Question Tag: Profit Forecast

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AAA – May 2017 – L3 – Q4c – Assurance Engagements

Explain Prospective Financial Information (PFI) and procedures for assurance engagements on profit forecasts.

Question

Traditionally, the role of the auditor has focused on providing assurance on “historical” events, for example, on financial statements relating to a period of time in the past. As business and economic environments have changed, demand has grown for practising accountants to provide assurance on prospective financial information (PFI).

Required:

i. Explain “Prospective Financial Information” (2 Marks)

ii. State and explain SIX procedures you will perform in a PFI assurance engagement on Profit Forecast of a company. (6 Marks)

Answer

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Tags: Assurance engagements, Procedures, Profit Forecast, Prospective financial information
Level: Level 3

Topic: Assurance Engagements

FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Question

Syntax Plc., a fertilizer company, is concerned about fluctuating sales and earnings. This caused the management of the company to consider acquisition of another company in the same line of business.

In order to boost its sales and stabilize its earnings, Syntax Plc.’s management has identified Synapse Chemical Company Plc. as a possible target. Syntax proposed to acquire Synapse for a consideration of N20 million, which was agreed to by both companies.

Synapse’s expected future profits, as projected from its past financial records, are as follows:

Forecast Profits

Year	Revenue (N’m)	Cost of Sales (N’m)	Other Expenses (N’m)	Depreciation (N’m)	Total Expenses (N’m)	Profit Before Tax (N’m)
2015	60	30	15	5	50	10
2016	70	35	15	4	54	16
2017	78	39	15	4	58	20
2018	86	43	15	4	62	24
2019	94	47	15	4	66	28

The following information is relevant:

The forecast profits have been limited to five years.
All sales are for cash.
The net book value of Synapse’s assets of N2 million is intended to be sold for N1 million in 2015. The expected loss from the disposal of these assets has been included in the depreciation for 2015. These assets currently have a tax written down value of N3 million. Capital allowances were claimed as at when due.
Synapse currently has a tax liability of N4.5 million due for payment in 2015.
The interest charges of N1 million of Synapse Plc. have been included in other expenses.
In order to maintain the future earnings forecast of Synapse Chemical Company, Syntax Plc. needs to invest in capital expenditure.

7. Company income tax is currently at 30 percent, and the tax delay is one year.

8. The after-tax weighted average cost of capital has been calculated at 22%.

The management of Syntax Plc. has asked you, as a Financial Expert, to appraise the intended acquisition of Synapse Chemical Company Plc. and advise on the reasonableness of the acquisition. Your advice should be in the form of a report to the Board of Directors of Syntax Plc.

Answer

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Tags: Acquisition Appraisal, Discounted Cash Flow, Investment Analysis, Profit Forecast, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2014

AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information

Evaluate considerations before accepting PFI engagements and procedures for reviewing profit forecasts under ISAE 3400.

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

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Tags: Assurance Engagement, ISAE 3400, Profit Forecast, Prospective financial information, Review Procedures, Risk Assessment
Level: Level 3

Topic: Audit of Prospective Financial Information

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

Question

Investigation under investment decision will NOT include:
A. Loan facility decision
B. Purchase of shares
C. Purchase of business
D. Reporting on profit forecast
E. Partnership participation

Answer

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Tags: Financial Analysis, Investigation, Investment Decision, Profit Forecast
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2012

AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

Question

Which of the following is NOT an objective of profit forecast investigation on which an opinion can be given?
A. Whether or not the profit forecast complies with the Generally Accepted Accounting Principles
B. As to whether the profit forecast has been prepared on the basis of the existing organization’s accounting policies
C. Whether or not the profit forecast has been prepared on the basis of management assumptions and judgment
D. On the reasonableness of the management assumptions and judgment of the profit forecast
E. As to whether the profit forecast agrees with the underlying records

Answer

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Tags: Assurance, Compliance, GAAP, Profit Forecast, Regulatory Standards
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2012

MA – April 2022 – L2 – Q5a – Decision making techniques

Analyze the profitability of four strategic options for Kuntu Ltd and estimate the required selling price to achieve a target profit.

Question

Kuntu Ltd manufactures one standard product, the standard marginal cost of which is as follows:

Cost Element	GH¢
Direct material per unit	10.00
Direct wages per unit	7.50
Variable production overhead	1.25
Total Marginal Cost per Unit	18.75

The budget for the year includes the following:

Output (units): 80,000
Total fixed Overheads:
- Production: GH¢1,000,000
- Advertising: GH¢600,000
- Marketing: GH¢500,000
Contribution: GH¢2,500,000

In reviewing the budget for the coming year, management is dissatisfied with the results likely to arise. An emergency board meeting was held to discuss possible strategies to improve the situation, and the following strategies were proposed:

Strategy 1: The Production Manager suggested reducing the selling price by 10%. This could increase output by 25%. It is estimated that these changes would result in an increase in fixed production overhead by GH¢50,000 and fixed marketing overhead by GH¢25,000.

Strategy 2: The Director of Finance suggested increasing the selling price by 10%. Additionally, with an increase in advertising cost by GH¢400,000, sales units would increase to 90,000 units. It is also estimated that this strategy would increase the fixed production overhead by GH¢25,000 and marketing overhead by GH¢20,000.

Strategy 3: The Marketing Director suggested that with an appropriate increase in advertising expenditure, sales could be increased by 20%, and a profit on turnover of 15% could be obtained. It is estimated that fixed production overhead would increase to GH¢1,040,000 and marketing overhead would increase by GH¢25,000.

Strategy 4: The Managing Director seeks a profit of GH¢600,000. He would like to know at what selling price the target profit could be achieved given the following estimates: An increase in advertising expenditure by GH¢360,000 would result in a 10% increase in sales. However, fixed production and marketing overheads would increase by GH¢25,000 and GH¢17,000 respectively.

Required:

i) Prepare a forecast profit statement for Strategy 1 and Strategy 2. (6 marks)

ii) Estimate the additional expenditure on advertisement to achieve results in Strategy 3. (5 marks)

iii) Estimate the selling price that is required to achieve a profit of GH¢600,000 in Strategy 4. (5 marks)

Answer

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Tags: Advertising Costs, Profit Forecast, Selling Price Strategy, Strategic Decision-Making
Level: Level 2

Topic: Decision making techniques
Series: APR 2023

AAA – May 2017 – L3 – Q4c – Assurance Engagements

Explain Prospective Financial Information (PFI) and procedures for assurance engagements on profit forecasts.

Question

Required:

i. Explain “Prospective Financial Information” (2 Marks)

ii. State and explain SIX procedures you will perform in a PFI assurance engagement on Profit Forecast of a company. (6 Marks)

Answer

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Tags: Assurance engagements, Procedures, Profit Forecast, Prospective financial information
Level: Level 3

Topic: Assurance Engagements

FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Question

Synapse’s expected future profits, as projected from its past financial records, are as follows:

Forecast Profits

Year	Revenue (N’m)	Cost of Sales (N’m)	Other Expenses (N’m)	Depreciation (N’m)	Total Expenses (N’m)	Profit Before Tax (N’m)
2015	60	30	15	5	50	10
2016	70	35	15	4	54	16
2017	78	39	15	4	58	20
2018	86	43	15	4	62	24
2019	94	47	15	4	66	28

The following information is relevant:

The forecast profits have been limited to five years.
All sales are for cash.
The net book value of Synapse’s assets of N2 million is intended to be sold for N1 million in 2015. The expected loss from the disposal of these assets has been included in the depreciation for 2015. These assets currently have a tax written down value of N3 million. Capital allowances were claimed as at when due.
Synapse currently has a tax liability of N4.5 million due for payment in 2015.
The interest charges of N1 million of Synapse Plc. have been included in other expenses.
In order to maintain the future earnings forecast of Synapse Chemical Company, Syntax Plc. needs to invest in capital expenditure.

7. Company income tax is currently at 30 percent, and the tax delay is one year.

8. The after-tax weighted average cost of capital has been calculated at 22%.

Answer

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Tags: Acquisition Appraisal, Discounted Cash Flow, Investment Analysis, Profit Forecast, Valuation
Level: Level 3

Topic: Mergers and acquisitions
Series: NOV 2014

AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information

Evaluate considerations before accepting PFI engagements and procedures for reviewing profit forecasts under ISAE 3400.

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.

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)”:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Assurance Engagement, ISAE 3400, Profit Forecast, Prospective financial information, Review Procedures, Risk Assessment
Level: Level 3

Topic: Audit of Prospective Financial Information

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

Question

Investigation under investment decision will NOT include:
A. Loan facility decision
B. Purchase of shares
C. Purchase of business
D. Reporting on profit forecast
E. Partnership participation

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial Analysis, Investigation, Investment Decision, Profit Forecast
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2012

AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

Question

Answer

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Tags: Assurance, Compliance, GAAP, Profit Forecast, Regulatory Standards
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2012

MA – April 2022 – L2 – Q5a – Decision making techniques

Analyze the profitability of four strategic options for Kuntu Ltd and estimate the required selling price to achieve a target profit.

Question

Kuntu Ltd manufactures one standard product, the standard marginal cost of which is as follows:

Cost Element	GH¢
Direct material per unit	10.00
Direct wages per unit	7.50
Variable production overhead	1.25
Total Marginal Cost per Unit	18.75

The budget for the year includes the following:

Output (units): 80,000
Total fixed Overheads:
- Production: GH¢1,000,000
- Advertising: GH¢600,000
- Marketing: GH¢500,000
Contribution: GH¢2,500,000

Required:

i) Prepare a forecast profit statement for Strategy 1 and Strategy 2. (6 marks)

ii) Estimate the additional expenditure on advertisement to achieve results in Strategy 3. (5 marks)

iii) Estimate the selling price that is required to achieve a profit of GH¢600,000 in Strategy 4. (5 marks)

Answer

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Tags: Advertising Costs, Profit Forecast, Selling Price Strategy, Strategic Decision-Making
Level: Level 2

Topic: Decision making techniques
Series: APR 2023

Question Tag: Profit Forecast

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AAA – May 2017 – L3 – Q4c – Assurance Engagements

Explain Prospective Financial Information (PFI) and procedures for assurance engagements on profit forecasts.

Required:

FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Forecast Profits

AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information

Evaluate considerations before accepting PFI engagements and procedures for reviewing profit forecasts under ISAE 3400.

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

MA – April 2022 – L2 – Q5a – Decision making techniques

Analyze the profitability of four strategic options for Kuntu Ltd and estimate the required selling price to achieve a target profit.

AAA – May 2017 – L3 – Q4c – Assurance Engagements

Explain Prospective Financial Information (PFI) and procedures for assurance engagements on profit forecasts.

Required:

FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Forecast Profits

AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information

Evaluate considerations before accepting PFI engagements and procedures for reviewing profit forecasts under ISAE 3400.

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

MA – April 2022 – L2 – Q5a – Decision making techniques

Analyze the profitability of four strategic options for Kuntu Ltd and estimate the required selling price to achieve a target profit.

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AAA – May 2017 – L3 – Q4c – Assurance Engagements

Explain Prospective Financial Information (PFI) and procedures for assurance engagements on profit forecasts.

Required:

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FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Forecast Profits

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AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information

Evaluate considerations before accepting PFI engagements and procedures for reviewing profit forecasts under ISAE 3400.

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AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

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AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

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MA – April 2022 – L2 – Q5a – Decision making techniques

Analyze the profitability of four strategic options for Kuntu Ltd and estimate the required selling price to achieve a target profit.

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AAA – May 2017 – L3 – Q4c – Assurance Engagements

Explain Prospective Financial Information (PFI) and procedures for assurance engagements on profit forecasts.

Required:

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FM – Nov 2014 – L3 – SB – Q3 – Mergers and Acquisitions

Appraise Syntax Plc.'s proposed acquisition of Synapse Chemical Company based on forecast profits and provide a recommendation.

Forecast Profits

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AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information

Evaluate considerations before accepting PFI engagements and procedures for reviewing profit forecasts under ISAE 3400.

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AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

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AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

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MA – April 2022 – L2 – Q5a – Decision making techniques

Analyze the profitability of four strategic options for Kuntu Ltd and estimate the required selling price to achieve a target profit.

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