Accountants' Handbook Special Industries and Special Topics 10th Edition_15

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Accountants’ Handbook Special Industries and Special Topics 10th Edition_1538 24 PROSPECTIVE FINANCIAL STATEMENTS • • Management has identified all key factors expected to affect the entity during the prospective period. • Management has developed assumptions for each key factor. • The assumptions are suitably supported. To determine whether management has identified all key factors and developed assumptions foreach one, the accountant needs to possess, or obtain during the engagement, an appropriate knowl-edge of the industry in which the entity will operate and the accounting principles and practices ofthat industry. The accountant can conclude that the assumptions are suitably supported if the preponderance ofinformation supports each significant assumption. Preponderance here does not imply a statisticalmajority of information. A preponderance exists if the weight of available information tends to sup-port the assumption. The AICPA Guide states, however, “Because of the judgments involved in de-veloping assumptions, different people may arrive at somewhat different but equally reasonableassumptions based on the same information.” The accountant need not obtain support for the hypothetical assumptions in a projection, sincethey are not necessarily expected to occur. For a projection, the accountant considers whether thehypothetical assumptions are consistent with the purpose of the projection and whether the otherassumptions are suitably supported given the hypothetical assumption. In evaluating the support for the assumptions, the accountant considers six factors: 1. Whether sufficient pertinent sources of information, both internal and external to the entity, have been considered 2. Whether the assumptions are consistent with the sources from which they are derived 3. Whether the assumptions are consistent with each other 4. Whether the historical financial information and other data used in developing the assump- tions are sufficiently reliable for that purpose 5. Whether the historical information and other data used in developing the assumptions are comparable over the periods specified or whether the effects of any lack of comparability were considered in developing the assumptions 6. Whether the logical arguments or theory, considered with the data supporting the assump- tions, are reasonable Support for assumptions may include market surveys, engineering studies, general economic in-dicators, industry statistics, trends and patterns developed from an entity’s operating history, and in-ternal data and analysis, accompanied by their supporting logical argument or theory. The accountant determines whether the assumptions provide a reasonable basis for the statementsbut cannot conclude that any outcome is expected because (1) realization of prospective results maydepend on management’s intentions, which cannot be examined; (2) there is substantial uncertainty inthe assumptions; (3) some of the information accumulated about an assumption may appear contra-dictory; and (4) different but similarly reasonable assumptions concerning a particular matter mightbe derived from common information.(iii) Evaluating Presentation. The accountant compares the presentation of the prospective finan-cial statements to the AICPA presentation guidelines [see Subsections 38.4(b) and (c)].(b) STANDARD EXAMINATION REPORT. The accountant’s standard report on an examinationof prospective financial statements includes six statements: 1. A title that includes the word “independent” 2. An identification of the prospective financial statements presented 38.7 EXAMINATION SERVICES 38 25 • 3. An identification of the responsible party and a statement that the prospective financial state- ments are the responsibility of the responsible party 4. A statement that the accountant’s responsibility is to express an opinion on the prospective fi- nancial statements based on the examination 5. A statement that the examination of the prospective financial statements was conducted in ac- cordance with attestation standards established by the AICPA and, accordingly, included such procedures as the accountant considered necessary in the circumstances 6. A statement that the accountant believes that the examination provides a reasonable basis for the opinion 7. The accountant’s opinion that the prospective financial statements are presented in confor- mity with AICPA presentation guidelines and that the underlying assumptions provide a rea- sonable basis for the forecast or a reasonable basis for the projection given the hypothetical assumptions 8. A caveat that the prospe ...