Advanced Audit and Assurance (International) · Specific 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 you examine the assumptions, the preparation and the presentation. You then give negative assurance on the assumptions and an opinion on whether the PFI is properly prepared on them and presented under the applicable framework.

Understand Prospective Financial Information (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, a budget given to a bank, or profit projections in a share offer document.

There are two types. A forecast is based on assumptions about what management expects to happen, and on its expected actions, as at the date of preparation (best-estimate assumptions). A projection is based on hypothetical assumptions about events that may not happen, or a mixture of best-estimate and hypothetical assumptions. It answers "what if". A forecast says "this is what we expect". A projection says "if this happened, results would be this".

The auditor is not asked to say the future will happen as shown. Nobody can. ISAE 3400 deals with what the practitioner does: you obtain evidence to support a negative assurance statement on whether the assumptions provide a reasonable basis for the PFI. You also consider whether the PFI is properly prepared on those assumptions, and whether it is properly presented, with the assumptions clearly disclosed. Evidence is mostly about the process and the support for the assumptions, not about outcomes.

The risk is high because the evidence is less persuasive than for historical information. So the report wording is careful. You state that nothing has come to your attention that the assumptions are not a reasonable basis, and you warn that actual results are likely to differ because events often do not occur as expected.

In the AAA exam this appears in due diligence, loan applications, takeovers and flotations. You may be given a forecast and asked to list procedures, comment on the assumptions, or explain the report and the ethical issues.

Key rules to remember

Forecast: Forecast = PFI based on best-estimate assumptions (what management expects); Management expected events and actions at the date of preparation.
Projection: Projection = PFI based on hypothetical assumptions, or a mix of hypothetical and best-estimate; Used for 'what if' scenarios, for example a proposed new project or a change in business model.
Three areas of examination: Assumptions + Preparation + Presentation; Your conclusions in the report cover each of these.
Assurance on assumptions: Negative assurance on assumptions: nothing suggests they are unreasonable as a basis for the PFI; For a projection, the report states that the hypothetical assumptions are consistent with the purpose of the information.
Opinion on preparation: Opinion on whether the PFI is properly prepared on the basis of the assumptions and presented in line with the applicable framework; This opinion covers preparation and presentation only. It is not assurance that the results will be achieved, and the report cautions that actual results are likely to differ. Check that the basis of accounting is consistent with historical policies.

How to solve Prospective Financial Information (ISAE 3400) questions

Use this method for any question on examining a forecast or projection. Always link points to the scenario, not generic lists.

1Identify the type: forecast (best estimate) or projection (hypothetical). Note the purpose and who will use it, such as a bank, investors or a bidder.
2Consider acceptance and the engagement terms: the intended use, whether the PFI will be widely or narrowly distributed, the period covered, and the practitioner's competence and ability to get evidence.
3Understand the entity and how the PFI was prepared: management's process, the accuracy of past forecasts, the staff involved, the systems, and the review and approval stages.
4Test the assumptions: identify the key ones, check them to evidence (contracts, orders, market data, industry reports, past results), and test sensitivity to changes. For hypothetical assumptions, check they are consistent with the purpose.
5Check preparation: mathematical accuracy, consistency with historical accounting policies, consistency with the business plan and other documents, and whether all costs, such as financing and tax, are included.
6Check presentation and disclosure: assumptions are clearly stated, best-estimate and hypothetical assumptions are distinguished, the period is stated, and key uncertainty is shown.
7Conclude and report: give negative assurance on whether the assumptions provide a reasonable basis, an opinion on whether the PFI is properly prepared on the basis of the assumptions and presented in accordance with the applicable framework, and a caution that actual results are likely to differ. If one or more assumptions do not provide a reasonable basis, issue an adverse opinion or withdraw. If the PFI is not properly prepared or presented, or disclosure is inadequate, qualify or give an adverse opinion depending on materiality. If there is a scope limitation, qualify or disclaim, or withdraw.
8Tie in professional skills: be sceptical, comment on bias and optimism, and state the limits of the assurance.

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

When to use it: Use when time is short and the requirement is to list procedures or evaluate a forecast in a scenario.

Write the three headings: Assumptions, Preparation, Presentation.
Under Assumptions, pick the two or three biggest items from the scenario, such as sales growth, a new contract or the exchange rate, and say what evidence you would seek for each.
Add one point on past accuracy: compare earlier forecasts with actual results to judge management's reliability.
Under Preparation, mention arithmetic, consistency with historical policies and consistency with the business plan.
Under Presentation, mention clear disclosure of assumptions, forecast versus projection, and uncertainty.
End with the report: negative assurance on the assumptions, an opinion on whether the PFI is properly prepared on the basis of the assumptions and presented in accordance with the applicable framework, and a caution that actual results are likely to differ.

Common mistakes in Prospective Financial Information (ISAE 3400)

Saying the auditor guarantees or confirms that the forecast will be achieved.
Students treat PFI like historical financial statements, where an opinion confirms the figures.
Fix: State that you give assurance on the assumptions, preparation and presentation only. Actual results will probably differ.
Mixing up forecasts and projections.
The words sound similar and many people use them loosely in daily work.
Fix: Forecast means best-estimate assumptions. Projection means hypothetical assumptions or a mix. Check the scenario wording to see which one applies.
Listing only arithmetic checks.
Recalculation is easy to remember and feels like audit work.
Fix: Spend most of your answer on the assumptions. Arithmetic is only one part of preparation.
Giving generic procedures that ignore the scenario.
Students recall a memorised list and do not read the facts.
Fix: Name the specific assumption from the case, say what evidence supports it, and say why it is risky.
Ignoring management's past forecasting record and bias.
Students focus on the current numbers and forget the human factor, especially when management wants funding.
Fix: Compare previous forecasts with actual results, and show scepticism where management is motivated to be optimistic.
Forgetting the report wording and the caution on differences.
Reporting is left to the end and time runs out.
Fix: Keep a short closing line: negative assurance on the assumptions, an opinion on whether the PFI is properly prepared on the basis of the assumptions and presented in accordance with the applicable framework, and a caution that actual results are likely to differ, possibly materially.

Worked examples

Example 1

Zenith Ltd, a manufacturer, has asked your firm to examine a 12-month cash flow forecast to support a bank loan application. The forecast assumes sales grow by 25% because of a new contract with a large retailer, which is still being negotiated. State the type of PFI and the procedures you would perform on this assumption.

Show the solution

Type: the forecast is based on what management expects to happen, so it is a forecast with best-estimate assumptions. The contract is unsigned, so the assumption carries high uncertainty.
Obtain the draft contract, correspondence and board minutes, and discuss the status of negotiations with management and, if possible, the retailer's buyer.
Check the volumes, prices and payment terms in the draft against the forecast, including the effect on receivables and cash timing.
Check production capacity and the supply of materials to see whether Zenith can deliver the extra 25%, and whether new financing for capacity is included.
Compare past forecasts with actual results to assess management's reliability and optimism.
Test sensitivity: recalculate cash flows if the contract is delayed or lost, and see whether the loan can still be serviced.
Consider disclosure: the forecast must state that the contract is not yet signed and show the impact if it fails.

Answer: This is a forecast. The key procedures are to corroborate the unsigned contract, test capacity and cash timing, review past forecast accuracy, run sensitivity analysis and ensure the uncertainty is clearly disclosed.

Example 2

Explain what the practitioner's report on a profit projection for a proposed new product line would say and why it differs from an audit report.

Show the solution

The information is a projection, because it relies on hypothetical assumptions about a product line not yet launched.
The report would include a statement of the work done and the responsibilities of management and the practitioner.
It would give negative assurance on the assumptions: nothing has come to the practitioner's attention that the assumptions do not provide a reasonable basis for the projection, given the stated hypothetical assumptions.
It would give an opinion on whether the projection is properly prepared on the basis of the assumptions and presented in line with the applicable framework.
It would add a caution that the projection is hypothetical, that actual results are likely to differ because events often do not occur as expected, and that the differences may be material.
Difference from an audit report: an audit gives reasonable assurance on historical figures that can be checked to actual transactions. PFI relates to future events which cannot be verified, so the assurance is on assumptions and process, and the report carries a caution.

Answer: The report gives negative assurance on the hypothetical assumptions, an opinion on whether the projection is properly prepared on the basis of the assumptions and presented in accordance with the applicable framework, and a caution that actual results are likely to differ. It does not say the profit will be achieved.

Exam tips

Start by saying whether the information is a forecast or a projection. It earns an easy mark and shapes the rest.
Focus most of your answer on assumptions. Pick the riskiest from the scenario and name the evidence you would get.
Mention the history of management's forecast accuracy and the risk of bias when funding depends on the forecast.
Always include the reporting limits: negative assurance on the assumptions, an opinion on whether the PFI is properly prepared on the basis of the assumptions and presented in accordance with the applicable framework, and a caution that actual results are likely to differ.
Use professional skills marks by giving a clear recommendation. If one or more assumptions do not provide a reasonable basis, recommend an adverse opinion or withdrawal. If the PFI is not properly prepared or presented, or disclosure is inadequate, recommend a qualified or adverse opinion depending on materiality. If there is a scope limitation, recommend a qualification or disclaimer, or withdrawal.

Practice questions from Specific assignments

Prospective Financial Information (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 (ISAE 3400): frequently asked questions

What is the difference between a forecast and a projection?

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, to show what could happen if certain events occurred.

Does ISAE 3400 mean the auditor guarantees the forecast?

No. The practitioner gives negative assurance on the assumptions and an opinion on whether the PFI is properly prepared and presented. The report cautions that actual results are likely to differ, because future events often do not occur as expected.

What evidence do you use for assumptions about the future?

You use contracts, orders, market and industry data, past performance, board minutes and management's plans. You also compare earlier forecasts with actual results and test how sensitive the figures are to changes in key assumptions.

How does this appear in the AAA exam?

It usually appears in a scenario involving a loan, takeover or share offer where management gives a forecast. You may need to list procedures, assess assumptions, explain the report wording or discuss ethical and acceptance issues.