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

Sunrise Textiles Ltd has asked CA Mehta to examine a profit forecast that it will include in an information memorandum. Management wants the report to say that the assumptions are 'free of material misstatement' and that the forecast profit will be achieved. Under SAE 3400, what should CA Mehta do?

The auditor gives only moderate assurance, in the form of negative assurance, on whether the assumptions provide a reasonable basis for the forecast. The evidence is future-oriented and speculative, so the auditor cannot opine that the forecast results will be achieved.

  1. AReport positively that the assumptions are free of material misstatement, since the evidence is audited
  2. BReport on the reasonableness of the assumptions with only a moderate level of assurance, and not give an opinion that the forecast results will be achievedCorrect
  3. CGive a guarantee that the forecast results will be achieved, provided management signs a representation letter
  4. DDecline to report on the assumptions and give an opinion only on the arithmetic of the forecast

Explanation

Evidence for prospective information is itself future-oriented and speculative. SAE 3400 therefore allows only a moderate level of assurance on the reasonableness of the assumptions, and the auditor cannot opine that the results will be achieved. A positive expression on the assumptions is therefore not permitted.

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