ACCOUNTANTS’ HANDBOOK VOLUM phần 8 pptx

rather than prospective financial statements. In that case, the accountant is not required to provide a standard service on the prospective data. Chapter 23 of the AICPA Guide contains guidelines for compilations, examinations, and application of agreed-upon procedures to partial presentations. It does not require those services on partial presentations, but provides guidance for the accountant who is engaged to provide them. (ii) Third-Party Use. Third parties generally are any persons outside the entity presenting the prospective financial statements. Sometimes, however, such persons may not need to be considered third parties for the purpose of determining whether the guidance on accountants’ services applies. The AICPA Guide (Section 10.02) provides the following guidelines for determining whethe r out- siders are considered third parties: In deciding whether a party that is or reasonably might be expected to use an accountant’s report is considered to be a third party, the accountant should consider the degree of consistency of interest between [management] and the user regarding the forecast. If their interests are substan- tially consistent (for example both the [preparer] and the user are employees of the entity about which the forecast is made), the user would not be deemed to be a third party. On the other hand, where the interests of the [preparer] and user are potentially inconsistent (for example, the [preparer] is a nonowner manager and the user is an absentee owner), the user would be deemed a third party. In some cases, this determination will require the exercise of considerable professional judgment. In considering whether the statements will be restricted to internal use, the accountant may generally rely on management’s oral or written representations, unless something leads the accountant to believe that, despite management’s representations, the statements are likely to be distributed to a third party. (iii) Assemble and Submit. “Assembly” means the “manual or computer processing of mathematical or other clerical functions related to the presentation of the prospective financial statements” (AICPA Guide, Section 3.16). This refers to converting the assumptions into prospective amounts or putting the amounts into the form of statements. Assembly does not mean merely copying or collat- ing statements prepared by someone else. (c) INTERNAL USE. The accountant may provide compilation, examination, or agreed-upon procedures engagements for internal use if engaged to do so. However, for internal use, the ac countant has more flexibility to accommodate the varying circumstances of the engagement. Normally, these engagements involve consulting or planning (such as in management-consulting or tax-planning services) rather than third-party reliance. Common reporting options for internal use include assembly reports and plain paper prospective financial statements. Internal-use services are discussed in more detail in Subsection 38.9(a). (d) PROHIBITED ENGAGEMENTS. The AICPA Guide prohibits the accountant from submitting or reporting on prospective financial statements intended for third-party use if those statements omit the disclosure of significant assumptions. Similarly, the accountant is prohibited from submitting or reporting on a projection for third-party use if it does not identify the hypothetical assumption or describe the limitations on the usefulness of the presentation. The accountant also may not submit or report on a financial projection that is intended for general use (unless it supplements a forecast for the same period) because such use is considered inappropriate [see Subsection 38.2(b)]. This prohibition means that the accountant could not assemble and submit such a presentation even if management agreed not to present the accountant’s report or refer to the accountant in the document containing the projection that would be presented to general users. 38.5 TYPES OF ACCOUNTANTS’ SERVICES 38 • 17 (e) MATERIALITY. Accountants consider materiality in conducting engagements on prospective financial statements much as they do for historical financial statements. The AICPA Guide (Section 10.31) states, however, “Materiality is a concept that is judged in light of the expected range of reasonableness of the information; therefore, users should not expect prospective information (information about events that have not yet occurred) to be as precise as historical information.” It follows, then, that materiality criteria would be higher for prospective statements than for the same company’s historical statements. That is, an amount that would be material to the historical statements might not be material to the prospectives. There is no consensus in practice, however, as to just how much higher materiality should be for prospective financial statements. (f) SEC PERSPECTIVE. Relevant SEC rules regarding accountants’ services on prospective financial statements in filings subject to the SEC’s authority include the Safe Harbor Rule for Projections and as policies stated in equation S-K § 229.10. These rules, however, add relatively little to the re- quirements for accountants’ procedures and reports established by the AICPA Guide. The more significant SEC policies in this area are less formal ones. Two particularly significant positions taken by the SEC involve compilation services and independence rules. (i) Compilations in SEC Filings. Although not stated in formal SEC rules, the Commission’s staff has been reluctant to accept compilations of prospective financial statements. Thus, although that service is allowed under the AICPA literature for both public and nonpublic entities (unlike compilations of historical statements, which are only appropriate for nonpublic companies), they generally are not an option for filings subject to SEC authority. (ii) Independence. The SEC independence rules differ from those established by the AICPA. As a general rule, AICPA literature considers independence impaired when the accountant either has a direct financial interest in the client or when the accountant is acting in the capacity of management or an employee. Thus, providing a service on prospective financial statements would not, in and of itself, affect the auditor’s independence for the audit of its historical financial statements or any other service. The SEC rules, however, are based on a different concept, which the SEC refers to as “mutuality of interest.” The SEC considers that the accountant’s assistance in preparing prospective financial statements creates a mutuality of interest in the prospective results. Thus, it has stated that, generally, an accountant who actively participates in the preparation of the prospective data loses the independence necessary to examine and report on that prospective data. In a letter to an accountant, the SEC staff pursued this reasoning even further, stating that active assistance in the preparation of a company’s prospective financial statements would also affect the accountant’s independence in regard to its historical financial statements for the length of the prospective period. This independence impairment would occur regardless of whether the prospective statements were forecasts or projections or whether they were issued to the public or restricted to internal use. 1 (g) IRS PERSPECTIVE. The IRS Circular 230 applies to prospective financial statements included in tax shelter offerings. It states that an accountant who reports on prospective financial statements in such offerings must either provide a tax shelter opinion or rely on one issued by another professional, such as another accountant or a lawyer. A tax shelter opinion under Circular 230 states whether, in the professional’s opinion, it is more likely than not that an investor will prevail on the merits of each material tax issue that involves a 38 • 18 PROSPECTIVE FINANCIAL STATEMENTS 1 Letter from Chief Accountant to Amper, Politzner, and Mattia, April 14, 1987; CCH, 1990, paragraph 7986. reasonable possibility of challenge by the IRS and an overall evaluation of the extent to which the material tax benefits are likely to be realized in the aggregate. 38.6 COMPILATION SERVICES (a) SCOPE OF THE COMPILATION SERVICE. A compilation of prospective financial statements is similar to a compilation of historical financial statements performed subject to SSARS No. 1, “Compilation and Review of Financial Statements” (1978). It relies primarily on an informed reading of the statements with an eye for obvious problems, but it does not provide any assurance on the statements. The AICPA Guide states that a compilation of prospective financial statements involves these three: 1. Assembling, to the extent necessary, the prospective financial statements based on management’s assumptions 2. Performing the required compilation procedures, including reading the prospective financial statements with their summaries of significant assumptions and accounting policies and considering whether they appear to be presented in conformity with AICPA presentation guidelines and not obviously inappropriate 3. Issuing a compilation report (b) ASSEMBLY. Assembly, which is defined in Subsection 34.5(b)(iii), refers to performing the necessary mathematics to turn assumptions into prospective financial data and drafting prospective financial statements in the appropriate form. In some cases, such as when the client has a sophisti- cated financial reporting function and prepares its own statements, assembly may not be required in a compilation. Often, however, assembly assistance is one of the primary benefits the client receives from the accountant. Assembly does not include identifying key factors or developing assumptions, although accountants often help clients in these areas in a compilation. (c) COMPILATION PROCEDURES. The compilation procedures required by AICPA standards are listed in Exhibit 38.4. There are two principal differences between the procedures done in a compilation of prospective statements and a compilation of historical statements: the requirement to consider the actual results for any expired portion of the prospective period and the requirement to obtain signed representations from the client. Another difference between prospective and historical compilations is that working papers are required in a compilation of prospective financial statements. The working papers serve mainly to: • Provide the principal support for the accountant’s report, including the representation regarding observance of the standards of fieldwork, which is implicit in the reference in the report to the attestation standards. • Aid the accountant in the conduct and supervision of the engagement. In this regard, the working papers should be sufficient to (1) enable members of the engagement team with supervision and review responsibilities to understand the nature, timing, extent, and results of procedures performed, and the information obtained and (2) indicate the engagement team member(s) who performed and reviewed the work. (d) REPORTING ON A COMPILATION. The standard report on a compilation of prospective financial statements includes: 1. An identification of the prospective financial statements presented by the responsible party 2. A statement that the accountant has compiled the prospective financial statements in accordance with attestation standards established by the AICPA 38.6 COMPILATION SERVICES 38 • 19 38 • 20 PROSPECTIVE FINANCIAL STATEMENTS In performing a compilation of prospective financial statements the practitioner should, where applicable— a. Establish an understanding with the client regarding the services to be performed. The understanding should include the objectives of the engagement, the client’s responsibilities, the practitioner’s responsibilities, and limitations of the engagement. The practitioner should document the understanding in the working papers, preferably through a written communication with the client. If the practitioner believes an understanding with the client has not been established, he should decline to accept or perform the engagement. b. Inquire about the accounting principles used in the preparation of the prospective financial statements. • For existing entities, compare the accounting principles used to those used in the preparation of pre- vious historical financial statements and inquire whether such principles are the same as those expected to be used in the historical financial statements covering the prospective period. • For entities to be formed or entities formed that have not commenced operations, compare special- ized industry accounting principles used, if any, to those typically used in the industry. Inquire about whether the accounting principles used for the prospective financial statements are those that are expected to be used when or if the entity commences operations. c. Ask how the responsible party identifies the key factors and develops its assumptions. d. List, or obtain a list of, the responsible party’s significant assumptions providing the basis for the prospective financial statements and consider whether there are any obvious omissions in light of the key factors upon which the prospective results of the entity appear to depend. e. Consider whether there appear to be any obvious internal inconsistencies in the assumptions. f. Perform, or test the mathematical accuracy of, the computations that translate the assumptions into prospective financial statements. g. Read the prospective financial statements, including the summary of significant assumptions, and consider whether— • The statements, including the disclosures of assumptions and accounting policies, appear to be not presented in conformity with the AICPA presentation guidelines for prospective financial statements. 1 • The statements, including the summary of significant assumptions, appear to be not obviously inappropriate in relation to the practitioner’s knowledge of the entity and its industry and, for a— Financial forecast, the expected conditions and course of action in the prospective period. Financial projection, the purpose of the presentation. h. If a significant part of the prospective period has expired, inquire about the results of operations or significant portions of the operations (such as sales volume), and significant changes in financial position, and consider their effect in relation to the prospective financial statements. If historical financial statements have been prepared for the expired portion of the period, the practitioner should read such statements and consider those results in relation to the prospective financial statements. i. Confirm his understanding of the statements (including assumptions) by obtaining written representations from the responsible party. Because the amounts reflected in the statements are not supported by historical books and records but rather by assumptions, the practitioner should obtain representations in which the responsible party indicates its responsibility for the assumptions. The representations should be signed by the responsible party at the highest level of authority who the practitioner believes is responsible for and knowledgeable, directly or through others, about matters covered by the representations. • For a financial forecast, the representations should include the responsible party’s assertion that the financial forecast presents, to the best of his knowledge and belief, the expected financial position, results of operations, and cash flows for the forecast period and that the forecast reflects the responsible party’s judgment, based on present circumstances, of the expected conditions and its expected course of action. The representations should also include a statement that the forecast is presented in conformity with guidelines for presentation of a forecast established by the AICPA. The representations should also include a statement that the assumptions on which the forecast is based are reasonable. If the forecast contains a range, the representation should also include a statement that, to the best of the responsible party’s knowledge and belief, the item or items subject to the assumption are expected to actually fall within the range and that the range was not selected in a biased or misleading manner. Exhibit 38.4 Standard compilation procedures. (Source: AICPA, Statement on Standards for Attesta- tion Engagements, AT 301.) 3. A statement that a compilation is limited in scope and does not enable the accountant to express an opinion or any other form of assurance on the prospective financial statements or the assumptions 4. A caveat that the prospective results may not be achieved 5. A statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report 6. The manual or printed signature of the accountant’s firm 7. The date of the compilation report The standard form of compilation report for a financial forecast is as follows: We have compiled the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX,* and for the year then ending, in accordance with attestation standards established by the American Institute of Certified Public Ac- countants. A compilation is limited to presenting in the form of a forecast information that is the representation of management and does not include evaluation of the support for the assumptions underlying the forecast. We have not examined the forecast and, accordingly, do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. [Signature] [Date] * If the presentation is summarized, the opening sentence of the report would begin, “We have compiled the accompanying summarized forecast of XYZ Company as of December 31, 20X1 ” 38.6 COMPILATION SERVICES 38 • 21 • For a financial projection, the representations should include the responsible party’s assertion that the financial projection presents, to the best of his knowledge and belief, the expected financial position, results of operations, and cash flows for the projection period given the hypothetical assumptions, and that the projection reflects his judgment, based on present circumstances, of expected conditions and its expected course of action given the occurrence of the hypothetical events. The representations should also (1) identify the hypothetical assumptions and describe the limitations on the usefulness of the presentation, (2) state that the assumptions are appropriate, (3) indicate if the hypothetical assumptions are improbable, and (4) if the projection contains a range, include a statement that, to the best of the responsible party’s knowledge and belief, given the hypothetical assumptions, the item or items subject to the assumption are expected to actually fall within the range and that the range was not selected in a biased or misleading manner. The representations should also include a statement that the projection is presented in conformity with guidelines for presentation of a projection established by the AICPA. j. Consider, after applying the above procedures, whether he has received representations or other information that appears to be obviously inappropriate, incomplete, or otherwise misleading and, if so, attempt to obtain additional or revised information. If he does not receive such information, the practitioner should ordinarily withdraw from the compilation engagement. 2 (The omission of disclosures, other than those relating to significant assumptions, would not require the practitioner to withdraw.) 1 Presentation guidelines for entities that issue prospective financial statements are set forth and illustrated in the AICPA Guide for Prospective Financial Information. 2 The practitioner need not withdraw from the engagement if the effect of such information on the prospective financial statements does not appear to be material. Exhibit 38.4 Continued. The standard form of report for the compilation of a financial projection is as follows: We have compiled the accompanying projected balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX,* and for the year then ending, in accordance with attestation standards established by the American Institute of Certified Public Ac- countants. The accompanying projection was prepared for [state special purpose, for example, “the purpose of negotiating a loan to expand XYZ Company’s plant”]. A compilation is limited to presenting information in the form of a projection that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection. We have not examined the projection and, accordingly do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, even if [describe hypothetical assumption, for example, “the loan is granted and the plant is expanded”], there will usually be differences between the projected and the actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. The accompanying projection and this report are intended solely for the information and use of [identify specified parties, for example, “XYZ Company and DEF Bank”] and are not intended to be and should not be used by anyone other than these specified parties. [Signature] [Date] * If the presentation is summarized, the opening sentence of the report would begin, “We have compiled the accompanying summarized projection of XYZ Company as of December 31, 20X1 ” If the presentation is shown as a range, the accountant’s report also includes a paragraph that states that management has shown the results of one or more assumptions as a range. The following is an example of such a paragraph: As described in the summary of significant assumptions, management of XYZ Company has elected to portray forecasted [description of the financial statement element or elements for which the expected results of one or more assumptions fall within a range, and identification of the assumptions expected to fall within a range, e.g., “revenue at the amounts of $XX and $YY, which is predicated upon occupancy rates of XX% and YY% of available apartments”] rather than as a single-point estimate. Accordingly, the accompanying forecast presents forecasted financial position, results of operations, and cash flows [description of the assumptions expected to fall within a range, e.g., “at such occupancy rates”]. However, there can be no assurance that the actual results will fall within the range [description of the assumptions expected to fall within a range, e.g., “occupancy rates”] presented. (e) PROBLEM SITUATIONS. Potential problems in a compilation engagement include scope limitations, deficiencies in the prospective financial statements, and lack of independence. (i) Scope Limitations. Scope limitations might include a client’s inadequate responses to the limited inquiries required in a compilation or its refusal to supply signed representations. The AICPA Guide does not allow a scope-limitation compilation report. An accountant who cannot apply all the necessary procedures cannot complete the engagement and ordinarily should withdraw. (ii) Presentation Deficiencies. Possible deficiencies in the prospective financial statements might affect either the assumptions or the other required disclosures. If the deficiency affects disclosures other than assumptions, the accountant may mention it in the compilation report. For example, if management chose to omit the disclosure of significant accounting policies, the accountant might add the following paragraph to the compilation report: 38 • 22 PROSPECTIVE FINANCIAL STATEMENTS Management has elected to omit the summary of significant accounting policies required by the guidelines for presentation of a financial forecast established by the American Institute of Certified Public Accountants. If the omitted disclosures were included in the forecast, they might influence the user’s conclusions about the Company’s financial position, results of operations, and cash flows for the forecast period. Accordingly, this report is not intended for those who are not informed about such matters. If the deficiency affects the disclosure of assumptions and the accountant is unable to have it cor- rected, the accountant is not permitted merely to mention it in the report. In that case, the accountant ordinarily would withdraw from the engagement. (iii) Independence. Since a compilation provides no assurance, an accountant may compile prospective financial statements when not independent. In that case, the report would indicate the lack of independence, but not the reason for it. The following sentence would be added to the compilation report to indicate the lack of independence: We are not independent with respect to XYZ Company. 38.7 EXAMINATION SERVICES (a) SCOPE OF AN EXAMINATION. An examination of prospective financial statements is similar to an audit of historical financial statements. It is based on evidence-gathering procedures and results in positive assurance about the statements. The main difference between the two services involves the evidence-gathering procedures. Because completed transactions do not generally constitute the bulk of the data underlying prospective financial statements, the accountant’s procedures generally consist primarily of inquiry and analysis rather than of document inspection and confirmation. An examination of prospective financial statements involves the following four evaluations: 1. Evaluating the preparation of the statements 2. Evaluating the support underlying the statements 3. Evaluating the presentation of the statements for conformity with AICPA presentation guidelines 4. Issuing a report as to whether, in the accountant’s opinion, a. The prospective financial statements are presented in conformity with AICPA presentation guidelines and b. The assumptions provide a reasonable basis for the forecast or, for a projection, whether the assumptions provide a reasonable basis given the hypothetical assumptions (i) Evaluating Preparation. The accountant considers the process that management uses to de- velop its prospective financial statements to determine how much support will need to be accumulated. This consideration is similar to the consideration an auditor gives to a company’s internal control in planning and performing an audit of historical financial statements. The better controlled the process of developing the financial statements, the less work the accountant generally needs to do in obtaining support for them. In judging the process the entity uses in developing its prospective financial statements, the accountant generally compares the process to the guidelines discussed in Subsection 38.3(a). (ii) Evaluating Assumptions. The accountant performs procedures to determine whether the assumptions provide a reasonable basis for the prospective financial statements. The accountant can decide that they do if the accountant can conclude that: 38.7 EXAMINATION SERVICES 38 • 23 • Management has identified all key factors expected to affect the entity during the prospective period. • Management has developed assumptions for each key factor. • The assumptions are suitably supported. To determine whether management has identified all key factors and developed assumptions for each one, the accountant needs to possess, or obtain during the engagement, an appropriate knowledge of the industry in which the entity will operate and the accounting principles and practices of that industry. The accountant can conclude that the assumptions are suitably supported if the preponderance of information supports each significant assumption. Preponderance here does not imply a statistical majority of information. A preponderance exists if the weight of available information tends to support the assumption. The AICPA Guide states, however, “Because of the judgments involved in developing assumptions, different people may arrive at somewhat different but equally reasonable assumptions based on the same information.” The accountant need not obtain support for the hypothetical assumptions in a projection, since they are not necessarily expected to occur. For a projection, the accountant considers whether the hypothetical assumptions are consistent with the purpose of the projection and whether the other assumptions are suitably supported given the hypothetical assumption. In evaluating the support for the assumptions, the accountant considers six factors: 1. Whether sufficient pertinent sources of information, both internal and external to the entity, have been considered 2. Whether the assumptions are consistent with the sources from which they are derived 3. Whether the assumptions are consistent with each other 4. Whether the historical financial information and other data used in developing the assumptions are sufficiently reliable for that purpose 5. Whether the historical information and other data used in developing the assumptions are comparable over the periods specified or whether the effects of any lack of comparability were considered in developing the assumptions 6. Whether the logical arguments or theory, considered with the data supporting the assumptions, are reasonable Support for assumptions may include market surveys, engineering studies, general economic in- dicators, industry statistics, trends and patterns developed from an entity’s operating history, and internal data and analysis, accompanied by their supporting logical argument or theory. The accountant determines whether the assumptions provide a reasonable basis for the statements but cannot conclude that any outcome is expected because (1) realization of prospective results may depend on management’s intentions, which cannot be examined; (2) there is substantial uncertainty in the assumptions; (3) some of the information accumulated about an assumption may appear contra- dictory; and (4) different but similarly reasonable assumptions concerning a particular matter might be derived from common information. (iii) Evaluating Presentation. The accountant compares the presentation of the prospective financial statements to the AICPA presentation guidelines [see Subsections 38.4(b) and (c)]. (b) STANDARD EXAMINATION REPORT. The accountant’s standard report on an examination of prospective financial statements includes six statements: 1. A title that includes the word “independent” 2. An identification of the prospective financial statements presented 38 • 24 PROSPECTIVE FINANCIAL STATEMENTS 3. An identification of the responsible party and a statement that the prospective financial statements are the responsibility of the responsible party 4. A statement that the accountant’s responsibility is to express an opinion on the prospective financial statements based on the examination 5. A statement that the examination of the prospective financial statements was conducted in accordance with attestation standards established by the AICPA and, accordingly, included such procedures as the accountant considered necessary in the circumstances 6. A statement that the accountant believes that the examination provides a reasonable basis for the opinion 7. The accountant’s opinion that the prospective financial statements are presented in conformity with AICPA presentation guidelines and that the underlying assumptions provide a reasonable basis for the forecast or a reasonable basis for the projection given the hypothetical assumptions 8. A caveat that the prospective results may not be achieved 9. A statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report 10. The manual or printed signature of the accountant’s firm 11. The date of the examination report The standard report on the examination of a financial forecast is as follows: Independent Accountant’s Report We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX,* and for the year then ending. XYZ Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination. Our examination was conducted in accordance with attestation standards established by the Ameri- can Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion. In our opinion, the accompanying forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s forecast. However, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. [Signature] [Date] * If the presentation is summarized, the opening sentence of the report would begin, “We have examined the accompanying summarized forecast of XYZ Company as of December 31, 20X1 ” The standard report on the examination of a financial projection is as follows: Independent Accountant’s Report We have examined the accompanying projected balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending.* XYZ Company’s management is responsible for the projection, which was prepared for [state special purpose, for example, “the purpose of negotiating a loan to expand XYZ Company’s plant”]. Our responsibility is to express an opinion on the projection based on our examination. Our examination was conducted in accordance with attestation standards established by the Amer- ican Institute of Certified Public Accountants and, accordingly, included such procedures as we 38.7 EXAMINATION SERVICES 38 • 25 considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection. We believe our examination provides a reasonable basis for our opinion. In our opinion, the accompanying projection is presented in conformity with guidelines for presentation of a projection established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s projection [describe the hypothetical assumption, for example, “assuming the granting of the requested loan for the purpose of expanding XYZ Company’s plant as described in the summary of significant assumptions”]. How- ever, even if [describe hypothetical assumption, for example, “the loan is granted and the plant is expanded”], there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. The accompanying projection and this report are intended solely for the information and use of [identify specified parties, for example, “XYZ Company and DEF National Bank”] and are not intended to be and should not be used by anyone other than these specified parties. [Signature] [Date] * If the presentation is summarized, the opening sentence of the report would begin, “We have examined the accompanying summarized projection of XYZ Company as of December 31, 20X1 ” When the prospective financial statements are presented as a range, the report also includes a sep- arate paragraph describing the range [see Subsection 38.6(d) for an example]. (c) MODIFIED EXAMINATION REPORTS. There are four types of modified examination reports: 1. A qualified report, used when the statements depart from the AICPA presentation guidelines but the deficiency does not affect the assumptions (although if the matter is highly material, the accountant may issue an adverse report) 2. An adverse report, used when the statements fail to disclose significant assumptions or when the assumptions do not provide a reasonable basis for the presentation 3. A disclaimer used when the accountant is precluded from applying procedures considered necessary in the circumstances 4. A reference to another accountant, used when another accountant examines the prospective financial statements of a significant portion of the entity, such as a major subsidiary (i) Qualified Opinion. The accountant issues a qualified opinion if there is a material presentation deficiency that does not affect the assumptions. The following is an examination report qualified because of a presentation deficiency: Independent Accountant’s Report We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. XYZ Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe our examination provides a reasonable basis for our opinion. 38 • 26 PROSPECTIVE FINANCIAL STATEMENTS [...]... Condition December 31, 20X3 and 20X2 December 31 20X3 160,500 28, 000 48, 000 550,000 111,400 171,900 140,700 24,000 42,000 475,000 98, 900 1 28, 800 5,500 190,000 55,000 $0,040,000 5,200 180 ,000 50,000 $0,036,500 $1,206,700 $00, 08, 800 25,000 98, 200 $0,000,000 $0,000,400 26,000 99,000 $0,000,000 125,400 239,000 $1,013,000 160,000 $0,921,300 $1, 384 ,000 Estimated income taxes on the differences between the... Inc Estimated Current Values 1,500 80 0 400 $0 98, 813 11,000 13 ,87 5 300 200 9,750 $020,337 December 31, 20X2 Number of Shares or Bonds Estimated Current Values 600 200 1,200 100 300 $004,750 5,200 96,000 2 ,87 5 $025,075 $153,775 Bonds Jackson Van Lines, Ltd (12% due 7/1/X9) United Garvey, Inc (7% due 11/15/X6) 5 2 5,225 $001,500 $133,900 5 2 5,100 $001,700 $006,725 $006 ,80 0 $160,500 $140,700 Note 3 Jane... Distribution from limited partnership Gains on sales of marketable securities $060,500 $0,079,000 $022,000 Net unrealized increase in net worth $0,0 68, 100 $0 38, 500 Net increase in net worth Net worth at the beginning of year 91,700 $0,921,300 58, 300 $86 3,000 Net worth at the end of year $1,013,000 $921,300 The notes are an integral part of these statements Exhibit 39.2 Continued 39.2 GENERAL DESCRIPTION... extensive as the specified parties desire, as long as the specified parties take responsibility for their sufficiency However, mere reading of a financial forecast does not constitute a 38. 8 AGREED-UPON PROCEDURES 3 4 5 6 7 8 9 10 38 29 • procedure sufficient to permit an accountant to report on the results of applying agreedupon procedures The specified parties take responsibility for the sufficiency of the agreed-upon... $1, 384 ,000 Assets Cash Bonus receivable Investments Marketable securities (Note 2) Stock options (Note 3) Kenbruce Associates (Note 4) Davekar Company, Inc (Note 5) Vested interest in deferred profit-sharing plan Remainder interest in testamentary trust (Note 6) Cash value of life insurance ($43,600 and $42,900), less loans payable to insurance companies ($ 38, 100 and $37,700) (Note 7) Residence (Note 8) ... taxes on the differences between the estimated current values of assets and the estimated current amounts of liabilities and their tax bases $ 085 ,000 1 ,80 0 4,000 $000,500 $091,300 26,000 13,000 4,000 $0,036,700 22,000 14,000 3,000 $032,500 $071,500 $0,023,600 $019 ,80 0 3,000 4,000 75,000 6,000 12,500 43,100 $0,003,500 500 500 25,000 9,500 25,000 $000,000 $0,147,100 Net realized increase in net worth $0,095,000... * If the presentation is summarized as discussed in Subsection 38. 4(b), the first sentence would read, in part, “We have assembled the accompanying summarized forecast of XYZ Company ” In addition to the above, the accountant’s report on prospective financial statements for internal use would: 38. 10 SOURCES AND SUGGESTED REFERENCES 38 33 • 1 Indicate if the accountant is not independent with respect... and use of the Boards of Directors of ABC Company and XYZ Corporation and is not intended to be and should not be used by anyone other than these specified parties [Signature] [Date] 38. 9 INTERNAL USE SERVICES 38 31 • 38. 9 INTERNAL USE SERVICES (a) SCOPE OF SERVICES The accountant who assembles and submits or reports on prospective financial statements for third-party use, must compile, examine, or apply... Exhibit 39.2 Continued 39 8 • PERSONAL FINANCIAL STATEMENTS December 31 20X3 Current assets Plant, property, and equipment—net Other assets Total assets 20X2 $3,147,000 165,000 $0,120,000 $2,975,000 145,000 $0,110,000 $3,432,000 $3,230,000 Current liabilities Long-term liabilities 2,157,000 $0,400,000 2,030,000 $0,450,000 Total liabilities $2,557,000 $2, 480 ,000 Equity $0 ,87 5,000 $0,750,000 The sales... SOP 82 -1 says that it should be considered but that it does not necessarily determine estimated current value 39.4 LIABILITIES 39 11 • A question that SOP 82 -1 does not address is whether an accountant preparing a personal financial statement should try to value a closely held business at all Competence in valuing businesses requires a considerable degree of concentration on the subject, and some accountants’ . tax issue that involves a 38 • 18 PROSPECTIVE FINANCIAL STATEMENTS 1 Letter from Chief Accountant to Amper, Politzner, and Mattia, April 14, 1 987 ; CCH, 1990, paragraph 7 986 . reasonable possibility. Stamford, CT, 1 987 . Pallais, Don, and Holton, Stephen D., Guide to Forecasts and Projections, 3rd ed. Practitioners Publishing, Fort Worth, TX, 19 98. 38. 10 SOURCES AND SUGGESTED REFERENCES 38 • 33

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