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AAS 35 The Examination Of Prospective Financial Information1 The following is the text of the Auditing and Assurance Standard (AAS)
35, "The Examination of Prospective Financial Information", issued by the
Institute of Chartered Accountants of
Introduction 1. The purpose of this Auditing and Assurance Standard (AAS) is to establish standards and provide guidance on engagements to examine and report on prospective financial information including examination procedures for best-estimate and hypothetical assumptions. This AAS does not apply to the examination of prospective financial information expressed in general or narrative terms, such as that found in management's discussion and analysis in an entity's annual report, though many of the procedures outlined herein may be suitable for such an examination2. Further, the principles laid down in the other Auditing and Assurance Standards (AASs), issued by the Institute of Chartered Accountants of India, should be used by the auditor, to the extent practicable, in applying this AAS. 2. In an engagement to examine prospective financial information, the auditor3 should obtain sufficient appropriate evidence as to whether:
3. "Prospective financial information" means financial information based on assumptions about events that may occur in the future and possible actions by an entity. It is highly subjective in nature and its preparation requires the exercise of considerable judgment. Prospective financial information can be in the form of a forecast, a projection, or a combination of both, for example, a one year forecast plus a five year projection. 4. A "forecast" means 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). 5. A "projection" means prospective financial information prepared on the basis of:
Such information illustrates the possible consequences as of the date the information is prepared if the events and actions were to occur (a "what‑if" scenario). 6. Prospective financial information can include financial statements or one or more elements of financial statements and may be prepared:
7. Management is responsible for the preparation and presentation of the prospective financial information, including the identification and disclosure of the sources of information, the basis of forecasts and the underlying assumptions. The auditor may be asked to examine and report on the prospective financial information to enhance its credibility, whether it is intended for use by third parties or for internal purposes. The Auditor's Assurance Regarding Prospective Financial Information 8. Prospective financial information relates to events and actions that have not yet occurred and might not occur. While evidence may be available to support the assumptions on which the prospective financial information is based, such evidence is itself generally future‑ oriented and, therefore, speculative in nature, as distinct from the evidence ordinarily available in the examination of historical financial information. The auditor is, therefore, not in a position to express an opinion as to whether the results shown in the prospective financial information will be achieved. 9. Further, given the types of evidence available in assessing the assumptions on which the prospective financial information is based, it may be difficult for the auditor to obtain a level of satisfaction sufficient to provide a positive expression of opinion that the assumptions are free of material misstatement. Consequently, in this AAS, when reporting on the reasonableness of management's assumptions, the auditor provides only a moderate level of assurance. Acceptance of Engagement 10 : Before accepting an engagement to examine prospective financial information, the auditor would consider, amongst other things:
11. The auditor should not accept, or should withdraw from, an engagement when the assumptions are clearly unrealistic or when the auditor believes that the prospective financial information will be inappropriate for its intended use. 12. In accordance with AAS 26, "Terms of Audit Engagement", it is necessary that the auditor and the client should agree on the terms of the engagement. It is in the interest of both client and auditor that the auditor sends an engagement letter to help in avoiding misunderstandings regarding the engagement. An engagement letter would address the matters in paragraph 10 and set out the management's responsibilities for the assumptions and for providing the auditor with all relevant information and source data used in developing the assumptions. Knowledge of the Business 13. The auditor should obtain a sufficient level of knowledge of the business to be able to evaluate whether all significant assumptions required for the preparation of the prospective financial information have been identified. The auditor would also need to become familiar with the entity's process for preparing prospective financial information, for example, by considering:
14. The auditor should consider the extent to which reliance on the entity's historical financial information is justified. The auditor requires knowledge of the entity's historical financial information to assess whether the prospective financial information has been prepared on a basis consistent with the historical financial information and to provide a historical yardstick for considering management's assumptions. The auditor will need to establish, for example, whether relevant historical information was audited or reviewed and whether acceptable accounting principles were used in its preparation. 15. If the audit or review report on prior period historical financial information was other than a clean report4 or if the entity is in a start‑up/ expansion phase, the auditor would consider the relevant facts and the effect on the examination of the prospective financial information. Period Covered 16. The auditor should consider the period of time covered by the prospective financial information. Since assumptions become more speculative as the length of the period covered increases, as that period lengthens, the ability of management to make best‑estimate assumptions decreases. The period would not extend beyond the time for which management has a reasonable basis for the assumptions. The following are some of the factors that are relevant to the auditor's consideration of the period of time covered by the prospective financial information:
Examination Procedures 17. When determining the nature, timing and extent of examination procedures, the auditor should consider matters such as:
18. The auditor would assess the source and reliability of the evidence supporting management's best‑estimate assumptions. Sufficient appropriate evidence supporting such assumptions would be obtained from internal and external sources including consideration of the assumptions in the light of historical information and an evaluation of whether they are based on plans that are within the entity's capacity. Examples of external sources are government publications, industry publications, economic forecast, existing or proposed legislation, and reports of changing technology. Examples of internal sources are budgets, the economic substance and viability of the entity and/or transaction or project of the entity, reputation of management responsible for assumptions underlying the prospective financial information, wage agreements, patents, royalty agreements and records, sales backlog records, debt agreements, and actions of the board of directors involving entity plans, etc. 19. The auditor would consider whether, when hypothetical assumptions are used, all significant implications of such assumptions have been taken into consideration. For example, if sales are assumed to grow beyond the entity's current plant capacity, the prospective financial information will need to include the necessary investment in the additional plant capacity or the costs of alternative means of meeting the anticipated sales, such as subcontracting production. 20. The auditor would need to be satisfied that the hypothetical assumptions are consistent with the purpose of the prospective financial information and that there is no reason to believe they are clearly unrealistic. 21. The auditor will need to be satisfied that the prospective financial information is properly prepared from management's assumptions by for example, making checks such as recomputation and reviewing internal consistency, that is, the actions management intends to take are compatible with each other and there are no inconsistencies in the determination of the amounts that are based on common variables such as interest rates. 22. The auditor would focus on the extent to which those areas that are particularly sensitive to variation will have a material effect on the results shown in the prospective financial information. This will influence the extent to which the auditor will seek appropriate evidence. It will also influence the auditor's evaluation of the appropriateness and adequacy of disclosure. 23. When engaged to examine one or more elements of prospective financial information, such as an individual financial statement, it is important that the auditor considers the interrelationship of other components in the financial statements. 24. When any elapsed portion of the current period is included in the prospective financial information, the auditor would consider the extent to which procedures need to be applied to the historical information. Procedures will vary depending on the circumstances, for example, how much of the prospective period has elapsed. 25. The auditor should obtain written representations from management regarding the intended use of the prospective financial information, the completeness of significant management assumptions and (f) management's acceptance of its responsibility for the prospective financial information. The management is also responsible for identification and disclosure of uncontrollable factors, outstanding litigations, commitments, or any other material factors that are likely to affect the prospective financial information. Presentation and Disclosure 26. When assessing the presentation and disclosure of the prospective financial information and the underlying assumptions, in addition to the specific requirements of any relevant statutes, regulations as well as the relevant professional pronouncements, the auditor will need to consider whether:
there is any change in the accounting policy of the entity from that disclosed in the most recent historical financial statements and whether reason for the change and the effect of such change on the prospective financial information has been adequately disclosed. Documentation 27. The auditor should document matters, which are important in providing evidence to support his report on examination of prospective financial information, and evidence that such examination was carried out in accordance with this AAS. The working papers will include the sources of information, basis of forecasts and the assumptions made in arriving the forecasts, hypothetical assumptions, evidence supporting the assumptions, management representations regarding the intended use and distribution of the information, completeness of material assumptions, management's acceptance of its responsibility for the information, audit plan, the nature, timing and extent of examination procedures performed, and, in case the auditor expresses a modified opinion or withdraws from the engagement, the reasons forming the basis of such decision. Report on Examination of Prospective Financial Information 28. The report by an auditor on an examination of prospective financial information should contain the following:
29. Such a report would:
30. The following is an example of an extract from an unmodified report on a projection:
A complete illustrative format of an unmodified report on a projection is given in Appendix 1. 31. The following is an example of an extract from an unmodified report on a forecast:
A complete illustrative format of an unmodified report on a forecast is given in Appendix 2. 32. When the auditor believes that the presentation and disclosure of the prospective financial information is not adequate, the auditor should express a qualified or adverse opinion in the report on the prospective financial information, or withdraw from the engagement as appropriate. An example would be where financial information fails to disclose adequately the consequences of any assumptions, which are highly sensitive. 33. When the auditor believes that one or more significant assumptions do not provide a reasonable basis for the prospective financial information prepared on the basis of best‑estimate assumptions or that one or more significant assumptions do not provide a reasonable basis for the prospective financial information given the hypothetical assumptions, the auditor should (c) either express an adverse opinion setting out the reasons in the report on the prospective financial information, or withdraw from the engagement. 34. When the examination is affected by conditions that preclude application of one or more procedures considered necessary in the circumstances, the auditor should either withdraw from the engagement or disclaim the opinion and describe the scope limitation in the report on the prospective financial information. Effective Date 35. This AAS is effective in relation to reports on projections/forecasts, issued on or after April 1, 2007. However, earlier application of the Standard is encouraged. Compatibility with International Standard on Assurance Engagement (ISAE) 3400 Except for the matters noted below, the basic principles and essential procedures of this AAS and International Standard on Assurance Engagement (ISAE) 3400 "The Examination of Prospective Financial Information", are consistent in all material respects:
Appendix 1 Illustrative Format of Report on Examination of Prospective Financial Information To the ... (addressee) ............. We have examined the projection of _________________________
(project) _______________ (name of the entity) for the period from
__________ to __________ as given in7
__________ to the Prospective Financial Information from page _____ to
_____ in accordance with Auditing and Assurance Standard 35, The
Examination of Prospective Financial Information, issued by the Institute
of Chartered Accountants of India. The preparation and presentation of the
projection including the underlying assumptions, set out in note ‑ to to
the prospective financial information, is the responsibility of the
Management and has been approved by the Board of Directors8
of the company. Our responsibility is to examine the evidence supporting
the assumptions (excluding the hypothetical assumption) and other
information in the prospective financial information. Our responsibility
does not include verification of projections. Therefore, we do not vouch
for the accuracy of the same. This projection has been prepared for _______________ (intended use). The projection has been prepared using a set of assumptions that include hypothetical assumptions about future events and management's actions that are not necessarily expected to occur. Consequently, users are cautioned that this projection may not be appropriate for purposes other than that described above. We have carried out our examination of the prospective financial information on a test basis. Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the projection, assuming that _______________ (state or refer to the hypothetical assumptions). Further, in our opinion the projection is properly prepared on the basis of the assumptions as set out in Note _____ to the Prospective Financial Information and on a consistent basis with the historical financial statements, using appropriate accounting principles. Even if the events anticipated under the hypothetical assumptions described above occur, actual results are still likely to be different from the projection since other anticipated events frequently do not occur as expected and the variation may be material.
For ABC & Co., Illustrative Format of Report on Examination of Prospective Financial Information To the ...... (addressee) ........ We have examined the forecast of__________ (project) __________ of the _______________ (name of the entity) for the period from __________ to __________ as given10 in _____ to _____ of the prospective financial information in accordance with Auditing and Assurance Standard ___,The Examination of Prospective Financial Information, issued by the Institute of Chartered Accountants of India. The preparation and presentation of the forecast including the underlying assumptions, set out in Note _____ to the Prospective Financial Information, is the responsibility of the management and has been approved by the Board of Directors of the company11. The sources of information are set out in Annexure _____ to the prospective financial information, Our responsibility is to examine the evidence supporting the forecast. Our responsibility does not include verification of the forecasts. Therefore, we do not vouch for the accuracy of the same. This forecast has been prepared for __________ (intended use). The forecast has been prepared using a set of assumptions as set out in Note _____ to the prospective financial information. We have carried out our examination of the prospective financial information on a test basis. Based on our examination of the evidence supporting the assumptions, nothing has come to our attention, which causes us to believe that assumptions do not provide a reasonable basis for the forecast. Further, in our opinion the forecast, read with the notes thereon, is properly prepared on the basis of the assumptions as set out in Note and on a consistent basis with the historical financial statements, using appropriate accounting principles. Actual results are likely to be different from the forecast since anticipated events might not occur as expected and the variation might be material.
For ABC & Co., 1 The date this Auditing and Assurance Standard comes into effect, the Guidance Note on Accountant's Report on Profit Forecasts and/or Financial Forecasts, issued in September, 1982 shall stand withdrawn. 2 The guidance provided in this Standard is in line with the provisions of clause (3) of Part 1 of the Second Schedule to the Chartered Accountants Act, 1949 [as amended by the Chartered Accountants (Amendment) Act, 2006].This clause provides that a chartered accountant in practice shall be deemed to be guilty of professional misconduct if he permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast" As per the opinion of the Council while finalising the Guidance Note on Accountant's Report on Profit Forecasts and/or Financial Forecasts at its 1 0Otl meeting held on 22nd through 24th July 1982, a chartered accountant can participate in the preparation of profit or financial forecasts and can review them, provided he indicates clearly in his report the sources of information, the basis of forecasts and also the major assumptions made in arriving at the forecasts and so long as he does not vouch for the accuracy of the forecasts. The Council has further opined that the same opinion would also apply to projections made on the basis of hypothetical assumptions about future events and management actions which are not necessarily expected to take place so long as the auditor does not vouch for the accuracy of the projection. (emphasis added) 3 The term "auditor" is used throughout this AAS when describing services involving examination of prospective financial information. Such reference is not intended to imply that a member performing such services need necessarily be the statutory auditor of the entity's financial statements. 4 Alternatively known as the unmodified report in terms of the Auditing and Assurance Standard (AAS) 28, The Auditor's Report on Financial Statements. 5 Provide suitable identification, such as by reference to page numbers or by identifying the individual schedule. 6 Other corresponding approving authority in the case of entities other than companies. 7 Provide suitable identification, such as by reference to page numbers or by identifying the individual schedule. 8 Other corresponding approving authority in the case of entities other than companies. 9 Partner or proprietor, as the case may be. 10 Provide suitable identification, such as by reference to page numbers or by identifying the individual schedule. 11 Other corresponding approving authority in the case of entities other than companies. 12 Partner or proprietor, as the case may be.
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