CHAPTER 30

NONAUDIT ENGAGEMENTS:
PROCEDURES AND REPORTS
Examination of Prospective Financial Information
Philippine Standard on Assurance Engagements 3400 establishes standards
and provides guidance on engagements to examine and report on perspective
FINANCIAL INFORMATION including examination procedures for best estimate and
hypothetical assumptions. This PSA does not apply to the PSAE in general or
narrative terms, such as that found managements discussion and analysis in an
entitys annual report.
General guidelines before ACCEPTANCE OF ENGAGEMENT
- The intended use of the information.
- Whether the information will be for general or limited distribution.
- The nature of the assumptions, that is, whether they are best-estimate or
hypothetical assumptions.
- The elements to be included in the information.
- The period covered by the information.
The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the
prospective financial information will be inappropriate for its intended use. The
auditor and the client should agree on the terms of the engagement. It is in the
interest of both entity and auditor that the auditor sends an engagement letter to
help in avoiding misunderstandings regarding the engagement. An engagement
letter would address the matters in paragraph 10 of PSAE 3400 and set out
managements responsibilities for the assumptions and for providing the auditor
with all relevant information and source data in developing the assumptions.
NATURE AND PURPOSE OF PROSPECTIVE FINANCIAL INFORMATION
(a)

As an internal management tool.

For example,
To assists in evaluating in possible capital investment.
(b)
For Distribution to third parties in.
For example,
A prospectus to provide potential investors with
expectations.

information

about

An annual report to provide information to shareholder regulatory bodies and

other interested parties.
A document for the information of lenders which may include. For example,
cash flow forecast.
Management is responsible for the preparation and presentation of the prospective
financial information, including the identification and disclosure of the assumptions
on which it is based. The auditor may be asked to examine and report on the
prospective financial information to enhance the credibility whether it is intended
for use by third parties or for internal purposes.
APPROACH AND ASSURANCE REGARDING PROSPECTIVE FINANCIAL INFORMATION
(a) Managements best estimate assumptions on which the prospective financial
information is based are not unreasonable and in the use of hypothetical
assumptions, such assumptions are consistent with the purpose of the information;
(b) The prospective financial information is properly prepared on the basis of the
assumptions;
(c) The prospective financial information is properly presented and in material
assumptions are adequately disclosed, including a client indication as to whether
they are best-estimate assumptions on hypothetical assumptions; and
(d) The prospective financial information is prepared on a consistent basis with
financial statements, using appropriate accounting basis with financial statements,
using appropriate accounting principles.
Prospective financial information relates to events and actions that have not yet
occurred and may occur. While evidence may be available to support the
assumptions on which the prospective financial information is based. Such evidence
is generally future oriented and, therefore, speculative in nature, as distinct from
the evidence ordinarily available in the audit of historical financial information. The
auditor therefore is not in a position to express an opinion as to whether the results
shown in the prospective financial information will be achieved. Given the types of
evidence, it may be difficult for the auditor to obtain a level of satisfaction sufficient
to provide a positive expression of opinion that the assumptions are free of material
misstatement. The auditor provides a moderate level of assurance and is not
precluded from expressing positive assurance regarding the assumptions.
KNOWLEDGE BASIS
The auditor should obtain a sufficient level of knowledge of the business to be able
to evaluate whether all significant assumptions required for the preparation have
been identified. The auditor needs to become familiar with the entitys process for
preparing.
For example, by considering:

The internal controls over the system used to prepare prospective financial
information and the expertise and experience of those persons preparing the
prospective financial information.
The nature of the documentation prepared by the entity supporting
managements assumptions.
The extent to which statistical, mathematical and computer-assisted
techniques are used.
The methods used to develop and apply assumptions.
The accuracy of prospective financial information prepared in prior periods
and the reasons for significant variances.

The auditor should consider the extent to which reliance on the entitys historical
financial information is justified. The auditor will need to establish whether relevant
historical information was reviewed and whether acceptable accounting principles
were used in the preparation.The auditor should consider the period of time covered
by the prospective financial information.
The following are some factors of auditors consideration of the period of time
covered by the prospective financial information:
-

Operating cycle, for example, in the case of a major constructions project, the
time required to complete the project may dictate the period covered.
The degree of assumptions, for example, if the entity of introducing a new
product, the prospective period covered end in short and broken into small
segments, such as weeks or months. Alternatively, if the entitys sole
business owns a property under long-term lease, a relatively long prospective
period might be reasonable.
The needs of users, for example, prospective financial information may be
prepared in connection with application for a loan for the period of time
required to generate sufficient funds for repayment. Alternatively, the
information may be prepared for investment in connection with the sale
debentures to illustrate the subsequent period.

EXAMINATION PROCEDURES
(a) The likelihood of material misstatement;
(b) The knowledge obtained during any previous engagements;
(c) Managements competence regarding the preparation of prospective financial
information;
(d) The extent to which the prospective financial information is affected by the
managements judgement;
(e) The adequacy and reliability of the underlying data
The auditor should obtain written representations from management regarding
the intended use of prospective financial information, the completeness of

significant management assumptions and managements acceptance of its

responsibility for the prospective financial information.
PRESENTATION AND DISCLOSURE
(a) The presentation of prospective financial information is informative and not
misleading;
(b) The accounting policies are clearly disclosed in the notes to the prospective
financial information;
(c) The assumptions are adequately disclosed in the notes to the prospective
financial information. It needs to be clear whether assumptions represent
managements best-estimates or are hypothetical and, when assumptions are
made in areas that are material and are subject to a high degree of
uncertainty, this resulting sensitivity of results needs to be adequately
disclosed;
(d) The date as of which the prospective financial information was prepared is
disclosed. Management needs to confirm that the assumptions are
appropriate as of this date, even though the underlying information may have
been accumulated over a period of time;
(e) The basis of establishing points in a range is clearly indicated and the range
is not selected in a biased or misleading manner when results shown are
expressed in terms of a range
(f) Any change in accounting policy since the most recent historical financial
statements is disclosed, along with the reason for the change and its effect
on it.
REPORT ON EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION
(a) Title;
(b) Address;
(c) Identification of the prospective financial information;
(d) A reference to the Philippine Standards on Auditing applicable to the
examination of prospective financial information;
(e) A statement that management is responsible for the prospective financial
information including the assumptions on which it is based;
(f) When applicable, a reference to the purpose of distribution of the prospective
financial information;
(g) A statement of negative assurance as to whether the assumptions provide a
reasonable basis for the prospective financial information;
(h) An opinion as to whether the prospective financial information is properly
prepared on the basis of the assumptions and is presented in accordance
with the financial reporting standards in the Philippines;
(i) Appropriate caveats concerning the achievability by the prospective financial
information;

(j) Date of report which should be the date procedures have been completed;
(k) Auditors address
(l) Signature
Such report would:
- State whether, based on the examination of the evidence supporting the
assumptions, anything has come to the auditors attention which causes the
auditor to believe that the assumptions do not provide a reasonable basis for
the prospective financial information.
- Express an opinion as to whether the prospective financial information is
properly prepared on the basis of the assumptions and is presented in
accordance with the financial reporting standards in the Philippines.
- State that:
Actual results likely to be different from the prospective financial
information since anticipated events frequently do not occur as
expected and the variation could be material. Likewise, when the
prospective financial information is expressed as a range, it would be
stated that there can be no assurance that actual results will fall within
the range.
- In the case of a projection, it has been prepared for using a set of assumptions
that include hypothetical assumptions about future events and managements
actions that are not necessarily expected to occur. Consequently, readers are
cautioned that it is not used for purposes other than that described.
The following is an example of extract from an unmodified report on a forecast:
We have examined the forecast in accordance with Philippine Standards on
Auditing applicable to the examination of prospective financial information.
Management is responsible for the forecast including the assumptions set out in
Note X on which it is based.
Based on our examination of the evidence supporting the assumptions,
nothing has come to our attention which causes us to believe that these
assumptions do not provide a reasonable basis for the forecast. Further, in our
opinion the forecast is properly prepared on the basis of the assumptions and is
presented in accordance with
Actual results are likely to be different from the forecast since anticipated events
frequently do not occur as expected and the variation is material.
The following is an example of an extract from an unmodified report on a projection:
We have examined the projection in according with Philippine Standards on
Auditing applicable to the examination of prospective financial information.

Management is responsible for the projection including the assumptions set out in
Note X on which it is based.
This projection has been prepared for (described purpose) As the entity is in a
start-up phase, the projection has been prepared using a set of assumptions that
include hypothetical assumptions about future events and managements actions
that are not necessarily expected to occur. Consequently, readers are cautioned
that this projection may not be appropriate for purposes other than the described
above.
Based on our examination of the evidence supporting the assumptions,
nothing has come to our attention which cause us to believe that these assumptions
do not provide a reasonable basis for projection, assuming that (state or refer to the
hypothetical assumptions). Further, in our opinion the projection is properly
prepared on the basis of the assumptions and is presented in accordance with
Even if the events anticipated under the hypothetical assumptions described above
occur, actual results are still likely to be different from the projection since other
anticipated events frequently do not occur as expected and the variation may be
material.
When the auditor believes that the presentation and disclosure of the prospective
financial information is not adequate, the auditor should express a qualified or
adverse opinion in the report on the prospective financial information, or withdraw
from the engagement as appropriate. An example would be where financial
information fails to disclose adequately the consequences of any assumptions which
are highly sensitive.
When the auditor believes that one or more significant assumptions do not provide
a reasonable basis for the prospective financial information prepared on the basis of
best-estimate assumptions or that one or more significant assumptions do not
provide a reasonable basis for the prospective financial information given the
hypothetical assumptions, the auditor should either express an adverse opinion in
the report on the prospective financial information, or withdraw from engagement.
When the examination is affected by conditions that preclude application of one or
more procedures considered necessary in the circumstances. The auditor should
either withdraw from the engagement or disclaim the opinion described the scope
limitation in the report on the prospective financial information.
ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS
Philippine Standard on Review Engagements (PSRE) 2400 ENAGEMENTS REVIEW
FINANCIAL STATEMENS is directed towards the review of financial statements.

However, it is to be applied, adapted as necessary in the circumstances, to the

extent practicable to engagements to review of financial statements. However, it is
to be applied, adapted as necessary in the circumstances, to the extent practicable
to engagements to review other historical financial or other information. Guidance
in the Philippine Standards on Auditing (PSAs) may be useful to the practitioners in
applying this PSRE.
Nature of Service
REVIEW involves limited investigations of much narrower scope than an audit an
undertaken for the purpose of providing limited (negative) assurance that the
statements are presented in accordance with PRFS.
In the United States of America, public companies are required to file intent
(quarterly) financial information with the SEC. Unlike annual financial statements
filed with the SEC, the interim information is not required to be audited. This does
not mean that the SEC is not concerned about its reliability. All public companies are
encouraged, and certain larger companies are required to have the interim financial
information reviewed by independent accountant. In the Philippines, this service has
also been gaining wide recognition and acceptance especially among big companies
applying for loans with banks and those contemplating issuance of additional
stocks.
OBJECTIVE OF A REVIEW ENGAGEMENT
The objective of a review of financial statements is to enable an auditor to say
whether, on the basis of procedures which do not provide all the evidence that
would be required in an audit, anything has come to the auditors attention that
causes the auditor to believe that the financial statements are not prepared, in
material respects, in accordance with an identified financial reporting framework
(negative assurance.
A review engagement provides a moderate level of assurance that the information
subject to review is free of material misstatement; this is express in the form of
negative assurance.
GENERAL PRINCIPLES OF A REVIEW ENGAGEMENT
The auditor should comply with the Code of Ethics for Professional Accountants in
the Philippines. Ethical principles governing the auditors professional
responsibilities are:
(a) Independence;
(b) Integrity;
(c) Objectivity;
(d) Professional competence and due care;
(e) Confidentiality;
(f) Professional behavior;
(g) Technical standards

The auditor should conduct a review in accordance with PSRE 2400.

The auditor should plan and perform the review with an attitude of professional
skepticism recognizing that circumstances may exist which causes the financial
statements to be materially misstated.
For the purpose of expressing negative assurance In the review report, the auditor
should obtain sufficient appropriate evidence primarily through inquiry and
analytical procedures to be able to draw conclusions.
SCOPE OF REVIEW
The term scope of a review refers to the review procedures deemed necessary in
the circumstances to achieve the objective of the review. The procedures required
to conduct a review of financial statements should be determined by the auditor
having regard to the requirements of the Standards of Auditing, relevant
professional bodies, legislation, regulation and, where appropriate, the terms of the
review engagement and reporting requirements.
MODERATE ASSURANCE
A review engagement provides a moderate level of assurance that the information
subject to review is free of material misstatement; this is expressed in the form of
negative assurance.
TERMS OF ENGAGEMENT
The auditor and the client should agree on the terms of the engagement. The
agreed terms would be recorded in an engagement letter or other suitable form
such as contract.
An engagement letter will be assistance in planning the review work. It is in the
interests of both the auditor and the client that the auditor sends an engagement
letter documenting the key terms of the appointment. An engagement letter
confirms the auditors acceptance of the appointment and helps avoid
misunderstanding regarding such matters as the objectives and scope of the
engagement, the extent of the auditors responsibilities and the form of reports to
be issued.
Matters that would be included in the engagement letter include:
- The objective of the service being performed
- Managements responsibility for the financial statements.
- The scope of the review, including reference to PSRE 2400.
- Unrestricted access to whatever records, documentation and other information
requested in connection with the review.
- A sample of the report expected to be rendered.
- The fact that the engagement cannot be relied upon to disclose errors, illegal acts
or other irregularities, for example, fraud or defalcations that may exist.

- A statement that an audit is not being performed and that an audit opinion will not
be expressed. To emphasize this point and to avoid confusion, the auditor may also
consider pointing out that a review engagement will not satisfy any statutory or
third party requirements for an audit.
ENGAGEMENT LETTER OF A REVIEW OF FINANCIAL STATMENTS
PAGE 1093. . .
Planning
In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entitys organization,
accounting systems, operating characteristics and
the nature of its assets,
liabilities, revenues and expenses. The auditors needs to possess an understanding
of such matters and other matters relevant to the financial statements. The auditors
requires this understanding to be able to make relevant inquiries and to design
appropriate procedures, as well as to assess the responses and other information
obtained.