Business compliance keeping you awake?
Cleartax's wide range of compliance services is here for you
Explore Now

SAE 3400 The Examination of Prospective Financial Information

Updated on: Jul 6th, 2021

|

8 min read

social iconssocial iconssocial iconssocial icons

SAE 3400 provides guidelines on the engagement to examine and report on prospective financial information which includes examination procedures for best estimates and hypothetical assumptions.

Let’s understand in detail about Standard on Assurance Engagement SAE 3400 – The Examination of Prospective Financial Information.

Introduction

SAE 3400 is not applicable to expression in general or narrative terms and the principles of standards on auditing should be used as much as possible by the auditor. Management is responsible for the preparation of prospective financial information and the auditor is required to validate and report on the same.

Definition

“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. It can be in the form of forecast and projections including financial statements and can be prepared:

  • As an internal management tool
  • For the distribution/submission to third parties 

Auditor’s Assurance – Prospective Financial Information

Prospective financial information is the management’s estimate of future results and is based on evidence which is generally future-oriented and speculative in nature. The auditor will not be able to express an opinion if those results will be achieved or if they are free from material misstatement. Therefore per SAE 3400, the auditor can provide only a moderate level of assurance on the reasonableness of management’s assumptions.

Acceptance of Engagement

The auditor should consider the following before accepting an engagement to examine prospective financial information:

  1. The intended use of the information
  2. If the information will be for general or limited distribution
  3. Nature of assumptions – best estimate or hypothetical
  4. Elements to be included in the information
  5. Period covered by the information

The auditor should not accept an engagement if the assumptions are clearly unrealistic or the prospective financial information will be inappropriate for intended use. Auditor and the client should agree on the terms of engagement per SA 210.

Knowledge of Business

It is important for the auditor to obtain sufficient knowledge of the business to evaluate the significant assumptions required for the preparation of prospective financial information and also know the following:

  • Internal controls over the system
  • Nature of documentation supporting the management assumption
  • Statistical, mathematical and computer-assisted techniques
  • Methods used to develop and apply assumptions
  • Accuracy of prospective financial information prepared in prior periods and if there were any significant variances later
  • The extent to which reliance on historical information is justified.

If the prior period historical information was other than a clear report, then the auditor should consider the relevant facts and effect on the current examination

Period Covered

The period of time covered by the prospective financial information should be determined by considering some of the factors mentioned below:

  • The operating cycle eg. The time required to complete the project may dictate the period covered
  • The degree of reliability of assumptions eg. Entity owning a long-term lease, a relatively long prospective period might be reasonable
  • The need of users eg. Information used by investors in connection with the issue of securities to illustrate the intended use of the proceeds in the subsequent period

Examination Procedures

A. In determining the nature, timing and extent of examination procedures, following to be considered by the auditor:

  • Knowledge obtained during the previous engagements
  • Management’s competence regarding the preparation of prospective financial information
  • Likelihood of misstatement
  • Management’s judgment effect on prospective financial information
  • Stability of entity’s business
  • Source of information and its adequacy, reliability etc
  • Engagement team’s experience with the business and industry

B. Source and reliability of the evidence (internal or external) supporting the management’s best-estimate assumptions should be analysed. Internal sources include budgets, projects, royalty agreements etc whereas external sources include government and industry publications, economic forecast etc

C. All significant implications are considered when using hypothetical assumptions and they are not clearly unrealistic Eg. If sales are assumed to increase beyond entity’s current capacity if the prospective financial information provides for necessary investment to expand plant capacity etc

D. If management’s assumptions are appropriately considered in preparation of prospective financial information. Eg making checks such as re-computation and reviewing the internal consistency

E. Areas which are sensitive to variation and would materially affect the prospective financial information should be focused by the auditor for evaluating appropriate and adequate audit evidence

F. All the components of financial statements including the interrelationship between those components should be considered by the auditor

G. If the elapsed portion of the current period is included in the prospective financial information, procedures related to historical information should be applied H. Auditor to obtain written representations from the management for:

  • The intended use of the prospective information
  • Completeness of significant management assumption
  • Management responsibility for the prospective financial information (including identification and disclosure of uncontrollable factors, litigations etc)

Presentation and Disclosure

An auditor should consider the following while assessing the prospective financial information:

  1. The presentation is informative and not misleading
  2. Disclosure of accounting policies in the notes
  3. Adequate disclosure of assumptions in the notes including nature
  4. The date as of which it was prepared and disclosed
  5. Any changes in the accounting policies of the entity and reason for such change
  6. The basis of establishing points in a range is clearly indicated

Documentation

The auditor should document the following:

  1. Evidence to support the auditor’s report on examination of prospective financial information
  2. Evidence that examination was carried out as per SAE
  3. Working papers include sources of information, the basis of forecast etc
  4. Evidence supporting the assumptions, hypothetical assumptions
  5. Management representation regarding intended use and distribution of information
  6. Management’s acceptance of its responsibilities for the information
  7. Audit plan, the nature, timing and extent of examination procedures
  8. If auditors express modified opinion or withdraw from engagement, the reason for the same

1Report on Examination of Prospective Financial information

Auditor’s report should contain the following:

  1. Title
  2. Addressee
  3. Identification of the prospective financial information
  4. Reference to the applicable standards on auditing
  5. Statement from management for its responsibilities including underlying assumptions
  6. Reference to the purpose and/or restricted distribution of prospective financial information as applicable
  7. Examination procedures included the examination on the test basis, evidence supporting the assumptions, forecast or disclosure
  8. Statement of negative assurance if assumptions provide a reasonable basis
  9. Opinion if the prospective financial information is properly prepared on the basis of assumptions and presented per the financial reporting framework
  10. Date of report
  11. Place of signature
  12. Signature

inline CTA
File your returns in just 3 minutes
100% pre-fill. No manual data entry
CONTENTS

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption