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Other AssignmentsOther AssignmentsProspective Financial InformationISAE 3400Engagement Acceptance

ACCA · Question 3 · Other Assignments

SECTION B: ADVISORY REPORT

You are a manager at Stellar Advisory. OrbitData Solutions (OrbitData) is an existing audit client of your firm, with a financial year-end of 31 March 20X6. OrbitData provides high-resolution satellite imaging data to agricultural and defense sectors.

OrbitData is currently seeking a $50 million syndicated bank loan to fund the design, manufacture, and launch of a new constellation of five micro-satellites. The bank has requested that OrbitData provide a business plan, including Prospective Financial Information (PFI) comprising a forecast statement of profit or loss and cash flows for the five years ending 31 March 20Y1.

The Board of Directors of OrbitData has approached Stellar Advisory to examine and provide an assurance report on this PFI to be submitted to the bank. The PFI includes significant assumptions regarding future revenue from uncontracted defense clients and massive capital expenditure for the satellite launches.

Required:
(a) Identify and explain the matters to be considered by Stellar Advisory before accepting the engagement to report on OrbitData's Prospective Financial Information (PFI). (8 marks)

(b) Describe the examination procedures you would perform to obtain sufficient appropriate evidence regarding the forecast revenue and forecast capital expenditure within the PFI. (17 marks)

How to approach this question

For part (a), think about ISAE 3400 (The Examination of Prospective Financial Information). Focus on acceptance criteria: purpose, assumptions, competence, ethics, and the time period. For part (b), divide your answer into clear headings: General, Revenue, and Capex. Use the 'verb, document, purpose' structure for procedures. Because it's a forecast, rely heavily on quotes, draft contracts, letters of intent, sensitivity analysis, and assessing management's past forecasting accuracy.

Full Answer

This question covers 'Other Assignments', specifically Prospective Financial Information (ISAE 3400). It tests the candidate's ability to step outside historical financial statement auditing and apply assurance principles to forward-looking data. Acceptance considerations focus heavily on risk management for the firm (liability, competence, speculative nature of long-term forecasts). The procedures require commercial awareness, focusing on how a company actually plans and costs a major capital project like a satellite launch.

Common mistakes

1. In part (a), incorrectly stating that a self-review threat prevents acceptance. PFI is future-oriented, so it doesn't directly impact the historical audit, though advocacy threats exist. 2. In part (b), suggesting historical audit procedures (e.g., 'check the sales invoices') for a forecast. You must use forward-looking evidence. 3. Failing to address both Revenue and Capex adequately in part (b), losing out on easy marks for one of the sections.
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