8.03 - PROSPECTIVE FINANCIAL STATEMENTS Flashcards
8.03 - PROSPECTIVE FINANCIAL STATEMENTS
An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided the…
The accountant takes responsibility for the adequacy of the procedures performed.
Accountant also examines the prospective financial statements.
Distribution of the report is restricted to the specified users.
Provisions of Statements on Standards for Accounting and Review Services (SSARS) are followed.
Distribution of the report is restricted to the specified users.
EXPLANATION:
Distribution of a report on applying agreed-upon procedures to prospective financial would be limited to those who are in position to understand the agreed-upon procedures, referred to as specified users.
The engagement is performed in accordance with Attestation Standards, not SSARS.
The accountant is not required to examine the prospective financial statements in order to perform an agreed-upon procedures engagement in relation to them.
The specified parties, not the accountant, take responsibility for the adequacy of procedures performed.
8.03 - PROSPECTIVE FINANCIAL STATEMENTS
Which of the following is true about projections?
Projections present what management believes will occur based on certain assumptions held by management.
Projections present management’s expected future results based on externally-provided hypothetical
assumptions.
Projections present what management believes would occur based on hypothetical assumptions in a ‘what-if’ scenario.
Projections present future financial
information with an assumption that current trends will continue into
the future.
Projections present what management believes would occur based on hypothetical assumptions in a ‘what-if’ scenario.
EXPLANATION:
Forecasts and projections are the two forms of prospective financial statements.
Projections present future results base
on hypothetical assumptions in a ‘what-if’ scenario.
In a projection, management does not necessarily agree with the hypothetical assumptions used in the projection as they may or may not materialize.
Hypothetical assumptions may be external
such as projecting the effects of a change in interest rates that may or may not occur, or internal, such as converting to a new
technology.
Although a projection may be used to show what management believes will occur if current trends continue into the
future, that is not necessarily the case.
8.03 - PROSPECTIVE FINANCIAL STATEMENTS
An accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the…
Accountant’s responsibility to update the projection for future events and circumstances is limited to one year.
Projection omits all hypothetical assumptions and presents the most likely future financial position.
Projection may notbe included in a document with audited historical financial
statements.
Engagement does notinclude an evaluation of the support for the assumptions underlying the projection.
Engagement does notinclude an evaluation of the support for the assumptions underlying the projection.
EXPLANATION:
Assumptions made in projections are based on the judgment of management and the accountant would not be qualified to evaluate them.
Like the compilation of historical financial statements, an accountant compiling projections provides no assurance and ordinarily applies no procedures other than reading the financial statements, without performing an evaluation of
the underlying assumptions.
A projection may be included in a document with audited historical financial statements.
The accountant has no responsibility to update the projection for future events, not even for one year.
A projection does not omit all hypothetical assumptions.
8.03 - PROSPECTIVE FINANCIAL STATEMENTS
Accepting an engagement to examine an entity’s financial projection most likely would be appropriate if the projection were to be distributed to…
All stockholders of record as of the report date.
Potential stockholders who request a prospectus or a registration statement.
A bank with which the entity is negotiating for a loan.
All employees who work for the entity
A bank with which the entity is negotiating for a loan.
EXPLANATION:
A financial projection provides an indication of the results that might be obtained in the case of the occurrence, or
nonoccurrence, of a specific event or circumstance, such as the obtaining of a bank loan, the acquisition of an asset, entering into a contractual relationship, passage of a law, or some other event.
Due to the potentially confusing nature of a projection, an accountant would want to make certain that its distribution is limited to those who are likely to understand the assumptions made in its preparation, such as a bank with which the entity is negotiating for a loan.
General financial statement users, such as
employees or current or potential stockholders, may not understand the assumptions and would not be appropriate recipients.
Accepting an engagement to compile a financial projection most likely would be inappropriate if the projection is to be distributed to…
A financial institution in a loan application.
A state or federal regulatory agency.
Potential stockholders in an offering
statement.
The entity’s principal stockholder, to the exclusion of the other stockholders.
Potential stockholders in an offering
statement.
EXPLANATION:
An accountant would only accept an engagement to compile a financial projection if distribution was limited to those who would be knowledgeable enough to understand it.
This would not include the general public, who would be receiving the financial information associated with an offering statement.
It would be appropriate if the projections were going to be used by principal stockholder who would be likely to understand the assumptions: a financial institution that is probably requesting the
statements; or a regulatory agency that might be requiring the statements.
