Reasonableness of forecast assumptions

Question 1

What are the matters to be considered when reviewing the reasonableness of assumptions underlying the receipts in a cash flow forecast? (4)

Answer 1

The economic climate and market research support growth expectations
Inflows need to reflect gradual increases in receipts (what is the client expecting to see)
Receipts affected by seasonal fluctuations
Inflows subjected to sensitivity analysis

Question 2

What are the matters to be considered when reviewing the reasonableness of assumptions underlying the payments in a cash flow forecast? (4)

Answer 2

Payments to suppliers reflect company’s payment policies
Payments to HMRC, VAT, PAYE, NIC, Corp tax consistent with profit forecasts, paid on time
Interest payments reflects level of borrowing, are in line with market expectation rates
Interest and repayments on loans paid on due dates

Question 3

Name some revenue assumptions (3)

Answer 3

Market conditions
Historical performance
Future events

Question 4

Name some expense assumptions (4)

Answer 4

OPEX
Interest e.g interest on borrowings
Purchases
Do these align with expansion plans?

Question 5

Matters you would consider when reviewing the reasonableness of the assumptions of the receipt of a bank loan?

Answer 5

New loan received from bank:
Is should be large enough to cover expected costs of the expenditure in forecast
It should be received after date of review of FS for bank BUT before expenses are incurred

Question 6

What matters should be considered regarding ‘Receipts from customers’? (3)

Answer 6

1. Reflect credit terms.
2. Bad debts, slow payers should have been taken into account.
3. Reflect lost contracts / customers / seasonality.

Question 7

What matters should be considered regarding ‘Receipts from potential sales of PPE’?

Answer 7

Should be in line with correspondence.

Question 8

What matters should be considered regarding ‘Receipts from income from new funding arrangements’?

Answer 8

In line with correspondence.
Interest payable accrued properly.
Finance costs pro-rated if acquired during the year.
Further debt > strain on cash flow.

Question 9

What matters should be considered regarding ‘Payments to suppliers’? (2)

Answer 9

1. Reflect credit terms.
2. Amended for anticipated changes in suppliers.

Question 10

What matters should be considered regarding ‘Payments for payroll’ ? (2)

Answer 10

In line with previous trends.
Updated for new joiners / pay rises.

Question 11

What matters should be considered regarding ‘Payments for rent / utilities’ ?

Answer 11

In line with previous trends, updated changes in rates.

Question 12

What matters should be considered regarding ‘Payments to acquire new PPE’ ?

Answer 12

In line with quotes and standard list prices.