CA Final · Advanced Auditing, Assurance and Professional Ethics

Prospective Financial Information and Other Assurance Services: formula sheet

Full chapter guide

Key formulas

Forecast: Forecast = PFI based on best-estimate assumptions; Management expects these events and actions to occur. Usually suits general use.
Projection: Projection = PFI based on hypothetical assumptions (or a mix with best-estimate assumptions); Answers a what-if question. Usually suits limited use, for a stated purpose.
Assurance on assumptions: Nothing has come to attention that causes belief that the assumptions do not provide a reasonable basis for the PFI; Negative-form assurance, which is a lower level of assurance than for historical financial information. For a projection, the wording also covers that the assumptions are consistent with the purpose of the information.
Opinion on the PFI: PFI is properly prepared on the basis of the assumptions and is presented in accordance with the relevant framework; This is a positive opinion on preparation and presentation, not on achievability.
Caution on actual results: Actual results are likely to differ from the PFI, as anticipated events frequently do not occur as expected; Include it in your report wording. The difference may be material.
Type 1 report: Description fairly presented + controls suitably designed, as at a specified date; No testing of operating effectiveness. Evidence is about design and implementation only.
Type 2 report: Description fairly presented + controls suitably designed + controls operated effectively, throughout a specified period; Requires tests of controls and a description of the tests and results.
Three opinion elements: Fair description, suitable design, operating effectiveness (Type 2 only); Each is assessed in all material respects against stated criteria.
Parties: Service organisation (provides) | User entity (outsources) | User auditor (audits user entity) | Service auditor (reports on controls); Management of the service organisation gives the assertion, not the service auditor.
Report use: Restricted to user entities and their auditors; Report should state that it is intended only for them.
Intended users: Intended users = user entities + their financial statement auditors; Not the public, not lenders by default, not regulators unless the engagement terms say otherwise.
Purpose of the report: Purpose = help assess risks of material misstatement in user entities' financial statements; The report is not an opinion on the user entity's financial statements.
Restricted-use statement: Report states: intended only for user entities and their auditors who have sufficient understanding to consider it with other information; Includes understanding of controls operated by the user entities themselves.
Type 1 vs Type 2: Type 1 = design at a date; Type 2 = design + operating effectiveness over a period; Only Type 2 gives evidence on operating effectiveness.
Subservice organisation methods: Carve-out = subservice controls excluded; Inclusive = subservice controls included in description and scope; Under carve-out, user auditors must handle those controls separately.
Nature of the opinion: Opinion = whether pro forma information has been compiled, in all material respects, on the basis of the applicable criteria; The opinion is on compilation, not on the accuracy of the pro forma results.
Level of assurance: Reasonable assurance engagement (positive-form opinion); Not limited assurance. Do not write a negative-form conclusion.
Pro forma build-up: Pro forma information = Unadjusted financial information ± Pro forma adjustments; Adjustments must be clearly shown and tied to the event.
Three checks on compilation: Source of unadjusted information + Adjustments + Arithmetic and presentation; Use as a skeleton for the procedures in any answer.
Responsibility split: Responsible party compiles; practitioner reports on the compilation; The practitioner never compiles the information as part of this engagement.

Quick revision

SAE 3400 deals with prospective financial information: a forecast uses best-estimate assumptions, a projection uses hypothetical assumptions.
The practitioner on PFI does not give assurance that results will be achieved, and the report says actual results are likely to differ from the prospective information and the variation may be material.
Under SAE 3400 the conclusion on assumptions is a negative-form (limited-type) conclusion: nothing has come to attention that causes the practitioner to believe the assumptions do not provide a reasonable basis. The practitioner also gives an opinion on whether the information is properly prepared on those assumptions and presented in accordance with the relevant financial reporting framework.
Management, not the practitioner, is responsible for the PFI and its assumptions.
Do not accept a PFI engagement, or withdraw from it, if the assumptions are clearly unrealistic or the PFI is likely to be inappropriate for its intended use.
SAE 3402 reports on controls at a service organisation; the service auditor reports on management's description of the system, control design and, for Type 2, operating effectiveness. It is a reasonable assurance engagement.
Type 1 report: description and design of controls at a specified date. Type 2 report: also operating effectiveness over a specified period.
The service auditor's report includes a statement that it is intended only for user entities and their auditors who have a sufficient understanding of the system.
A subservice organisation can be handled by the carve-out method or the inclusive method.
SAE 3420 is a reasonable assurance engagement on whether pro forma information is compiled properly on the applicable criteria.
In an SAE 3420 engagement, the practitioner does not update or reissue reports on the historical information used in the compilation.
In all three, identify the responsible party, the intended users and the level of assurance before you write the answer: SAE 3402 and SAE 3420 give reasonable assurance, while SAE 3400 gives a negative-form (limited-type) conclusion on the assumptions and an opinion on preparation and presentation.

Common mistakes

Saying the auditor gives positive, high assurance that the forecast will be achieved. Fix: State that the auditor does not vouch that the results will be achieved. The statement on assumptions is negative in form, and the positive opinion covers only preparation and presentation.
Mixing up a forecast and a projection. Fix: Link each to its assumptions. Forecast means best estimate. Projection means hypothetical or mixed.
Saying a Type 1 report gives assurance on operating effectiveness. Fix: Type 1 covers description and design at a date only. Operating effectiveness appears only in Type 2.
Treating the service auditor as the user entity's auditor. Fix: The service auditor reports on the service organisation. The user auditor audits the user entity and uses that report as evidence.
Saying anyone who gets the report may rely on it. Fix: Remember it is a special-purpose report restricted to user entities and their auditors.
Stating the purpose as an opinion on the user entity's financial statements. Fix: The service auditor reports on the service organisation's description and controls, not on the user's financial statements.
Writing that the practitioner gives an opinion on the pro forma figures being true and fair. Fix: Write that the opinion is on whether the information has been compiled, in all material respects, on the basis of the applicable criteria.
Describing the engagement as limited assurance. Fix: State clearly that it is a reasonable assurance engagement.

Exam tips

Start every answer by labelling the PFI as a forecast or a projection. Marks often follow that label.
Write the report wording in full for a 5 or 6 mark question. Include the negative-form assurance, the opinion and the caution.
In case MCQs, look for the assumption type in the facts. Words like if, suppose or what if point to hypothetical assumptions.
Remember the split: negative-form statement on the assumptions, positive opinion on preparation and presentation. Any option claiming the auditor vouches for the results is wrong.
Link modified reports to causes. Unreasonable assumptions or poor disclosure lead to a qualified or adverse opinion. A scope limit leads to qualification or disclaimer.
Always begin a comparison with the time frame: date for Type 1, period for Type 2.
In case questions, name the four parties from the facts before you answer. It earns easy marks.
Mention that management gives the assertion and prepares the description. Examiners often test who is responsible.