(b) Examination procedures
Up to 1 mark for each procedure explained. In addition, ½ mark for relevant calculations, e.g. trend
analysis, up to a maximum of 2 marks:

General procedures:
– Identity of the preparer of the operating profit forecast, and assess their competence
– Understanding the procedures/controls which have been followed in the preparation of the forecast
– Confirm the consistency of accounting policies applied
– Confirm that the assumptions underpinning the forecast are in line with knowledge of the business obtained from performing the company’s audit
– Re-cast the forecast to ensure it is arithmetically correct

Specific procedures:
– Ask management to prepare a more detailed profit forecast in an appropriate format and to provide forecast statement of financial position and statement of cash flows
– Recalculate the gross profit margins and compare with gross profit margins from audited financial statements
– Obtain a break down showing the components of cost of sales and other expenses; perform analytical review and discuss results
– Assess whether there are any missing categories of expenditure
– For revenue, consider whether the forecast appears overly optimistic – allow credit for calculation of appropriate trends from the forecast
– Compare revenue forecast with revenue from prior years’ audited financial statements. Investigate any unusual trends through discussion with management
– Review any marketing plans and discuss with an appropriate senior member of staff, for example, the sales director
– Review design costs, discuss with management and assess if such an increase in revenue can be achieved with such a small increase in design costs
– Confirm costs to appropriate supporting documentation, e.g. staff costs to human resources projected costs, marketing costs to advertising budgets
– Obtain and review the cash flow forecast prepared for the same period as the operating profit forecast
– Discuss with management the rationale for using 30% of revenue as a basis for determining the amount of other expenses

Maximum marks 9