Becker CPA Audit Exam A5:M4: Agreed-Upon Procedures and Prospective Financial Statements

Types of Prospective Financial Statements:

1. financial forecast (expected financial results, expected conditions, expected courses of actions) = Management is the responsible party 2. financial projection (hypothetical assumptions, what-if scenarios)

Agreed-upon procedures applied to prospective financial statements (I AM SURE)

If I AM SURE cannot be achieved, then you cannot use agreed-upon procedures.

Preparation of prospective financial statements:

SSARS provides guidance - Very similar to the requirements for a preparation of historical financial statements. Practitioner should not prepare if: 1. excludes the summary of significant assumptions or 2. In the case of financial projection, excludes ID of hypothetical assumptions, or description of limitation of use of financials.

Whenever an accountant reports on prospective financials the report should include what?

The report should include a caveat that the prospective results of the financial forecast may not be achieved.

How does assurance and independence correlate:

Where there is assurance, independence is required.

Engagement Types for Prospective Financial Statements (4 types)

1. Preparation engagement 2. Compilation engagement 3. Examination engagement 4. Agreed-upon procedures engagement NOTE: review of prospective financials is not allowed

Agreed-upon procedures engagement

Attestation engagement in which a practitioner is engaged by a client and performs specific procedures on underlying subject matter or subject matter info (such as an assertion) and reports findings.

Examination of prospective financial statements:

More substantial in scope and responsibility than a compilation or engagement using agreed-upon procedures The purpose is to express opinion on whether the statements are presented in conformity with AICPA guidelines and the underlying assumptions provide a reasonable basis for the prospective statements Independence required evidence required Statement stating examination was conducted in accordance with attestation standards established by the AICPA in report

Required reporting requirements:

Must report specialist help if used.

Modifications to the opinion

Following issues would require the practitioner to modify the opinion -AICPA guidelines not followed --> qualified or adverse -significant assumptions not disclosed --> adverse -basis not reasonable --> adverse -scope limitation --> disclaimer

Prospective financial statements:

Forward looking financial statements that are based on projections rather than historical past events. - partially expired prospective financials are allowed - Statements for periods that have completely expired are not considered prospective - Pro forma financial statements and partial presentations are not prospective financial statements.

Uses of Prospective Financial Statements

General Use: only a financial forecast is appropriate for general use Limited Use: Financial projections must use limited, forecasts can use limited.

explanatory language that may be used

Practitioner may include the following explanatory language:

Conditions for an agreed-upon procedures attestation engagement

Remember: I AM SURE (Do you agree? I AM SURE) The following conditions must exist to perform an agreed-upon procedures attestation engagement: 1. I = Independence of practitioner 2. A = Agreement of the parties 3. M = Measurability and consistency (reasonably consistent measurement, reasonably consistent findings) 4. S = Sufficiency of the procedures (client takes responsibility for sufficiency of the procedures) 5. U = Use of the report can be general or restricted 6. R = Responsibility for the subject matter (client is responsible for subject matter or client is able to provide evidence that a 3rd party is responsible.) 7. E = Engagements to perform agreed upon procedures on prospective financial statements (must include summary of significant assumptions)

Compilation of prospective financial statements

SSARS provides guidance Purpose is the proper assembling of the financial data based on the responsible party's assumptions. - No assurance - Accountant should read the prospective financials with the summaries of significant assumptions and accounting policies, and consider whether they appear to be presented in conformity with the AICPA presentations. - Practitioner should be aware of obvious inappropriate assumptions used. - Lack of independence should be disclosed, practitioner is permitted, but not required to disclose the reasons for lack of independence.

Pro forma financial statements

demonstrate the effect of a future or hypothetical event by showing how it might have affected the historical financial statements if it had occurred during the period covered by those financial statements

Partial presentations

generally not appropriate for general use Limitations on usefulness of the presentation should be included in report.

contents of compilation report & adjustments for financial projection

swap out financial forecast for financial projection wherever listed in report.