CBE-Style Question Practice for F8

Introduction
This collection of questions is designed to allow you to practice answering questions in an environment similar
to that of the live exams, even when you cannot access ACCA’s online support resources.
1. This interactive PDF will allow you to answer Objective Test (OT) Case questions similar to the styles that
appear in section A in the live exam.
2. Questions in the style of the constructed response (CR) questions that appear in section B in the live exam
can be accessed in the accompanying spreadsheet.
3. These documents can be saved and submitted for marking.
4. The questions are organised into broad topic areas, as indicated on the Contents page.

Some important points to note are as follows:

• These documents cannot replicate the exact functionality of the live exam environment but will provide a
similar experience
• The questions are presented in a way which closely mirrors, but is not the same as the live exam
• If you have not done so already, please refer to the full specimen exam and other resources available at
www.accaglobal.com/uk/en/student/exam-support-resources.html
• The full specimen exam has been prepared by ACCA’s examining team and reflects the live exam experience
in terms of its structure, range of questions and functionality, and these resources should be a key part of your
preparation for the exam.

The content for this F8 question pack has been provided by BPP Learning Media and may feature in the
BPP Q&A banks.
Contents
TOPICS OT/OT CASE CONSTRUCTED PAGE
QUESTIONS RESPONSE QUESTIONS*
1 Audit and assurance 1 3

2 Governance 2-6 4-5

3 Ethics 7-11 6-7

4 Audit risk 12-13 8

5 Audit planning 14-16 9

6 Internal control systems 17-26 27 10-14

7 Audit evidence (1) 28 15

8 Audit evidence (2) 29-33 34-36 16-18

9 Audit evidence (3) 37-38 19

10 Audit completion 40-49 39 20-24

*See related spreadsheet file for constructed response questions

Topic 1 – Audit and assurance

QUESTION 1
*See related spreadsheet file for constructed response questions

3
Topic 2 – Governance

THE FOLLOWING SCENARIO RELATES TO QUESTIONS 2-6 18 mins

You are an audit manager of Satsuma & Co and have been assigned to the audit of Tangerine Tech Co (Tangerine),
a company which is planning to list on a stock exchange within six months. The listing rules of the stock exchange
require compliance with corporate governance principles, and the directors are unsure whether they are following
best practice in relation to this. They have asked the audit engagement partner for their view on this matter.
Tangerine’s board is comprised of six executive directors, a non-executive chairman and three other non-executive
directors (NEDs). The chairman and one of the NEDS are former directors of Tangerine and on reaching retirement
age were asked to take on non-executive roles. The company has established an audit committee, and all NEDs
are members including the chairman who chairs the committee. All four members of the audit committee were
previously involved in sales or production related roles.
All of the directors have been members of the board for at least four years. As the chairman does not have an
executive role, he has sole responsibility for liaising with the shareholders and answering their questions. The
company has not established an internal audit function to monitor internal controls.

QUESTION 2
Which of the following features are corporate governance weaknesses which Tangerine Co would need to
address prior to their listing?
(1) The chairman has sole responsibility for liaising with shareholders
(2) The company has not established an internal audit function
(3) The chairman and one of the NEDs are former executive directors of Tangerine Co

1 and 2 only

1 and 3 only
2 and 3 only
1, 2 and 3

QUESTION 3
The audit engagement partner’s review has identified the following additional corporate governance weaknesses:
(1) All the directors have been members of the board for at least four years
(2) The board is comprised of six executive and four non-executive directors
Which of the following would the engagement partner recommend to address these weaknesses to ensure
compliance with corporate governance principles?
Weakness 1 Weakness 2

The directors should be subject to At least 50% of the board must be
re-election at regular intervals not comprised of non-executive directors
exceeding three years

The directors must be re-appointed At least 75% of the board must be
annually by the chairman comprised of executive directors.

The directors should be subject to At least 75% of the board must be
re-election at regular intervals not comprised of executive directors
exceeding three years
The directors must be re-appointed At least 50% of the board must be
annually by the chairman comprised of non-executive directors

4
QUESTION 4
The engagement partner has assessed the make-up of the audit committee.
Which of the following would be valid conclusions from this assessment?
(1) It is acceptable for the chairman to chair the audit committee
(2) A new member of the audit committee with relevant financial experience must be recruited

1 only
2 only
1 and 2
Neither 1 nor 2

QUESTION 5
The directors are aware that in accordance with corporate governance provisions they have responsibilities for
internal control but are unclear as to the extent of these responsibilities.
Which of the following correctly describes their responsibilities?
To review internal To report on internal
controls annually controls to shareholders
No No
Yes No
No Yes
Yes Yes

QUESTION 6
The board of Tangerine is considering establishing an internal audit function.
Which of the following factors would be relevant in making this decision?
(1) It would help the audit committee to discharge its responsibilities for monitoring internal control
(2) The board would no longer need to take responsibility for the prevention and detection of fraud and error
(3) The costs of establishing an internal audit function should be considered against the benefits gained

1 and 2 only

1 and 3 only
2 and 3 only
1, 2 and 3

(TOTAL: 10 marks)

5
Topic 3 – Ethics

THE FOLLOWING SCENARIO RELATES TO QUESTIONS 7-11

Stark 18 mins
You are an audit manager of Ali & Co and have just been assigned the audit of Stark Co (Stark). Stark, a listed
company, provides investment advice to individuals, and is regulated by the relevant financial conduct authority.
Mr Day, a partner in Ali & Co, has been the audit engagement partner for Stark for the previous nine years and has
excellent knowledge of the client. Mr Day has informed you that he would like his daughter Zoe to be part of the
audit team this year; Zoe is currently studying for her first set of fundamentals papers for her ACCA qualification.
In an initial meeting with the finance director of Stark, you learn that the audit team will not be entertained on
Stark’s yacht this year, instead, he has arranged a balloon flight costing less than one-tenth of the expense of using
the yacht and hopes this will be acceptable.
Ali & Co has always carried out tax advisory work for Stark. The tax advisory services do not have an impact on the
figures reported in the financial statements. The finance director has stated that he feels strongly that the firm that
offers taxation services this year should charge a fee which is based on a percentage of tax saved. He also trusts
that your firm will accept a fixed fee for representing Stark in a dispute regarding the amount of sales tax payable
to the taxation authorities.

QUESTION 7
From a review of the information above, your audit assistant has highlighted some of the potential risks to
independence in respect of the audit of Stark.
(1) Mr Day would like his daughter Zoe to be part of the audit team
(2) Audit team to be offered a balloon flight
(3) Tax fee to be based on a percentage of tax saved
(4) Firm to represent Stark in a dispute with the tax authorities
Which of the following options best identifies the valid threats to independence and allocates the threat to
the most appropriate category?
Advocacy Intimidation Self-interest
(3) and (4) (3) only (1) and (2)
(4) only (3) only (2) and (3)
(3) only (3) and (4) (2)
(3) and (4) (1) and (4) (1) and (2)

QUESTION 8
In relation to the audit team being offered a balloon ride:
Which of the following actions should be taken to ensure the firm complies with ACCA’s Code of Ethics
and Conduct?

The gift may be accepted as Stark has taken appropriate measures to reduce the value of the gift compared to
previous years.
The value of the gift should be assessed to determine whether it is of material value to the financial statements.
The gift should only be accepted if its value is trivial and inconsequential to the recipients.
Only the audit partner and audit manager should accept the gift.

6
QUESTION 9
In relation to the audit engagement partner holding the role for nine years:
Which of the following safeguards should be implemented in order to comply with ACCA’s Code of Ethics
and Conduct?
An independent review partner should be appointed to the audit.

The audit engagement partner should be removed from the audit team but may serve as a quality
control reviewer.
Ali & Co should not audit Stark for a two year period.
The audit engagement partner should be removed from the audit team.

QUESTION 10
Mr Day’s daughter, Zoe, is currently learning about International Standards on Auditing (ISAs) in her studies. She
has asked you for clarification of the following.
Which is the correct order of the following stages involved in the development of an ISA?
(1) Distribution of exposure draft for public comment
(2) Consideration of comments received from the public
(3) Approval by IAASB members
(4) Establishment of task force to develop draft standard
(5) Discussion of proposed standard at a public meeting

1, 5, 4, 3, 2
2, 4, 1, 3, 5
4, 5, 1, 2, 3
5, 4, 2, 1, 3

QUESTION 11
Zoe is also concerned that Ali & Co might breach confidentiality were the audit firm to represent Stark in its dispute
with the tax authorities.
Which of the following statements best reflects the auditor’s duty of confidentiality?

Auditors must never, under any circumstances, disclose any matters of which they become aware during
the course of the audit to third parties, without the permission of the client.

Auditors may disclose any matters in relation to criminal activities to the police or taxation authorities,
if requested to do so by the police or a tax inspector.

Auditors may disclose matters to third parties without their client’s consent if it is in the public interest,
and they must do so if there is a statutory duty to do so.

Auditors may only disclose matters to third parties without their client’s consent if the public interest
or national security is involved.

(TOTAL: 10 marks)

7
Topic 4 – Audit risk

QUESTIONS 12 – 13
*See related spreadsheet file for constructed response questions

8
Topic 5 – Audit planning

QUESTIONS 14 – 16
*See related spreadsheet file for constructed response questions

9
Topic 6 – Internal control systems

THE FOLLOWING SCENARIO RELATES TO QUESTIONS 17-21.

Flowers Anytime (AIR 12/02) (amended)
You are an audit manager in a medium-sized audit firm. You are currently planning the audit of Flowers Anytime
(Flowers) for the year ended 31 March 20X7. Flowers, a traditional flower wholesaler, is a new audit client for your firm.
As this is the first year you are auditing Flowers, it is necessary to understand and evaluate the company’s system of
internal control. The audit firm’s policy requires the following steps to be taken when performing first year audits:
(1) Perform walkthrough tests
(2) Complete flowcharts and internal control evaluation questionnaires
(3) Revise the audit strategy and audit plan
(4) Perform tests of control
You have obtained the following background information about your new client. When customers call the company,
their orders are taken by clerks who take details of the flowers to be delivered, the address to which they are to
be delivered, and the account details of the customer. The clerks input these details into the company’s computer
system (whilst the order is being taken) which is integrated with the company’s inventory control system.
The audit junior has made the following notes on the system for the receipt, processing and recording of the orders:
(1) All orders are recorded on pre-printed, three-part sequentially numbered order forms. One copy is kept by the
sales clerk, one copy is forwarded to the warehouse for the dispatch of inventory, and one copy being is sent to
the customer as evidence of the order.
(2) T
 he sales clerk regularly performs reviews of the standing data on the system, matching the price of flowers
against an up-to-date price list.
(3) To ensure completeness of orders, a sequence check is performed on the sales invoices manually by the sales
clerk and any missing documents are investigated.
(4) Sales invoices are posted on a weekly basis to the sales daybook and accounts receivable ledger.

QUESTION 17
Which of the following correctly summarises the order in which the steps required by the firm’s policy for
first year audits would take place?
1, 2, 3, 4
3, 2, 1, 4
1, 2, 4, 3
2, 1, 4, 3

QUESTION 18
The audit junior has asked you whether internal control questionnaires (ICQs) should be completed as well as
internal control evaluation questionnaires (ICEQs).
Which of the following statements is correct in relation to ICQs and ICEQs?
ICEQs determine whether controls exist which meet specific control objectives; ICQs determine whether there
are controls which prevent or detect specified errors or omissions.
ICEQs are generally easier to apply to a variety of different systems than ICQs.
ICQs are likely to overlook how internal controls deal with unusual transactions; this will normally have to be
recorded using ICEQs.
ICQs can give the impression that all controls are of equal weight; this issue is resolved by using ICEQs.

10
QUESTION 19
Which of the internal control activities identified in the audit junior’s notes above would satisfy the objective
of preventing/detecting a material misstatement if it is operating effectively?
1 only
3 only
1 and 2
3 and 4

QUESTION 20
You instruct the audit junior to confirm whether the post is opened by more than one individual.
Over which of the following internal control objectives would this provide assurance?
(1) Cash receipts are not misappropriated
(2) All cash receipts that occurred are recorded
(3) Cash receipts are recorded at the correct amounts in the ledger
(4) Cash receipts are posted to the correct receivables accounts and to the general ledger

1 only
2 only
3 and 4
1 and 4

QUESTION 21
During the course of the audit, the audit team identified numerous deficiencies in internal control relating to the
sales system. The amounts exposed to the deficiencies were high and you have concluded that it is likely that the
deficiencies would result in material misstatements in the financial statements. A deficiency was also identified in
the purchases system but further investigation showed this to be a minor, isolated issue.
Which of the following statements is correct regarding the deficiencies which must be included in the report
to management?
The deficiencies identified in the sales system only
The deficiencies identified in the purchases system only
The deficiencies identified in the sales and purchases system
Neither the deficiencies identified in the sales system nor the purchases system

11
THE FOLLOWING SCENARIO RELATES TO QUESTIONS 22-26.

SouthLea (2007 Pilot Paper) (amended)

SouthLea Co, your audit client, is a large unlisted construction company (building houses, offices and hotels)
employing a large number of workers on various construction sites.
As part of planning for the audit of the financial statements for the year ended 31 December 20X6, you are
reviewing the cash wages systems within the company.
The following information is available concerning the wages systems:
(i) Hours worked are recorded using a clocking in/out system. On arriving for work and at the end of each days
work, each worker enters their unique employee number on a keypad.
(ii) Workers on each site are controlled by a foreman. The foreman has a record of all employee numbers and can
issue temporary numbers for new employees.
(iii) Any overtime is calculated by the computerised wages system and added to the standard pay.
(iv) The two staff in the wages department make amendments to the computerised wages system in respect of
employee holidays, illness, as well as setting up and maintaining all employee records.
(v) The computerised wages system calculates deductions from gross pay, such as employee taxes, and net pay.
Every month a wages clerk checks the gross pay and deductions for a sample of employees. Finally a list of net
cash payments for each employee is produced.
(vi) Cash is delivered to the wages office by secure courier.
(vii) The two staff place cash into wages packets for each employee along with a handwritten note of gross pay,
deductions and net pay. The packets are given to the foreman for distribution to the individual employees.
SouthLea’s finance director has mentioned to you that an allegation of suspected fraud had been made against a
member of the senior management team during the year. This is currently being investigated by the internal audit
team and the finance director hopes that the audit may shed further light on the matter.
SouthLea has an internal audit department of six staff. The chief internal auditor appoints staff within the internal
audit department, although the chief executive officer (CEO) is responsible for appointing the chief internal auditor.
The chief internal auditor reports directly to the finance director. The chief internal auditor decides on the scope of
work of the internal audit department. SouthLea does not currently have an audit committee.

QUESTION 22
In preparation for the audit planning meeting, the audit junior has identified a number of areas requiring audit focus.
Based on the information regarding the wages system, which TWO of the following are likely to introduce
the highest risk of material misstatement?
Completeness of wages
Accuracy of deductions from gross pay
Cut-off of starters’ and leavers’ wages
Potential fraud risk factors

12
QUESTION 23
During the previous audit, the audit team had recommended SouthLea’s management to ensure that any
amendments to standing data on the wages system are reviewed by an authorised manager.
Which of the following is a test of control designed to provide evidence that the recommended internal
control is operating effectively?
Review overtime lists for evidence of authorisation
Review the log of amendments to standing data for evidence of review
Perform a proof in total using the number of employees and average wage
Obtain printouts of employee wage rates and compare these to HR records

QUESTION 24
Which of the following statements about the responsibilities of external and internal auditors with regards
to fraud is NOT correct?
 he external auditor must maintain an attitude of professional scepticism throughout the audit, recognising the
T
possibility that a material misstatement due to fraud could exist.
 he internal auditor must always consider the potential of management overriding controls and modify their
T
audit procedures accordingly when performing internal audit engagements.
It is not the responsibility of the external auditors to detect fraud within a client.
The work of internal auditors in reviewing the company’s internal control systems helps management to fulfill its
responsibility for preventing and detecting fraud.

QUESTION 25
Which of the following recommendations are appropriate in increasing the independence of SouthLea’s
internal audit department?
(1) The chief internal auditor should be appointed by the board of directors.
(2) The chief internal auditor should report to the board of directors.
(3) The finance director should decide on the scope of the internal audit work

(1) and (2) only

(1) and (3) only
(2) and (3) only
(1), (2) and (3)

QUESTION 26
You have been told by the finance director that the senior management team is looking to upgrade the company’s
computerised accounting system in a year’s time. This is partly because the senior management team believes that
due to the increasing size and complexity of the business, the company will need more robust general IT controls
in the future.
Which TWO of the following are general IT controls?
Full testing procedures using test data when developing computer applications
One for one checking
Disaster recovery procedures
Hash totals
(TOTAL = 10 marks)
13
QUESTION 27
*See related spreadsheet file for constructed response questions

14
Topic 7 – Audit evidence (1)

QUESTION 28
*See related spreadsheet file for constructed response questions

15
Topic 8 – Audit evidence (2)

THE FOLLOWING SCENARIO RELATES TO QUESTIONS 29-33.

Newthorpe
You are an audit manager, auditing the financial statements of Newthorpe Engineering Co, a listed company, for
the year ended 30 April 20X7.
Newthorpe’s management has provided you with a schedule of the realisable values of the inventories. A full
inventory count was carried out at 30 April 20X7.
Audit tests have confirmed that the inventory counts are accurate and there are no purchases or sales cut-off errors.
One of the company’s factories was closed on 30 April 20X7. The plant and equipment and inventories were to be
sold. By the time the audit work commenced in June 20X7, most of the inventory had been sold.
You have instructed the audit junior to evaluate the valuation of the inventory related to the closing factory at the
year end. The audit junior has sent you a list of planned audit procedures.
On 17 March 20X7, Newthorpe’s managing director was dismissed for gross misconduct. It was decided that the
managing director’s salary should stop from that date, and that no redundancy or compensation payments should
be made.
The managing director has claimed unfair dismissal and is taking legal action against the company to obtain
compensation for loss of his employment. The managing director says he has a service contract with the company
which would entitle him to two years’ salary at the date of dismissal. The directors believe that there is a 35%
chance of the managing director succeeding in his claim.
The financial statements for the year ended 30 April 20X7 record the resignation of the director. However, they do
not mention his dismissal and no provision for any damages has been included in the financial statements.

QUESTION 29
Which TWO of the following statements are true regarding the auditor’s attendance at the inventory count?
It is the auditor’s responsibility to organise the inventory count.
The auditor observes client staff to determine whether inventory count procedures are being followed.
The auditor reviews procedures for identifying damaged, obsolete and slow-moving inventory.
If the results of the auditors’ test counts are not satisfactory, the auditor should insist that the inventory
is recounted.

QUESTION 30
Which of the audit procedures below is NOT appropriate in auditing the valuation assertion for Newthorpe’s
inventory?
Agree the selling prices of inventory sold since the year-end to sales invoices and the cash book.
 ssess the reasonableness of management’s point estimates of realisable value of inventory that has not yet
A
been sold by reviewing sales before the year-end, comparing the values with inventory that has been sold since
the year-end and considering offers made which have not yet been finalised.
 or a sample of inventory sold just before and just after the year end, match dates of sales invoices/date
F
posted to ledgers with date on related goods despatched notes.
 or unsold inventory, assess reasonableness of provisions for selling expenses by comparison of selling
F
expenses with inventory sold.

16
QUESTION 31
Which of the following options correctly summarises the correct accounting treatment for the legal claim
made by the managing director for unfair dismissal?
Accounting treatment Reason
Record a provision A present obligation exists, but the outflow
of economic resources is not probable.
Record a provision A possible obligation exists, depending on whether
or not some uncertain future event occurs.
 o provision but disclose
N A present obligation exists, but the outflow of
as a contingent liability economic resources is not probable.
No provision but disclose A possible obligation exists, depending on whether
as a contingent liability or not some uncertain future event occurs.

QUESTION 32
Which of the following audit procedures is likely to provide the auditor with the MOST reliable audit
evidence regarding the legal claim?
 eview the minutes of the disciplinary hearing to understand whether the company has acted in
R
accordance with employment legislation and its internal rules.
Review correspondence between the company and its lawyers regarding the likely outcome of the case.
 equest a written representation from management supporting their assertion that the claim will not
R
be successful.
 end an enquiry letter to Newthorpe’s lawyers to obtain their view as to the probability of the claim
S
being successful.

QUESTION 33
The dismissal of Newthorpe’s managing director has alerted you to the possibility that the company may not have
complied with employment regulations. You therefore need to determine the impact that such non-compliance
may have on the audit.
In accordance with ISA 250 Consideration of laws and regulations in an audit of financial statements, which
of the following responsibilities is CORRECT regarding the responsibilities of the auditors of Newthorpe in
relation to compliance with employment regulations?
To obtain sufficient appropriate evidence regarding compliance as they have a direct effect on the financial
statements
To perform specific audit procedures to identify possible non-compliance
 he auditors do not have any responsibility as the employment regulations do not have a direct effect on the
T
financial statements
To prevent and detect all non-compliance with the regulations

(TOTAL = 10 marks)

17
QUESTIONS 34 – 36
*See related spreadsheet file for constructed response questions

18
Topic 9 – Audit evidence (3)

QUESTIONS 37 – 38
*See related spreadsheet file for constructed response questions

19
Topic 10 – Audit completion

QUESTION 39
*See related spreadsheet file for constructed response questions

20
THE FOLLOWING SCENARIO RELATES TO QUESTIONS 40-44.

Greenfields (12/10) (amended)

Greenfields Co specialises in manufacturing equipment which can help to reduce toxic emissions in the production
of chemicals. The company has grown rapidly over the past eight years and this is due partly to the warranties that
the company gives to its customers. It guarantees its products for five years and if problems arise in this period it
undertakes to fix them, or provide a replacement product.
You are the manager responsible for the audit of Greenfields and you are performing the final review stage of the
audit and have come across the following issues.
Receivable balance owing from Yellowmix Co
Greenfields has a material receivable balance owing from its customer, Yellowmix Co. During the year-end audit,
your team reviewed the ageing of this balance and found that no payments had been received from Yellowmix for
over six months, and Greenfields would not allow this balance to be circularised. Instead management has assured
your team that they will provide a written representation confirming that the balance is recoverable.
Warranty provision
The warranty provision included within the statement of financial position is material. The audit team has
performed testing over the calculations and assumptions which are consistent with prior years. The team has
requested a written representation from management confirming the basis and amount of the provision are
reasonable. Management has yet to confirm acceptance of this representation.
Other information
You have reviewed a financial summary which is to be included in the annual report and have found that the details
are inconsistent with the financial statements. Your investigations have shown that the error is in the summary and
not the financial statements.

QUESTION 40
Assuming you received the written representations as described above for both the receivables balance
and the warranty provision, in respect of which balances is the auditor most likely to conclude that sufficient
appropriate evidence has been obtained?
Receivables balance only
Warranty provision only
Receivables balance and warranty provision
Neither the receivables balance nor the warranty provision

QUESTION 41
Which of the following audit procedures could the audit team carry out to obtain independent evidence
relating to the recoverability of the debt from Yellowmix?
(1) Review correspondence with Yellowmix regarding the late payment
(2) Trace a sample of goods despatched notes for Yellowmix to sales invoices
(3) Trace the entries in Yellowmix’s account in the receivables ledger to invoices and remittances
(4) Perform a review of post year-end cash receipts

1 and 2
1 and 4
2 and 3
2 and 4

21
QUESTION 42
Management has now stated that it is not prepared to confirm that the basis and amount of the warranty provision
are reasonable.
In accordance with ISA 580 Written representations which of the following actions must you take?
(1) Discuss with management why they have refused to provide the representations requested
(2) Re-asses the integrity of management and consider the implications for any other representations
(3) Seek legal advice
(4) Resign as auditors

1 and 2
3 and 4
1 and 3
2 and 4

QUESTION 43
You have discussed the matter with management but they are still not prepared to provide the representations you
have requested.
What type of modified opinion would be issued and what would be the basis for this modification?
Audit opinion Reason
Qualified Material misstatement
Disclaimer Inability to obtain sufficient appropriate evidence
Adverse Material misstatement
Qualified Inability to obtain sufficient appropriate evidence

QUESTION 44
You have notified the directors of the error in the summary financial statements.
Which of the following correctly summarises the impact on the auditor’s report if the directors do not
correct this error?
Audit opinion Disclosure
Modified Other Information section stating that there is nothing to report
Modified Other Information section would not be required as there is nothing to report
Unmodified Other Information section including a description of the uncorrected misstatement
Unmodified Other Matter paragraph including a description of the uncorrected misstatement

(TOTAL = 10 marks)

22
THE FOLLOWING SCENARIO RELATES TO QUESTIONS 45-49.

Clarinet (6/14) 20 mins

Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years. The company is
funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 20X4.
Clarinet has experienced significant growth in previous years; however, in the current year a new competitor, Drums
Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share
from Clarinet including one of its largest customers. Clarinet is looking to develop new products to differentiate
itself from the rest of its competitors. It has approached its shareholders to finance this development; however,
they declined to invest further in Clarinet. Clarinet’s loan is long term and it has met all repayments on time. The
overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is
due for renewal next month and they believe it will be renewed.
The directors have produced a cash flow forecast which shows a significantly strengthening position over the coming 12
months. They are confident with the new products being developed, and in light of their trading history of significant
growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern.
At the year end, Clarinet received notification from one of its customers that the hardware installed by Clarinet
for the customers’ online ordering system has not been operating correctly. As a result, the customer has lost
significant revenue and has informed Clarinet that they intend to take legal action against them for loss of earnings.
Clarinet has investigated the problem post year end and discovered that other work-in-progress is similarly affected
and inventory should be written down by $375,000. The finance director believes that as this misstatement was
identified after the year end, it can be amended in the 2015 financial statements. Draft financial statements for the
year ended 30 April 20X4 showed profit after tax of $2.5m.

QUESTION 45
Which of the following correctly summarises whether the uncorrected misstatement of inventory is material
and its impact on the 20X4 financial statements?
Material Adjust in 20X4 financial statements
No No
No Yes
Yes Yes
Yes No

QUESTION 46
Which of the following factors are indicators that may cast doubt on Clarinet’s ability to continue as a
going concern?
(1) The entry of the new competitor reducing Clarinet’s market share
(2) The significant increase in the overdraft
(3) The company has a long term loan
(4) The reluctance of the shareholders to provide further investment in Clarinet

1, 2 and 3
1, 2 and 4
1, 3 and 4
2, 3 and 4

23
QUESTION 47
As part of your assessment of going concern you have reviewed the cash flow forecast. This is based on the
assumption of significant increases in revenue.
Which of the following procedures would provide the most reliable evidence regarding the validity of
this assumption?
Email correspondence between the sales director and potential new customers
A review of board minutes showing details of new customers won
A review of post year-end sales and the order book
Discussions with management regarding their plans for obtaining new business

QUESTION 48
You have concluded that circumstances exist which cast significant doubt on Clarinet’s ability to continue as a
going concern.
Which of the following must you include in your communication with those charged with governance in
accordance with ISA 570 Going concern?
(1) Whether the circumstances you have identified constitute a material uncertainty
(2) Whether the use of the going concern basis of accounting is appropriate in the preparation and presentation of
the financial statements
(3) The adequacy of the related disclosures
(4) The period of time your assessment has covered if less than 12 months from the date of the financial statements

1, 2 and 3
1, 2 and 4
1, 3 and 4
2, 3 and 4

QUESTION 49
The auditors have been informed that Clarinet’s bankers will not make a decision on the overdraft facility until after
the auditor’s report is completed. The directors have now agreed to include some going concern disclosures and
you believe these disclosures are adequate.
Which of the following correctly summarises the impact on the auditor’s report of Clarinet if the auditor
believes the company is a going concern but that this is subject to a material uncertainty?
Opinion Disclosure
Modified Key Audit Matters
Unmodified Material Uncertainty Related to Going Concern
Unmodified Key Audit Matters
Modified Material Uncertainty Related to Going Concern

(TOTAL = 10 marks)

24