 Hello and welcome to this session. This is Professor Farhad in which we will discuss prospective financial statements Prospectives means futuristic financial statements. Now. Why are we learning about prospective financial statements? We have to put this into a context Well, this is part of your auditing and attestation course and specifically prospective financial information or prospective financial statements is a subject matter is a subject matter that's subject to some sort of An attestation. Well, we have three level of service that we can provide. We can provide examination Review engagement and agreed upon procedures here What we're working with is under the state under the statements on standards for attestation engagement But specifically now we're gonna start to apply those service level on various subject matter starting with perspective For a prospective financial statements, what can we do? We can perform an examination We can perform and agreed upon procedures. We cannot perform a review now Once we go through the and through the explanation what our prospective financial information I'll explain why review does not work, but you should know what a review engagement is So a review don't work with prospective financial statements Now we have two types of prospective financial statements We could have a financial forecast and we could have a financial projection and you need to be familiar with both What is a financial forecast? Financial forecast is a prospective financial statement Present to the best of the responsible parties knowledge and believe an entity Expected financial position and notice what I did I highlighted in yellow Expected financial position and specifically expected in red the results of the operation cash flow so on and so forth Simply put a forecast think of the weather The weather person they will try to forecast try to tell you to the best of their knowledge What's what's expected to happen rain? Sunshine cold nice weather whatever the forecast is based on their best assumption Reflecting their assumption what they expect to exist in the course of action and expect to take Simply put they're giving you their best guess or their most likely scenario and this is what a financial forecast is In the real world for example a company might forecast an airline company air travel might grow at 3% How would they come up to that? Forecast well, they would look at prior period. They would look at Current financial conditions. They would look at their pipeline and they can guess which air travel should grow this summer around 3% Now bear in mind that if we perform an examination on financial forecast generally speaking It's for a general use. It means if you perform an Examination remember you can perform an examination you can perform and agreed upon procedure if it's an examination The general rule is it's for a general use There's some exceptions, but it's for the general use if you Perform and agreed upon procedure. It's for limited use and again agreed upon procedures We talked about this it's for limited use because it's between you between two parties agreeing on certain terms Third parties or others should not be involved. That's the assumption before we proceed any further I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of lectures multiple choice questions through false questions as well as exercises Go ahead start your free trial today. No obligation. No credit card required Now what is a financial projection? Notice it's very similar with a slight modification It's a prospective financial statement that present to the to the best of the responsible party's knowledge and belief Given this is what we're adding one or more hypothetical assumptions an entity expected financial statement Financial position result of operation and cash flow what we are adding to the financial projection is one or more hypothetical assumptions here We are using assumptions If this happened this would happen. So now we're not using our best guess. We are making hypothetical assumptions For example an air an airline company. They can say what if what would happen if Someone find a cure for covid if someone find cure for covid Maybe we can say air travel would go up by 10 but this is a hypothetical assumption it's basically on Banking on some event that's may or may not happen. It's a hypothetical assumption So that's the difference between financial projection and financial forecast financial forecast You are more realistic. Think of it this way. You're giving your best guess or most likely scenario Here a financial projection is based on the responsible party's assumption Reflecting condition it exists It expect would exist and the course of action is it expect it would taken Giving one or more hypothetical simply put hypothetical Assumptions basically think of it. It's Using your wild imagination. You can you can hypothetically assume anything But that's not what a financial forecast is assumption Hypothetical assumption are related to financial projection. Now since they are crazy or imagine Wild imagination. They're not crazy. But the point is I'm trying to show you it's outside the box The limit they have a limited use for if you have any examination or a up It's a limited use Why because you are using assumptions or hypothetical assumptions that only specific parties might understand Therefore you limit the use of the report What are the preconditions for projection? Or forecast for projection or forecast and I'm going to be focusing on the same terms again and again and again Agree to disclose significant assumptions because in both of them you are making assumptions now in one you are making more Wild hypothetical assumptions, but you are still making assumption in both for projection. Remember projection is more wild Identify which of the assumptions are hypothetical. You also want to comment on the limitation of the projection's usefulness How useful are they? What are their limitation? Now bear in mind as a precondition if you have no written assertions from the party no examination You cannot examine something if they don't provide you written assertions about what they want to do Simply put you just know no examination. You can't perform it Planning what do you do during planning? You learn about the entity's industry That's part of the planning process if you are performing an examination Remember examination is more like an audit. I agreed upon procedure. It's basically private private negotiation private party Treatment evaluate the factors underlying the prospective financial information for reasonableness Remember you are looking at the future. So you want to evaluate What are they telling you are these reasonable assumptions that they're making you just have to evaluate those When you perform the procedures you have to evaluate the support for significant assumption And look looking at the big picture as well Remember you are dealing with the future. You are dealing with assumptions. So you're always when you are dealing with financial statement projection or Forecasts you are dealing with assumptions. So our significant assumption supported by preponderance of the information So they said what's preponderance of the information? It means is there a more than 51% chance the assumption might happen If you're looking at a forecast, are they reasonably objective basis for the forecast? Are they reasonable? What if they said, you know, the economy is going to grow at 10% and there's no way they are making an assumption You and I know the economy is growing at 2% is that is that reasonable? For key factor identified for example, let's talking about the air travel Well, they have to look at the overall picture. They cannot make wild assumptions. Do they have sufficient? Sufficiently objective assumption. You have to check their assumptions. That's what you are doing For projection again, this is the more wild stuff Are the hypothetical assumption consistent with the purpose of the projections? Okay, they are making hypothetical assumptions Okay, that's fine. But why are they making those hypothetical assumption? Is it for the purpose of the projection? And what's the purpose of the projection? Or is it the purpose for misleading something? Okay, no need to find support by the hypothetical assumptions, but you need to know why are they making those hypothetical assumptions? Are they aligned with their purpose the purpose of the projection? You also want to obtain written representation from the client For example, in an examination of a forecast You want them to know the forecast present the expected financial statement and reflect expected condition You want them to tell you this this is evidence to you that they're admitting to what they're telling you Is what they are telling you the underlying assumptions are reasonable and suitably supported You want them to tell you this this is what we mean by written representation Just tell me what you're telling me in writing. That's what we're doing and the range selected is not in a way misleading So if you are making a forecast, well, you can select the data or you can select a certain time frame to mislead So you want them to tell you the data that they gave you for the forecast is not Purposely misleading the data is not misleading in case of a projection Well, in addition to the three above remember you have hypothetical assumptions In that projection identify the hypothetical assumptions. They have to give you this and a written representation. That's it's important Describe the limitation of the usefulness of the presentation. You know, okay, we're talking we're doing this projection What are the limitation of the usefulness? Again, no written representation It could amount to a scope limitation It could amount to a withdrawal now the best way to look at this little bit further is to look at the end product And the end product is a report. So we'd look at two reports or three reports That's dealing with projected financial statements examination and agreed upon procedures That will summarize for us the end product and thus teaching us a little bit more About what is an examination? What is an agreed upon procedure when it comes to projected financial statements What should you do now go to far hat lectures and work mcqs? That's going to help you understand this topic better This topic is tested on the CPA exam and most audit courses. They cover it And others don't Good luck study hard and of course stay safe