Page 210 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
SAE 3400
Prospective financial information:
• SAE 3400 offers guidance on engagements to examine and report on prospective financial information,
covering examination procedures for best-estimate and hypothetical assumptions.
No need to be Statutory Auditor:
• The examination of prospective financial information doesn't necessarily have to be performed by the statutory
auditor of the entity’s financial statements.
What is Prospective financial information?
Definition of Prospective Financial Information:
• "Prospective financial information" is financial information based on assumptions about future events and
possible actions by an entity.
• This type of information is highly subjective and preparing it involves significant judgment.
Forms of Prospective Information:
• Prospective financial information can manifest as a forecast, a projection, or a combined format like a 1-year
forecast plus a 5-year projection.
What is Forecast?
Definition of Forecast:
• A forecast is Prospective Financial Information formulated based on assumptions about future events that
management expects to happen and actions they intend to take.

Best-Estimate Assumptions:
• These assumptions, known as best-estimate assumptions, anticipate experience without accounting for the risk
of adverse deviations (Be realistic don’t be Conservative)

Example of Financial Forecast:
• In light of current market conditions, supply availability, historical buying patterns, and seasonal trends, the
CFO of X ltd expects a 5% sales increase in the next quarter. This 5% sales increase represents his financial forecast
for that period.
What is Projection?
Definition of Projection:
• A projection is Prospective Financial Information based on hypothetical assumptions about future events and
management actions which are not necessarily expected to occur.
Hypothetical and Best-Estimate Assumptions:
• This information might be built on a mix of hypothetical and best-estimate assumptions (imagined or
suggested).

Examples
Projection for Growth:
• For example, X Ltd might project actions for hypothetical situations like creating a new product for expected
market growth, serving as an outline for evaluating desired financial, cash flow, and operational outcomes.
Projection for Equity Investors:
• A company planning to raise funds from an equity investor may ask a firm of Chartered Accountants to
examine the profit forecast to present it before the prospective investor.
Projection for Financial Assistance:
• When a company, such as one setting up a new plant, needs financial assistance in the form of loans and credit
facilities, it might prepare a projection of profits and cash flows along with underlying assumptions for a period,
like the next seven years.

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