Mr. B, a Chartered Accountant in practice, has been approached by ABC Ltd. to examine and report on its prospective financial information prepared…

As per SAE 3400, “The Examination of Prospective Financial Information”, before accepting an engagement to examine prospective financial information, the practitioner (CA B in this case) must consider several factors. The concerns raised by CA B during the initial discussion are critical and must be addressed before accepting the engagement. Factors CA B should evaluate before accepting the engagement: Intended Use of the Information: CA B needs to understand the specific intended use of the prospective financial information. In this case, it is for raising finance from investors. This implies a high level of reliance by external parties. Distribution of Information: The management intends to circulate the information widely. This increases the auditor's responsibility and the risk associated with the engagement. CA B must consider whether the information will be for general or limited distribution. Wide distribution necessitates greater scrutiny and clarity. Nature of Assumptions: CA B has noted that certain assumptions appear to be unrealistic. This is a major concern. The auditor must evaluate the nature of the assumptions, i.e., whether they are best estimates or hypothetical assumptions. If the assumptions are clearly unrealistic, CA B should not accept the engagement or should withdraw from it. The auditor needs to assess if the assumptions are reasonable and adequately supported. Reliability of Historical Financial Data: CA B is uncertain about the reliability of historical financial data. Prospective financial information is often based on historical trends and data. If the historical data is unreliable, the prospective information derived from it will also be unreliable. CA B needs to consider the extent to which reliance on the entity's historical financial information is justified. This might require performing additional procedures on the historical data. Purpose and Scope of Circulation: CA B is uncertain about the exact purpose and scope of circulation. This needs to be clarified with management. The purpose (e.g., for specific investors, general public offering) and scope (e.g., private placement memorandum, public prospectus) will influence the level of assurance required and the content of the report. Elements to be Included in the Information: CA B should understand what elements are to be included in the prospective financial information (e.g., forecast balance sheet, income statement, cash flow statement). Period Covered by the Information: The period covered by the prospective financial information should be appropriate and clearly defined. Management's Responsibility: CA B must ensure that management acknowledges its responsibility for the prospective financial information, including the assumptions on which it is based. Ethical Requirements and Competence: CA B must ensure that he has the necessary competence and can comply with all ethical requirements, including independence, for this type of engagement. Conclusion for CA B: CA B should not accept, or should withdraw from, an engagement when the assumptions are clearly unrealistic or when the auditor believes that the prospective financial information will be inappropriate for its intended use. Given the concerns about unrealistic assumptions and unreliable historical data, CA B must: Seek Clarification and Documentation: Obtain clear and documented understanding from management regarding the purpose, scope, and intended users of the information. Challenge Assumptions: Discuss the unrealistic assumptions with management and request justification and supporting evidence. If management cannot provide reasonable support, CA B should not proceed. Assess Historical Data: Perform procedures to assess the reliability of the historical financial data that forms the basis of the prospective information. Evaluate Appropriateness: Conclude whether the prospective financial information, based on the revised assumptions and reliable historical data, is appropriate for its intended use and wide circulation. If CA B cannot resolve these fundamental concerns, accepting the engagement would be professionally risky and could lead to a misleading report. He should decline the engagement if the assumptions remain unrealistic or if the historical data's reliability cannot be established.