Question Tag: Prospective financial information

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AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

Question

Tijara Nigeria Limited has a credit facility of N6 million with Godiya Bank. The facility was due to expire on December 31, 2021. The overdraft in the recently audited statement of financial position as at September 30, 2021 is N5.5 million. The directors of Tijara have started negotiations with their bankers for a renewal of the facility and to increase the amount to N9 million. To support this request, the bank has asked Tijara to provide a business plan for the coming twelve months consisting of a cash flow forecast supported by a forecast income statement and statement of financial position.

The management of Tijara has produced a cash flow forecast for the period October 1, 2021, to September 30, 2022, and, at the request of the bank, has asked an auditor to examine and report on it.

The Audit Manager, who has recently completed Tijara’s audit, has been asked to make a preliminary examination of the cash flow forecast and supporting materials. The manager has made the following observations:

The cash flows from sales are based on the assumption of an overall increase in sales of 24% compared to the previous financial year. Analysis shows that this is based on an increase in selling price of 5% and an increase in the volume of sales of 18%. Just over a quarter of all Tijara sales are made to foreign customers.
The cost of sales in the recently audited comprehensive income to September 30, 2021, was 80% of sales revenue, giving a gross profit of 20%. In the forecast income statement for the year to September 30, 2022, the cost of sales has fallen to 72%, giving a gross profit of 28%. Manufacturing costs are made up of equal proportions of materials, labor, and production overheads.
The trade receivables collection period used in the cash flow forecast to September 30, 2022, is 61 days. In the year to September 30, 2021, this period averaged 93 days. Management has stated that it is its intention to inform all customers of a new standard 60-day credit period. In addition, an early settlement discount of 1% will apply to customers who settle their accounts within 30 days of the statement. Conversely, the credit period for trade payables has been extended from an average of 45 days in the current year to 90 days in the forecast.
The cash flow forecast showed that the maximum credit required during the period would rise to nearly N9 million in August 2022.

Required:

a. Describe the general approach to the assurance work an auditor should consider before accepting the engagement of a reporting accountant on Prospective Financial Information (PFI) under ISAE 3400: The Examination of Prospective Financial Information. (8 Marks)

b. Detail the procedures applicable to the cash flow forecast of Tijara for the year to September 30, 2022. (7 Marks)

c. Prepare a summarized presentation of what the reporting accountant should consider in forming an opinion on prospective financial information (PFI). (5 Marks)

Answer

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Tags: Audit Procedures, Cash Flow Forecast, ISAE 3400, Prospective financial information, Reporting Accountant
Level: Level 3

Topic: Audit of Prospective Financial Information

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 – July 2023 – L3 – Q2 – Assurance services | The audit approach | Planning

Discuss matters to consider before accepting a review engagement and recommend procedures for examining a cash flow forecast.

Question

Eebuks Ltd is a retailer of academic textbooks that sells through its own network of bookshops and online through its website. The revenue from the website includes both cash sales and sales on credit to educational institutions. The company has provided historical analysis from its trade receivables ledger indicating that for sales made on credit, 25% payment is received in the month of sale, 70% after 30 days, and the remainder are irrecoverable debts.

You are a Manager in Makafui & Associates, a firm of Chartered Accountants offering a range of services from audit to non-audit for its clients. On 1 July 2023, your firm was asked by Eebuks Ltd, a company that is not an audit client of your firm, to consider a potential engagement to review and provide an assurance report on Prospective Financial Information. Makafui & Associates has already conducted specific client identification procedures in line with money laundering regulations with satisfactory results.

Additionally, Eebuks Ltd has approached your firm to obtain an independent assurance opinion on its cash flow forecast, which is being prepared for its bankers in support of an application for an increase in its existing overdraft facility.

Required:

a) In line with ISAE 3400: The Examination of Prospective Financial Information, discuss FIVE (5) matters to be considered by Makafui & Associates before accepting the engagement to review and report on Eebuks Ltd’s Prospective Financial Information. (10 marks)

b) Assuming Makafui & Associates accepts the engagement, recommend EIGHT (8) procedures to be performed in respect of Eebuks Ltd’s cash flow forecast. (10 marks)

Answer

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Tags: Assurance Services, Audit Procedures, Cash Flow Forecast, ISAE 3400, Prospective financial information, Review Engagement
Level: Level 3

Topic: Assurance services, Planning, The audit approach
Series: JULY 2023

AAA – Nov 2015 – L3 – Q3 – Assurance services

This question addresses the considerations before accepting an engagement to review prospective financial information and the reporting requirements thereafter.

Question

You are a manager in BS Cipax, a medium-sized firm which offers a range of services to audit and non-audit clients. You have been asked to consider a potential engagement to review and provide a report on the prospective financial information of Filtane Limited, a company which has been an audit client of BS Cipax for six years. The audit of the financial statements for the year ended 31 August 2015 has been completed and your firm issued an unmodified report. Filtane Limited operates a chain of fashion stores across the country.

Currently its merchandise are out of date and it sells clothing which do not reflect the latest and in mode fashion labels which are becoming more popular especially with the youth. Management is planning to revamp its image and stock the latest fashion in Africa and across the other continents. It also intends to invest in the latest technologies to include online real time trading on the internet order to attract more customers, especially the up-and-coming youth, trendy middle-aged persons and even those far from its shops by attracting them to shop over the internet. The company has sufficient cash to fund half of the necessary capital expenditure, and has approached its bank, Boafo Bank Limited, with a loan application of GHS32 million for the remainder of the funds required. Most of the cash will be used to invest in acquiring inventory and the technology for ensuring secure and safe online trading. The remaining cash will be used for refurbishment of the shops. Management had informed the Audit team, in the invitation to start the audit, of its intention to use the audited financial statements as the basis for preparing the prospective financial information to be used to seek for the loan from Boafo Bank Limited. The draft forecast statements of profit or loss for the years ending 31 August 2016 and 2017 are shown below, along with the key assumptions which have been used in their preparation. The audited statement of profit or loss for the year ended 31 August 2015 is also shown below.

The forecast has been prepared for use by the bank in making its lending decision, and was to be accompanied by other prospective financial information including a forecast statement of cash flows. Note 1: The forecast increase in revenue is based on the following assumptions:
(i) All shops will be stocked with new modern and in mode fashion to attract new customers to the shops and many persons who don’t live in the vicinity of the shops will also be attracted through online shopping by December, 2015.
(ii) Prices will increase by an average of 25% in December 2015.
Note 2: Operating expenses include mainly staff costs, depreciation of property and fittings, and repairs and maintenance to the shop fittings and equipment as well as ensuring continuous safe and secure on-line shopping.

Required:

a) i) Explain the matters to be considered by BS Cipax before accepting the engagement to review and report on the prospective financial information of Filtane Limited. (5 marks)

ii) Assuming the engagement is accepted, and the results of the examination procedures show that the prospective financial information have been prepared in accordance with the assumptions and appear reasonable, discuss the issues that will be in the report your firm will issue in respect of the forecast statement of profit or loss. (8 marks)

b) Boafo Bank Limited gave the loan to Filtane Limited on 15 October 2015, and a review of the first six months of operation in May 2016 of the new shops revealed that the company was not doing well and could not pay the first installment for the loan from Boafo Bank Limited. Further investigation revealed that the audited financial statements signed by BS Cipax, which showed a profit of GHS20.2M, should have been of a loss of GHS4.3M.

Boafo Bank Limited has indicated its intention to sue your firm for negligence on the basis that it placed reliance on the financial statements audited by your firm.

Required:

Comment on the matters that you should consider in deciding whether your firm will contest the matter in court or seek an out-of-court settlement with the bank. (7 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Assurance engagements, Ethical considerations, Prospective financial information, Reporting
Level: Level 3

Topic: Assurance services, Professional responsibility and liability
Series: NOV 2015

AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

Question

The management of Tijara has produced a cash flow forecast for the period October 1, 2021, to September 30, 2022, and, at the request of the bank, has asked an auditor to examine and report on it.

The cash flows from sales are based on the assumption of an overall increase in sales of 24% compared to the previous financial year. Analysis shows that this is based on an increase in selling price of 5% and an increase in the volume of sales of 18%. Just over a quarter of all Tijara sales are made to foreign customers.
The cost of sales in the recently audited comprehensive income to September 30, 2021, was 80% of sales revenue, giving a gross profit of 20%. In the forecast income statement for the year to September 30, 2022, the cost of sales has fallen to 72%, giving a gross profit of 28%. Manufacturing costs are made up of equal proportions of materials, labor, and production overheads.
The trade receivables collection period used in the cash flow forecast to September 30, 2022, is 61 days. In the year to September 30, 2021, this period averaged 93 days. Management has stated that it is its intention to inform all customers of a new standard 60-day credit period. In addition, an early settlement discount of 1% will apply to customers who settle their accounts within 30 days of the statement. Conversely, the credit period for trade payables has been extended from an average of 45 days in the current year to 90 days in the forecast.
The cash flow forecast showed that the maximum credit required during the period would rise to nearly N9 million in August 2022.

Required:

b. Detail the procedures applicable to the cash flow forecast of Tijara for the year to September 30, 2022. (7 Marks)

c. Prepare a summarized presentation of what the reporting accountant should consider in forming an opinion on prospective financial information (PFI). (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Procedures, Cash Flow Forecast, ISAE 3400, Prospective financial information, Reporting Accountant
Level: Level 3

Topic: Audit of Prospective Financial Information

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 – July 2023 – L3 – Q2 – Assurance services | The audit approach | Planning

Discuss matters to consider before accepting a review engagement and recommend procedures for examining a cash flow forecast.

Question

Required:

b) Assuming Makafui & Associates accepts the engagement, recommend EIGHT (8) procedures to be performed in respect of Eebuks Ltd’s cash flow forecast. (10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Assurance Services, Audit Procedures, Cash Flow Forecast, ISAE 3400, Prospective financial information, Review Engagement
Level: Level 3

Topic: Assurance services, Planning, The audit approach
Series: JULY 2023

AAA – Nov 2015 – L3 – Q3 – Assurance services

This question addresses the considerations before accepting an engagement to review prospective financial information and the reporting requirements thereafter.

Question

Required:

a) i) Explain the matters to be considered by BS Cipax before accepting the engagement to review and report on the prospective financial information of Filtane Limited. (5 marks)

Boafo Bank Limited has indicated its intention to sue your firm for negligence on the basis that it placed reliance on the financial statements audited by your firm.

Required:

Comment on the matters that you should consider in deciding whether your firm will contest the matter in court or seek an out-of-court settlement with the bank. (7 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Assurance engagements, Ethical considerations, Prospective financial information, Reporting
Level: Level 3

Topic: Assurance services, Professional responsibility and liability
Series: NOV 2015

Question Tag: Prospective financial information

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AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

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 – July 2023 – L3 – Q2 – Assurance services | The audit approach | Planning

Discuss matters to consider before accepting a review engagement and recommend procedures for examining a cash flow forecast.

AAA – Nov 2015 – L3 – Q3 – Assurance services

This question addresses the considerations before accepting an engagement to review prospective financial information and the reporting requirements thereafter.

AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

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 – July 2023 – L3 – Q2 – Assurance services | The audit approach | Planning

Discuss matters to consider before accepting a review engagement and recommend procedures for examining a cash flow forecast.

AAA – Nov 2015 – L3 – Q3 – Assurance services

This question addresses the considerations before accepting an engagement to review prospective financial information and the reporting requirements thereafter.

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AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

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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 – July 2023 – L3 – Q2 – Assurance services | The audit approach | Planning

Discuss matters to consider before accepting a review engagement and recommend procedures for examining a cash flow forecast.

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AAA – Nov 2015 – L3 – Q3 – Assurance services

This question addresses the considerations before accepting an engagement to review prospective financial information and the reporting requirements thereafter.

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AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

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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.

You're reporting an error for "AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information"

AAA – July 2023 – L3 – Q2 – Assurance services | The audit approach | Planning

Discuss matters to consider before accepting a review engagement and recommend procedures for examining a cash flow forecast.

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AAA – Nov 2015 – L3 – Q3 – Assurance services

This question addresses the considerations before accepting an engagement to review prospective financial information and the reporting requirements thereafter.

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