## **Learning Outcomes**

After reading this article, you should be able to explain how a senior financial advisor evaluates financial information, challenges fundamental assumptions, and applies professional scepticism in strategic decision-making. You will recognise the importance of professional skills such as analysis, judgement, and scepticism in meeting stakeholder needs and supporting high-quality financial management advice.

## **ACCA Advanced Financial Management (AFM) Syllabus**

For ACCA Advanced Financial Management (AFM), you are required to understand the professional responsibilities of a senior financial advisor regarding information quality, challenging assumptions, and exercising professional scepticism. Revision should focus on:

- The role of the senior financial executive in reviewing and questioning management information and assumptions
- Identifying, evaluating, and justifying key business assumptions in financial analyses
- Applying professional scepticism—investigating, questioning, and challenging data, opinions, and estimates
- Balancing organisational goals, stakeholder interests, and ethical standards when evaluating financial information
- Demonstrating and applying professional analysis, evaluation, and judgement skills

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which professional skill is most relevant when critically appraising the management’s assumptions in a financial model?
2. List two types of information a senior financial advisor should seek to verify when reviewing a forecast prepared by management.
3. True or false? It is acceptable for an advisor to use information without challenge if it has been supplied by a reputable senior manager.
4. Briefly explain what professional scepticism means in the context of evaluating project appraisals.

## **Introduction**

Senior financial advisors must ensure that strategic financial decisions are based on reliable information and robust analysis. This duty involves more than simply accepting figures and reports provided by management or other departments. Financial information, forecasts, and business models often depend on material assumptions, subjective judgements, and estimations that may not always stand up to scrutiny. The advisor’s proficiency lies in evaluating the quality of this information, identifying key assumptions, and questioning both the data and the reasoning supporting recommendations. Exercising professional scepticism is essential—actively scrutinising, seeking evidence, and maintaining an enquiring mindset to protect organisational value, support sound decision-making, and uphold ethical standards.

## **INFORMATION AND ASSUMPTIONS—WHY THEY MATTER**

Senior advisors rarely build business cases from raw data alone. Instead, financial appraisals, forecasts, and strategic plans depend on information supplied by management, operational teams, or third parties. This information contains explicit figures and projections but also relies on implicit or stated assumptions such as sales growth rates, price levels, market share expectations, or cost savings from projects.

If these assumptions are weak, unsupported, or overly optimistic, any decisions based on them risk financial loss, regulatory issues, or reputational damage. Therefore, the advisor must not only verify the arithmetic accuracy but also review the relevance, credibility, and justification for every key assumption used.

> **Key Term: assumption**
> A statement or estimate accepted as true for the purposes of modelling or analysis, which may significantly influence forecasts or recommendations.
>
> **Key Term: information quality**
> The degree to which financial and non-financial data is accurate, reliable, complete, timely, and suitable for making strategic decisions.

### Information Sources and Verification

A senior advisor must consider whether information is complete, sourced from competent parties, and relevant for current strategic decisions. They should review:

- The relevance of historic data versus current market trends
- Whether data has been independently verified, audited, or cross-checked
- The consistency of data with known facts or external benchmarks
- Any gaps, missing information, or unexplained adjustments

### Questioning and Justifying Assumptions

Key assumptions supporting business projections must be critically evaluated. Advisors should:

- Determine how key figures (e.g., sales growth, cost reductions) have been estimated
- Request supporting evidence or justification for management’s assumptions
- Assess the risk of bias, undue optimism, or errors in estimates
- Model the effects of changes to critical assumptions (sensitivity analysis)

### **Worked Example 1.1**

An advisor is reviewing a cash flow forecast for a planned factory investment. The project team assumes 8% annual sales growth for five years, citing “industry optimism” but provides no source or analysis.

**Question:** How should the advisor respond?

> **Answer:**
> The advisor should not accept the growth rate at face value. They must request evidence supporting the 8% estimate—such as market studies, competitor data, or historic company performance. Sensitivity analysis should also be used to test the effect if growth is lower. Without valid justification, board approval should not be recommended.

## **PROFESSIONAL SCEPTICISM—WHAT IT MEANS IN PRACTICE**

Professional scepticism is a mindset of ongoing questioning and critical assessment. It requires the advisor to avoid passive acceptance and actively identify gaps, inconsistencies, or risks in both information and reasoning.

> **Key Term: professional scepticism**
> An attitude involving a questioning mind and a critical assessment of information, assumptions, and conclusions; essential to avoid accepting assertions without adequate evidence.

Professional scepticism involves:

- Being alert to signs of bias, selective evidence, or overconfidence in forecasts
- Challenging vague statements (“management expects improvement”) lacking data
- Requesting corroborating evidence or independent analyses
- Considering conflicting information or alternative explanations
- Ensuring all key assertions are supported by sufficient, appropriate evidence

### **Worked Example 1.2**

The CFO claims that “delays to a product launch will not affect annual targets,” but no revised sales plan is shown.

**Question:** What should the financial advisor do?

> **Answer:**
> The advisor should ask for clarification on how the previous targets can be met despite delays. They should request a revised sales forecast showing timing, product pipeline impacts, and mitigating actions. Accepting the original forecast without adjustment would show insufficient scepticism and could mislead the board.

### When and How to Challenge

Advisors should distinguish between well-supported estimates and those lacking a sound basis. If assumptions are based on management optimism or unchecked external forecasts, these must be flagged. The advisor must be prepared to challenge even senior personnel if evidence is lacking. If evidence cannot be obtained, this should be documented and reported in any recommendation.

### **Exam Warning**

> Examiners expect you to clearly articulate where information is incomplete, questionable, or unsupported—even if the question scenario comes from a trusted source. Do not simply reiterate figures. Demonstrate scepticism by stating your assumptions, requesting evidence, and indicating where further information is needed before making a final recommendation.

## **ANALYSIS, JUDGEMENT, AND STAKEHOLDER IMPACTS**

Professional scepticism also requires an understanding of broader stakeholder interests and the implications of advice. When forming judgements, the advisor must balance:

- The organisation’s strategic objectives and risk appetite
- The impact on shareholders, employees, customers, and regulators
- Ethical and reputational considerations
- The potential for management bias or conflicting incentives

In all cases, conclusions and recommendations should only be made once the advisor is satisfied that information and assumptions are robust, documented, and fit for the intended decision.

### **Worked Example 1.3**

A manager presents a new financing plan projecting cost savings from a supplier change, but the advisor notices the supplier has no track record.

**Question:** How should the advisor proceed?

> **Answer:**
> The advisor should challenge the assumption that cost savings are guaranteed by requesting supplier references, evidence of service quality, and analysing the risks of disruption. They should model the effects if anticipated savings do not occur. Recommendations must reflect these checks and express any residual uncertainties to decision-makers.

## **Summary**

A senior financial advisor’s responsibility is to ensure all financial decisions are grounded in reliable data, justified assumptions, and critical analysis. This requires actively verifying information, scrutinising assumptions, and applying professional scepticism in every step of the decision process. Professional skills in analysis, judgement, and ethical conduct are indispensable. High-quality advice depends not on producing calculations alone but on questioning and validating the inputs and reasoning behind any recommendation.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The necessity for senior advisors to rigorously verify information and identify fundamental assumptions
- How to question and justify business assumptions in financial analysis
- The meaning and practical application of professional scepticism in advising management and boards
- The importance of documenting and reporting doubts about unsupported or risky information
- The role of professional skills—such as analysis, judgement, and scepticism—in safeguarding quality advice and supporting sound decisions

## **Key Terms and Concepts**

- assumption
- information quality
- professional scepticism

Role of the senior financial advisor - Information, assumptions, and professional scepticism