CA Final · Advanced Auditing, Assurance and Professional Ethics

Prospective Financial Information and Other Assurance Services: CA Final Audit Guide

This chapter covers three assurance engagements beyond audit: examining prospective financial information under SAE 3400, reporting on controls at a service organisation under SAE 3402, and reporting on pro forma financial information in a prospectus under SAE 3420. Learn each engagement's objective, assurance level, report wording and limits, then apply them to case facts.

What this chapter covers

Most of your audit paper deals with historical financial statements. This chapter moves to engagements where the practitioner gives assurance on something else: a forecast or projection, the controls of an outsourced service provider, or a set of pro forma figures in a prospectus. These are covered by ICAI's Standards on Assurance Engagements (SAEs), which sit under the general assurance framework you already know.

The three standards share one pattern. There is a responsible party (management or the service organisation) that prepares the subject matter. There are intended users who rely on the result. And there is a practitioner who gives a report with a defined level of assurance and clear limits. If you learn this pattern once, each standard becomes a matter of filling in the details.

The chapter connects to the rest of the paper through engagement acceptance, ethics and independence, evidence, risk assessment and reporting. SAE 3402 links closely to the auditor's use of service organisation information in a user entity's audit. SAE 3420 links to the work done for a prospectus and to the practitioner's duties and responsibilities in public offerings. SAE 3400 links to the going-concern and estimates thinking you use in audit.

The chapter is compact and its content is largely rule-based, so it rewards structured learning. Questions usually give a short scenario and ask you to decide what the practitioner should do, which type of report fits, or what the report must say. You can score well by knowing the objective, the level of assurance, the key report elements and the limits of each engagement. Students who skip it as 'minor' often lose easy marks in the case-scenario MCQs and in short descriptive answers.

Prospective Financial Information and Other Assurance Services: topics in the order to study them

1SAE 3400: Examination of Prospective Financial InformationStart here to learn what prospective financial information is, the difference between a forecast and a projection, and the idea of best-estimate and hypothetical assumptions.
2Auditor's Assurance on Prospective Financial InformationOnce the basics are clear, study what the practitioner actually concludes. The practitioner gives a negative-form (limited-type) conclusion on whether the assumptions provide a reasonable basis. The practitioner also gives an opinion on whether the PFI is properly prepared on the assumptions and presented in accordance with the relevant financial reporting framework. Also learn what the report says and why it states that actual results are likely to differ from the prospective information and that the variation may be material.
3SAE 3402: Assurance Reports on Controls at a Service OrganisationThis is a new subject matter (controls, not numbers), so study it after the forecast topics. Start with the roles of the service organisation, user entity and service auditor, then learn the Type 1 and Type 2 distinction within this standard.
4Service Auditor's Report: Intended Users and PurposeLearn this right after SAE 3402, once you know Type 1 and Type 2, so the report contents and the statement on intended users are fresh together.
5SAE 3420: Pro Forma Financial Information in a ProspectusKeep this last because it is the most specific. Compare it with SAE 3402, as both are reasonable assurance engagements, and check what the practitioner does and does not opine on.

How to prepare Prospective Financial Information and Other Assurance Services

Prepare this chapter by comparing the three standards on the same set of questions, rather than reading each in isolation. A one-page comparison sheet is the best output of your preparation.

Read each standard once for the objective and the subject matter. Write one line: who prepares it, who relies on it, and what the practitioner reports on.
Build a comparison sheet with columns for SAE 3400, SAE 3402 and SAE 3420, and rows for responsible party, intended users, level of assurance, key conclusion and limits.
For SAE 3400, list the types of assumptions and learn when the practitioner should not accept, or should withdraw from, the engagement: when the assumptions are clearly unrealistic or the prospective information is likely to be inappropriate for its intended use. The conclusion on the assumptions is a negative-form (limited-type) conclusion: nothing has come to the practitioner's attention that causes the practitioner to believe the assumptions do not provide a reasonable basis. The practitioner also gives an opinion on whether the PFI is properly prepared on the assumptions and presented in accordance with the relevant financial reporting framework.
For SAE 3402, learn the Type 1 and Type 2 reports side by side: Type 1 covers the design and implementation of controls at a specified date, and Type 2 also covers operating effectiveness over a period. This is a reasonable assurance engagement. Also note how subservice organisations are handled.
For SAE 3420, be clear that this is a reasonable assurance engagement and that the practitioner reports on whether the pro forma information has been compiled properly by the responsible party on the applicable criteria. It is not an opinion on the pro forma figures being right or on the underlying historical information.
Practise short scenarios: read a few lines of facts, decide the engagement, the report type and the conclusion, and write the answer in provision, facts and conclusion form.
Revise the report elements and the limitation statements last, because these are the points most often tested.

Common mistakes in Prospective Financial Information and Other Assurance Services

Treating a forecast and a projection as the same thing.
Fix: Link each to its assumptions: a forecast rests on best-estimate assumptions about expected events, while a projection rests on hypothetical assumptions about events that may not occur.
Saying the practitioner guarantees that the prospective results will be achieved.
Fix: State that the conclusion is on assumptions and preparation, and that the report states that actual results are likely to differ from the prospective information and the variation may be material.
Giving a positive opinion on the assumptions under SAE 3400.
Fix: Write that 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. Only the separate opinion on preparation and presentation is stated in positive terms.
Mixing up Type 1 and Type 2 service auditor reports.
Fix: Remember that only Type 2 covers operating effectiveness, and it covers a period. Type 1 is at a point in time.
Assuming a service auditor's report is meant for any reader.
Fix: Write that the report states it is intended only for user entities and their auditors who have a sufficient understanding of the system. Do not say it can never be given to anyone else.
Claiming the practitioner gives an opinion on the pro forma figures themselves under SAE 3420.
Fix: Say the practitioner reports on whether the responsible party has compiled the pro forma information properly on the applicable criteria, not on the correctness of the underlying historical information.
Writing generic answers without using the facts in the scenario.
Fix: Use provision, facts and conclusion. Quote the relevant fact from the case, link it to the rule and end with a clear decision.

Last-day revision: Prospective Financial Information and Other Assurance Services

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.

Prospective Financial Information and Other Assurance Services practice questions

Prospective Financial Information and Other Assurance Services in other exams

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

Prospective Financial Information and Other Assurance Services: frequently asked questions

Which standards are covered in this chapter?

The chapter covers SAE 3400 on prospective financial information, SAE 3402 on assurance reports on controls at a service organisation and SAE 3420 on pro forma financial information in a prospectus. Study them together as examples of assurance engagements other than an audit of historical financial statements.

What is the difference between a Type 1 and a Type 2 report under SAE 3402?

A Type 1 report covers management's description of the system and the design of controls at a specified date. A Type 2 report covers the same and also tests whether the controls operated effectively over a specified period.

Does the practitioner confirm that a forecast will come true?

No. Under SAE 3400 the practitioner gives a negative-form (limited-type) conclusion that nothing has come to attention to suggest 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. The report cautions that actual results are likely to differ from the forecast.

How should I answer scenario questions from this chapter?

Identify the engagement, the responsible party and the intended users first. Then state the relevant rule, apply it to the facts given and end with a clear conclusion. Keep the answer short and tied to the case.