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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Specific assignments

Kestrel & Partners is carrying out due diligence for Bramwell plc on a target, Orion Ltd. Orion's management supplies a profit forecast for the next three years, and Bramwell wants Kestrel to confirm the forecast is achievable. What is the most appropriate response by Kestrel?

Kestrel should examine the forecast's assumptions and mathematical accuracy and report on whether the assumptions are reasonable, stating that actual results will probably differ. It cannot guarantee achievement because prospective information depends on uncertain future events, and it must not simply accept management's assumptions.

  1. AAgree to guarantee that the forecast will be achieved, since it is based on management information
  2. BRefuse any work on the forecast because auditors may never deal with prospective information
  3. CReview the forecast's assumptions and arithmetic and report on whether the assumptions are reasonable, making clear that actual results will differ and no guarantee is givenCorrect
  4. DAccept management's assumptions without challenge because the forecast belongs to Orion

Explanation

Under ISAE 3400 principles, the practitioner can examine the support for assumptions and the proper preparation of a forecast, and express limited assurance on reasonableness. The practitioner cannot guarantee achievement because future events are uncertain. Accepting assumptions without challenge would fail professional scepticism.

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