Orbit Technologies Ltd. is preparing prospective financial information for presentation to a potential investor.

Management has prepared the following information:

Expected sales from existing customers based on historical retention patterns;
Expected wage increases based on an already signed employment agreement;
A new manufacturing facility expected to commence operations six months from the date of the information; and
An assumption that the company will receive a government subsidy for the new facility, although the subsidy has not yet been approved and management has merely submitted an application.

Management calls the entire information a “forecast”, stating that all assumptions represent management’s expectations.

The auditor is examining the prospective financial information under SAE 3400.

Which ONE of the following is most appropriate?

A. The subsidy assumption cannot automatically be treated as a best-estimate assumption merely because management expects the subsidy; the auditor must evaluate whether the nature of the assumption makes it hypothetical and whether its use is consistent with the purpose of the prospective information.

B. The entire prospective financial information constitutes a forecast because management has represented that each assumption reflects its expectations, and the auditor is not required to distinguish between best-estimate and hypothetical assumptions.

C. The information necessarily constitutes a projection because it contains at least one assumption relating to an event that is uncertain, regardless of whether management expects the event to occur.

D. The subsidy assumption must be rejected outright because SAE 3400 permits hypothetical assumptions only for start-up entities or entities proposing a fundamental change in the nature of their operations.