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discuss the assurance provided for prospective financial information…

- - - - PDL 2!!!
      - PDL 3!!!
      - PDL 1!!!
      - PASSCARD!!!
      - ISAE 3400 The Examination of Prospective Financial Information. Prospective financial information
        
        one of the few subject matters, other than historical financial information, for which the profession provides specific guidance
        
        In Australia, there is also a standard which covers prospective financial information, ASAE 3450 Assurance Engagements involving Corporate Fundraisings and/or Prospective Financial Information,
        
        this standard is deemed not to be equivalent to ISAE 3400
        
        ASAE 3450 applies to reporting on:
        (a) historical financial information, pro forma historical financial information, prospective financial information and/or pro forma forecast prepared in connection with a corporate fundraising, and included in, or to be included in, a public or non-public document; and
        (b) prospective financial information, including a pro forma forecast or a projection, prepared for any other purpose (ASAE 3450, para. 1).
        
        definitions
        
        prospective financial information
        
        financial information based on assumptions about events that may occur in the future and possible actions by an entity … Prospective financial information can be in the form of a forecast, or projection or a combination of both, for example, a one year forecast plus a five year projection (ISAE 3400, para. 3).
        
        ‘forecast’
        
        prospective financial information prepared on the basis of assumptions as to future events which management expects to take place, and the actions management expects to take as of the date the information is prepared (best estimate assumptions) (ISAE 3400, para. 4).
        
        a forecast is the entity’s best estimate of what is expected to occur,
        
        ‘projection’
        
        prospective financial information prepared on the basis of … hypothetical assumptions [or a mixture of best-estimate and hypothetical assumptions] about future events and management actions which are not necessarily expected to take place, such as when some entities are in a start up phase or are considering a major change in the nature of operations (ISAE 3400, para. 5).
        
        a projection is an entity’s estimate of what will occur if a specific course of action is undertaken.
        
        Auditor’s objective
        
        in providing assurance on prospective financial information is to obtain sufficient appropriate audit evidence as to whether: BPPC
        (a) Management’s best-estimate assumptions on which the prospective financial information is based are not unreasonable and, in the case of hypothetical assumptions, such assumptions are consistent with the purpose of the information;
        (b) The prospective financial information is properly prepared on the basis of the assumptions;
        (c) The prospective financial information is properly presented and all material assumptions are adequately disclosed, including a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions; and
        (d) The prospective financial information is prepared on a consistent basis with historical financial reports, using appropriate accounting principles (ISAE 3400, para. 2).
        
        What are the key points to note when an auditor provides assurance on prospective financial information?
        
        Evidence is generally future-oriented and therefore speculative
        
        The auditor does not express an opinion whether the results will be achieved
        
        It may be difficult to express a positive opinion
        
        When reporting on the reasonableness of management assumptions, moderate level of assurance is usually provided
        
        The auditor is not precluded from providing a reasonable level of assurance regarding the assumptions when the appropriate level of satisfaction has been obtained.
        
        In the assurance report, explicit mention that forecasts and projections may not necessarily occur [p403]
    - - general procedures to be performed
        form and content of the report
      - More specifically, ISAE 3400 provides the auditor with considerable guidance about: PPPFAAK
        • the auditor’s assurance regarding prospective financial information
        • acceptance of the engagement
        • knowledge of the entity’s business, which may have a significant effect on the prospective financial information, including knowledge of the entity’s process for preparing prospective financial information
        • the period of coverage of the prospective financial information and its impact on underlying assumptions
        • the audit procedures to be adopted, particularly in relation to management’s hypothetical and best-estimate assumptions
        • the presentation and disclosure of the prospective financial information
        • the form and content of the auditor’s report, including the expression of an opinion, as well as the nature of the prospective financial information and its limitations.
      - Evidence
        
        The procedure for collecting evidence varies between management’s best-estimate assumptions (i.e. assumptions regarding future events that management expects to occur and actions management expects to take) and their hypothetical assumptions (i.e. future events and management actions that are not necessarily expected to take place).
        
        forecast
        
        • Sufficient appropriate audit evidence needs to be obtained for best-estimate assumptions (‘forecast’) (ISAE 3400, para. 18).
        
        projection
        
        • Supporting evidence need not be obtained for hypothetical assumptions (‘projection’), but the auditor would need to:
        –– consider whether all significant implications of the assumptions have been taken into consideration
        –– be satisfied that they are consistent with the purpose of the prospective financial information and that there is no reason to believe they are clearly unrealistic (ISAE 3400, paras 19–20).
        
        In relation to the auditor’s assurance on prospective financial information, a number of key points are important: SACMP
        • While evidence may be available to support the underlying assumptions, such evidence is generally future-oriented and, therefore, speculative in nature.
        • The auditor is not in a position to express an opinion as to whether the results shown in the prospective financial information will be achieved.
        • It may be difficult for the auditor to obtain a level of comfort sufficient to express a positive opinion that the assumptions are free of material misstatement.
        • When reporting on the reasonableness of management’s assumptions, the auditor ordinarily provides only a moderate level of assurance.
        • The auditor is not precluded from providing a reasonable level of assurance regarding the assumptions when the appropriate level of satisfaction has been obtained.
- - - - the following warnings that need to be given to users: HAO
        • Actual results are likely to be different from the prospective financial information, since anticipated events frequently do not occur as expected and the variation may be material …; (ISAE 3400, para. 27).
        • In the case of a projection, the prospective financial information has been prepared for
        (state purpose), using a set of assumptions that include hypothetical assumptions about future events and management’s actions that are not necessarily expected to occur. Consequently, readers are cautioned that the prospective financial information is used for purposes other than that described; (ISAE 3400, para. 27).
        • Even if events anticipated under the hypothetical assumptions described … occur, actual results are still likely to be different from projection since other anticipated events frequently do not occur as expected … (ISAE 3400, para. 28).
    - - When the issuer of a prospectus wants to illustrate the effect of a planned acquisition or divestment, it is common to demonstrate this by presenting adjusted past financial statements.
        
        The adjusted financial statements demonstrate the financial effect of that transaction by showing what the financial statements would be if that transaction had taken place in the prior period.
      - The pro forma financial information should be presented in the following columns: PUR
        • the unadjusted financial information
        • the pro forma adjustments
        • the resulting pro forma financial information (ISAE 3420, para. 11(c)).
      - have an entity’s securities trading on any of the major stock exchanges around the world generally requires the issue of a prospectus approved by a relevant securities regulator.
        
        The prospectus content is normally determined by statutory or regulatory requirements, but usually contains details of the offering entity and the securities being offered.
        
        In a number of jurisdictions—the European Union (EU), for example—issuers who have a prospectus approved by an appropriate regulator in their own jurisdiction, can also offer securities into other jurisdictions (such as other EU member states) without the need for any additional approval.
        
        This has led to an increase in the number of cross-jurisdictional offerings in the EU.
        
        In a number of jurisdictions, assurers obtain and convey reasonable assurance on the process for compiling prospective financial information, not the information itself. It also should be noted that the assurer is not involved in the compilation of the information (compilation engagements)
      - suitable criteria
        
        prerequisite for any assurance engagement
        
        For an assurance engagement to report on the process for compiling prospective financial information, suitable criteria are required for evaluating whether that process has, in all material respects, been appropriately applied by the responsible party.
        
        To ensure an appropriate level of consistency in the application of ISAE 3420 in relation to the suitability of criteria, the International Auditing and Assurance Standards Board (IAASB) requires that the practitioner determine that:
        
        • financial information is extracted from an appropriate source, which in most cases is expected to be published financial information such as annual or interim financial statements
        • any pro forma adjustments are directly attributable to transactions or events, factually supportable, and consistent with the reporting entity’s financial reporting framework and associated accounting policies.