Assurance of Prospective Financial Information

Question 1

Acceptance

Answer 1

* Nature of circumstance & Engagement : Intended use of info - mgmt threat if for use of finance providers for e.g . Period covered can’t be more than 5yrs. Level of assurance needed.

* Client Integrity: CDD, MLRO, Bizz repo, mGMT INTEGRITY . Evaluate why existing auditor didn’t stay on.

* Firms ability to perform engagement: If firm is higher risk then greater competency required.
Timeline - resource availability.

* Threats to ethics:
Evaluate

• • Conclusion

Question 2

Evaluation of Completeness of Assumptions

Answer 2

1. Evaluate financial information given : if sales increase do COS increase? or Direct wages?

2. **Assumptions optimistic?: **Loan forecasted to come in next month even though just applied for.

**3. Look for missing info in forecast: ** new product where is marketing expenses? Where loan repayments?

Question 3

Procedures /Evidence

Answer 3

1. Discuss assumptions w. mgmt & compare with own expectations based on bizz environment.
2. Confirm past values & see if follows trend taking into account planned changes/exceptional costs.
3. Inspect post year end mgmt accts & bank statements for confirmation of reasonableness.
4. Perform sensitivity analysis by varying key assumptions & an assesment of impact of variations on forecast.
5. Assess competence & experience of perepare of forecast.

Question 4

Reporting

Answer 4

1. Is addresse correct?
2. Is the period covered stated?
3. Proper reference to standards used made?
4. Report specify what forecast assurance refers to.

Question 5

Lavenza Co - Review Engagement Considerations and Examination Procedures

Answer 5

(i) Matters to Consider Before Accepting the Review Engagement
1. Intended Use:
- Understand the specific purpose of the cash flow forecast and assurance report (e.g., for an overdraft facility).
- Clarify if the report will be used for other purposes, such as securing new loan finance.

2. Distribution:
   
   • Consider the intended audience for the report (general vs. limited distribution).
   • General distribution increases risk for Moritz & Co.
3. Forecast Period and Assumptions:
   
   • Review the period covered and the assumptions used (e.g., growth rates, operating cash receipts).
   • Ensure assumptions are realistic and suitable for the forecast’s intended use.
4. Scope of Work:
   
   • Define the specific elements Moritz & Co is to report on (e.g., only the cash flow forecast).
   • Confirm the level of assurance being provided (likely negative assurance).
5. Resources and Skills:
   
   • Assess if Moritz & Co has the necessary staff, skills, and access to complete the work on time.
6. Client Integrity:
   
   • Evaluate the integrity of Lavenza Co’s management and reasons for choosing Moritz & Co over their auditors.
7. Ethical Matters:
   
   • Ensure there are no threats to independence or objectivity.
   • Consider why the auditors were not chosen for this engagement and whether this poses a risk.

Question 6

(ii) Examination Procedures on Cash Flow Forecast

Answer 6

1. Mathematical Accuracy:
   
   • Cast the cash flow forecast to ensure it is mathematically correct.
2. Consistency of Accounting Policies:
   
   • Confirm that the same accounting policies are used as in the last audited financial statements.
3. Opening Cash Position:
   
   • Agree the opening cash position to the bank ledger account and bank statement.
4. Key Assumptions:
   
   • Discuss and assess the reasonableness of key assumptions (e.g., growth rates, receivables collection period).
5. Analytical Review:
   
   • Compare forecast trends with historical data and industry benchmarks.
6. Receivables and Cash Flow Patterns:
   
   • Verify the collection period and recalculate cash flows to confirm they are based on historical analysis.
7. Sensitivity Analysis:
   
   • Perform sensitivity analyses on key assumptions to assess their impact on cash flow.
8. Salary Payments:
   
   • Agree salary payments to payroll records and cash book entries.
9. Overhead Payments:
   
   • Review forecast overheads against historical data, ensuring non-cash items are excluded.
10. Supporting Documentation:
    
    • Review supporting documents for overhead costs and new shop/marketing expenses.
11. Previous Forecast Accuracy:
    
    • Assess the accuracy of previous management forecasts compared to actual outcomes.
12. Cost Omissions:
    
    • Discuss potential omissions, such as finance costs, tax payments, and capital expenditures.
13. Management Representations:
    
    • Obtain written representations from management regarding the reasonableness of assumptions.
14. Bank Confirmation:
    
    • Request confirmation of the potential terms of the additional finance from the bank.
15. Finance Charge Reasonableness:
    
    • Evaluate whether the finance charge in the forecast is reasonable.