When a company raises money from the public, or changes shape through an acquisition, investors want to see what the business would have looked like if the change had already happened. That is pro forma financial information. Because it is hypothetical, it needs care, and accountants are asked to report on how it was put together.
The same company will use a team of advisers to prepare for a stock market listing, and the reporting accountant is one of them.
This topic covers International Standard on Assurance Engagements (ISAE) 3420 on reports on the compilation of pro forma financial information in a prospectus. The reports a reporting accountant produces for a listing. The syllabus links the second part to the duties and responsibilities of a reporting accountant in raising capital.
In 30 seconds
Pro forma financial information illustrates the effect of a significant event or transaction on a company’s unadjusted financial information, as if it had happened at an earlier date. ISAE 3420 covers an engagement to report on the compilation of such information in a prospectus. The practitioner gives reasonable assurance on the client’s compilation. The client, not the practitioner, compiles the information.
The objective is to judge whether the criteria the client used give a reasonable basis for showing the significant effects directly attributable to the event, and to get evidence that the pro forma adjustments give appropriate effect to those criteria and that the pro forma column applies them properly to the unadjusted information. The practitioner also evaluates the overall presentation.
The work is not an audit or review of the underlying information, and the practitioner does not update earlier reports on it. The reporting accountant, who may be a team from the auditor’s firm, produces a long form report, a short form report, a report on the adequacy of financial reporting systems and a working capital report.
Why pro forma information is used
As capital markets have become global, financial information in capital market transactions must be understandable across borders. Users also need assurance on how it is produced. In response, the International Auditing and Assurance Standards Board (IAASB) issued ISAE 3420, Assurance engagements to report on the compilation of pro forma financial information included in a prospectus, in December 2011.
Pro forma financial information is information that shows the effect of a significant event or transaction on unadjusted financial information, as if the event had happened or the transaction had been done at an earlier date. Typical examples are an acquisition, a disposal or a share issue. The information is for illustration only. It does not show what actually happened.
ISAE 3420: the nature of the engagement
- The practitioner gives reasonable assurance on the responsible party’s compilation of the pro forma information in a prospectus. The responsible party is the client.
- The practitioner has no responsibility to compile the pro forma information. That rests with the client.
- The engagement does not require the practitioner to update or reissue any report or opinion on historical financial information used in the compilation, or to audit or review that information.
Objective
The objective is to assess whether the applicable criteria that the client used in compiling the pro forma information give a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to get sufficient appropriate evidence about whether:
- the related pro forma adjustments give appropriate effect to those criteria; and
- the resulting pro forma column reflects the proper application of those adjustments to the unadjusted financial information.
The engagement also involves evaluating the overall presentation of the pro forma information.
The illustrative assurance report
The syllabus gives an illustrative report headed “Independent practitioner’s assurance report on the compilation of pro forma financial information included in a prospectus”. Its parts are as follows.
- Introduction. The practitioner has completed an assurance engagement to report on the compilation of pro forma information of the company by the responsible party. It names the statements, such as a pro forma net asset statement, income statement and cash flow statement, with their dates and the pages in the prospectus. It gives the criteria, such as those in securities regulations and described in a note.
- Purpose. The information was compiled to illustrate the impact of the event or transaction as if it had taken place at a given date. The underlying information was extracted by the responsible party from the company’s financial statements, on which an audit report, a review report or no report has been published.
- Responsible party’s responsibility. To compile the information on the basis of the criteria.
- Practitioner’s responsibilities. To express an opinion, as required by the securities regulation, on whether the information has been compiled, in all material respects, on the basis of the criteria. The engagement follows ISAE 3420. The practitioner is not responsible for updating or reissuing reports on the historical information, and has not audited or reviewed it.
- The purpose of pro forma information and a warning. It is solely to illustrate the impact of an event on unadjusted information as if the event had occurred earlier, so no assurance is given that the actual outcome would have been as presented.
- Nature of the work. Procedures to assess the criteria and to get evidence on the adjustments and their application, chosen by the practitioner’s judgement, and an evaluation of the overall presentation.
- Opinion. The pro forma information has been compiled, in all material respects, on the basis of the criteria.
- Other legal and regulatory requirements, if any, and the signature, date and address.
Reporting accountants
A company preparing for a listing on the Nigerian Stock Exchange (NSE) or the NASD needs several advisers. The accountants who give assurance on pro forma information are only one group. Others include:
- underwriters;
- stockbrokers;
- solicitors;
- the issuing house;
- financial advisers; and
- reporting accountants.
Note. The exam refers to the NSE and the NASD. The NSE has since been restructured as the Nigerian Exchange Group, and the NASD market has a new name. Use those names in the exam.
The reporting accountant is different from the company’s auditors, but can be a team from the same firm. The reporting accountant produces several reports for the company’s nominated adviser, to help in preparing for a new listing.
| Report | Description |
|---|---|
| Long form report | A detailed financial due diligence review. It covers the company’s history, the nature of the business, an assessment of key employees, accounting systems and internal controls, an analysis of the last three years’ financial statements and cash flows, key accounting policies, taxation issues and any legal issues such as litigation |
| Short form report | Focuses on the company’s results for the past three years |
| Adequacy of financial reporting systems report | Comments on the financial reporting systems and controls, such as the information technology (IT) environment, accounting procedures and the corporate governance structure |
| Working capital report | A review of the basis of the company’s forecast working capital, including sensitivity analysis |
Some of these reports are for the use of the company’s advisers and are not published. The short form report and the pro forma report are the ones that usually appear in the prospectus.
Background: That last point reflects usual market practice, in which the long form report is a confidential due diligence document, and the short form report and pro forma report are published for investors. Check the listing rules of the exchange concerned.
The rules in more depth
Why reasonable assurance is possible on a hypothetical figure
The practitioner does not say that the pro forma figures are right. The practitioner says that the client has compiled them properly from stated criteria and the underlying information. That is a matter of fact that can be tested, so reasonable assurance is possible.
Why the practitioner does not audit the underlying information
The underlying statements may already have been audited or reviewed, or not. The report says which. The engagement is about the compilation, and reopening the historical numbers would make it a different, larger engagement.
Reporting accountant and auditor
A firm may act as both. The independence points in the earlier topics apply, and the firm should check that its roles do not create a self-review threat, especially where it reviews systems it later audits.
Worked example: a pro forma net asset statement
Scenario. Orchid Holdings Plc has unadjusted net assets of ₦800 million at 31 December 2025, taken from its audited statements. It plans a rights issue raising ₦300 million, with issue costs of ₦10 million, and then to buy a business for ₦250 million in cash. The business has net assets at fair value of ₦200 million, so goodwill would be ₦50 million. The prospectus includes a pro forma net asset statement as if both events happened at 31 December 2025.
The adjustments. The rights issue adds ₦300 million of cash and costs ₦10 million, a net increase of ₦290 million. The acquisition reduces cash by ₦250 million and adds ₦200 million of net assets and ₦50 million of goodwill, so net assets change by −₦250 million + ₦200 million + ₦50 million = ₦0.
The pro forma column. Pro forma net assets are ₦800 million + ₦290 million + ₦0 = ₦1,090 million.
What the practitioner tests. First, the criteria: are they in the securities regulation and described in a note, and do they limit adjustments to effects directly attributable to the two events? Second, each adjustment: agree the issue proceeds and costs to the rights issue terms and the price and fair values to the acquisition agreement, and check that the goodwill is the difference.
Third, the unadjusted column: agree it to the audited statements. This is a check on the extraction, not a re-audit. Fourth, the column: re-add the figures and check that each adjustment is applied once. Fifth, the presentation, including the notes and the wording that the information is for illustration only.
The practitioner issues a reasonable assurance opinion that the information has been compiled, in all material respects, on the basis of the criteria.
How to score full marks
- Say what the practitioner does not do. No compiling, no audit of the historical information, no updating of earlier reports.
- Give the two evidence questions. Do the adjustments give effect to the criteria, and does the column apply them properly?
- State the level of assurance. Reasonable, in a report with an opinion.
- Include the warning. The information illustrates and does not show what actually happened.
- For reporting accountants, name all four reports and what each covers.
Common mistakes in the exam
- Saying that the practitioner compiles the pro forma information.
- Saying the practitioner audits the underlying financial information.
- Giving limited assurance. ISAE 3420 gives reasonable assurance.
- Confusing pro forma information with a forecast. Pro forma shows a past position as if an event had happened, not the future.
- Forgetting the working capital report, or its sensitivity analysis.
- Saying the reporting accountant must be a different firm from the auditor. It can be the same firm, with a different team.
Quick revision
- Pro forma: effect of an event on unadjusted information as if it had happened earlier.
- ISAE 3420: reasonable assurance on the client’s compilation, in a prospectus.
- Evidence: adjustments give effect to criteria, column applies them properly. Evaluate presentation.
- No audit or review of the underlying information and no updating of earlier reports.
- Reporting accountant: long form, short form, adequacy of financial reporting systems, working capital.
- Other advisers: underwriters, stockbrokers, solicitors, issuing house, financial advisers.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. ISAE 3420 deals with:
- Prospective financial information
- Reports on the compilation of pro forma financial information in a prospectus
- Forensic audits
- Interim reviews
Show the answer
B. It was issued in December 2011.
Question 2. Who compiles the pro forma financial information?
- The practitioner
- The responsible party, the client
- The regulator
- The underwriter
Show the answer
B. The practitioner has no responsibility to compile it.
Question 3. The assurance given under ISAE 3420 is:
- Limited
- Reasonable
- None
- Absolute
Show the answer
B. The practitioner gives reasonable assurance on the compilation.
Question 4. Under ISAE 3420, the practitioner:
- Audits the underlying historical information
- Does not audit or review the underlying financial information
- Reissues earlier reports
- Prepares the prospectus
Show the answer
B. The engagement does not involve an audit or review of the underlying information.
Question 5. The purpose of pro forma information in a prospectus is to:
- Forecast future profit
- Illustrate the impact of an event as if it had occurred earlier
- Replace the audited statements
- Show tax liabilities
Show the answer
B. The report warns that no assurance is given that the actual outcome would have been as presented.
Question 6. Which is NOT an adviser normally involved in a listing?
- Underwriters
- Solicitors
- The issuing house
- The company’s competitors
Show the answer
D. Advisers include underwriters, stockbrokers, solicitors, the issuing house, financial advisers and reporting accountants.
Question 7. The reporting accountant:
- Must be a different firm from the auditor
- Is different from the auditors but can be a team from the same firm
- Is the company’s director
- Is the regulator
Show the answer
B. The reporting accountant may be a different team in the auditor’s firm.
Question 8. A detailed financial due diligence review of a company seeking a listing is the:
- Short form report
- Long form report
- Working capital report
- Pro forma report
Show the answer
B. The long form report covers history, business, key employees, systems, three-year analysis, policies, tax and legal issues.
Question 9. The working capital report includes:
- A review of the basis of the forecast working capital, with sensitivity analysis
- A tax return
- A dividend plan
- A staff list
Show the answer
A. It reviews the basis of the company’s forecast working capital.
Question 10. The adequacy of financial reporting systems report comments on:
- The IT environment, accounting procedures and corporate governance structure
- Only the share price
- Only the audit fee
- Nothing
Show the answer
A. It covers the systems and controls that produce the company’s financial reporting.
Written questions
Question 11 (10 marks). Explain the nature and objective of an engagement under ISAE 3420, including what the practitioner is not required to do.
Question 12 (20 marks). (a) Explain what pro forma financial information is and why it is included in a prospectus. (4 marks) (b) Describe the main elements of the independent practitioner’s assurance report on the compilation of pro forma information. (8 marks) (c) Name the advisers a company needs when preparing for a listing, and describe the reports produced by the reporting accountant. (8 marks)
Question 13 (10 marks). Cedar Foods Plc intends to list on the stock exchange. The directors ask your firm to act as reporting accountant, and some directors say the firm cannot do so because it is also the auditor. Advise them, and describe the reports your firm would produce.
Model answers
Show the model answer to Question 11
Nature (4 marks). The practitioner gives reasonable assurance on the client’s compilation of pro forma information in a prospectus. (2) The practitioner has no responsibility to compile it, because that rests with the responsible party. (2)
Objective (4 marks). To assess whether the criteria used by the client give a reasonable basis for presenting the significant effects directly attributable to the event or transaction. (2) To get sufficient appropriate evidence that the adjustments give appropriate effect to the criteria and that the pro forma column applies them properly to the unadjusted information, and to evaluate the overall presentation. (2)
Not required (2 marks). The practitioner need not update or reissue reports on the historical information used, and does not audit or review it. (2)
Show the model answer to Question 12
(a) Pro forma information (4 marks). It shows the effect of a significant event or transaction on unadjusted financial information as if it had occurred at an earlier date. (2) It is included so that investors can see the impact of events such as an acquisition or a share issue. An assurance report gives users confidence in how it was produced. (2)
(b) Report elements (8 marks). Identification of the pro forma information, its statements, dates and the criteria used. (1.5) The purpose, and the source of the underlying information and whether it was audited, reviewed or neither. (1.5) The responsible party’s responsibility to compile on the basis of the criteria. (1) The practitioner’s responsibility to express an opinion, and the use of ISAE 3420.
(1.5) A statement that the practitioner is not responsible for updating earlier reports and has not audited or reviewed the underlying information. (1) The warning that pro forma information only illustrates, and no assurance is given that the actual outcome would have been as presented. (1) The nature of the work and the evaluation of presentation.
The opinion that the information has been compiled, in all material respects, on the basis of the criteria. (0.5)
(c) Advisers and reports (8 marks). Advisers: underwriters, stockbrokers, solicitors, the issuing house, financial advisers and reporting accountants. (2) The long form report is a detailed financial due diligence review covering history, the business, key employees, systems and controls, a three-year analysis, key policies, tax and legal issues. (2) The short form report focuses on the last three years’ results.
(1) The report on the adequacy of financial reporting systems comments on the IT environment, accounting procedures and governance structure. (1.5) The working capital report reviews the basis of the forecast working capital, including sensitivity analysis. (1.5)
Show the model answer to Question 13
The advice (3 marks). The reporting accountant is different from the company’s auditors, but can be a team from the same firm. (1.5) The firm should check its ethical position, including independence and any self-review threat, and use separate teams. (1.5)
The reports (7 marks). A long form report: a detailed financial due diligence review covering history, nature of the business, key employees, accounting systems and internal controls, an analysis of the last three years’ statements and cash flows, key accounting policies, taxation and legal issues. (2.5) A short form report focusing on the results for the past three years.
(1) A report on the adequacy of the financial reporting systems, commenting on IT, accounting procedures and corporate governance. (1.5) A working capital report reviewing the basis of the forecast working capital, with sensitivity analysis. (1.5) If the prospectus includes pro forma information, an ISAE 3420 assurance report on its compilation. (0.5)
Pathfinder on pro forma information and reporting accountants
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
No written question in these two diets tests ISAE 3420 or the reporting accountant on its own. The syllabus links the topic to the duties of a reporting accountant in raising capital, so expect it in a case about a listing or a share issue.
Revise first: Reporting accountants
Section A is a single compulsory case with several requirements. Practise stating what the practitioner does and does not do in an ISAE 3420 engagement before you attempt it.
Revise first: How to score full marks
Source: ICAN Pathfinder, Advanced Audit, Assurance and Forensics. Diets covered: May Diet, 2026 and November Diet, 2025.
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