What is the difference between forecast and projection in audit?

Understanding the Distinction between Forecast and Projection in Auditing

In the realm of auditing, it is crucial to differentiate between forecasts and projections. While both terms involve predicting future events, they differ in their nature and audit considerations.

Forecast vs. Projection

• Forecast: A forecast relies on historical data and statistical analysis to estimate future outcomes. It typically assumes that past trends and patterns will continue.
• Projection: A projection, in contrast, employs hypothetical scenarios and assumptions to envision potential future outcomes. It is speculative in nature and not necessarily based on historical data.

Audit Implications

The distinction between forecast and projection has significant audit implications:

1. Use Clause:

• Forecasts may include a general use clause, indicating that the forecast is not intended for specific purposes.
• Projections, on the other hand, often carry a restricted use clause, limiting their application to certain specified purposes.

2. Audit Treatment:

• When a forecast has a general use clause, auditors may not need to express an opinion on its accuracy.
• Projections, due to their inherent speculation, require careful scrutiny and may warrant an auditor’s opinion on their reasonableness.

Specific Considerations for Projections

Due to their speculative nature, projections pose unique challenges for auditors:

• Assumptions and Scenarios: Auditors must carefully evaluate the underlying assumptions and scenarios used in the projection.
• Justification and Support: Projectors should provide sufficient justification and support for their assumptions and methodologies.
• Disclosure and Sensitivity Analysis: Auditors should ensure that adequate disclosure is included in the projection, including sensitivity analysis to demonstrate how changes in assumptions affect the results.

Conclusion

The distinction between forecast and projection is fundamental in auditing. Forecasts, based on historical data, require less scrutiny, while projections, due to their inherent speculation, demand careful examination and consideration of their use limitations. By understanding this distinction, auditors can effectively assess and provide assurance on financial information that includes either forecast or projection elements.