Acca aaa s21 Notes

4. Examination procedures
Factors that may affect the nature, timing and extent of examination procedures include:
๏
The likelihood of material misstatement
๏
Knowledge obtained in previous engagements (e.g. the audit)
๏
Management’s competence in preparing PFI
๏
The extent to which the PFI is affected by management’s judgment
๏
The adequacy and reliability of underlying data used.
In order to report on PFI, the auditor must obtain sufficient appropriate evidence that:
๏
Assumptions
are reasonable and consistent with the purpose of the PFI
๏
The PFI has been 
properly prepared
(through arithmetic checks and a review of consistency)
๏
Both the PFI and all material assumptions have been adequately 
disclosed
.
Analytical procedures are likely to be used extensively, with verification of amounts wherever 
possible. For example, if a profit forecast shows a 10% increase in revenue:
๏
Is that increase in volume and/or prices? (How realistic is an increase in price?)
๏
Is it consistent with the forecast cost of sales? (If not, why not?)
๏
Does production have capacity for the increase? If not, what investment must be made in plant 
and equipment? Verify reasonableness of cost of investment to a supplier’s price list. Will 
employees have to work overtime? Verify reasonableness of costs to payroll information.
๏
Is the timing of the increase in sales consistent with the timing of the investment in plant and 
how long it takes to manufacture goods?
The auditor 
must obtain written representation
regarding:
๏
intended use of PFI
๏
completeness of significant management assumptions
๏
management’s acceptance responsibility for PFI.
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5. Example
Clairvoy Co
It is 5/1/2019 and Clairvoy Co is applying to its bank for loan finance. The loan would amount to 
$10,000,000, repayable in equal instalments over the three years 2019, 2020 and 2021. 
In support of this application, the company cash flow forecast for the next three years.