Page 212 - CA Final Audit Titanium Full Book. (With Cover Pages)

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4. Proper Presentation and Disclosure: The auditor should ascertain if the prospective financial information is
properly presented and all material assumptions are adequately disclosed, including a clear indication as to
whether they are best-estimate assumptions or hypothetical assumptions.

(CNO 3400.060) Acceptance of Engagement: Precautions to be taken by Auditor Before Accepting such an
Engagement
1. Considerations Before Acceptance: (Shortcut: Urban DEN)
• Before taking on an engagement to examine prospective financial information, the auditor will contemplate
factors such as the intended Use of the information, its intended Distribution (general or limited), the Nature of
the assumptions (best estimates or hypothetical), the Elements in the information, and the period it covers.
1A. Auditor's Stance on Unrealistic Assumptions:
• The auditor should either reject or withdraw from an engagement if the assumptions appear blatantly
unrealistic or if the prospective financial information seems unsuitable for its intended purpose.
2. Reliance on Historical Information:
• The auditor should gauge the degree to which dependence on the entity’s historical financial data is warranted.
3. Agreeing on Engagement Terms:
• As with other engagements, it’s vital to settle the engagement terms with the client, typically via an engagement
letter.

(CNO 3400.080) Examination Procedures
Shortcut: SB Jain made Technology for Prevention of Money Laundering
When determining the nature, timing and extent of examination procedures, the following matters should
be considered such as: -
• The Sources of information considered by the management for the purpose, their adequacy, reliability of the
underlying data, including data derived from third parties, such as industry statistics, to support the
assumptions.
• The Stability of entity’s Business and
• The extent to which the prospective financial information is affected by the management’s Judgment.
• The engagement Team’s experience with the business and the industry in which the entity operates and with
reporting on prospective financial information.
• The knowledge obtained during any Previous engagements.
• Management’s competence regarding the preparation of prospective financial information
• The Likelihood of material misstatement
1. Best-estimate assumptions: Assess the source and reliability of evidence supporting management's best-
estimate assumptions, which may come from various sources like entity's budgets, debt agreements, industry
publications.

2. Hypothetical Assumptions:
Implications
Evaluate all significant implications of hypothetical assumptions. For instance, if sales growth beyond current
plant capacity is assumed, the prospective financial information should account for necessary investment in
additional plant capacity or costs of alternative production means.
Alignment: Verify that hypothetical assumptions align with the purpose of the prospective financial information
and are not clearly unrealistic.

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