ACCA P7 lectures Download P7 notes
Chapter 13
The examination of prospective financial information
Prospective financial information means financial information based on assumptions about events that may occur in the future and possible action by the entity. Listed entities should have procedures that allow them to generate reliable PFI, compare it to market expectations, publish it when necessary and subsequently report actual performance against it.
ACCA P7 Lecture Index
1 Rules of Professional Conduct
2 Professional Responsibility and Liability
3 Regulatory Environment
4 Practice Management
5 Audit Process
6 Evidence
7 Evaluation and Review
8 Audit of Financial Statements
9 Group Audits
10 The external audit report
11 Audit Related Services (Non Audit Services)
12 Assurance Services
13 Prospective Financial Information (PFI)
14 Internal Audit
15 Outsourced Finance and Accounting Functions
16 Social and Environmental Audits
Matters to consider before accepting an engagement to report on prospective financial information
Before accepting such an engagement, the audit firm should consider:
the intended use of the information. For example, is it intended for internal or external use?
whether the information will be for general or limited distribution.
the nature of the assumptions on which the information is based.
the information to be included.
the period covered by the information.
Examination procedures
The audit firm should obtain sufficient appropriate evidence as to whether:
- management’s assumptions on which the PFI is based are not unreasonable.
- the information is properly prepared on the basis of the assumptions.
- the information is properly presented and all material assumptions are adequately disclosed.
Example
The directors of Ebagum Limited are planning a management buy-out from their parent entity and have asked your firm to report on the accuracy of the profit forecast and Statements of Financial Position of the entity for the following five years.
Ebagum buys car parts from manufacturers and sells them to retailers mainly on a cash basis from about 20 retail outlets throughout the UK.
The management is planning to finance the buy-out from their own resources and from funds provided by financial institutions. It is expected that:
(a) the equity shares will be purchased by the directors and a financial institution.
(b) the current loan account between Ebagum and their parent will be repaid and be replaced by loans from banks and financial institutions. Some of these loans will have the option of conversion into equity at a later date.
A detailed monthly forecast Statement of Comprehensive Income and budgeted Statements of Financial Position have been prepared for the first year’s trading and an annual forecast Statement of Comprehensive Income and Statement of Financial Position have been prepared for the following four years:
Hello.
My humble opinion is that it is possible to audit future projections. I personally do not think that this should be a problem, say in BIG4 companies, where transaction advisory personnel could be attracted to provide extra support on more complicated matters/calculations. Companies applying for bank loans (I am talking hundreds of millions), for example, have to produce future cash flow projections into significantly more than one year, more likely 3-5 years (that’s what I’ve seen). And lender find a way to satisfy themselves and risk huge amount of money. So is one year such a big deal? You’d certainly alter accuracy, but I do not think one year is much of a bother.
I actually think you can “Review” projections and not “Audit ” them. Review provides a moderate assurance which is the best You can provide for a review assignment. How do you audit a projection? What evidence do you have that would be sufficient and appropriate?
the lectures are very helpful. thank you
You’re welcome
Very nice
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excellent lectures mike!!