Other assurance engagement

A) Reviewing prospective financial information (PFI)

Prospective: future information - for certain purpose - Projection

- Cash flow forecast

Assure user that we have assessed the PFI and nothing come to our attention that the XXX
are not true and fair. (Remember Limited assurance?)

Example

- Forecast, projection, business plan

Assurance provider will perform a review not audit

Review engagement  able to provide negative assurance/limited assurance)

 “Nothing has come to our attention to indicate that assumption in

the PFI are not true and fair”

Why review?

 Less extensive procedure – no TOC, only SP

not as detail as audit
-perform analytical procedure
 Evidence gathered are persuasive rather than conclusive
o Future figures/transaction - compare py with forecast
-compare previous year forecast
with actual audit
Assurance is being provided to the user, in which they are not the shareholders

Banker? Investor?
- enquire
-inspecting documents
-recalculate
We include caveat paragraph in the report emphasizing that the PFI may not be achieved as
it is prepared based on hypothetical assumptions.

Report banker (CIMB) of client

co.

Conclusion
_____
____

Basis for conclusion

_____
______

Caveat-like disclaimer, this PFI not giving opinion

whether can achieve, only reviewing conclusion on as-
sumption provided
Exam questions relating to PFI

1. Client acceptance procedure (CAP)

a. Deadline (depends on requirement of mgmt – how fast they need the loan for
example)
b. Fees – lower than audit engagement (only SP – less extensive)
c. Experience – audit knowledge would be sufficient as it is not complex as DD
or forensic engagement
d. Determine from the client on the PIC in the preparation of forecast
i. Assess the competency of the person
ii. Emphasize to the mgmt. on their responsibility in prepare forecast and
auditor only perform review
e. Type of forecast
i. SOPL? SOFP? SOCF? Biz plan?
f. Availability of evidence
i. Mgmt. must provide access to all sufficient and appropriate evidence
for review engagement
g. Ethics – high risk for ADVOCACY!!!
i. Let say our audit client ask us to prepare PFI - Show practicality – why
we cant help them to prepare – because we will apply our own
assumption – which might lead us to be seen as “promoting our client”
ii. Can only help on straight forward item which doesn’t require
assumption (help recalculate something2 yang simple je)
iii. If you are the auditor and you being asked to REVIEW pfi  self review
threat

2. Procedures
a. The procedure are performed on FUTURE figures/transaction
i. The type of evidence required would be diff
ii. For eg : audit of purchase > purchase invoice or GRN
iii. but for review > correspondence with supplier or quotation or tender
iv. Main procedure for PFI :
1. Recalculate
2. compare PY “projection” to actual amount figure

3. Content of assurance on PFI

a. The standard applicable to the examination of PFI
b. Statement on mgmt’s responsibility
i. Prepare FS
ii. Mgmt. assumption as the basis of PFI
c. Restriction on distribution and purpose of PFI
d. Negative assurance on reasonableness of assumption
e. Appropriate caveat
f. Date, name of firm, signature
Vizsla

(a) (i)

Providing tax planning advice

- Advocacy Threat
- Perceived as promoting the Management / Client
- There is no sufficient safeguards that can be applied to reduce on the level of advocacy threat
- Impair my objectivity
- Determine more information from the Management of Setter Co to understand further on the tax
planning advice that is required by them before applying the appropriate safeguards

Preparation of tax computation

- Self review threat
- Review on the Company's financial statement in which would include the figures that were
determined by the firm in the preparation of tax computation
- Rely on our own work , failing to criticise our own work
- Can be accepted with appropriate safeguards, separate team, separate partner

Recommending competitor
- Intimidation threat
- Recommendation is made by an audit chent that contributes 10% of the total income of the firm
- Fear of losing the client
- Give in and accommodate client
- Objectivity impaired

Providing lower fees

- This would be subjected to the size and nature of the engagement
- No sufficient information that has yet been received from the Client
- Explain to the MD of Setter Co that the amount of fees tho be charges is based on the no of hours
and manpower that is going to be involved

Integrity of the Management

- Breached law - Non Compliance
- Company's pension plan to set up a business abroad - indicator of ML
- Cast doubt on the integrity of Management
- Assess further before accepting the client
- We do not want the firm to be associated with Management that is involved in criminal activities
- If required, upon acceptance of the engagement the firm should assign experience team member
when dealing with the Management
- Perform CDD

Resources
- Knowledge + Competence of the resources to be involved
- Audit experience so to accept the engagement would not be an issue
- Integrity issue involved - increase professional scepticism
- Client is asking for lower fees - consider the approrpiate no of man power that can be involved in
the engagement
- Reduce the manpower because lower fees
(a) (ii)

Importance of CDD

1. Background of the client

- Experience
- Qualificaton
- Have they involve in any criminal activities
- Reputation

2. Source of funding
- Is it from illegal activities
- Is it genuine?

3. Business nature of the client

- Genuine business

Information should be obtained

- Verify the client by obtaining their identification document and perform background checks via
independent source

- Confirm all the shareholders that own the 90% of the share capital are from Potts family by reviewing
share certificate and performing proofing

- Review on the PY FS of potential client to determine the nature and genuiniuity of biz that are being
conducted by the Potts family

- Understand the purpose of the engagement and determine the source of funds that are being
obtained to finance the engagement and business.
(b)

1. Enquire with the Management on the background of the person in charge in the preparation of the
forecast to assess their level competence and experience.

2. Perform recalculation on the forecast to confirm on the accuracy of the arithmetic of the forecast

3. Enquire with the Management on their basis assumptions towards the increase in revenue over
the 2 years period, ie. Revenue increase by 7% for 6 months results in Sept X8 to 6 months results
in Sept X9 and revene increase by 12% for 6 months results in March X9 to 6 months results in
March YO.

4. Obtain to the cost of sales and gross profi: breakdown from the Management and perform
recalculation comparing the gross profit and revenue to determine if the gross profit margin
calculated by the Management is accurate

5. Obtain a detailed breakdown on the staff costs that are expected to be incurred and understand
further that the no of employees involved and their salary rates. This is as the staff costs remain
consistent it the forecast despite the revenue is on increasing trend.

6. Enquire with the Management on the constant rate of the design costs despite the revenue is on
an increasing trend.

7. Request for detailed breakdown on the marketing expenses to understand further on the nature
of the marketing activites and their contribution towards the increase in revenue.

8. Obtain the cash flow forecast of the entity for the next 2 years to assess the assumption that the
Management does not require any overdraft in the future.

9. Request for the detailed breakdown on the other expenses and assess the completeness of the
detailed expenses, such as depreciation costs, any other operation costs that are not being
included

10. Enquire with the Management on their basis of assumptions indicating that other expenses are
based on 30% of projected revenue.