ACCA F8 - Audit and Assurance Revision Kit 2016

Audit risk
The current ratio and quick ratio have both
decreased significantly. In addition, the
company's positive cash balance of $2.3m in
20X3 has become an overdraft of $0.9m.
Taken together with the growth in revenue and
the increase in operating expenses, this may
indicate overtrading. A going concern risk
should be considered.
Audit response
Detailed going concern testing to be performed
during the audit. Cash flow forecasts covering at
least 12 months from the year end should be
reviewed, and the assumptions discussed with
management.
(b)
Going concern procedures
Obtain Walters' cash flow forecast and review the cash payments and receipts. Assess the
assumptions for reasonableness and discuss the findings with management to understand if the
company will have sufficient cash flows.
Review any current agreements with the bank to determine whether any covenants in relation to the
overdraft have been breached.
Read minutes of the meetings of shareholders, the board of directors and important committees for
reference to financing difficulties and for evidence of any future financing plans.
Review the company's post year-end sales and order book to assess the levels of trade. Evaluate
whether the revenue figures in the cash flow forecast are reasonable.
Review post year-end correspondence with suppliers to identify any restriction in credit that may not
be reflected in the cash flow forecasts.
Inquire of the lawyers of Walters as to the existence of litigation and claims.
Perform audit tests in relation to subsequent events to identify any items that might indicate or
mitigate the risk of going concern not being appropriate.
Review post year end management accounts to assess if it is in line with cash flow forecast.
Consider whether any additional disclosures as required by IAS 1 Presentation of financial statements
in relation to material uncertainties over going concern should be made in the financial statements.
Confirm the existence, legality and enforceability of arrangements to provide or maintain financial
support with related and third parties and assess the financial ability of such parties to provide
additional funds.
Consider Walter's position concerning any unfulfilled customer orders.
Obtain a written representation confirming the director's view that Walters is a going concern.
Note. Only five procedures were required.
44 Sycamore
Text references. Chapters 1 and 6.
Top tips. In part (b), make sure that you explain both the audit risk and the auditor's response to the risk. Using a
two-column format can help. Make sure that you discuss audit risks – the risks which have an impact on the
financial statements – only. Talking about business risks in general will not get you marks!
Easy marks. Parts (a) and (c) both offer easy marks. If you know the material well, you should score good marks
there.
Answers 95