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

SAE 3420: Pro Forma Financial Information in a Prospectus

Updated 5 October 2026 · Fact-checked

SAE 3420 deals with a practitioner's reasonable assurance engagement to report on whether a responsible party has properly compiled pro forma financial information in a prospectus. To answer, state the applied criteria, check the source, adjustments and compilation, and give an opinion on whether it is compiled on the basis stated.

Understand SAE 3420: Pro Forma Financial Information in a Prospectus

Pro forma financial information shows how a significant event or transaction might have affected the entity's reported financial information, had the event occurred earlier. Examples are an acquisition, a disposal or a restructuring. It is shown in a prospectus so that investors see the likely effect on past numbers.

It is not a forecast and it is not a new audit. It starts with historical information (the unadjusted financial information), adds pro forma adjustments for the event, and arrives at the pro forma figures. The responsible party (usually the issuer's management or board) compiles it using applicable criteria.

SAE 3420 covers the practitioner's reasonable assurance engagement to report on this compilation. The practitioner does not give an opinion on the pro forma information itself being true. The practitioner opines on whether the responsible party has compiled it, in all material respects, on the basis of the applicable criteria.

The practitioner does not update or reissue any reports on the historical financial information used in compiling the pro forma information. The engagement does not make the practitioner responsible for that source. The practitioner evaluates whether the unadjusted information has been appropriately extracted from the source, and notes whether that source was audited or reviewed. Pro forma information is hypothetical, so by its nature it may not show actual results.

SAE 3420 is based on ISAE 3420 but adapted for India, for example for the Indian legal and regulatory setting of prospectuses. Exams ask for the engagement steps, the report content and the material modifications, so learn all three.

Key rules to remember

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.

How to solve SAE 3420: Pro Forma Financial Information in a Prospectus questions

Use this order for any question on SAE 3420, whether it asks for procedures, the report or a case decision.

1Identify the engagement: a report on compilation of pro forma information included in a prospectus, with the responsible party named.
2Name the applicable criteria and check they are suitable and available to users, as the opinion is measured against them.
3Check acceptance points: the practitioner's competence, independence and ethics, and a clear engagement letter on scope and responsibilities.
4List the procedures: understand the event, evaluate the source of unadjusted information, test adjustments for support and consistency, recheck arithmetic, and review presentation and disclosures.
5Obtain written representations from the responsible party and consider any modification.
6State the conclusion as a reasonable assurance opinion on compilation, in the prescribed report form.
7Apply the facts of the case: write the provision, the fact and the conclusion in that order.

Quickest way: Provision, fact, conclusion in four lines

When to use it: Use when time is short, especially for case-scenario MCQs and short-note questions.

Say what is being reported: compilation of pro forma information, not the information itself.
Say the assurance level: reasonable assurance.
Say who is responsible: management compiles; the practitioner reports.
Link the case fact to one of the three checks (source, adjustments, presentation) and end with the opinion effect.

Common mistakes in SAE 3420: Pro Forma Financial Information in a Prospectus

Writing that the practitioner gives an opinion on the pro forma figures being true and fair.
Students mix this with a normal audit opinion on financial statements.
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.
Students link a prospectus engagement with review work.
Fix: State clearly that it is a reasonable assurance engagement.
Saying the practitioner compiles the pro forma information.
Confusion with compilation engagements under SRS 4410.
Fix: Remember that the responsible party compiles. The practitioner only examines and reports on that compilation.
Treating pro forma information as a forecast.
The word 'prospectus' suggests future numbers, similar to SAE 3400.
Fix: Pro forma information adjusts historical information for an event as if it had happened earlier. A forecast looks forward.
Ignoring the applicable criteria in the answer.
Students jump straight to procedures.
Fix: Open with the criteria. Without suitable criteria the practitioner cannot form the opinion.
Listing the modifications to ISAE 3420 from memory without conditions.
The material modification points are rarely revised.
Fix: Frame them as adaptations to suit the Indian context, and revise them from the SAE text itself.

Worked examples

Example 1

Case: Nova Foods Ltd plans a public issue. Its draft prospectus includes pro forma financial information showing the effect of the acquisition of Tasty Snacks Ltd, as if the acquisition had happened at the start of the last financial year. The board has compiled it using criteria stated in the prospectus. The board asks CA Rao to report on it. What is the nature of CA Rao's engagement, and on what will he opine?

Show the solution

Provision: SAE 3420 covers a reasonable assurance engagement to report on the compilation of pro forma financial information in a prospectus.
Fact: The board is the responsible party and has compiled the information. The criteria are stated in the prospectus.
Application: CA Rao does not compile the information. He examines it against the stated criteria, after confirming they are suitable.
Conclusion: He gives a reasonable assurance opinion on whether it has been compiled, in all material respects, on the basis of the applicable criteria. He does not opine that the pro forma results are accurate or will occur.

Answer: CA Rao has a reasonable assurance engagement. His opinion is on the compilation of the information by the board against the applicable criteria, not on the pro forma results themselves.

Example 2

Case: In the above engagement, CA Rao finds that one pro forma adjustment, a ₹4,00,000 reduction of finance cost, is not supported by any contract or other evidence. The amount is material. Management refuses to remove it. What procedures led to this finding, and what is the effect on his report?

Show the solution

Provision: The practitioner tests whether each adjustment is directly attributable to the event and supported by evidence, and checks consistency with the applicable criteria.
Fact: The ₹4,00,000 adjustment has no support and is material.
Application: This is a failure in the adjustments check, one of the three checks on compilation. CA Rao first discusses the adjustment with management. Management refuses to remove it, so it stays in the pro forma information.
Conclusion: Because the unsupported adjustment is included, the pro forma information is not compiled in accordance with the applicable criteria. This is a misstatement (non-compliance with the criteria), not a scope limitation. If the effect is material but not pervasive, CA Rao gives a qualified opinion. If it is material and pervasive, he gives an adverse opinion. A disclaimer applies only when the practitioner cannot obtain evidence (a scope limitation) and the possible effects are material and pervasive. That is not the case here.
Further step: Since management refuses to correct it, CA Rao should also consider whether the engagement can continue, including withdrawal, and whether the unsupported adjustment makes the prospectus misleading.

Answer: The unsupported material adjustment was found while testing adjustments. Management refuses to remove it, so the pro forma information is not compiled in accordance with the criteria. This is a misstatement, not a scope limitation. CA Rao gives a qualified opinion if the effect is material but not pervasive, or an adverse opinion if it is material and pervasive. A disclaimer is for cases where evidence cannot be obtained and the possible effects are material and pervasive. He should also consider withdrawal and whether the adjustment makes the prospectus misleading.

Exam tips

Begin every answer with the assurance level and what the opinion covers. This earns the first marks quickly.
For a question on material modifications over ISAE 3420, state that SAE 3420 is adapted for Indian requirements. Revise the exact points from the standard text.
In case MCQs, check whether the facts describe compilation by the practitioner (SRS 4410) or a report on compilation by management (SAE 3420).
Use the three checks of source, adjustments and presentation as headings in procedure questions.
Do not call pro forma information a forecast or projection. This costs easy marks.

Practice questions from Prospective Financial Information and Other Assurance Services

SAE 3420: Pro Forma Financial Information in a Prospectus: frequently asked questions

What is pro forma financial information in auditing?

It is information showing how a significant event or transaction might have affected historical financial information, as if it had happened earlier. It is prepared by the responsible party using applicable criteria. It is hypothetical and not a forecast.

Is SAE 3420 a reasonable or limited assurance engagement?

It is a reasonable assurance engagement. The practitioner gives an opinion in positive form on whether the pro forma information has been compiled, in all material respects, on the basis of the applicable criteria.

Does the practitioner compile the pro forma information under SAE 3420?

No. The responsible party, usually management, compiles it. The practitioner reports on that compilation. Compiling financial information for a client falls under SRS 4410, which is a different engagement.

How does SAE 3420 differ from ISAE 3420?

SAE 3420 is based on ISAE 3420 with modifications for the Indian context. Questions often ask for these material modifications, so study the list given in the standard itself and write it in your own words.