Advanced Auditing, Assurance and Professional Ethics · Prospective Financial Information and Other Assurance Services

SAE 3400: Examination of Prospective Financial Information

Updated 5 October 2026

SAE 3400 deals with an auditor's examination of prospective financial information (PFI): a forecast, a projection, or a mix. A forecast rests on best-estimate assumptions; a projection rests on hypothetical assumptions. To answer, check the assumptions, check the compilation, check the presentation, then give the right form of report.

Understand SAE 3400: Examination of Prospective Financial Information

Prospective financial information (PFI) is financial information based on assumptions about events that may occur in the future and actions management may take. It looks forward. Historical financial statements record what has happened. PFI shows what is expected to happen.

PFI is of two main kinds. A forecast is PFI prepared on assumptions about future events and management actions that are expected to occur. These are management's best-estimate assumptions as at the date of preparation. A projection is PFI prepared on one or more hypothetical assumptions, which are assumptions about future events and actions that are not necessarily expected to happen. A projection can also mix best-estimate and hypothetical assumptions. A projection answers the question: what if this happened?

The standard covers an engagement where the auditor examines PFI and reports on it. Typical uses are a prospectus, a loan proposal to a bank, or a business plan shown to investors. The users are mostly the entity itself and third parties such as lenders. Because the future is uncertain, the auditor does not give an opinion that the results will be achieved.

The auditor's report covers three matters, and the form of assurance differs between them. On the assumptions, the auditor gives a statement of negative assurance (limited assurance): whether anything has come to attention that causes the auditor to believe that management's assumptions do not provide a reasonable basis for the PFI. On the other two matters, the auditor gives an opinion: whether the PFI is properly prepared on the basis of the assumptions, and whether it is properly presented, with all material assumptions adequately disclosed, in accordance with the relevant financial reporting framework. For a projection, the auditor also states whether the hypothetical assumptions are consistent with the purpose of the information. The report can be modified: qualified, adverse or a disclaimer.

The auditor should not accept, or should withdraw from, the engagement when the assumptions are clearly unrealistic or the PFI is clearly unsuitable for its intended use. The responsibility for the PFI and its assumptions always stays with management. The auditor examines it. The auditor does not prepare it.

Key rules to remember

Forecast: Forecast = PFI on best-estimate assumptions (expected events and actions); Use when management expects the events to happen. A forecast may be for general or limited distribution.
Projection: Projection = PFI on hypothetical assumptions (or a mix of hypothetical and best-estimate); Use when the assumptions are 'what if' and not necessarily expected. Restrict a projection to limited distribution.
Scope of the conclusion: Report covers: (1) assumptions reasonable basis: negative assurance; (2) PFI properly prepared on those assumptions: opinion; (3) proper presentation and adequate disclosure: opinion; For a projection, also say the hypothetical assumptions are consistent with the purpose.
Nature of report: Report = negative assurance that nothing has come to attention to suggest the assumptions do not provide a reasonable basis, plus an opinion on proper preparation and presentation, plus a caution that actual results may differ; The assumptions get negative assurance. Preparation and presentation get an opinion. Never certify that the results will be achieved.
Responsibility: Management prepares the PFI and owns the assumptions; the auditor examines and reports; The auditor's work does not shift responsibility to the auditor.

How to solve SAE 3400: Examination of Prospective Financial Information questions

Use this order for any SAE 3400 question. It keeps your answer in provision-facts-conclusion form and covers every mark point.

1Identify the type of PFI from the facts. Best-estimate assumptions mean a forecast. Hypothetical or 'what if' assumptions mean a projection. A mix is still a projection.
2Check the purpose and intended users. Ask whether the PFI is for general use or for limited use, and whether the type suits that use.
3Decide on acceptance. Check whether the assumptions are clearly unrealistic, whether the PFI suits its purpose, and whether the auditor has the skills and information to do the work.
4List the procedures. Evaluate the source and support for the assumptions, check the mathematical accuracy of the model, and compare with past results where relevant.
5Test the presentation. Check that the format is proper, the assumptions are disclosed, and the basis of preparation is stated, including any hypothetical assumptions.
6Consider management's representations and any limit on the scope of work.
7Conclude with the right report. Give negative assurance on whether the assumptions provide a reasonable basis, and give an opinion on whether the PFI is properly prepared on those assumptions and properly presented. Add a caution that results may differ, and state clearly where the report is modified (qualified, adverse or disclaimer) or the engagement is withdrawn.
8Link your conclusion to the facts of the case. Name the specific assumption or defect that drives your conclusion.

Quickest way: Three-test shortcut

When to use it: Use this in a short case-scenario MCQ or a 5 to 6 mark written answer when time is tight.

Ask first: are the assumptions best-estimate or hypothetical? This tells you forecast or projection.
Test three things: are the assumptions a reasonable basis, is the PFI prepared properly on them, and is the presentation and disclosure adequate?
Add the usual closing point: management owns the PFI, and the auditor gives no assurance that the results will be achieved.
If the facts show an unrealistic assumption or a scope limit, move straight to the modified conclusion or withdrawal.

Common mistakes in SAE 3400: Examination of Prospective Financial Information

Treating forecast and projection as the same thing.
Both look forward and both appear in the same standard.
Fix: Link the word to the assumption. Best-estimate means forecast. Hypothetical, even in part, means projection.
Saying the auditor guarantees that the forecast will be achieved.
Students carry over the idea of 'true and fair' from a historical audit.
Fix: State that the auditor gives no assurance on achievability. Actual results will usually differ because events do not occur as expected.
Writing that the auditor prepares the PFI or owns the assumptions.
The word 'examination' is confused with preparation.
Fix: Say that management is responsible for the PFI and its assumptions. The auditor only examines and reports.
Leaving out the assumptions in the conclusion, or giving a positive opinion on the assumptions instead of negative assurance.
Students focus on arithmetic and presentation alone, and carry over the opinion form from a historical audit.
Fix: Always cover the three parts. Give negative assurance on whether the assumptions provide a reasonable basis. Give an opinion on whether the PFI is properly prepared on those assumptions and properly presented, with adequate disclosure.
Forgetting that a projection needs an additional statement on hypothetical assumptions.
The rule is a small add-on and is easily missed.
Fix: For a projection, state that the hypothetical assumptions are consistent with the purpose of the information.
Ignoring the type of distribution when the PFI rests on hypothetical assumptions.
Students do not link the type of PFI to the type of use.
Fix: State it clearly: a forecast may be for general or limited distribution. A projection should be restricted to limited distribution, with users who understand its hypothetical basis. For a projection, the report should carry a restriction on distribution and use.

Worked examples

Example 1

Kavya Textiles Ltd plans to seek a term loan from a bank. Its management gives the auditor a statement of expected profit and cash flow for the next three years. Management says it is based on its expected order book and planned capacity addition, which it expects to complete as scheduled. Classify the PFI and state what the auditor's conclusion should cover.

Show the solution

Identify the type. The assumptions cover the order book and capacity addition that management expects to occur. These are best-estimate assumptions.
Classify. PFI on best-estimate assumptions is a forecast.
Note the purpose. It goes to a bank, a third-party user, so the auditor must be sure that the assumptions are realistic and the information suits that use.
State the matters for the report: negative assurance on whether the assumptions give a reasonable basis for the forecast, and an opinion on whether the forecast is properly prepared on those assumptions and properly presented with the material assumptions disclosed.
Add the caution. The auditor does not give assurance that the results will be achieved, and management remains responsible for the forecast.

Answer: The statement is a forecast. The auditor gives negative assurance on whether the assumptions are a reasonable basis, and an opinion on whether the forecast is properly prepared and presented, with adequate disclosure. The auditor gives no assurance that the forecast results will be achieved.

Example 2

Zenith Infra Ltd shows its auditor a financial model for a proposed project. The model assumes that a government contract, which the company has not yet bid for, will be won in year 2. Management says the model is meant to show a prospective investor the effect if the contract were won. How should the auditor treat the model, and what extra point must the report cover?

Show the solution

Identify the assumption. Winning an unbid contract is not an event that management expects to occur. It is a 'what if' case.
Classify. A hypothetical assumption makes the PFI a projection.
Consider the purpose. The model is for one prospective investor who understands the hypothetical basis. This is a limited use, which suits a projection.
Plan the work. Check the arithmetic of the model, check that the other assumptions have support, and check that the hypothetical assumption is clearly disclosed as hypothetical.
Decide on the report. The auditor covers the three standard matters: negative assurance on whether the assumptions provide a reasonable basis, and an opinion on proper preparation and on proper presentation and disclosure.
Add the extra point. For a projection, the report must say whether the hypothetical assumptions are consistent with the purpose of the information.

Answer: The model is a projection, since it relies on a hypothetical assumption. The auditor gives negative assurance on whether the assumptions are a reasonable basis, and an opinion on whether the PFI is properly prepared and presented. The auditor also states whether the hypothetical assumptions are consistent with the purpose. The report should caution that actual results will probably differ.

Exam tips

Start any definition question by contrasting the two terms: forecast uses best-estimate assumptions, projection uses hypothetical ones. This usually earns the first marks.
In case scenarios, underline the words 'expected', 'if', and 'assume'. These words tell you whether it is a forecast or a projection.
Always include the three-part scope of the report: negative assurance on the assumptions, and an opinion on preparation and on presentation. Examiners look for it.
Close with a line that management is responsible and that the auditor gives no assurance of achievement. This is a frequent mark point.
For MCQs, eliminate any option that says the auditor guarantees results or prepares the PFI.

Practice questions from Prospective Financial Information and Other Assurance Services

SAE 3400: Examination of Prospective Financial Information: frequently asked questions

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

A forecast is based on assumptions about events and actions that management expects to occur, so the assumptions are best estimates. A projection is based on hypothetical assumptions, or a mix of hypothetical and best-estimate assumptions. A projection shows what could happen if certain events occurred.

Does the auditor give assurance that the prospective results will be achieved?

No. The future is uncertain and events often do not occur as expected. The auditor gives negative assurance on whether the assumptions provide a reasonable basis, and an opinion on whether the PFI is properly prepared and presented. The report also cautions users that actual results may differ.

Who is responsible for prospective financial information?

Management is responsible for the PFI, including the assumptions on which it is based. The auditor examines the information and reports. The auditor does not prepare it.

Is SAE 3400 the same as an audit of financial statements?

No. It is an assurance engagement on forward-looking information. An audit of financial statements gives an opinion on historical information. Under SAE 3400, the assumptions get only negative assurance because they concern the future, while proper preparation and presentation are covered by an opinion.