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7. In an engagement to examine prospective financial information, the auditor should obtain sufficient appropriate evidence as to whether:
I. 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.
II. The prospective financial information is properly prepared on the basis of the assumptions.
III.
The prospective financial information is properly presented and all material assumptions are adequately disclosed, including a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions.
IV. The prospective financial information is prepared on a consistent basis with historical
financial statements, using appropriate accounting principles.
a. I,II,III and IV b. I,II and III c. I and II d. I,II and IV
Agreed Upon Procedures Engagement
-practitioner is engaged by the client to issue a report of findings based on specific agreed-upon procedures
-client assumes responsibility for whether the procedures are sufficient
-attestation standards apply
-written assertion isn't required
-doesn't provide an opinion or negative assurance
Conditions of Agreed Upon Procedures:
I: Independence of practitioner
A: Agreement of parties
M: Measurability & consistency
S: Sufficiency of procedures
U: Use of report is restricted 2 specific parties
R: Responsibility 4 subject matter "either client or a 3rd party client names"
E: Engagements 2 perform agreed-upon procedures on FS
Agreed Upon Procedures Reporting:
-title
"independence"
-signature
-date
-identification of specific parties, subject matter, character of engagement & responsible party
statement that subject matter is responsibility of responsible party
-statement that procedures performed were those agreed to by specified parties
Agreed Upon Procedures Reporting:
Part 2
-statement: sufficiency of procedures is solely responsibility of specified parties &a disclaimer of that responsibility
-statement: engagement was conducted in accordance w/ attestation standards
list of procedure performed & related finding
-if needed description of assistance provided by specialist
Agreed Upon Procedures Reporting Requirements
Part 3
-statement: practitioner didn't conduct an examination, disclaimer of opinion on subject matter
-statement: if practitioner had performed other procedures other matters might've come to his attention
-statement of restrictions on use of report
if needed reservation or restriction for procedure or finding
Explanatory Language
practitioner may use in regards to:
*disclosure of stipulated facts, assumptions or interpretations
*description of condition of records, controls or data to which procedures were applied
*explanation that practitioner has no responsibility to update his report
explanation of sampling risk
Prospective Financial Statements
-forward-looking
-based on projections rather than past events
Types of Prospective Financial Statements
1. financial forecast
2. financial
projection
Financial Forecast
based on expected conditions and expected course of action
Financial Projection
based on hypothetical assumptions
Uses of Prospective Financial Statements
General use - ONLY financial forecast
Limited use - specified parties financial forecast and financial projection
Engagement Types for Prospective Financial Statements
1. compilation
2. examination
3. agreed-upon procedures
4. preparation
NO review
Compilation of Prospective Financial Statements:
Independence is NOT required, BUT a lack of should be disclosed:
Purpose:
-proper assembling of financial data based on responsible party's assumption
-NO assurance given
-accountant isn't required to gather evidence but should be aware of obvious inappropriate assumptions
-can't issue a report if entity fails to disclose a summary of significant assumptions
Contents of a Compilation Report:
-Identification of prospective Financial Statements by responsible party.
-practitioner has compiled FS in accordance with AICPA attestation standards
-compilation is limited in scope & doesn't provide assurance or opinion
-prospective results may not be achieved
-that practitioner assumes no responsibility to update report for subsequent events
-signature of practitioner's firm & date of report
Additional Items for Compilation Report of a Financial Projection
-description of the purpose of the projection
-reference to the hypothetical assumption
-paragraph restricting use
Examination of Financial Statements
Purpose: to express an opinion on whether statements are presented in conformity with AICPA guidelines or the underlying assumptions provide a reasonable basis for the prospective statements
independence
required
sufficient evidence must be obtained
Contents of a Examination Report:
Part 1
-title "independent"
-signature of practitioner's firm
-date of report
-identification of prospective FS by responsible party
-identification of responsible party & a statement that prospective FS r responsibility of responsible party
Statements:
1. practitioner's responsibility to express an
opinion based on his examination
2. examination was conducted in accordance with AICPA attestation standard
3. practitioner believes the examination provides a reasonable basis for his opinion
4. practitioner assumes no responsibility to update report for subsequent events
Contents of a Examination Report:
Prospective FS
Opinion that:
-prospective FS are presented in conformity with
AICPA guidelines &,
-underlying assumptions provide a reasonable basis for forecast or projection
-prospective results may not be achieved
for projection include purpose
-paragraph restricting use
Modifications to Opinion for Examination
1. AICPA guidelines not followed = qualified or adverse
2. Significant assumptions not disclosed = adverse
3. Basis not reasonable = adverse
4.
Scope limitation = disclaimer
Additional Items for Examination Report of a Financial Projection
-Description of the purpose of the projection
-Reference to the hypothetical assumption
-Paragraph restricting use
Agreed-Upon Procedures for Prospective Financial Statements Requirements
-must include a summary of significant
assumptions
I-AM-SURE
-reference to prospective financial statements
-disclaimer on opinion
-financial results may not be achieved
-statement that the practitioner assumes no responsibility to update the report for subsequent events
Partial Information
not appropriate for general use
excludes one of
- sales
- gross profits
- unusual or infrequent itemes
- income tax expense
-
discontinued operations
- income from continuing operations
- net income
- earnings per share
- significant changes in financial position
Pro Forma Financial Statements:
May be used to determine the effect of a future or hypothetical event by showing how it might have affected historical financial statements
-may be 1. Examined or 2. Reviewed
-practitioner should obtain an understanding of the event
-practitioner should obtain written representations from management
-refer to the financial statements from which the historical financial information was derived