Question

The American Institute of Certified Public Accountants (AICPA) issued the Statement on Standards for Attestation Engagement (SSAE) No. 10 (AT Sec. 301) “Financial Forecasts and Projections”. Visit the AICPA website (www.aicpa.org) and write a report to summarize the auditors’ responsibilities regarding prospective financial statements and the key requirements of the SSAE No. 10. Your report should include the following:

1. Explanation of the uses of the prospective financial statements.
2. Discussion of the auditor’s compilation of the prospective financial statements.
3. Discussion of the auditor’s examination of the prospective financial statements.
4. Discussion of the auditor’s application of agreed-upon procedures to prospective financial statements.

Answer 1

Report to summarize the auditors’ responsibilities regarding prospective financial statements and the key requirements of the SSAE No. 10.

Prospective financial statements—Either financial forecasts or financial projections including the summaries of significant assumptions and accounting policies. Although prospective financial statements may cover a period that has partially expired, statements for periods that have completely expired are not considered to be prospective

Uses of Prospective Financial Statements

Prospective financial statements are for either general use or limited use. General use of prospective financial statements refers to the use of the statements by persons with whom the responsible party is not negotiating directly, for example, in an offering statement of an entity's debt or equity interests. Because recipients of prospective financial statements distributed for general use are unable to ask the responsible party directly about the presentation, the presentation most useful to them is one that portrays, to the best of the responsible party's knowledge and belief, the expected results. Thus, only a financial forecast is appropriate for general use.

Limited use of prospective financial statements refers to the use of prospective financial statements by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly. Examples include use in negotiations for a bank loan, submission to a regulatory agency, and use solely within the entity. Third-party recipients of prospective financial statements intended for limited use can ask questions of the responsible party and negotiate terms directly with it. Any type of prospective financial statements that would be useful in the circumstances would normally be appropriate for limited use. Thus, the presentation may be a financial forecast or a financial projection.

Because a financial projection is not appropriate for general use, a practitioner should not consent to the use of his or her name in conjunction with a financial projection that he or she believes will be distributed to those who will not be negotiating directly with the responsible party, for example, in an offering statement of an entity's debt or equity interests, unless the projection is used to supplement a financial forecast.

Compilation of Prospective Financial Statements

A compilation of prospective financial statements is a professional service that involves the following:

Assembling, to the extent necessary, the prospective financial statements based on the responsible party's assumptions

Performing the required compilation procedures, including reading the prospective financial statements with their summaries of significant assumptions and accounting policies, and considering whether they appear to be presented in conformity with AICPA presentation guidelines and not obviously inappropriate.

Issuing a compilation report.

Examination of Prospective Financial Statements

An examination of prospective financial statements is a professional service that involves—

1. Evaluating the preparation of the prospective financial statements.
2. Evaluating the support underlying the assumptions.
3. Evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines.
4. Issuing an examination report.

As a result of his or her examination, the practitioner has a basis for reporting on whether, in his or her opinion—

1. The prospective financial statements are presented in conformity with AICPA guidelines.
2. The assumptions provide a reasonable basis for the responsible party's forecast, or whether the assumptions provide a reasonable basis for the responsible party's projection given the hypothetical assumptions.

The practitioner should follow the general, fieldwork, and reporting standards for attestation engagements established in section 50, SSAE Hierarchy, and further explained in section 101, Attest Engagements, in performing an examination of prospective financial statements and reporting thereon.

Applying Agreed-Upon Procedures to Prospective Financial Statements

The practitioner who accepts an engagement to apply agreed-upon procedures to prospective financial statements should follow the general, field- work, and reporting standards for attest engagements established in section 50, SSAE Hierarchy, and the guidance set forth herein and in section 201, Agreed- Upon Procedures Engagements.

A practitioner may perform an agreed-upon procedures attest engagement on prospective financial statements provided the following conditions are met.

1. The practitioner is independent.
2. The practitioner and the specified parties agree upon the procedures performed or to be performed by the practitioner.
3. The specified parties take responsibility for the sufficiency of the agreed-upon procedures for their purposes.
4. The prospective financial statements include a summary of significant assumptions.
5. The prospective financial statements to which the procedures are to be applied are subject to reasonably consistent evaluation against criteria that are suitable and available to the specified parties.
6. Criteria to be used in the determination of findings are agreed upon between the practitioner and the specified parties.
7. The procedures to be applied to the prospective financial statements are expected to result in reasonably consistent findings using the criteria.
8. Evidential matter related to the prospective financial statements to which the procedures are applied is expected to exist to provide a reasonable basis for expressing the findings in the practitioner's report.
1. Where applicable, the practitioner and the specified users agree on any agreed-upon materiality limits for reporting purposes.
10. Use of the report is to be restricted to the specified parties.

Generally, the practitioner's procedures may be as limited or as extensive as the specified parties desire, as long as the specified parties take responsibility for their sufficiency. However, mere reading of prospective financial statements does not constitute a procedure sufficient to permit a practitioner to report on the results of applying agreed-upon procedures to such statements.

To satisfy the requirements that the practitioner and the specified parties agree upon the procedures performed or to be performed and that the specified parties take responsibility for the sufficiency of the agreed-upon procedures for their purposes, ordinarily the practitioner should communicate directly with and obtain affirmative acknowledgment from each of the specified parties. For example, this may be accomplished by meeting with the specified parties or by distributing a draft of the anticipated report or a copy of an engagement letter to the specified parties and obtaining their agreement. If the practitioner is not able to communicate directly with all of the specified parties, the practitioner may satisfy these requirements by applying any one or more of the following or similar procedures:

• Compare the procedures to be applied to written requirements of the specified parties.
• Discuss the procedures to be applied with appropriate representatives of the specified parties involved.
• Review relevant contracts with or correspondence from the specified parties.

The practitioner should not report on an engagement when specified parties do not agree upon the procedures performed or to be performed and do not take responsibility for the sufficiency of the procedures for their purposes.