Pro Forma Financial Information: Audit and Review Standards
Learn about reporting on pro forma financial information for the CPA AUD exam. Covers AT-C Section 310, practitioner responsibilities, and pro forma adjustments.
Understanding Pro Forma Financial Information
Pro forma financial information shows what the historical financial statements would have looked like had a particular transaction or event occurred at an earlier date. Common events giving rise to pro forma presentations include business combinations, disposal of a significant portion of the business, changes in the form of business organization, and proposed transactions expected to occur. Pro forma financial information is not a forecast or projection; it is a restatement of historical data with specific adjustments.
Under AT-C Section 310, a practitioner may examine or review pro forma financial information. The practitioner's objective is to obtain appropriate evidence to express an opinion (in an examination) or a conclusion (in a review) about whether management's assumptions provide a reasonable basis for presenting the significant effects of the transaction or event, whether the pro forma adjustments give appropriate effect to those assumptions, and whether the pro forma column reflects the proper application of those adjustments to the historical financial statements.
Prerequisites for an Engagement
Requirements for the Historical Financial Statements
The practitioner may report on pro forma financial information only if the historical financial statements on which the pro forma information is based have been audited or reviewed. If the historical statements have been audited, the practitioner may examine or review the pro forma information. If the historical statements have been reviewed but not audited, the practitioner may only review the pro forma information. The level of assurance on the pro forma information cannot exceed the level of assurance on the underlying historical statements.
Assessing the Appropriateness of Assumptions
The practitioner evaluates whether management's assumptions are reasonable and provide a basis for the pro forma adjustments. The adjustments must be directly attributable to the transaction or event, factually supportable, and, for pro forma statements of income, expected to have a continuing impact. Adjustments that are not expected to have a continuing impact should be disclosed but not included in the pro forma income statement.
Examination vs. Review Engagements
Examination Engagement
In an examination, the practitioner obtains reasonable assurance and expresses an opinion on the pro forma financial information. Procedures include obtaining an understanding of the transaction or event, reading the pro forma information, obtaining evidence about the underlying financial statements, evaluating the assumptions and adjustments, and performing other procedures the practitioner considers necessary.
Review Engagement
In a review, the practitioner obtains limited assurance and expresses a conclusion in the form of negative assurance. The practitioner's procedures are limited primarily to inquiries and analytical procedures. A review provides a lower level of assurance than an examination but is still a meaningful level of service.
Reporting
The practitioner's report on pro forma financial information includes an identification of the pro forma financial information, a statement that the examination or review was conducted in accordance with attestation standards, a reference to the financial statements from which the historical financial information was derived and the type of report issued on those statements, and an opinion (examination) or conclusion (review) on the pro forma information. The report should also note that pro forma financial information is not necessarily indicative of what would have occurred had the event taken place on the date specified.
CPA Exam Tips
- Pro forma financial information is based on historical data with adjustments for specific events, not on forecasts or projections.
- The level of assurance on pro forma information cannot exceed the assurance on the underlying historical financial statements.
- Pro forma adjustments must be directly attributable, factually supportable, and have a continuing impact (for income statement purposes).
- The practitioner's report must state that pro forma information is not necessarily indicative of what would have occurred or will occur.
- Examination provides reasonable assurance (opinion); review provides limited assurance (negative assurance).
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