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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Reporting on other assignments

Kestrel plc's management has prepared a forecast for a loan application and asks Danby LLP to examine it. The forecast is based on a mix of best-estimate assumptions and a hypothetical assumption that a new factory will be built, although no decision has been made. How should Danby LLP deal with this in its ISAE 3400 report?

Danby should treat the information as a projection and make clear in the report that the hypothetical assumption may not occur and that the information is intended for a specific purpose. Hypothetical assumptions are acceptable if consistent with that purpose, so refusing or omitting any mention is wrong.

  1. ARefuse the engagement because hypothetical assumptions are never permitted
  2. BTreat the hypothetical assumption as a best-estimate assumption to simplify testing
  3. CReport that the forecast is a projection, and state that the hypothetical assumption is not expected to be realised, drawing attention to its purpose and limited useCorrect
  4. DReport on the forecast with no mention of the hypothetical assumption, as it is management's responsibility

Explanation

A forecast using hypothetical assumptions is a projection. The report should state whether the practitioner concludes the assumptions are reasonable given the purpose, and caution that actual results are likely to differ because events may not occur as assumed. Hypotheticals are allowed if they are consistent with the purpose, so refusal is not required.

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