Page 227 - AAA Integrated Workbook STUDENT S18-J19

Prospective financial information

Example 1

Peanut Co has prepared a cash flow forecast to support a loan application.
The directors have approached your firm to provide assurance over the
forecast.

Your firm performs the external audit for Peanut Co therefore you have a good
understanding of the company and its past performance.

Peanut Co is applying for the loan to finance investment in new plant and
machinery that is required to expand the business. This expansion will
necessitate employing a further 15 production employees and 2 additional
employees to assist with administration.

The new production workers and administrative staff will be paid a salary in
line with the average salary of the existing workforce in those departments.

The directors have obtained quotations for the machinery they wish to
purchase if the loan application is successful.

General procedures the auditor can perform to obtain assurance over the
forecast include:

 Obtain the forecast and cast it to verify arithmetical accuracy.

 Compare previous forecasts prepared by management with actual
results for the same period to assess the reasonableness of the
forecasts.

 Compare the accounting policies used in the forecast with those used in
the financial statements to ensure they are consistent.

 Obtain written representation from management confirming:

– the intended use of the PFI

– the completeness of significant management assumptions

– management's acceptance of its responsibility for the PFI.

(cont.)

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