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SAE 3420 Assurance Engagement to Report on the Compliance of Pro Forma Financial Information Included in a Prospectus

Updated on: Jul 21st, 2021


8 min read

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SAE 3420 deals with reasonable assurance engagement undertaken by a practitioner to report on the responsible party’s compilation of pro forma financial information included in the prospectus.

Scope of SAE 3420

SAE 3420 applies where:

i. Such reporting is required by securities law or regulation

ii. This reporting is generally accepted practice in such jurisdiction

SAE 3420 is effective for assurance reports dated on or after April 1, 2016.

Effective Date

i. Obtain reasonable assurance about whether the pro forma financial information has been compiled, in all material respects, by the responsible party on the basis of suitable criteria

ii. To report in accordance with the practitioner’s findings


“Pro forma adjustments – In relation to unadjusted financial information, these include: Adjustments to unadjusted financial information that illustrate the impact of a significant event or transaction as if the event had occurred or the transaction had been undertaken at an earlier date selected for the illustration purpose Adjustments to unadjusted financial information that is necessary for the pro forma financial information to be compiled on a basis consistent with the applicable financial reporting framework of the reporting entity and its accounting policy.”

Engagement Acceptance

Before accepting an engagement, the practitioner should:

i. Determine the capabilities and competence to perform the engagement ii. If the applicable criteria are suitable and that the pro forma financial information will not mislead the purpose of its preparation iii. Where the sources from which information is extracted has been audited or reviewed iv. Entity’s historical financial information has ever been audited or reviewed v. If the event or transaction includes an acquisition and the acquiree’s historical financial information has ever been audited or reviewed vi. If the responsible party acknowledges and understands its responsibility for:

a. Adequately disclosing and describing the applicable criteria to the intended users

b. Compiling the pro forma financial information on the applicable criteria basis

c. Providing the practitioner with:

i. Access to all information – records, documents and other material

ii. Additional information required for the engagement purpose

iii. Access to those within the entity for obtaining all relevant evidence

iv. Access to appropriate individuals within the acquire in a business combination

Assessing the Suitability Criteria

A practitioner should assess if the applicable criteria are suitable as required by the Framework for assurance engagement and include that:

i. Unadjusted financial information be extracted from an appropriate source ii. The pro forma adjustment be:

a. Directly attributable to the event or transaction

b. Factually supportable

c. Consistent with the entity’s financial reporting framework and accounting policy

iii. Appropriate presentation made and disclosure be provided iv. Do not conflict with relevant law or regulation

Understanding the Pro Forma Financial Information

1Understanding How the Responsible Party has Compiled the Pro Forma Financial Information and Other Engagement CircumstancesObtain understanding of:
  1. Event or transaction for which Pro forma information is compiled
  2. How the responsible party has done the compilation
  3. Nature of entity and any acquire or divestee, including:
    1. Operations
    2. Assets and Liabilities
    3. Way of Structuring and financing
  4. Relevant industry, legal and regulatory and other external factors
  5. Applicable financial reporting framework and other policies

2Obtaining evidence regarding appropriateness of the source from which the unadjusted financial information has been extracted To determine if the unadjusted financial information has been extracted from an appropriate source. If the source has not been audited or reviewed, then necessary procedures to satisfy its appropriateness should be done
3Obtaining evidence about the appropriateness of the Pro forma adjustmentsDetermine whether the responsible party has identified pro forma adjustments necessary to illustrate the event or transaction for the period.  Also if the pro forma adjustments are: i. Directly attributable to the event or transactionii. Factually supportableiii. Consistent with entity’s financial reporting framework

Information Source

Based on the procedures performed, if the practitioner identifies that the responsible party has:

i. Used an inappropriate source to extract unadjusted financial information

ii. Omitted a pro forma adjusted that should have been included or inappropriately applied a pro forma adjustment

The practitioner should discuss with the responsible party and if unable to reach a conclusion, then the practitioner should evaluate what further action to take.

Evaluating the presentation of Pro Forma Financial Information

A practitioner should evaluate the presentation of the pro forma financial information on the basis of the following considerations:

i. Overall presentation and Structure (including labeling)

ii. Contents illustrate the event in a manner that is not misleading

iii. Whether appropriate disclosures are provided

iv. If there are any significant event subsequent to the source date which may require a reference to or disclosure

v. If the other information in the prospectus indicates any material inconsistencies etc

Forming the Opinion

SAE 3420

To form an opinion the Practitioner should ensure whether sufficient evidence has been obtained to conclude that the pro forma financial information is free from material omissions or inappropriate use of pro forma adjustments.

Preparing the Assurance Report

Following basic details has to be included in the assurance report: i. A title (to indicate that it is an independent assurance report) ii. An address (as per the terms of engagement) iii.  Introductory paragraph stating:

a. Pro forma financial information with the period covered

b. Applicable criteria based on which Pro forma financial information was prepared

c. A source from which unadjusted financial information was extracted

d. Whether such source was subject to audit or review

iv) The statement that the responsible party is responsible for compiling the pro forma financial information on the basis of applicable criteria v) With regard to Practitioner’s responsibility

a. Is to express opinion if the pro forma financial information has been compiled by the responsible party on the basis of applicable criteria

b. Practitioner is not responsible  for updating or reissuing any reports or opinion on any historical financial information used

c. Practitioner does not provide any assurance that the actual outcome of the event or transaction at that date would have been as presented

vi. Statement that engagement was performed in accordance with SAE 3420 vii. Statement that:

a. Reasonable assurance engagement to report whether  the pro forma financial information has been compiled in all material aspects and obtain sufficient evidence about whether:

i) Related pro forma adjustments give appropriate effect to those criteria

ii) Pro forma financial information reflects the proper application of those adjustments

b. Procedures selected depend on the practitioner’s judgment based on the understanding of the nature of the entity, event or transaction.

c. Engagement involves evaluating the overall presentation

viii. Practitioner’s signature including date and place of the signature

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