Advanced Audit and Assurance (International) · Reporting on other assignments

ISAE 3400 Prospective Financial Information Explained

Updated 11 October 2026 · Fact-checked

Prospective financial information (PFI) is financial information based on assumptions about future events and actions. It covers forecasts and projections. Under ISAE 3400 the practitioner examines the assumptions, the preparation and the presentation, then gives limited-style negative assurance on the assumptions and an opinion on proper compilation.

Understand Prospective Financial Information and ISAE 3400

Prospective financial information (PFI) is financial information about the future. It rests on assumptions about events that may happen and actions management may take. Examples are a cash flow forecast for a bank loan, or a profit projection in a share offer document.

There are two types. A forecast is PFI based on assumptions about future events management expects to take place and the actions it expects to take. These are the best-estimate assumptions as at the date of preparation. A projection is PFI based on hypothetical assumptions about future events or actions that may not necessarily occur, or on a mixture of best-estimate and hypothetical assumptions. A projection answers a "what if" question, for example what if we win the new contract.

The practitioner cannot give assurance that the forecast results will be achieved. The future is uncertain. What the practitioner can do is examine the support for the assumptions, check that PFI is properly prepared on the basis of those assumptions, and check it is properly presented with all material assumptions disclosed and the basis clear.

ISAE 3400 applies to examination of PFI. The engagement is accepted only if the use of the PFI is clear, the assumptions are suitable, and the practitioner has the skills and information needed. If PFI is intended for general use, such as a prospectus, only best-estimate assumptions (a forecast) are appropriate. Hypothetical assumptions are suitable only for limited use, such as negotiations with a named party.

The practitioner's report explains what was done and gives a conclusion. It also warns that actual results are likely to differ, because events often do not occur as expected, and the differences may be material.

Key rules to remember

Forecast: Forecast = PFI based on best-estimate assumptions (expected events and actions); Suitable for general and limited use.
Projection: Projection = PFI based on hypothetical assumptions, or a mix of hypothetical and best-estimate; Suitable only for limited use, for example negotiations with a specific party.
Scope of the practitioner's examination: Examine (1) support for assumptions, (2) proper preparation on those assumptions, (3) proper presentation and disclosure; These three areas drive both the procedures and the report.
Conclusion on assumptions: Negative assurance: nothing has come to attention that the assumptions are not a reasonable basis (forecast) or are not consistent with the purpose (projection); Assurance is on the assumptions, never on achievement of the results.
Opinion on preparation: Opinion: PFI is properly prepared on the basis of the assumptions and presented in accordance with the relevant framework; Positive-form opinion on preparation and presentation.

How to solve Prospective Financial Information and ISAE 3400 questions

Use this order for any PFI question, whether it asks about acceptance, procedures or reporting.

1Identify the PFI: forecast or projection, and its intended use (general or limited distribution).
2Consider acceptance: is the use clear, are the assumptions suitable for that use, do you have the competence and access to information, and is the period covered reasonable.
3Understand the entity and how the PFI was prepared: the process, the track record of past forecasts versus actuals, and the preparer's skill and integrity.
4Test the assumptions: best-estimate assumptions need reasonable support, hypothetical ones must be consistent with the purpose and not unrealistic.
5Test the arithmetic and mechanics: recompute the model, check consistency with the accounting policies, and check that the assumptions flow through properly.
6Check presentation: assumptions disclosed, best-estimate versus hypothetical made clear, basis, dates and sensitivity disclosed.
7Obtain written representations from management on its assumptions and the intended use.
8Report: state the work done, the conclusion on assumptions, the opinion on preparation, and a warning that actual results will probably differ.

Quickest way: A-P-P-R: Assumptions, Preparation, Presentation, Report

When to use it: Use when time is short or when a requirement says briefly describe procedures or comment on the engagement.

Assumptions: is there evidence that they are reasonable, and how do they compare with past results, market data and contracts.
Preparation: recompute, check logic, check consistency with accounting policies and last audited accounts.
Presentation: check disclosure of assumptions and risks, and the forecast or projection label.
Report: negative assurance on assumptions, opinion on preparation, and a warning that results may differ.
Link each point to the scenario facts, such as the lender, the new product or the bank covenant.

Common mistakes in Prospective Financial Information and ISAE 3400

Saying the practitioner guarantees or gives assurance that the forecast will be achieved.
Students confuse examining PFI with auditing historical results.
Fix: State that assurance covers only assumptions, preparation and presentation. Actual results will probably differ.
Mixing up forecast and projection.
Both words sound alike and are often used loosely in practice.
Fix: Forecast means best-estimate assumptions. Projection means hypothetical or mixed. Always label which one the scenario describes.
Accepting a projection for general distribution, such as a prospectus.
Students ignore the link between assumption type and the use of the PFI.
Fix: Hypothetical assumptions suit only limited use. For general use only a forecast on best-estimate assumptions is suitable.
Listing generic audit procedures such as inventory counts and receivable confirmations.
Students default to historical audit work.
Fix: Focus on the assumptions: past accuracy of forecasts, contracts, market data, capacity, funding and sensitivity, plus recomputation of the model.
Forgetting disclosure and presentation checks.
Students focus on numbers and treat disclosure as secondary.
Fix: Always check that significant assumptions, their basis and the forecast or projection nature are disclosed.
Giving a report with no warning about differences between actual and forecast results.
Students overlook this required element of the report.
Fix: Include a clear statement that events often do not occur as expected, so actual results may differ materially.

Worked examples

Example 1

Zenith Ltd is applying for a bank loan and has prepared a cash flow forecast for the next 12 months. The bank asks you to report on it. Explain the procedures you would perform on the assumptions and on the preparation of the forecast.

Show the solution

Assumptions first. Compare forecast sales growth with the past two years of actual results and with the accuracy of previous forecasts, which shows management's track record.
Agree key assumptions to evidence: signed customer contracts, order books, supplier price lists, and market or industry data for volumes and prices.
Check the cash timing assumptions. Compare the assumed customer payment and supplier payment periods with actual patterns and with credit terms.
Check financing and capital expenditure assumptions against loan terms, quotes and board approval.
Preparation next. Recompute the model arithmetic and confirm that the starting position agrees to the latest financial statements.
Check that accounting policies in the forecast are consistent with those used in the historical statements.
Test sensitivity: change the main assumptions, such as sales volumes and receipts timing, and see whether the forecast still shows adequate cash.
Obtain written representations from management on the assumptions and the intended use.

Answer: Examine the support for assumptions through track record, contracts and external data, and test cash timing and funding. Recompute the model, check policy consistency and run sensitivities. Obtain management representations.

Example 2

A client asks you to examine a profit projection that assumes it wins a major contract and will be shown to a potential investor and included in a public offer document. Advise on whether you can accept the engagement and what your report would say.

Show the solution

Identify the type. Winning a contract that may not happen is a hypothetical assumption, so this is a projection.
Consider the intended use. A public offer document is general use. Hypothetical assumptions are not suitable for general use.
So you should not accept the projection for the public document. Suggest preparing a forecast on best-estimate assumptions instead.
A projection may be suitable for limited use, such as discussions with the specific investor, if the use is clear and the hypothetical assumptions are consistent with that purpose.
If a forecast is examined, the report would describe the work done and give a negative assurance conclusion that nothing indicates the assumptions are not a reasonable basis.
It would also give an opinion that the PFI is properly prepared on the basis of the assumptions and presented in line with the framework.
It would add a warning that actual results are likely to differ because events often do not occur as expected, and the differences may be material.

Answer: Do not accept a projection for general use in the public document. Use a best-estimate forecast, or restrict the projection to limited use with the named investor. The report must give negative assurance on assumptions, an opinion on preparation and a warning that actual results may differ.

Exam tips

Define forecast and projection in one line each, then tie the answer to the intended use. This earns quick marks.
Always link procedures to scenario facts such as the lender, the new product line or past forecast accuracy. Generic lists score low on professional skills.
Show scepticism: question optimistic assumptions, management bias and the lack of evidence for future events.
When asked about the report, cover the work done, the conclusion on assumptions, the opinion on preparation and the warning about differences.
Use the professional skills marks by giving a clear, reasoned recommendation, for example whether to accept the engagement and on what terms.

Practice questions from Reporting on other assignments

Prospective Financial Information and ISAE 3400 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA FinalAuditor's Assurance on Prospective Financial Information

Prospective Financial Information and ISAE 3400: frequently asked questions

What is the difference between a forecast and a projection under ISAE 3400?

A forecast uses best-estimate assumptions about what management expects to happen. A projection uses hypothetical assumptions, or a mix of hypothetical and best-estimate assumptions. A projection is a what-if view of the future.

What assurance does the practitioner give on prospective financial information?

The practitioner gives negative assurance on the assumptions and an opinion on whether the PFI is properly prepared and presented. There is no assurance that the results will be achieved. The report warns that actual results will probably differ.

How do I review a cash flow forecast in the exam?

Test the assumptions against track record, contracts and external data. Recompute the model and check consistency with accounting policies. Check disclosure, run sensitivities and get management representations.

Can a projection be used in a prospectus?

No. A prospectus is general use, so only best-estimate assumptions are suitable. Projections suit limited use, such as negotiations with a named party.