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

Kaveri Textiles Ltd, an unlisted company, has asked CA Mehta to examine its five-year cash flow projection that will be given to a lender. Management wants the report to say that the auditor 'gives reasonable assurance that the projected cash flows will be achieved'. What is the correct response under SAE 3400?

The auditor must refuse the wording. Prospective information relates to events that may not occur, and the supporting evidence is future-oriented and speculative. The auditor therefore cannot opine on whether projected results will be achieved, and the report should carry caveats about achievability instead.

  1. AAgree, because a positive opinion on achievability is allowed if the lender is the only user
  2. BAgree, provided the report is dated after the first projected year ends
  3. CRefuse that wording, because the auditor cannot express an opinion on whether the results shown in the prospective financial information will be achievedCorrect
  4. DAgree, provided management signs a representation that the projections are realistic

Explanation

Prospective financial information relates to events that have not yet occurred and might not occur. The supporting evidence is itself future-oriented and speculative. So the auditor cannot express an opinion on whether the results will be achieved. The report instead carries appropriate caveats on achievability. A management representation or a restricted user group does not change this.

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