- 15 Marks
Question
Allhope Publications Limited is an old established publishing company owned by two brothers. Over the years, the company had made consistent progress both in sales and profitability.
Due to the quality of their work, the patronage of the company has grown to the extent that its working capital cannot accommodate the work on hand.
The Directors have approached their bankers, Owopo Bank Plc for a facility of N500m to procure essentially modern machinery and printing materials and also for running expenses, particularly salaries.
In support of its application for the bank facility, the company has prepared a profit forecast which is being presented to your firm for review.
Required:
As contained in ISAE 3400: “The Examination of Prospective Financial Information (PFI)”:
a. What will you take into consideration before accepting this assurance engagement? (5 Marks)
b. Enumerate the procedures to be adopted after you have agreed to take up the engagement:
i. As regards PFI assurance engagements generally.
ii. On the Profit forecast. (10 Marks)
Answer
a. Considerations Before Accepting the Engagement (5 Marks)
- Purpose of the Engagement:
- Determine whether the purpose of the profit forecast review is appropriate and achievable.
- Management’s Responsibility:
- Confirm that management accepts responsibility for the preparation and presentation of the prospective financial information.
- Availability of Sufficient Data:
- Ensure the availability of adequate and reliable data to support the assumptions in the forecast.
- Auditor Expertise:
- Assess whether the audit team has the expertise and resources required to conduct the engagement.
- Independence and Ethical Considerations:
- Verify compliance with ethical requirements, including independence and avoidance of conflicts of interest.
b. Procedures for Reviewing Prospective Financial Information (10 Marks)
i. Procedures for PFI Assurance Engagements Generally:
- Understanding the Entity:
- Obtain an understanding of the entity’s operations, business environment, and the assumptions underlying the forecast.
- Risk Assessment:
- Identify risks associated with the preparation and presentation of the prospective financial information.
- Evaluation of Assumptions:
- Evaluate whether the assumptions are reasonable, consistent, and aligned with the entity’s historical data and business strategy.
- Review of Methods and Calculations:
- Assess the methodology used in preparing the PFI and ensure calculations are mathematically accurate.
- Compliance with Standards:
- Confirm that the PFI complies with applicable financial reporting standards and regulatory requirements.
ii. Procedures on the Profit Forecast:
- Analysis of Key Assumptions:
- Evaluate key assumptions, such as growth rates, cost projections, and revenue estimates, to ensure they are reasonable.
- Comparison with Historical Data:
- Compare the forecast with historical financial statements to assess consistency and reliability.
- Sensitivity Analysis:
- Perform sensitivity analysis to determine the impact of changes in key assumptions on the profit forecast.
- Assessment of External Factors:
- Review external factors, such as market trends and economic conditions, to ensure assumptions reflect the external environment.
- Management Representations:
- Obtain written representations from management regarding the appropriateness of assumptions and completeness of information provided.
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