SSAEs - Pro Forma Financial Information

Question 1

Define Pro Forma

Answer 1

Shows the significant effects on historical financial information that might have been had a transaction (actual or proposed) occurred at an earlier date

Examples: The effects of a business combination, disposal of a significant segment of the business, change in capitalization, or issuance of securities and application of the proceeds.

Question 2

Requirements to report on Pro Forma Financial Info

Answer 2

A. The document containing the pro forma information includes or references the complete historical financial statements.
B. The accountant has audited or reviewed the related historical financial statements. (Note that the level of assurance on the pro forma information cannot exceed the level of assurance on the historical financial statements!)
C. The practitioner should have an appropriate level of knowledge of the accounting and financial reporting practices of the entity involved (having audited or reviewed the entity’s financial statements would provide that).

Question 3

Two types of Reports

Answer 3

Examination (Positive assurance)

Review (negative assurance)

Question 4

Objective

Answer 4

provide some degree of assurance as to (1) whether management’s assumptions provide a reasonable basis for presenting the effects of the transactions (events), (2) whether the pro forma adjustments reflect those assumptions, and (3) whether the historical financial statements are appropriately adjusted.

Question 5

Procedures

Answer 5

1. Obtain an understanding of the transaction, read any contracts involved and minutes of board meetings, make inquiries,
2. discuss the assumptions with management, evaluate the computations involved,
3. obtain “sufficient evidence” underlying the adjustments. (Note that an examination requires more evidence than a review.)

Question 6

Reporting structure for both

*Note, review provides negative assurance (no opinion)

Answer 6

A.
First paragraph – Identify the nature of the engagement, describe the pro forma information involved, and identify respective responsibilities.
B.
Second paragraph – State that the examination was performed according to attestation standards established by the AICPA and express belief that the examination provides a reasonable basis for the opinion.
C.
Third paragraph – Identify the objective of the pro forma information – “The objective of this pro forma financial information is to show what the significant effects on the historical financial information might have been had the transaction (or event) occurred at an earlier date.”
D.
Fourth paragraph – Express positive assurance (an opinion) on three matters:
1. Whether management’s assumptions provide a reasonable basis for presenting the significant effects.
2. Whether the adjustments appropriately reflect those assumptions.
3. Whether the pro forma column reflects the proper adjustments of the historical financial statements.