Nature and purpose of prospective financial information

In this lesson

1. 0:00 Advanced Audit and Assurance lesson overview
2. 0:38 What is prospective financial information
3. 1:10 Forecast versus projection explained
4. 2:10 Hypothetical illustrations and targets
5. 2:38 Profit forecast key components
6. 3:54 Cash flow forecast essentials
7. 5:01 Internal and external uses of PFI
8. 5:43 Tailoring forecasts for intended users

About this lesson

The video explains the critical distinction between forecasts (based on best estimate assumptions, typically under one year) and projections (based on hypothetical assumptions, usually 2–5 years), and introduces related concepts like targets and hypothetical illustrations. You'll discover why this matters: prospective information is used internally for investment decisions and acquisitions, and externally in share prospectuses and loan applications, so auditors must know how to evaluate its reliability and relevance to intended users. The lesson then breaks down the practical differences between profit forecasts and cash flow forecasts—two types you'll encounter in exam questions. A profit forecast focuses on revenue and expenses on an accruals basis, while a cash flow forecast tracks actual cash in and out, including loan receipts, capital expenditure, and precise timing. Understanding these distinctions is essential for assessing prospective information in audit engagements and recognising what assumptions and adjustments belong in each type of forecast.

Duration: 6m