Acca aaa s21 Notes

Actual
Budget
Budget
Budget
All amounts in $000
Sales
Cost of sales
Receipts from customers
Payments to suppliers
Other outflows:
Wages
Administration
Depreciation
Capital expenditure
Tax
Net cash flow
B/f cash
C/f cash
2018
2019
2020
2021
7,000
7,500
8,500
9,000
2,500
2,700
3,000
3,500
6,900
7,400
8,400
9,400
2,500
2,600
2,700
3,000
1,000
1,050
1,100
1,100
800
850
900
920
100
100
110
120
200
520
560
678
772
1,980
2,040
2,912
3,488
500
2,480
4,520
7,432
2,480
4,520
7,432
10,920
Clairvoy Co is not one of your clients, but the company has asked you to provide a report to the bank 
on the cash flow forecast that has been prepared.
Describe the work that you would perform in the examination of the prospective financial 
information.
September 2021 to June 2022 exams
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6. Solution - issues to consider
The great thing to remember with all types of budgets and forecasts is that nearly everything on the 
document is an assumption and therefore its reasonableness should be considered - both the amount 
and its timing. If an amount is not an assumption then it must be an historical amount (such as the 
opening cash balance) and that must be checked too. So ALL amounts are open to scrutiny. Usually, 
as here, you would also be asked to describe examination procedures.
So here we would:
๏
Agree the opening cash balance to the cash book balance.
๏
Agree actual 2018 amounts to the historical financial statements (eg sales to the statement of 
profit or loss and tax paid to the cash flow statement). Note that the cash flow statement should 
show no investment in long-term assets (and remember that it would only show payments to 
suppliers and employees if prepared under the direct method). 
๏
Sales have increased 7%, 13% and 6% pa. This rate of growth looks impressive (though we don’t 
know the industry sector) and needs to be justified by sales budgets, marketing reports and 
budgets, competitor analysis etc.
๏
Calculate relevant ratios based on the 2018 figures for use in analytical procedures on the 
projections:
‣
GP% = 4,500/7,000 = 64%. Note that the GP% has then become 4,800/7,500 = 64%, 
5,500/8,500 = 64.7% and 5,500/9,000 = 61%. We need to ask (eg the sales director) why this 
percentage has changed.
‣
Wages/sales = 1,000/7,000 = 14%. Note that this ratio has then become 14%, 13% and 12%. 
What is causing these efficiency gains?
‣
Administration/sales = 800/7,000 = 11%. Not that this ratio has then become 11%, 10.6% and 
10%. Again there are slight efficiency gains that should be investigated.
‣
In 2018, 6,900/7,000 cash from sales was received = 98.6%. This rises to 99% in 2020 then 
104% in 2021. The 2021 figure certainly looks odd and it is not clear why the cash receipts are 
higher than the sales.
‣
In 2018, 100% of purchases were paid for. This falls to 2,600/2,700 = 96%, 2,700/3000 = 90% 
to 3,000/3,500 = 86%. More credit is being taken from suppliers and we need to investigate if 
this is a reasonable assumption. For example, talk to buyers and payable ledger supervisors.
๏
The timings of receipts from customers and payments to suppliers need to be examined in 
detail as timings of receipts and payments are crucial to cash flow budgets. (Note that taking 
opening trade receivables and payables balances from the 2018 accounts it would be possible 
to calculate receivable days and payables days for further examination.)
๏
Depreciation shouldn’t appear in the forecast as it is not a cash flow. What other errors could the 
preparer have made?
๏
What is the capital expenditure for? Has it been authorised by the board? Is it in the correct year? 
Is it complete? Is there really no capital expenditure in other periods? Look at board minutes, 
expansion plans, capital expenditure budgets and authorisations.
๏
Are the tax payments calculated properly?
๏
No interest has been included on the cash budget. This is material. For example, if interest was 
charged at 5% then $10,000,000 x 5% = $500,000 pa
๏
No capital repayments appear in the cash budget. The potential loan agreement should be 
examined to see the proposed repayment schedule.