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

Kaveri Infra Ltd. engages CA Rohan to examine a forecast. Rohan's report says: 'In our opinion, the assumptions are free of material misstatement and provide a reasonable basis for the forecast.' Which comment best reflects SAE 3400?

The wording is incorrect. Because evidence on assumptions is future-oriented, SAE 3400 allows only a moderate level of assurance on the reasonableness of management's assumptions. The report should therefore give a statement of negative assurance on whether the assumptions provide a reasonable basis, not a positive opinion.

  1. ACorrect, because the auditor should always give a positive assurance on assumptions
  2. BCorrect, provided management's representation letter is obtained
  3. CIncorrect, because on the reasonableness of management's assumptions the auditor provides only a moderate level of assurance, expressed as negative assuranceCorrect
  4. DIncorrect, because the auditor should not comment on assumptions at all and only on arithmetical accuracy

Explanation

Given the types of evidence available for assumptions, it is difficult to reach satisfaction sufficient for a positive expression. SAE 3400 therefore gives only moderate assurance on the assumptions, reported as a statement of negative assurance on whether they provide a reasonable basis. A representation letter does not change this, and the auditor does comment on assumptions.

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