Verifying Cash Flow forecast!

Oh! I thought that was covered in notes / lectures.

All we are able to do really is confirm the reasonableness of the underlying assumptions and assure ourselves that they are realistic.

It’s often the case that a Cash Flow Forecast will show exactly what the preparer wants it to show …. and if it doesn’t, then the preparer will tweak it. The client is not going to show the bank / prospective lender a forecast which is gloomy and pessimistic so Cash Flow forecasts are most unlikely to present that picture.

It’s going to be bullish and smiley-faced and exciting and ( claimed to be ) realistic

The auditor will have to put on his cap / her hat of considerable professional scepticism

We can, in some cases, confirm that the first month or so of the forecast has actually happened, and we can confirm the opening receivables / payables to support the forecast flow from these bodies. We can also confirm the opening balance at the bank which is the start point.

Levels of sales and production can be seen to be (un) realistic given our knowledge of the history of sales and production capacity. Numbers of employees and wage rates can be re-computed and one off items like dividends and tax payments can be checked to see that they are included and reasonably calculated / forecast.

We can check to see that non-cash items like depreciation have not been included.

We should check the accuracy of the arithmetic

But, overall, it’s a check on the reasonableness of the assumptions used as well as the reason for the forecast, the target audience and, importantly, the integrity and historic success of the preparer in their previous forecasts