Chapter 11: Prospective Assurance (SAE 3400, 3402, 3420)
1. SAE 3400: Examination of Prospective Financial Information (PFI)
PFI is financial information based on assumptions about events that may occur in the future and possible actions by an entity.
| Dimension | Forecast | Projection |
|---|---|---|
| Basis of Preparation | Based on Best-Estimate Assumptions (events management expects to take place as of date of info). | Based on Hypothetical Assumptions (what-if scenarios about future events not necessarily expected to happen) OR a mix of best-estimate + hypothetical. |
| Typical Use | Budgeting, IPO prospectus, bank borrowing. | Feasibility studies for new product launch, bidding for a new venture. |
| Assurance Level | Moderate Level of Assurance regarding reasonableness of assumptions, and Negative Assurance on preparation. Auditor NEVER provides assurance on whether actual results will achieve projections! | |
1. Statement that actual results are likely to be different from PFI since anticipated events frequently do not occur as expected, and variation may be material.
2. In case of projection: Explicit statement that the projection was prepared for [specified purpose] and must not be used for any other purpose.
2. SAE 3402: Assurance Reports on Controls at a Service Organisation
Applies to service auditors reporting on internal controls at third-party service organisations (e.g., payroll processing, cloud data center, registrar & transfer agents).
| Report Category | Scope / What It Covers | Period Covered |
|---|---|---|
| Type 1 Report | • Description of service org's system. • Design and implementation of controls as of a specified date. • No testing of operating effectiveness! |
As of a specific point in time (e.g., as at March 31). |
| Type 2 Report | • Description of service org's system. • Design and implementation of controls. • Operating effectiveness of controls over a specified period (tests of controls performed). |
Covers a period of time (typically minimum 6 months). |
A user auditor can use a Type 2 Report as audit evidence to reduce control risk assessment. A Type 1 Report only assists in understanding controls but provides ZERO evidence of operating effectiveness throughout the audit period.
3. SAE 3420: Assurance on Compilation of Pro Forma Financial Info
Shows the unadjusted financial information of an entity as if a proposed transaction (e.g., merger, demerger, acquisition) had occurred at an earlier date chosen for illustration purposes. Commonly included in an Offer Document / Prospectus.
| Practitioner's Objective | Mandatory Reporting Expression |
|---|---|
| Reasonable Assurance | Obtain reasonable assurance about whether the pro forma financial information has been compiled, in all material respects, by responsible party on the basis of applicable criteria. |
| Opinion Statement | "In our opinion, the pro forma financial information has been properly compiled on the basis stated, and such basis is consistent with the accounting policies of the entity." |
| Important Clarification | The practitioner has no responsibility to update or re-issue any reports on underlying financial information used to compile pro forma information. |
4. Summary of Assurance Levels Across Standards
| Standard | Area | Nature of Assurance |
|---|---|---|
| SA 200–720 | Historical Financial Statements | Reasonable Assurance (High) |
| SRE 2400 / 2410 | Review of Historical / Interim FS | Limited Assurance (Moderate) |
| SAE 3400 | Prospective Financial Information (Forecast/Projection) | Moderate Assurance on assumptions + Negative on preparation |
| SAE 3402 Type 1 | Service Org Controls Design | Reasonable Assurance on design at a point in time |
| SAE 3402 Type 2 | Service Org Controls Operating Effectiveness | Reasonable Assurance on operating effectiveness over period |
| SAE 3420 | Pro Forma Financial Information | Reasonable Assurance on proper compilation |
| SRS 4400 / 4410 | Agreed-Upon Procedures / Compilation | No Assurance |