Prospective Financial Statements: Projection and Forecast | Auditing and Attestation | CPA Exam

In this video, I discuss prospective financial statement: Projection and forecast.
✔️Accounting students and CPA Exam candidates, check my website for additional resources: https://farhatlectures.com/
📧Connect with me on social media: https://linktr.ee/farhatlectures

#cpaexam #accountingstudent #auditcourse


Forecasts and Projections
AICPA attestation standards define two general types of prospective financial statements:
1. Forecasts are prospective financial statements that present an entity’s expected financial position, results of operations, and cash flows, to the best of the responsible party’s knowledge and belief. Banks commonly require this information as a part of loan applications.
2. Projections are prospective financial statements that present an entity’s financial position, results of operations, and cash flows, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions. For example, projected financial statements might assume the company is able to increase the price of its primary product by 10 percent with no reduction in units sold.
Forecasts and Projections
AICPA attestation standards define two general types of prospective financial statements:
1. Forecasts are prospective financial statements that present an entity’s expected financial position, results of operations, and cash flows, to the best of the responsible party’s knowledge and belief. Banks commonly require this information as a part of loan applications.
2. Projections are prospective financial statements that present an entity’s financial position, results of operations, and cash flows, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions. For example, projected financial statements might assume the company is able to increase the price of its primary product by 10 percent with no reduction in units sold.
Forecasts can be provided for both general and limited use. However, projections are restricted to the latter, because limited users are in a better position to understand the prospective statements and related assumptions than other parties. For example, a potential venture capital investor can ask the responsible party about hypothetical assumptions in a projection, whereas a removed user, such as a reader of a company prospectus, cannot. Because general users may have difficulty interpreting hypothetical assumptions without obtaining additional information, the standards prohibit their general use. There is an exception to this rule: a projection may be issued as a supplement to a forecast for general use.
Types of Engagements
AICPA attestation standards prohibit a CPA firm from performing a review of a forecast or projection, because a review service implies the CPA can be “moderately satisfied” about both the computational accuracy of the projections and the assumptions on which the projection is based. To avoid confusion among users, the AICPA created more specific attestation standards, prescribing the following types of engagements for prospective financial statements:
• An examination engagement in which the CPA obtains satisfaction as to the completeness and reasonableness of all the assumptions.
• A compilation engagement in which the CPA is primarily involved with the computational accuracy of the statements, and not the reasonableness of the assumptions.
• An agreed-upon procedures engagement in which the CPA and all users of the statements agree on specific, limited attestation procedures.
Only an examination of prospective statements is included in this chapter.
Examination of Prospective Financial Statements
In an examination level engagement, the CPA:
1. Evaluates the preparation of the prospective financial statements
2. Evaluates the support underlying the assumptions
3. Evaluates the presentation of the prospective financial statements for conformity with AICPA presentation guidelines
4. Issues an examination report
The CPA is not attesting to the accuracy of the prospective financial statements. Instead, the CPA is accumulating evidence about the completeness and reasonableness of the underlying assumptions, as disclosed in the prospective financial statements. To make the evaluation, the CPA needs to become familiar with the client’s business and industry, identify the significant matters on which the client’s future results are expected to depend (“key factors”), and determine that appropriate assumptions have been included with respect to these key factors.