AAA – May 2025 – Professional – SC – Q5 – Audit of Prospective Financial Information, Assurance Engagements

Develop procedures, evaluate considerations for nature/timing/extent, and disclose six elements of assurance report for prospective financial info submissions on Godman Philip School.

Question

To establish Godman Philip International High School and turn it to a world class institution, the Chief Operating Officer (COO) requires your services as an assurance service provider to report on five projected financial information obtained from professional services firms. Some of the details provided to the professional service firms include:

Background Information Godman Philip International High School is a proposed co-educational institution to be set up in one of the oil rich state capitals in the country. It is expected to be a boarding school for boys and girls. The students are expected to resume studies the next academic session, after obtaining approval from the government of the chosen state.

Basis for the prospective financial information The financial information will be used to raise capital to finance operations of the school and address other issues. The projection is expected to be part of a long term strategy to establish a world class institution with clear and achievable targets. The report to be obtained should be suitable to help in planning pre-operating budget and assess when the school will become profitable enough to give good returns to investors without compromising quality of education provided to the students, and expected facilities in the school. The financial information should be adequate to convince interested investors and lenders of the likely growth potential of the institution.

Minimum content of the prospective financial information Interested professional service firms will be expected to submit for review prospective financial information for the first four (4) years of business on likely:

(i) startup expenses;

(ii) payroll costs;

(iii) revenue forecast;

(iv) operating expenses;

(v) cash flow statements;

(vi) income statements;

(vii) statement of financial position;

(viii) break-even analysis;

(ix) financial ratios;

(x) amortisation and depreciation in the business; and

(xi) likely risks.

Professional services firms

The professional firms should be able to do a robust documentation of identified issues and should demonstrate ability to perform any outsourced service, like preparation of books of account or internal audit service (if required) after commencement.

The proposal should state expected fee, the profile of the firm and staff complement especially, if services are required for any of the outsourced services.

Submission The prospective financial information should be submitted on or before close of work on December 31, 2024. Only shortlisted professional service firm would be invited for presentation and interview.

Assurance engagement Your audit and assurance firm has been engaged to provide an assurance service to Godman Philip International, wherein you will report to the Chief Operating Officer (COO) after performing necessary procedures on the submissions of five professional service firms that submitted prospective financial information to the Chief Operating Officer (COO).

Required:

a. Develop the procedures your firm should apply on this assurance engagement.

(6 Marks)

b. Evaluate and communicate what you will consider in deciding the nature, timing and extent of the procedures required to complete this assurance engagement (3 Marks)

c. Disclose any SIX elements of the assurance report you believe should be included in the submission to the Chief Operating Officer (COO). (6 Marks)

Answer

The likely procedures to be applied on the assurance engagement

i. Where the audit firm has no previous knowledge of the entity, it should obtain sufficient knowledge of the entity and its environment. He should also understand the nature of the information to be examined.

ii. The nature of the assumptions that have been made by management (whether they are best estimate assumptions for a forecast, or hypothetical assumptions for the purpose of making a projection). If best estimate assumptions have been used in preparing the Prospective Financial Information (a forecast), the auditor should seek evidence to support these estimates.

iii. If hypothetical assumptions have been used (to prepare a projection), the auditor should assess whether they are realistic and sensible, and whether the full implications of the hypothetical assumptions have been properly reflected in the Projected Financial Information.

iv. The auditor should assess whether the Projected Financial Information contains all the relevant material items and that nothing of significance has been omitted.

v. If part of the „future period‟ in the forecast or projection has already passed, the auditor should review the actual results for that part of the period and compare actual results with the forecast or projection. The differences will help the auditor to assess the reliability of the forecast or accuracy of the projection.

vi. The auditor should also check the arithmetical accuracy and consistency of the projected financial information that has been prepared.

vii. The auditor should obtain representations from management on:

 management’s acceptance of responsibility for the information;

 the intended use of the information; and

 the completeness of the assumptions that were made to prepare the prospective financial information;

viii. Establish whether the information will be for general distribution or limited distribution to a small number of users;

ix. Confirm the time period covered by this information;

x. Assess risk disclosures: Evaluate whether major business risks are appropriately identified and disclosed;

xi. evaluate ethical and independence concerns: Confirm that the professional services firms are ethically sound and demonstrate competence. xii. Document and review: Properly document all procedures performed.

Conduct internal review and quality control in line with ISQC 1/ISQM 1.

When deciding the nature, timing and extent of the procedures required to complete this assurance engagement, the auditor should consider the following issues:

i. The likelihood of material misstatement in the forecast or projection;

ii. The knowledge that the auditor has obtained during any previous similar engagements;

iii. The competence of the client’s management with regard to the preparation of prospective financial information;

iv. The extent to which the prospective financial information is affected by management’s judgment (in other words, to what extent does the prospective financial information depend on judgment about best estimates or hypotheses);

v. The adequacy and reliability of the underlying data and assumptions that have been used as the basis for preparing the prospective financial information;

vi. Complexity of operations: New educational institutions may have unpredictable variables, thus procedures must be more robust;

vii. Intended use of the report: Since the report is for investors and lenders, a high level of assurance is expected;

viii. Availability of evidence: The extent of available data and third-party corroborations (e.g., market studies) will shape the depth of review;

ix. Risk assessment: Identify areas with high risk of material misstatement (e.g., unrealistic revenue forecasts, understated costs); and

x. Deadline (Timing): Given the December 31, 2024, submission date, plan a staged review and prioritise higher-risk areas early.

Topic: Assurance Engagements, Audit of Prospective Financial Information
Series: MAY 2025

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