Page 334 - Encyclopedia of Business and Finance

eobf_F 7/5/06 3:02 PM Page 311

Financial Forecasts and Projections

ants who examine such statements must consider whether knowledgeable third parties. In both forecasts and
the sources of information used by the client are sufficient prospective financial statement opinions, a warning must
to support the assumptions reflected in the prospective be included in the opinion that the prospective results
statements. For example, external sources that should be
may not be achieved.
considered include industry and government publica-
tions; reports on new information; digital, electronic, and If, in the accountants’ opinion, the prospective finan-
mechanical technology; reports on new scientific develop- cial statements depart from AICPA guidelines, or one of
ments; micro and macroeconomic forecasts; and reports the significant assumptions does not provide a reasonable
on present and proposed legislation. Examples of internal basis for the prospective statements, or the accountants
sources that accountants consider include strategic plans, could not apply some procedures that were considered
budgets, contractual agreements, purchase and sale agree- necessary, the report would have to be modified.
ments and commitments, intellectual property rights such
as copyrights and patents, royalty and commission agree- Applying Agreed-Upon Procedures. Another type of
ments, employee contracts and labor agreements, and engagement that certified public accountants may under-
financing and debt agreements.
take is to apply only some procedures, which have been
When the examination is of a financial projection,
the accountants must determine whether the hypothetical specified by the users, to the financial forecast or projec-
condition or course of action (which will not necessarily tion. An example of such an engagement might be to
occur) is consistent with the purpose of the projection. review the forecast in regard to sales, or payroll costs, or
The accountants must evaluate the support underlying both. Limiting the procedures to only one item, or some
assumptions in the same manner as is done for a forecast. of the items, on the prospective financial statements does
Upon completion of a financial forecast examination, not enable the accountants to provide an overall opinion.
assuming the accountants have collected sufficient evi- Because of the limitation in regard to the procedures per-
dence to provide a reasonable basis for the standard report formed, the report is restricted to the users who specified
to be issued, that report will state in part: the procedures to be applied.
In our opinion, the accompanying forecast is pre- The standard applying agreed-upon procedures
sented in conformity with guidelines for presenta- report will state in part:
tion of a forecast established by the American
Institute of Certified Public Accountants, and the At your request, we have performed certain
underlying assumptions provide a reasonable basis agreed-upon procedures, as enumerated below, …
for management’s forecast. we make no representation regarding the suffi-
ciency of the procedures described … [a list of the
Upon completion of a financial projection examina-
procedures performed and related findings would
tion, the standard report would include a description of
be stated] … we do not express an opinion on
the hypothetical assumption and the opinion would state
whether the prospective financial statements …
that the underlying assumptions provide a reasonable
provide a reasonable basis for the presentation.
basis for management’s forecast assuming the occurrence
of the hypothetical assumption. The report will state in
part: Compilation. A compilation of prospective financial
statements by certified public accountants involves only
In our opinion, the accompanying projection is the service of preparing the statements in whole or part
presented in conformity with guidelines for pres-
entation of a projection established by the Ameri- from information and significant assumptions provided
can Institute of Certified Public Accountants, and by the responsible party, usually a member of manage-
the underlying assumptions provide a reasonable ment. Because such an activity does not envision an exam-
basis for management’s projection [then the hypo- ination or even applying agreed-upon procedures, no
thetical assumption would be described and assurance is provided.
assumed to have occurred, for example, “assuming
the establishment of a Web site which will … ”] The standard compilation report on a forecast would
state in part:
Financial forecasts are considered general-purpose
financial statements that may be distributed to any inter- We have not examined the forecast and, accord-
ested party, whereas financial projections are considered ingly, do not express an opinion or any other form
limited-purpose financial statements only to be used by of assurance on the accompanying statements or
the responsible party who prepared the statements or by assumptions.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 311