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Examination of Prospective Financial Information and Review of Financial Statements

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Examination of Prospective Financial Information
Definition
“Prospective financial information” means information about future financial performance, future financial position, future cash flows, and future movements in equity based on assumptions about future events and courses of action. Prospective financial information includes prospective financial statements, the notes to the prospective financial statements, and any narrative relating directly to the prospective financial statements.
Philippine Standard on Assurance Engagements (PSAE) 3400 (previously PSA 810), “The Examination of Prospective Financial Information” establishes standards and provides guidance on engagements to examine and report on prospective financial information including examination procedures for best-estimate and hypothetical assumptions.
The general guidelines include the following: Acceptance of Engagement
Before accepting an engagement to examine prospective financial information, the auditor would consider, amongst other things: * The intended use of the information. * Whether the information will be for general or limited distribution. * The nature of the assumptions, that is, whether they are best-estimate or hypothetical assumptions. * The elements to be included in the information. * The period covered by the information.
Nature and Purpose of Prospective Financial Information
Prospective financial information can include financial statements or one or more elements of financial statements and may be prepared: (a) As an internal management tool (b) For distribution to third parties in, for example: * A prospectus to provide potential investors with information about future expectations. * An annual report to provide information to shareholders, regulatory bodies and other interested parties. * A document for the information of lenders which may include, for example, cash flow forecasts.
Approach and Assurance Regarding Prospective Financial Information
In an engagement to examine prospective financial information, the auditor should obtain sufficient appropriate evidence as to whether: (a) Management’s best-estimate assumptions on which the prospective financial information is based are not unreasonable and, in the case of hypothetical assumptions, such assumptions are consistent with the purpose of the information; (b) The prospective financial information is properly prepared on the basis of the assumptions; (c) The prospective financial information is properly presented and all material misstatements are adequately disclosed, including a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions; and (d) The prospective financial information is prepared on a consistent basis with financial statements, using appropriate accounting principles. * The auditor is not in a position to express an opinion as to whether the results shown in the prospective financial information will be achieved. * When reporting on the reasonableness of management’s assumptions the auditor provides only a moderate level of assurance. However, when in the auditor’s judgment an appropriate level of satisfaction is obtained, the auditor is not precluded from expressing positive assurance regarding the assumptions.
Knowledge of the Business * 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 should consider the extent to which reliance on the entity’s historical financial information is justified.
Period Covered
The auditor should consider the period of time covered by the prospective financial information. The following are some factors that are relevant to the auditor’s consideration of the period of time covered by the prospective financial information: * Operating cycle * The degree of reliability of assumptions * The needs of users
Examination of Procedures
When determining the nature, timing and extent of examination procedures, the auditor’s considerations should include: (a) The likelihood of material misstatement; (b) The knowledge obtained during any previous engagements; (c) Management’s competence regarding the preparation of prospective financial information; (d) The extent to which the prospective financial information is affected by the management’s judgment; and (e) The adequacy and reliability of the underlying data.
The auditor should obtain written representations from management regarding the intended use of the prospective financial information, the completeness of significant management assumptions and management’s acceptance of its responsibility for the prospective financial information.
Presentation and Disclosure
When assessing the presentation and disclosure of the prospective financial information, in addition to the specific requirements of any relevant statutes, regulations or professional standards, the auditor will need to consider whether: (a) The presentation of prospective financial information is informative and not misleading; (b) The accounting policies are clearly disclosed in the notes to the prospective financial information; (c) The assumptions are adequately disclosed in the notes to the prospective financial information. It needs to be clear whether assumptions represent management’s best-estimates or are hypothetical and, when assumptions are made in areas that are material and are subject to a high degree of uncertainty, this uncertainty and the resulting sensitivity of results needs to be adequately disclosed; (d) The date as of which the prospective financial information was prepared is disclosed. Management needs to confirm that the assumptions are appropriate as of this date, even though the underlying information may have been accumulated over a period of time; (e) The basis of establishing points in a range is clearly indicated and the range is not selected in a biased or misleading manner when results shown in the prospective financial information are expressed in terms of a range; and (f) Any change in accounting policy since the most recent historical financial statements is disclosed, along with the reason for the change and its effect on the prospective financial information.
Report on Examination of Prospective Financial Information
The report by an auditor on an examination of prospective financial information should contain the following: (a) Title; (b) Addressee; (c) Identification of the prospective financial information; (d) A reference to the ISAE or relevant national standards or practices applicable to the examination of prospective financial information; (e) A statement that management is responsible for the prospective financial information including the assumptions on which it is based; (f) When applicable, a reference to the purpose and/or restricted distribution of the prospective financial information; (g) A statement of negative assurance as to whether the assumptions provide a reasonable basis for the prospective financial information; (h) An opinion as to whether the prospective financial information is properly prepared on the basis of the assumptions and is presented in accordance with the relevant financial reporting framework; (i) Appropriate caveats concerning the achievability of the results indicated by the prospective financial information; (j) Date of the report which should be the date procedures have been completed; (k) Auditor’s address; and (l) Signature. * 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. * 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 either express an adverse opinion in the report on the prospective financial information, or withdraw from the engagement. * 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.
Engagements to Review Financial Statements
Philippine Standard on Review Engagements (PSRE) 2400 “Engagements to Review Financial Statements” is directed towards the review of financial statements.
Nature of Service
Review involves limited investigations of much narrower scope than an audit and undertaken for the purpose of providing limited (negative) assurance that the statements are presented in accordance with PFRS.
Objective of a Review Engagement
The objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material aspects, in accordance with an identified financial reporting framework.
Procedures to be Performed * A review of financial statements consists principally of inquiry and analytical procedures. * If the auditor has reason to believe that the information subject to review may be materially misstated, the auditor should carry out additional or more extensive procedures as are necessary to be able to express negative assurance or to confirm that a modified report is required.
Reporting Responsibility
The review report should contain a clear written expression of negative assurance. The auditor should review and assess the conclusion drawn from the evidence obtained as the basis for the expression of negative assurance.
The report on a review of financial statements should contain the following basic elements, ordinarily in the following layout: (a) Title; (b) Addressee; (c) Opening or introductory paragraph including: i. Identification of the financial statements on which the review has been performed; and ii. A statement of the responsibility of the entity’s management and the responsibility of the auditor, (d) Scope paragraph, describing the nature of a review, including: i. A reference to the Philippine Standard on Auditing applicable to review engagements; ii. A statement that a review is limited primarily to inquiries and analytical procedures; and iii. A statement that an audit has not been performed, that the procedures undertaken provide less assurance than an audit and that an audit opinion is not expressed; (e) Statement of negative assurance; (f) Date of the report; (g) Auditor’s address; and (h) Auditor’s signature. * The Unmodified Report An unmodified report is issued when the auditor believes, based on the evidence obtained that there is no material modifications that should be made to the financial statements in order for these financial statements to be in conformity with PFRS. * Modification of Review Report Material Misstatements If matters have come to the auditor’s attention that indicates the financial statements contain material misstatements, the report should describe those matters that impair a fair presentation of the financial statements, including, unless impracticable, a quantification of the possible effect/s on the financial statements, and either; * Express a qualification of the negative assurance; or * When the effect of the matter is material and pervasive to the financial statements that the auditor concludes that a qualification is not adequate to disclose the misleading or incomplete nature of the financial statements, give an adverse statement that the financial statements are not presented fairly, in all, material respects, in accordance with PFRS. Scope Limitation If there has been a material scope limitation, the report should describe the limitation and either: * Express a qualification of the negative assurance regarding the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed; or * When the possible effect of the limitation is material and pervasive that the auditor concludes that no level of assurance can be provided, the auditor should not provide any assurance. Distinctions between Audit and Review Engagements Nature of Service | Audit | Review | Objective | To express an opinion on the fs | To enable the CPA to report whether anything has come to his attention that would indicate that the fs are not presented fairly. | Level of assurance provided by the CPA | High/Reasonable Assurance | Moderate/limited assurance | Type of report issued | Positive assurance (opinion) | Negative assurance | Basic procedures | Risk assessment procedures, tests of controls, and substantive tests | Inquiry and analytical procedures. It does not include assessing control risk, test of records and of responses to inquiries by obtaining corroborative evidence. | Independence requirement | Required | Required |

Multiple Choice Questions 1. Professional standards prohibit one of the following types of engagements for prospective financial statements from being undertaken a. A compilation. b. A review. c. An examination. d. An agreed-upon procedures engagement. 2. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, financial statements that present an entity’s expected financial position, results of operations, and cash flows. Such prospective financial statements are known as e. Pro forma financial statements f. Financial projections g. Partial presentations h. Financial forecasts 3. Which of the following procedures is not included in a review engagement of a nonpublic entity? i. Inquiries of management j. Inquiries regarding events subsequent to the statement of financial position date k. Any procedures designed to identify relationships among data that appear to be unusual l. A study and evaluation of internal control 4. The concept of limited assurance is provided for in which of the following engagements? m. Audit n. Review o. Compilation p. Agreed-upon procedures 5. The statement that “nothing came to our attention which would indicate that the statements are not fairly presented” expresses which of the following? q. Disclaimer of opinion r. Negative assurance s. Negative confirmation t. Piecemeal opinion

BIBLIOGRAPHY

Cabrera, Ma. Elenita B., Public Accountancy Profession, GIC Enterprises & Co., Inc., M. Recto Avenue, Manila Philippines, 2013.
Salosagcol, Jekell G., et al., Auditing Theory, GIC Enterprises & Co., Inc., M. Recto Avenue, Manila Philippines, 2014. http://www.ifac.org/sites/default/files/meetings/files/0308.pdf http://www.ifac.org/sites/default/files/publications/files/B006%202012%20IAASB%20Handbook%20ISAE%203400.pdf

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