Reporting on Forecasts, Projections, and Prospective Financial Information

Prospective financial information looks forward instead of backward. It may show expected future financial position, results of operations, or cash flows. Because the information depends on assumptions about future events, practitioner reports must be precise about what is and is not being assured.

The AUD exam commonly tests two distinctions: forecasts versus projections, and examinations versus agreed-upon procedures. A practitioner may examine prospective financial information or perform agreed-upon procedures, but the practitioner does not guarantee that future results will occur.

    flowchart TD
	    A["Prospective financial information"] --> B{"Assumption basis"}
	    B -- "Expected conditions and expected course of action" --> C["Financial forecast"]
	    B -- "Hypothetical assumptions or what-if scenario" --> D["Financial projection"]
	    C --> E{"Engagement type"}
	    D --> E
	    E -- "Opinion wanted" --> F["Examination"]
	    E -- "Specific procedures wanted" --> G["Agreed-upon procedures"]
	    F --> H["Opinion on presentation and reasonable basis of assumptions"]
	    G --> I["Factual findings only"]

Forecasts vs. Projections

Forecasts and projections are both prospective, but they use different assumption bases.

A forecast answers “what does management expect?” A projection answers “what would happen if this specified scenario occurred?”

Management Responsibilities

Management is responsible for the prospective financial information and the underlying assumptions. The practitioner reports on the information, but management owns the assumptions and presentation.

Management should:

• Identify the prospective information as a forecast or projection.
• Disclose significant assumptions.
• Make assumptions internally consistent.
• Use a reasonable basis for forecast assumptions.
• Clearly identify hypothetical assumptions in a projection.
• Explain significant limitations of prospective information.

The practitioner should not make the prospective financial information appear more certain than it is.

Examination Engagements

In an examination of prospective financial information, the practitioner expresses an opinion. The opinion addresses whether the presentation is in conformity with applicable presentation guidelines and whether the assumptions provide a reasonable basis for the forecast or projection.

The practitioner does not opine that the forecast will be achieved or that the hypothetical events in a projection will occur.

Agreed-Upon Procedures

In an agreed-upon procedures engagement on prospective financial information, the practitioner performs specified procedures and reports factual findings. The practitioner does not express an opinion or conclusion on the prospective financial information as a whole.

Examples of AUP procedures include:

• Recalculating forecast schedules for mathematical accuracy.
• Comparing selected assumptions to board-approved budgets.
• Agreeing historical base-year amounts to audited financial statements.
• Comparing projected debt-service inputs to a loan agreement.
• Listing exceptions where model formulas do not match agreed formulas.

Users must decide what the findings mean. The practitioner’s report should not turn the findings into an overall assurance conclusion.

Use and Distribution

Prospective financial information can mislead users when assumptions are misunderstood. That risk is especially high for projections because they depend on hypothetical conditions.

Even when distribution is allowed, the report should caution that actual results are likely to differ from prospective results and that differences may be material.

Exam Traps

• A projection is based on hypothetical assumptions; a forecast is based on expected conditions.
• A practitioner does not guarantee future results.
• An examination gives an opinion on presentation and assumptions, not on whether the future will occur.
• An AUP engagement reports factual findings only.
• Projection reports are often restricted because hypothetical assumptions may be meaningful only to specified users.
• A mathematically accurate model can still have unreasonable or poorly disclosed assumptions.

Quick Review

Use this sequence for prospective financial information questions:

1. Decide whether the information is a forecast or projection.
2. Identify whether assumptions are expected or hypothetical.
3. Determine whether the engagement is an examination or AUP.
4. Match report wording to the engagement type.
5. Consider whether use should be restricted.
6. Reject any answer that says the practitioner guarantees future results.

Review Questions