PROSPECTIVE FINANCIAL INFORMATION
Forecasts may be of interest to users more so than historical information. Auditors may carry out a review or an assurance engagement on these forecasts.
Prospective financial information is based on assumptions about events that may occur in the future and possible actions by an organisation.
REPORTING ON PROSPECTIVE FINANCIAL INFORMATION
It is difficult to give assurance on such information as it is considered highly subjective. Projections generally relate to capital expenditure, profits and cash flows.
ACCEPTING AN ENGAGEMENT
The auditor needs to agree the terms of the engagement with the directors of the company. He should withdraw from the engagement if the assumptions used are clearly unrealistic.
Before accepting an engagement he should also consider:
- The intended use of the information,
- Will it be general or limited distribution,
- The nature of the assumptions, whether best estimate or hypothetical,
- The elements to be included in the information,
- The period covered by the information,
- Practical matters such as time available and staff experience.
PROCEDURES
The procedures adopted by the auditor will include analytical review and verification of projected expenditure to quotes or estimates.
In carrying out the review attention should be given to:
- The nature and background of the entities business such as recent history, activities, main products, markets, customers, suppliers, divisions and locations,
- The accounting policies used and whether they have been consistently applied in the preparation of the projections,
- The assumptions on which the projections are based,
- Whether the projections are based on forecasts regularly prepared for the purposes of management or specifically for this assignment,
- The degree of accuracy and reliability of previous forecasts and the frequency with which they are revised,
- Whether the projections represent the best estimate or a desired target,
- How the projections take account of any material extraordinary items, How the projection allows for factors which may have a high degree of risk,
- The arithmetical accuracy of all calculations.
When determining the nature, timing and extent of review procedures, the auditor should consider:
- The likelihood of a material misstatement occurring,
- His knowledge obtained during previous engagements,
- The competency of management in preparing the projections,
- Any extent to which figures may be effected by management’s judgment,
- The adequacy and the reliability of the underlying data.
The above can be considered general matters. The following considerations will be specific to the type of assignment that is carried out.
Profit forecasts
- Verify income to suitable evidence such as comparison of projected income on similar projects or current relevant market prices.
- Verify projected expenditure to suitable evidence such quotations or estimates, current relevant bills, market rate prices and interest rate assumptions.
Capital expenditure
- Auditor should review for reasonableness and should verify to estimates and quotations.
- Auditor should compare with other projects as to market values etc.
Cash forecasts
- Auditor needs to pay attention to the timing of cash flows.
- He should review the cash flows for consistency with any profit forecasts.
- EXPRESSING AN OPINION
The same level of assurance cannot be given for prospective information as can for say a set of historical financial statements.
It is suggested by ISAE[1] 3400 (the examination of prospective financial information) that an auditor should express an opinion to include:
- A statement of negative assurance as to whether the assumptions are reasonable,
- An opinion whether the information is properly prepared having regard to the assumptions and is presented in accordance with relevant financial reporting,
- Appropriate caveats as to the achievability of the forecasts.
The report itself should also contain
- Title and address,
- Identification of the prospective information,
- A reference to relevant national standards or practices applicable,
- A statement of management responsibility for information and assumptions,
- Date of report, auditor’s address and signature.
When the auditor believes that the presentation and disclosure of the prospective financial information is not adequate, the auditor should express a qualified or adverse opinion or withdraw from the engagement as appropriate.
When the auditor believes that;
- one or more significant assumptions do not provide a reasonable basis for the prospective financial information prepared on the basis of best estimate assumption or
- that one or more of the significant assumptions do not provide a reasonable basis for the prospective financial information given the hypothetical assumptions, the auditor should either express an adverse opinion in the report or withdraw from the engagement.
Question 13.1
You are auditing the accounts of an engineering firm which is experiencing going concern problems.
The company prepares detailed monthly accounts, and you have been given forecasts to enable you to assess whether the company will be able to continue as a going concern. The monthly forecasts have been prepared for a 12 month period after the audit year-end. They include Capital expenditure/disposal forecasts, Profit forecasts and Cash flow forecasts.
Required:
- Briefly explain the term going concern and what is the minimum period you would expect the engineering company to continue in business for it to be considered a going concern.
- List the factors which may indicate going concern issues.
Describe the work you would perform to verify the value of items in the forecasts are reasonable
[1] International Standards on Assurance Engagements
