AT 301: Financial Forecasts and Projections
EFFECTIVE DATE AND APPLICABILITY
| Original Pronouncement |
Statement on Standards for Attestation Engagements (SSAE) 10, Attestation Standards: Revision and Recodification, as amended by SSAE 11 and 17. |
| Effective Date |
These statements currently are effective. |
| Applicability |
The Statement applies to engagements in which a practitioner either (1) submits, to his or her clients or others, prospective financial statements that he or she has assembled or assisted in assembling or (2) reports on prospective financial statements, and also believes under (1) or (2) that those financial statements are, or reasonably might be, expected to be used by a third party. (See the following information.) |
APPLICABILITY
The practitioner should report when the practitioner submits to the client or others prospective financial statements the practitioner has assembled or assisted in assembling and also believes the prospective financial statements might be used by a third party.
This section also provides standards for a practitioner engaged to examine, compile, or apply agreed-upon procedures to partial presentations. (See the section “Definitions of Terms.”)
There are also several circumstances in which the pronouncement does not apply, as explained in the following paragraphs.
The Statement does not apply to a financial analysis of a potential project where the practitioner obtains the information, makes the assumptions, and assembles the presentation. This type of analysis is not for general use; however, if the responsible party (see below) reviews and adopts the assumptions and presentation, or bases its assumption and presentation on the analysis, the Statement does apply.
The Statement does not apply to engagements involving prospective financial statements used solely in connection with litigation services if the practitioner’s work is subject to analysis and challenge by all parties. This exception does not apply if:
1. The practitioner is specifically engaged to issue or does issue an examination, a compilation, or an agreed-upon procedures report on prospective financial statements.
2. The prospective financial statements are for use by third parties who, under the rules of the proceedings, do not have the opportunity for analysis and challenge by each party.
The Statement also does not apply to services involving the following:
1. Prospective financial statements restricted to internal use
2. Current year budgets presented with interim period historical financial statements
DEFINITIONS OF TERMS
For purposes of this section, the following definitions apply.
Assembly. Manual or computer processing of mathematical or other clerical functions related to the presentation of prospective financial statements.
Compilation of prospective financial statements. A professional service that involves:
1. Assembling prospective financial statements
2. Performing required procedures (see later sections), including reading the prospective financial statements and the accompanying summary of significant assumptions and accounting policies, and considering whether they appear to be presented in conformity with American Institute of Certified Public Accountants (AICPA) presentation guidelines (see AICPA Guide for Prospective Financial Information) and are not obviously inappropriate
3. Issuing a compilation report
A compilation does not provide assurance that the practitioner will become aware of significant matters that might be disclosed by more extensive procedures, such as those performed in an examination of prospective financial statements.
Entity. Any unit, existing or to be formed, for which financial statements could be prepared in accordance with generally accepted accounting principles or another comprehensive basis of accounting. It may be an individual, partnership, corporation, trust, estate, association, or governmental unit.
Examination of prospective financial statements. A professional service that involves:
1. Evaluating the preparation of the prospective financial statements
2. Evaluating the support underlying the assumptions
3. Evaluating the presentation of the financial statements for conformity with AICPA presentation guidelines (see AICPA Guide for Prospective Financial Information)
4. Issuing an examination report
An examination provides the practitioner with a basis for reporting on whether, in his or her opinion, the prospective financial statements are presented in conformity with AICPA guidelines and the assumptions provide a reasonable basis for the responsible party’s forecast or projection given the hypothetical assumptions.
Financial forecast. Prospective financial statements that present, to the best of the responsible party’s (see below) knowledge and belief, an entity’s expected financial position (see following entry), results of operations, and cash flows. It is based on the responsible party’s assumptions about the conditions it expects to exist and the course of action it expects to take. A financial forecast may be expressed in specific monetary amounts as a single point estimate of forecasted results or as a range.
Financial projection. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions (see entry in this section), an entity’s expected financial position, results of operations, and cash flows. Ordinarily, it is prepared to answer the question, “What would happen if . . . ?” A financial projection may contain a range.
General use of prospective financial statements. Use of prospective financial statements by persons with whom the responsible party is not negotiating directly (e.g., prospective financial statements in an offering statement for an entity’s debt or equity securities). Recipients of general-use prospective financial statements are unable to ask the responsible party directly about the presentation. Only a financial forecast is appropriate for general use.
Hypothetical assumption. An assumption used in a financial projection to present a condition or a course of action that may not occur but is consistent with the purpose of the projection.
Key factors. Significant matters on which an entity’s future results are expected to depend. Key factors encompass matters that affect items such as sales, production, service, and financing activities. They are the foundation for prospective financial statements and are the bases for assumptions.
Limited use of prospective financial statements. Use of prospective financial statements by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly (e.g., prospective financial statements used in loan negotiations, submission to a regulatory agency, or solely within the entity). Financial forecasts and financial projections are appropriate for limited use.
Partial presentation. A presentation of prospective financial information that excludes one or more of the items required for prospective financial statements (see “Fundamental Requirements: General”). Partial presentations are not ordinarily appropriate for general use and should be restricted for use by specified parties who will be negotiating directly with the responsible party.
Prospective financial statement. Financial forecasts or financial projections (see prior entry), including summaries of significant assumptions and accounting policies. Prospective financial statements may cover a period that has partially expired. The following are not prospective financial statements:
1. Statements for periods that have completely expired
2. Pro forma financial statements (see AT Section 401)
3. Partial presentations
Responsible party. Person or persons responsible for the assumptions underlying prospective financial statements. Ordinarily, the responsible party is management; however, it can be outsiders, such as a party considering acquiring the entity.
OBJECTIVES OF AT SECTION 301
For many years, practitioners have been requested to provide and have provided services relating to forecasts and projections. There was, however, little in the authoritative literature to guide the practitioner in these types of engagements for some time. In 1980, the AICPA issued a guide on reviews of financial forecasts, but many areas of practice were not covered by that guide. There was a need for more comprehensive guidance. This section provides that guidance.
The section does the following:
1. Defines a financial forecast and a financial projection, and related terms
2. Establishes procedures and reporting standards for prospective financial statements that require the following services:
a. Compilation
b. Examination
c. Application of agreed-upon procedures
The service that was previously called a “review” was renamed an “examination,” because that is the highest level of service available. Now there is no review service.
In January 2001, the Auditing Standards Board issued SSAE 10, Attestation Standards: Revision and Recodification. SSAE 10 superseded SSAEs 1 through 9 and renumbered the AT sections in the AICPA’s codification. The revisions to this section include:
- Changing elements of the standard reports to conform to those elsewhere in the attestation standards
- Making the section applicable to partial presentations of prospective financial information
- Changing references to statements of changes in financial position to statement of cash flows
Additional guidance for practitioners’ services relating to prospective financial statements is found in the AICPA Guide for Prospective Financial Information.
SSAE 11 amended this section to delete the guidance on working papers. Documentation requirements for attest engagements are now covered in Section 101, Attest Engagements.
FUNDAMENTAL REQUIREMENTS: GENERAL
A practitioner should perform one of the services described in this Statement—compilation, examination, or application of agreed-upon procedures—whenever he or she does the following:
1. Submits to the client or others prospective financial statements that he or she has assembled, or assisted in assembling, that are, or reasonably might be, expected to be used by others
2. Reports on prospective financial statements that are, or reasonably might be, expected to be used by others
A practitioner may not compile, examine, or apply agreed-upon procedures to prospective financial statements that omit the summary of significant assumptions.
A practitioner should not compile, examine, or apply agreed-upon procedures to a financial projection that excludes either an identification of hypothetical assumptions or a description of the limitations on the usefulness of the presentation.
A practitioner may not consent to the use of his or her name in conjunction with a financial projection if the projection is to be used by persons not negotiating directly (general use) with the responsible party unless the projection is used to supplement a forecast.
Prospective financial statements preferably should be in the format of the historical financial statements. According to AT 301, Appendix A, paragraph 1, at a minimum, however, the following must be presented:
1. Sales or gross revenues
2. Gross profit or cost of sales
3. Unusual or infrequently occurring items
4. Provision for income taxes
5. Discontinued operations or extraordinary items
6. Income from continuing operations
7. Net income
8. Basic and diluted earnings per share, if applicable
9. Significant changes in financial position (for examples, see AICPA Guide for Prospective Financial Information)
10. Summary of significant assumptions
11. Summary of significant accounting policies
12. A description of what the responsible party intends the prospective financial statements to present
13. A statement that the assumptions are based on the responsible party’s judgment at the time the prospective information was prepared
14. A caveat that the prospective results may not be achieved
A presentation that omits any of items 1 through 9 is a partial presentation, which would not ordinarily be appropriate for general use. If an omitted applicable minimum item is derivable from the information presented, the presentation would not be deemed to be a partial presentation. A presentation that contains items 1 through 9 but omits 10 through 14 is not a partial presentation and is subject to the provisions of this section applicable to complete presentations.
Partial Presentations
A practitioner who is engaged to or does compile, examine, or apply agreed-upon procedures to a partial presentation should follow the guidance in this section for complete presentations and make modifications necessary to reflect the nature of the presentation.
Procedures on a partial presentation may be affected by the nature of the information presented. When engaged to compile or examine a partial presentation, the practitioner should consider whether key factors affecting elements, accounts, or items that are interrelated with those in the partial presentation he or she has been engaged to examine or compile have been evaluated, including key factors that may not necessarily be obvious to the partial presentation. (An example of this might be productive capacity relative to a sales forecast.) The practitioner should also consider whether all significant assumptions have been disclosed. The scope of the examination or compilation of some partial presentations may need to be similar to that for the examination or compilation of a presentation of prospective financial statements.
Because partial presentations are generally for limited use, reports on partial presentations of both forecasted and projected information should describe any limitations on the presentation’s usefulness.
NOTE: Chapter 23 of the AICPA Guide for Prospective Financial Information explains how to apply the guidance for complete prospective financial statements to partial presentations.
FUNDAMENTAL REQUIREMENTS: COMPILATION OF PROSPECTIVE FINANCIAL STATEMENTS
Standards
The following standards apply to the compilation of prospective financial statements and the practitioner’s report on these statements:
1. The person or persons performing the compilation should have adequate technical training and proficiency to compile prospective financial statements.
2. The practitioner should exercise due professional care in performing the compilation and preparing the report.
3. The work should be adequately planned, and assistants should be properly supervised.
4. The practitioner should perform the applicable compilation procedures.
5. The practitioner’s report should conform to the guidance described in the following section.
NOTE: Applicable compilation procedures should be performed (see Appendix B of this chapter).
Practitioner’s Report
According to AT 301.18, the standard report on the compilation of prospective financial statements should include the following:
1. An identification of the prospective financial statements
2. A statement that the practitioner has compiled the prospective financial statements in accordance with attestation standards established by the AICPA
3. A statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the prospective financial statements or the assumptions
4. A warning that the prospective results may not be achieved
5. A statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report
6. The manual or printed signature of the practitioner’s firm
7. The date of the compilation report
Other requirements are as follows:
1. The date of the practitioner’s report is the date of completion of the practitioner’s compilation procedures.
2. If prospective financial statements contain a range, the practitioner’s report should include a separate paragraph related to the circumstances.
3. For the compilation of a projection, the practitioner’s report should include a statement describing the special purpose for which the projection was prepared, as well as a separate paragraph that restricts the use of the report to the specified parties.
4. A practitioner who is not independent may issue a compilation report. A separate paragraph of the report is as follows and may also include the reasons for independence impairment:
5. If prospective financial statements contain presentation deficiencies or omit disclosures other than those relating to significant assumptions, the practitioner’s report should disclose the deficiency or omission.
6. If prospective financial statements are presented on a comprehensive basis of accounting other than generally accepted accounting principles (GAAP) and this is not disclosed, the practitioner’s report should disclose the basis of presentation.
Examples of compilation reports on prospective financial statements are presented in Illustrations 1–3.
FUNDAMENTAL REQUIREMENTS: EXAMINATION OF PROSPECTIVE FINANCIAL STATEMENTS
Standards
The practitioner should follow the general, fieldwork, and reporting standards for attestation engagements described in AT Section 101.
NOTE: Standards concerning technical training and proficiency and planning the examination engagement, as well as applicable examination procedures, are described in Appendix C of this chapter.
Accountant’s Report
According to AT 301.33, the standard report on the examination of prospective financial statements should include the following:
1. A title that includes the word independent.
2. An introductory paragraph with statements that:
a. Identify the prospective financial statements.
b. Identify the responsible party.
c. The prospective financial statements are the responsibility of the responsible party.
d. The practitioner’s responsibility is to express an opinion on the prospective financial statements based on his or her examination.
3. A scope paragraph with statements that:
a. The examination was made in accordance with attestation standards established by the AICPA, and accordingly, included such procedures as the practitioner considered necessary in the circumstances.
b. The practitioner believes that the examination provides a reasonable basis for his or her opinion.
4. An opinion paragraph that presents:
a. The practitioner’s opinion that the prospective financial statements are presented in conformity with AICPA presentation guidelines (see AICPA Guide for Prospective Financial Statements) and that the underlying assumptions provide a reasonable basis for the forecast. If a projection is presented, the practitioner’s opinion should be that the underlying assumptions provide a reasonable basis for the projection given the hypothetical assumptions.
b. A warning that the prospective results may not be achieved.
c. A statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report.
5. The manual or printed signature of the practitioner’s firm
6. The date of the examination or report
Other requirements are as follows:
1. The date of the practitioner’s report is the date of completion of the practitioner’s examination procedures.
2. If prospective financial statements contain a range, the practitioner’s report should include a separate paragraph that describes the responsible party’s election to present a range and the assumptions involved.
3. For the examination of a projection, the practitioner’s report should include a statement describing the special purpose for which the projection was prepared and a separate paragraph that restricts the report to the specified parties.
Modifications of Practitioner’s Opinion
The practitioner should modify his or her opinion in the following circumstances.
1. If prospective financial statements depart from AICPA presentation guidelines, issue a qualified opinion or an adverse opinion.
2. If prospective financial statements fail to disclose significant assumptions, issue an adverse opinion.
3. If one or more of the significant assumptions do not provide a reasonable basis for the forecast, issue an adverse opinion.
4. If one or more of the significant assumptions do not provide a reasonable basis for the projection, given the hypothetical assumptions, issue an adverse opinion.
5. If there is a scope limitation, disclaim an opinion and describe the limitation.
6. If there is a departure from GAAP (e.g., failure to capitalize a capital lease), issue an adverse opinion.
Examples of modified reports on prospective financial statements are presented in “Illustrations.”
Qualified Opinion
A practitioner’s report with a qualified opinion should include a separate explanatory paragraph that states all substantive reasons for the qualification and describes the departure from AICPA presentation guidelines. The opinion should include the words “except” or “exception” and should refer to the separate explanatory paragraph.
NOTE: A qualified opinion cannot be issued for a measurement (GAAP) departure, unreasonable or omitted assumption, or scope limitation.
Adverse Opinion
A practitioner’s report with an adverse opinion should include a separate explanatory paragraph that states all substantive reasons for the adverse opinion. The opinion should state that the presentation is not in conformity with AICPA presentation guidelines and should refer to the separate explanatory paragraph.
If the assumptions do not provide a reasonable basis for the financial statements, the opinion paragraph should make that statement.
If a significant assumption is not disclosed, the practitioner should describe the assumption in the report.
Disclaimer of Opinion
A practitioner’s report with a disclaimer of opinion should include a separate explanatory paragraph that states how the examination did not comply with appropriate standards. The disclaimer of opinion paragraph should state that the scope of the examination was not sufficient to enable the practitioner to express an opinion on the prospective financial statements. The disclaimer of opinion should include a direct reference to the separate explanatory paragraph.
If there is a scope limitation and also material departures from presentation guidelines, the practitioner should describe the departures in the report.
Modification of Standard Examination Report
There are circumstances under which the practitioner should modify the report without modifying the opinion included in the report. The circumstances and the modifications are explained in this section.
Emphasis of a Matter
The practitioner may present explanatory information or other informative material regarding the prospective financial statements in a separate paragraph of the report.
Part of Examination Made by Another Accountant
If more than one practitioner is involved in the examination, the guidance provided in Section 543, Part of Audit Performed by Other Independent Auditors, is generally applicable.
Comparative Historical Financial Information
Prospective financial statements may be included in a document that also contains audited, reviewed, or compiled historical financial statements and the practitioner’s report on those financial statements. In addition, the historical financial statements in the document may also be summarized and presented comparatively with the prospective financial statements. In these circumstances, the concluding sentence of the last paragraph of the practitioner’s report on the examination of the prospective financial statements is as follows:
Examination Is Part of Larger Engagement
If the practitioner’s examination of prospective financial statements is part of a larger engagement (for example, a financial feasibility study or business acquisition study), the practitioner may expand the report on the examination of the prospective financial statements to describe the entire engagement.
Examples of reports on the examination of prospective financial statements are presented in “Illustrations.”
FUNDAMENTAL REQUIREMENTS: APPLYING AGREED-UPON PROCEDURES TO PROSPECTIVE FINANCIAL STATEMENTS (SEE ALSO AT SECTION 201)
General
A practitioner may accept an engagement to apply agreed-upon procedures to prospective financial statements only when the following conditions are met:
1. Is the practitioner independent?
2. Do the specified parties and the practitioner agree upon the procedures to be performed by the practitioner, and do the specified parties take responsibility for the sufficiency of the procedures to be performed?
3. Is the use of the report restricted to the specified parties involved?
4. Do the prospective financial statements include a summary of significant assumptions?
5. Are the prospective financial statements to which the procedures are to be applied subject to reasonably consistent evaluation against criteria that are suitable and available to the specified parties?
6. Are the criteria to be used in the determination of findings agreed upon between the practitioner and the specified parties?
7. Are the procedures to be applied to the prospective financial statements expected to result in reasonably consistent findings using the criteria?
8. Is evidential matter expected to exist to provide a reasonable basis for expressing the findings in the practitioner’s report?
9. Where applicable, do the practitioner and the specified parties agree on any materiality limits for reporting purposes?
The practitioner ordinarily should meet with the specified parties to discuss procedures to be followed. If the practitioner is not able to discuss the procedures directly with all specified parties who will receive the report, he or she should apply one of the following or similar procedures:
1. Discuss the procedures to be applied with appropriate representatives of the specified parties.
2. Review relevant correspondence from the specified parties.
3. Compare the procedures to written requirements of the specified parties.
4. Distribute a draft of the report or a copy of the client’s engagement letter to the specified parties and obtain their agreement.
While the agreed-upon procedures generally may be as extensive or limited as the parties specify, mere reading of the prospective financial statements is not a procedure sufficient to permit a practitioner to report on the results of applying agreed-upon procedures to those statements.
Practitioner’s Report
The practitioner’s report on the results of applying agreed-upon procedures should include the elements as indicated in the example report presented in Illustration 11.
FUNDAMENTAL REQUIREMENTS: OTHER
Practitioner-Submitted Document
If a practitioner-submitted document contains the practitioner’s compilation, review, or audit report on historical financial statements and prospective financial statements, the practitioner should compile, examine, or apply agreed-upon procedures to the prospective financial statements and report accordingly. However, the practitioner does not have to compile, examine, or apply agreed-upon procedures to the prospective financial statements if (1) they are labeled “budget,” (2) the budget is only for the current fiscal year, and (3) the budget is presented with current year interim financial statements. In these circumstances, the practitioner should report on the budget and indicate that he or she did not compile or examine it and disclaim an opinion or any other form of assurance.
The budgeted information may omit the summaries of significant assumptions and accounting polices required by the AICPA presentation guidelines as long as the omission is not undertaken with the intention of misleading a user of the budgeted information and is disclosed in the practitioner’s report (see Illustration 12).
Client-Prepared Document
If a client-prepared document contains the practitioner’s compilation, review, or audit report on historical financial statements and prospective financial statements, the practitioner should not consent to the use of his or her name in the document unless one of the following conditions exist:
1. The practitioner (or another practitioner) has compiled, examined, or applied agreed-upon procedures to the prospective financial statements and the report of the practitioner accompanies them or is included in the document.
2. The prospective financial statements are accompanied by an indication by the responsible party or the practitioner that the practitioner has not compiled, examined, or applied agreed-upon procedures to the prospective financial statements and that the practitioner assumes no responsibility for them.
If the practitioner audited historical financial statements that accompany prospective financial statements that he or she did not compile, examine, or apply agreed-upon procedures to, he or she should refer to Section 550, Other Information in Documents Containing Audited Financial Statements, and determine if that pronouncement applies.
If a client-prepared document contains the practitioner’s report on prospective financial statements and historical financial statements, the practitioner should not consent to the use of his or her name in the document unless one of the following conditions exists:
1. The practitioner (or another practitioner) has compiled, reviewed, or audited the historical financial statements and the report of the practitioner accompanies them or is included in the document.
2. The historical financial statements are accompanied by an indication by the responsible party or the practitioner that the practitioner has not compiled, reviewed, or audited the historical financial statements and that the practitioner assumes no responsibility for them.
Inconsistent Information
An entity may publish documents that contain information other than historical financial statements in addition to the compiled or examined prospective financial statements and the practitioner’s report thereon. In these circumstances, the practitioner should read the other information and consider whether there are inconsistencies with the information appearing in the prospective financial statements.
If the practitioner examined prospective financial statements included in a document containing inconsistent information, the practitioner should consider whether the prospective financial statements, the practitioner’s report, or both require revision. Depending on the conclusion reached, the practitioner should consider other actions, such as issuing an adverse opinion, disclaiming an opinion because of a scope limitation, withholding use of the practitioner’s report in the document, or withdrawing from the engagement.
If the practitioner compiled the prospective financial statements included in the document containing inconsistent information, the practitioner should try to obtain additional or revised information. If the additional or revised information is not received, the practitioner should withhold use of the compilation report or withdraw from the compilation engagement.
Material Misstatement of Fact
If, in the document containing the compiled or examined prospective financial statements, the practitioner becomes aware of information he or she believes is a material misstatement of fact, he or she should discuss the matter with the responsible party. If the practitioner concludes that there is a valid basis for concern, he or she should suggest that the responsible party consult with a party whose advice might be useful, such as the entity’s attorney.
If, after discussing the possible material misstatement of fact, the practitioner concludes that a material misstatement of fact exists, he or she should consider notifying the responsible party in writing and consulting his or her attorney.
INTERPRETATIONS
There are no interpretations for this section. The AICPA has issued the Prospective Financial Information Guide, which provides comprehensive guidance for engagements related to prospective financial statements.
ILLUSTRATIONS
The illustrations on the following pages are adapted from SSAE 10 (AT 300.19–.56).
NOTE: These report forms are appropriate whether the presentation is based on GAAP or an other comprehensive basis of accounting (OCBOA). If the responsible party is other than management, the references to management in these reports should be changed to refer to the party who assumes responsibility for the assumptions.
Illustration 1. Standard Report: Compilation of Forecast (Does Not Contain a Range)
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have compiled the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of Widget Company as of December 31, 20X1, and for the year then ending, in accordance with attestation standards established by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of a forecast information that is the representation of management and does not include evaluation of the support for the assumptions underlying the forecast. We have not examined the forecast, and, accordingly, do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.
Smith and Jones
February 15, 20X2
Illustration 2. Standard Report: Compilation of Projection (Does not Contain a Range)
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have compiled the accompanying projected balance sheet, statements of income, retained earnings, and cash flows for Widget Company as of December 31, 20X1, and for the year then ending, in accordance with attestation standards established by the American Institute of Certified Public Accountants.
The accompanying projection and this report were prepared for the Anytown National Bank for the purpose of negotiating a loan to expand Widget Company’s plant.
A compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection. We have not examined the projection and, accordingly, do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, even if the loan is granted and the plant is expanded, there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.
The accompanying projection and this report are intended solely for the information and use of Widget Company and Anytown National Bank and are not intended to be and should not be used by anyone other than these specified parties.
Smith and Jones
February 15, 20X2
Illustration 3. Standard Compilation Report: Separate Paragraph—Prospective Financial Statements Contain a Range
As described in the summary of significant assumptions, management of Widget Company has elected to portray forecasted revenue at the amounts of $X,XXX and $Y,YYY, which is predicated upon occupancy rates of XX% and YY% of available apartments, rather than as a single point estimate. Accordingly, the accompanying forecast presents forecasted financial position, results of operations, and cash flows at such occupancy rates. However, there is no assurance that the actual results will fall within the range of occupancy rates presented.
Smith and Jones
February 15, 20X2
Illustration 4. Standard Report: Examination of Forecast
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of Widget Company as of December 31, 20X1, and for the year then ending.
Widget’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion.
In our opinion, the accompanying forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s forecast. However, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.
Smith and Jones
February 15, 20X2
Illustration 5. Standard Report: Examination of Projection
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have examined the accompanying projected balance sheet, statements of income, retained earnings, and cash flows of Widget Company as of December 31, 20X1, and for the year then ending.
Widget’s management is responsible for the projection, which was prepared for the purpose of obtaining a loan. Our responsibility is to express an opinion on the projection based on our examination.
Our examination was conducted in accordance with attestation standards for an examination of a projection established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection. We believe that our examination provides a reasonable basis for our opinion.
In our opinion, the accompanying projection is presented in conformity with guidelines for presentation of a projection established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s projection assuming the granting of the requested loan for the purpose of expanding Widget Company’s plant as described in the summary of significant assumptions. However, even if the loan is granted and the plant is expanded, there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.
The accompanying projection and this report are intended solely for the information and use of the board of directors and are not intended to be and should not be used by anyone other than these specified parties.
Smith and Jones
February 15, 20X2
Illustration 6. Standard Examination Report: Separate Paragraph—Prospective Financial Statements (Forecast) Contain a Range
As described in the summary of significant assumptions, management of Widget Company has elected to portray forecasted revenue at the amounts of $X,XXX and $Y,YYY, which is predicated upon occupancy rates of XX% and YY% of available apartments rather than as a single point estimate. Accordingly, the accompanying forecast presents forecasted financial position, results of operations, and cash flows at such occupancy rates. However, there is no assurance that the actual results will fall within the range of occupancy rates presented.
Smith and Jones
February 15, 20X2
Illustration 7. Examination Report: Qualified Opinion on Forecast
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of Widget Company as of December 31, 20X1, and for the year then ending. Widget Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion.
The forecast does not disclose reasons for the significant variation in the relationship between income tax expense and pretax accounting income as required by generally accepted accounting principles.
In our opinion, except for the omission of the disclosure of the reasons for the significant variation in the relationship between income tax expense and pretax accounting income as discussed in the preceding paragraph, the accompanying forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants and the underlying assumptions provide a reasonable basis for management’s forecast. However, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.
Smith and Jones
February 15, 20X2
Illustration 8. Examination Report: Adverse Opinion on Forecast
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of Widget Company as of December 31, 20X1, and for the year then ending. Widget Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination.
Our examination was conducted in accordance with attestation standards for an examination of a financial forecast established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion.
As discussed under the caption “Sales” in the summary of significant forecast assumptions, the forecasted sales include, among other things, revenue from the Company’s federal defense contracts continuing at the current level. The Company’s present federal defense contracts will expire in March 20X2. No new contracts have been signed and no negotiations are under way for new federal defense contracts. Furthermore, the federal government has entered into contracts with another company to supply the items being manufactured under the Company’s present contracts.
In our opinion, the accompanying forecast is not presented in conformity with guidelines for presentation of a financial forecast established by the American Institute of Certified Public Accountants because management’s assumptions, as discussed in the preceding paragraph, do not provide a reasonable basis for management’s forecast. We have no responsibility to update this report for events or circumstances occurring after the date of this report.
Smith and Jones
February 15, 20X2
Illustration 9. Examination Report: Disclaimer of Opinion on Forecast
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We were engaged to examine the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of Widget Company as of December 31, 20X1, and for the year then ending. Widget Company’s management is responsible for the forecast.
As discussed under the caption “Income From Investee” in the summary of significant forecast assumptions, the forecast includes income from an equity investee constituting 23% of forecasted net income, which is management’s estimate of the Company’s share of the investee’s income to be accrued for 20X1. The investee has not prepared a forecast for the year ending December 31, 20X1, and we were therefore unable to obtain suitable support for this assumption.
Because, as described in the preceding paragraph, we are unable to evaluate management’s assumption regarding income from an equity investee and other assumptions that depend thereon, the scope of our work was not sufficient to express, and we do not express, an opinion with respect to the presentation of or the assumptions underlying the accompanying forecast. We have no responsibility to update this report for events and circumstances occurring after the date of this report.
Smith and Jones
February 15, 20X2
Illustration 10. Expansion of Practitioner’s Report on or for a Financial Feasibility Study
Independent Accountant’s Report
The Board of Directors
Example Hospital
Maintown, Texas
We have prepared a financial feasibility study of Example Hospital’s plans to expand and renovate its facilities. The study was undertaken to evaluate the ability of Example Hospital (the Hospital) to meet the Hospital’s operating expenses, working capital needs, and other financial requirements, including the debt service requirements associated with the proposed $25,000,000 [legal title of bonds] issue, at an assumed average annual interest rate of 10.0% during the five years ending December 31, 20X5.
The proposed capital improvements program (the Program) consists of a new two-level addition, which is to provide 50 additional medical-surgical beds, increasing the complement to 275 beds. In addition, various administrative support service areas in the present facilities are to be remodeled. The Hospital administration anticipates that construction is to begin June 30, 20X1, and to be completed by December 31, 20X2.
The estimated total cost of the Program is approximately $30,000,000. It is assumed that the $25,000,000 of revenue bonds that the Example Hospital Finance Authority proposes to issue would be the primary source of funds for the Program. The responsibility for payment of debt service on the bonds is solely that of the Hospital. Other necessary funds to finance the Program are assumed to be provided from the Hospital’s funds, from a local fund drive, and from interest earned on funds held by the bond trustee during the construction period.
Our procedures included analysis of:
- Program history, objectives, timing, and financing
- The future demand for the Hospital’s services, including consideration of:
- Economic and demographic characteristics of the Hospital’s defined service area
- Locations, capacities, and competitive information pertaining to other existing and planned area hospitals
- Physician support for the Hospital and its programs
- Historical utilization levels
- Planning agency applications and approvals
- Construction and equipment costs, debt service requirements, and estimated financing costs
- Staffing patterns and other operating considerations
- Third-party reimbursement policy and history
- Revenue/expense/volume relationships
We also participated in gathering other information, assisted management in identifying and formulating its assumptions, and assembled the accompanying financial forecast based on those assumptions.
The accompanying financial forecast for the annual periods ending December 31, 20X1 through 20X5, is based on assumptions that were provided by or reviewed with and approved by management. The financial forecast includes:
- Balance sheets
- Statements of operations
- Statements of cash flows
- Statements of changes in net assets
We have examined the financial forecast. Example Hospital’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants (AICPA) and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion.
Legislation and regulations at all levels of government have affected and may continue to affect revenues and expenses of hospitals. The financial forecast is based on legislation and regulations currently in effect. If future legislation or regulations related to hospital operations are enacted, such legislation or regulation could have a material effect on future operations.
The interest rate, principal payments, Program costs, and other financing assumptions are described in the section entitled “Summary of Significant Forecast Assumptions and Rationale.” If actual interest rates, principal payments, and funding requirements are different from those assumed, the amount of the bond issue and debt service requirements would need to be adjusted accordingly from those indicated in the forecast. If such interest rates, principal payments, and funding requirements are lower than those assumed, such adjustments would not adversely affect the forecast.
Our conclusions are presented below:
- In our opinion, the accompanying financial forecast is presented in conformity with guidelines for presentation of a financial forecast established by the AICPA.
- In our opinion, the underlying assumptions provide a reasonable basis for management’s forecast. However, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material.
- The accompanying financial forecast indicates that sufficient funds could be generated to meet the Hospital’s operating expenses, working capital needs, and other financial requirements, including the debt service requirements associated with the proposed $25,000,000 bond issue, during the forecast periods. However, the achievement of any financial forecast is dependent on future events, the occurrence of which cannot be assured.
We have no responsibility to update this report for events and circumstances occurring after the date of this report.
Smith and Jones
February 15, 20X2
Illustration 11. Practitioner’s Report: Applying Agreed-Upon Procedures to a Forecast
Independent Practitioner’s Report on Applying Agreed-Upon Procedures
Board of Directors—Widget Corporation
Board of Directors—Basic Company
At your request, we have performed certain agreed-upon procedures, as enumerated below, with respect to the forecasted balance sheet and the related forecasted statements of income, retained earnings, and cash flows of Generic Company, a subsidiary of Basic Company, as of December 31, 20X1, and for the year then ending. These procedures, which were agreed to by the Boards of Directors of Widget Corporation and Basic Company, were performed solely to assist you in evaluating the forecast in connection with the proposed sale of Generic Company to Widget Corporation. [Client]’s management is responsible for the forecast.
This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants (AICPA). The sufficiency of these procedures is solely the responsibility of the specified parties. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.
[Include paragraphs to enumerate procedures and findings]
We were not engaged to, and did not, conduct an examination, the objective of which would be the expression of an opinion on the accompanying prospective financial statements. Accordingly, we do not express an opinion on whether the prospective financial statements are presented in conformity with AICPA presentation guidelines or on whether the underlying assumptions provide a reasonable basis for the presentation. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. Furthermore, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.
This report is intended solely for the information and use of the Boards of Directors of Basic Company and Widget Corporation and is not intended to be and should not be used by anyone other than these specified parties.
Smith and Jones
February 15, 20X2
Illustration 12. Standard Paragraphs Added to Practitioner’s Report in a Practitioner-Submitted Document: Budgeted Financial Statements—summaries of Significant Assumptions and Accounting Policies Omitted
The accompanying budgeted balance sheet, statements of income, retained earnings, and cash flows of Widget Company as of December 31, 20X1, and for the six months then ending, have not been compiled or examined by us, and, accordingly, we do not express an opinion or any other form of assurance on them.
Management has elected to omit the summaries of significant assumptions and accounting policies required under established guidelines for presentation of prospective financial statements. If the omitted summaries were included in the budgeted information, they might influence the user’s conclusion about the company’s budgeted information. Accordingly, this budgeted information is not designed for those who are not informed about such matters.
APPENDICES
The following appendices are reproduced with permission from SSAE 10. Appendix B is concerned with compilation of prospective financial statements, and Appendix C is concerned with examination of prospective financial statements. The appendices deal with the following:
1. Training and proficiency of the practitioners
2. Planning the engagement
3. Procedures to be applied
Appendix A from the Statement is included in “Fundamental Requirements: General” (list of fourteen minimum presentation requirements).
Appendix B: Training and Proficiency, Planning and Procedures Applicable to Compilations
Training and Proficiency
1. The practitioner should be familiar with the guidelines for the preparation and presentation of prospective financial statements. The guidelines are contained in the AICPA Guide for Prospective Financial Information.
2. The practitioner should possess or obtain a level of knowledge of the industry and the accounting principles and practices of the industry in which the entity operates or will operate, that will enable him to compile prospective financial statements that are in appropriate form for an entity operating in that industry.
Planning the Compilation Engagement
3. To compile the prospective financial statements of an existing entity, the practitioner should obtain a general knowledge of the nature of the entity’s business transactions and the key factors upon which its future financial results appear to depend. He or she should also obtain an understanding of the accounting principles and practices of the entity to determine if they are comparable to those used within the industry in which the entity operates.
4. To compile the prospective financial statements of a proposed entity, the practitioner should obtain knowledge of the proposed operations and the key factors upon which its future results appear to depend and that have affected the performance of entities in the same industry.
Compilation Procedures
5. In performing a compilation of prospective financial statements the practitioner should, where applicable:
a. Establish an understanding with the client, preferably in writing, regarding the services to be performed. The understanding should include the objectives of the engagement, the client’s responsibilities, the practitioner’s responsibilities, and the limitations of the engagement. The practitioner should document the understanding, preferably through a written communication with the client. If the practitioner believes an understanding with the client has not been established, he or she should decline to accept or perform the engagement.
b. Inquire about the accounting principles used in the preparation of the prospective financial statements.
(1) For existing entities, compare the accounting principles used to those used in preparation of previous historical financial statements and inquire whether such principles are the same as those expected to be used in the historical financial statements covering the prospective period.
(2) For entities to be formed or entities formed that have not commenced operations, compare specialized industry accounting principles used, if any, to those typically used in the industry. Inquire about whether the accounting principles used for the prospective financial statements are those that are expected to be used when, or if, the entity commences operations.
c. Ask how the responsible party identifies the key factors and develops its assumptions.
d. List, or obtain a list of, the responsible party’s significant assumptions providing the basis for the prospective financial statements and consider whether there are any obvious omissions in light of the key factors upon which the prospective results of the entity appear to depend.
e. Consider whether there appear to be any obvious internal inconsistencies in the assumptions.
f. Perform, or test the mathematical accuracy of, the computations that translate the assumptions into prospective financial statements.
g. Read the prospective financial statements, including the summary of significant assumptions, and consider whether
(1) The statements, including the disclosures of assumptions and accounting policies, appear to be not presented in conformity with the AICPA presentations guidelines for prospective financial statements.
(2) The statements, including the summary of significant assumptions, appear to be not obviously inappropriate in relation to the practitioner’s knowledge of the entity and its industry and, for a
(a) Financial forecast, the expected conditions and course of action in the prospective period.
(b) Financial projection, the purpose of the presentation.
h. If a significant part of the prospective period has expired, inquire about the results of operations or significant portions of the operations (such as sales volume), and significant changes in financial position, and consider their effect in relation to the prospective financial statements. If historical financial statements have been prepared for the expired portion of the period, the practitioner should read such statements and consider those results in relation to the prospective financial statements.
i. Confirm his or her understanding of the statements (including assumptions) by obtaining written representations from the responsible party. Because the amounts reflected in the statements are not supported by historical books and records but rather by assumptions, the practitioner should obtain representations in which the responsible party indicates its responsibility for the assumptions. The representations should be signed by the responsible party at the highest level of authority who the practitioner believes is responsible for and knowledgeable, directly or through others, about matters covered by the representations.
(1) For a financial forecast, the representations should include the responsible party’s assertion that the financial forecast presents, to the best of the responsible party’s knowledge and belief, the expected financial position, results of operations, and cash flows for the forecast period and that the forecast reflects the responsible party’s judgment, based on present circumstances, of the expected conditions and its expected course of action. The representations should also include a statement that the forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants. The representations should also include a statement that the assumptions on which the forecast is based are reasonable. If the forecast contains a range, the representation should also include a statement that, to the best of the responsible party’s knowledge and belief, the item or items subject to the assumption are expected to actually fall within the range and that the range was not selected in a biased or misleading manner.
(2) For a
financial projection, the representations should include the responsible party’s assertion that the financial projection presents, to the best of the responsible party’s knowledge and belief, the expected financial position, results of operations, and cash flows for the projection period given the hypothetical assumptions, and that the projection reflects its judgment based on present circumstances, of expected conditions, and its expected course of action given the occurrence of the hypothetical events. The representations should also
(a) Identify the hypothetical assumptions and describe the limitations on the usefulness of the presentation.
(b) State that the assumptions are appropriate.
(c) Indicate if the hypothetical assumptions are improbable.
(d) If the projection contains a range, include a statement that, to the best of the responsible party’s knowledge and belief, given the hypothetical assumptions, the item or items subject to the assumption are expected to actually fall within the range and that the range was not selected in a biased or misleading manner.
The representations should also include a statement that the projection is presented in conformity with guidelines for presentation of a projection established by the AICPA.
j. Consider, after applying the above procedures, whether he has received representations or other information that appears to be obviously inappropriate, incomplete, or otherwise misleading and, if so, attempt to obtain additional or revised information. If he does not receive such information, the practitioner should ordinarily withdraw from the compilation engagement.
(Note that the omission of disclosures, other than those relating to significant assumptions, would not require the practitioner to withdraw; see “Fundamental Requirements.”)
Appendix C: Training and Proficiency, Planning and Procedures Applicable to Examinations
Training and Proficiency
1. The practitioner should be familiar with the guidelines for the preparation and presentation of prospective financial statements. The guidelines are contained in the AICPA Guide for Prospective Financial Information.
2. The practitioner should possess or obtain a level of knowledge of the industry and the accounting principles and practices of the industry in which the entity operates or will operate that will enable him to examine prospective financial statements that are in appropriate form for an entity operating in that industry.
Planning an Examination Engagement
3. Planning the examination engagement involves developing an overall strategy for the expected scope and conduct of the engagement. To develop such a strategy, the practitioner needs to have sufficient knowledge to enable him to adequately understand the events, transactions, and practices that, in his judgment, may have a significant effect on the prospective financial statements.
4. Factors to be considered by the practitioners in planning the examination include
a. The accounting principles to be used and the type of presentation.
b. The anticipated level of attestation risk
related to the prospective financial statements.
c. Preliminary judgments about materiality levels.
d. Items within the prospective financial statements that are likely to require revision or adjustment.
e. Conditions that may require extension or modification of the practitioner’s examination procedures.
f. Knowledge of the entity’s business and its industry.
g. The responsible party’s experience in preparing prospective financial statements.
h. The length of the period covered by the prospective financial statements.
i. The process by which the responsible party develops its prospective financial statements.
5. The practitioner should obtain knowledge of the entity’s business, accounting principles, and the key factors upon which its future financial results appear to depend. The practitioner should focus on such areas as
a. The availability and cost of resources needed to operate. Principal items usually include raw materials, labor, short-term and long-term financing, and plant and equipment.
b. The nature and condition of markets in which the entity sells its goods or services, including final consumer markets if the entity sells to intermediate markets.
c. Factors specific to the industry, including competitive conditions, sensitivity to economic conditions, accounting policies, specific regulatory requirements, and technology.
d. Patterns of past performance for the entity or comparable entities, including trends in revenue and costs, turnover of assets, uses and capacities of physical facilities, and management policies.
Examination Procedures
6. The practitioner should establish an understanding with the responsible party regarding the services to be performed. The understanding should include the objectives of the engagement, the responsible party’s responsibilities, the practitioner’s responsibilities, and the limitations of the engagement. The practitioner should document the understanding, preferably through a written communication with the responsible party. If the practitioner believes an understanding with the responsible party has not been established, he or she should decline to accept or perform the engagement. If the responsible party is different than the client, the practitioner should establish the understanding with both the client and the responsible party, and the understanding also should include the client’s responsibilities.
7. The practitioner’s objective in an examination of prospective financial statements is to accumulate sufficient evidence to limit attestation risk to a level that is, in his or her professional judgment, appropriate for the level of assurance that may be imparted by his or her examination report. In a report on an examination of prospective financial statements, he or she provides assurance only about whether the prospective financial statements are presented in conformity with AICPA presentation guidelines and whether the assumptions provide a reasonable basis for management’s forecast, or a reasonable basis for management’s projection given the hypothetical assumptions. He or she does not provide assurance about the achievability of the prospective results because events and circumstances frequently do not occur as expected and achievement of the prospective results is dependent on the actions, plans, and assumptions of the responsible party.
8. In the examination of prospective financial statements, the practitioner should select from all available procedures—that is, procedures that assess inherent and control risk and restrict detection risk—any combination that can limit attestation risk to such an appropriate level. The extent to which examination procedures will be performed should be based on the practitioner’s consideration of
a. The nature and materiality of the information to the prospective financial statements taken as a whole.
b. The likelihood of misstatements.
c. Knowledge obtained during current and previous engagements.
d. The responsible party’s competence with respect to prospective financial statements.
e. The extent to which the prospective financial statements are affected by the responsible party’s judgment (i.e., its judgment in selecting the assumptions used to prepare the prospective financial statements).
f. The adequacy of the responsible party’s underlying data.
9. The practitioner should perform those procedures he considers necessary in the circumstances to report on whether the assumptions provide a reasonable basis for the
a.
Financial forecast. The practitioner can form an opinion that the assumptions provide a reasonable basis for the forecast if the responsible party represents that the presentation reflects, to the best of its knowledge and belief, its estimate of expected financial position, results of operations, and cash flows for the prospective period
10 and the practitioner concludes, based on his examination
(1) That the responsible party has explicitly identified all factors expected to materially affect the operations of the entity during the prospective period and has developed appropriate assumptions with respect to such factors.
11(2) That the assumptions are suitably supported.
b.
Financial projection given the hypothetical assumptions. The practitioner can form an opinion that the assumptions provide a reasonable basis for the financial projection, given the hypothetical assumptions, if the responsible party represents that the presentation reflects, to the best of its knowledge and belief, expected financial position, results of operations, and cash flows for the prospective period, given the hypothetical assumptions,
12 and the practitioner concludes, based on his examination
(1) That the responsible party has explicitly identified all factors that would materially affect the operations of the entity during the prospective period if the hypothetical assumptions were to materialize and has developed appropriate assumptions with respect to such factors.
(2) That the other assumptions are suitably supported given the hypothetical assumptions. However, as the number and significance of the hypothetical assumptions increase, the practitioner may not be able to satisfy himself about the presentation as a whole by obtaining support for the remaining assumptions.
10. The practitioner should evaluate the support for the assumptions.
a. Financial forecast. The practitioner can conclude that assumptions are suitably supported if the preponderance of information supports each significant assumption.
b. Financial projection. In evaluating support for assumptions other than hypothetical assumptions, the practitioner can conclude that they are suitably supported if the preponderance of information supports each significant assumption, given the hypothetical assumptions. The practitioner need not obtain support for the hypothetical assumptions, although he should consider whether they are consistent with the purpose of the presentation.
11. In evaluating the support for assumptions, the practitioner should consider
a. Whether sufficient pertinent sources of information about the assumptions have been considered. Examples of external sources the practitioner might consider are government publications, industry publications, economic forecasts, existing or proposed legislation, and reports of changing technology. Examples of internal sources are budgets, labor agreements, patents, royalty agreements and records, sales backlog records, debt agreements, and actions of the board of directors involving entity plans.
b. Whether the assumptions are consistent with the sources from which they are derived.
c. Whether the assumptions are consistent with each other.
d. Whether the historical financial information and other data used in developing the assumptions are sufficiently reliable for that purpose. Reliability can be assessed by inquiry and analytical or other procedures, some of which may have been completed in past examinations or reviews of the historical financial statements. If historical financial statements have been prepared for an expired part of the prospective period, the practitioner should consider the historical data in relation to the prospective results for the same period, where applicable. If the prospective financial statements incorporate such historical financial results and that period is significant to the presentation, the practitioner should make a review of the historical information in conformity with the applicable standards for review.
13e. Whether the historical financial information and other data used in developing the assumptions are comparable over the periods specified or whether the effects of any lack of comparability were considered in developing the assumptions.
f. Whether the logical arguments, or theory, considered with the data supporting the assumptions are reasonable.
12. In evaluating the preparation and presentation of the prospective financial statements, the practitioner should perform procedures that will provide reasonable assurance that the
a. Presentation reflects the identified assumptions.
b. Computations made to translate the assumptions into prospective amounts are mathematically accurate.
c. Assumptions are internally consistent.
d. Accounting principles used in the
(1) Financial forecast are consistent with the accounting principles expected to be used in the historical financial statements covering the prospective period and those used in the most recent historical financial statements, if any.
(2)
Financial projection are consistent with the accounting principles expected to be used in the prospective period and those used in the most recent historical financial statements, if any, or that they are consistent with the purpose of the presentation.
14e. Presentation of the prospective financial statements follows the AICPA guidelines applicable for such statements.
15f. Assumptions have been adequately disclosed based on AICPA presentation guidelines for prospective financial statements.
13. The practitioner should consider whether the prospective financial statements, including related disclosures, should be revised because of
a. Mathematical errors.
b. Unreasonable or internally inconsistent assumptions.
c. Inappropriate or incomplete presentation.
d. Inadequate disclosure.
14. The practitioner should obtain written representations from the responsible party acknowledging its responsibility for both the presentation and the underlying assumptions. The representations should be signed by the responsible party at the highest level of authority whom the practitioner believes is responsible for and knowledgeable, directly or through others in the organization, about the matters covered by the representations. Appendix B, paragraph 5i, describes the specific representations to be obtained for a financial forecast and a financial projection. See “Disclaimer of Opinion” under “Fundamental Requirements: Examination of Prospective Financial Statements” for guidance on the form of report to be rendered if the practitioner is not able to obtain the required representations.
