ACCA F8 - Audit and Assurance Revision Kit 2016

10 All work carried out by the external auditor should be documented in their working papers regardless of
whether it relates to an interim or a final audit.
Which of the following is not a valid reason for producing audit documentation?
It prevents the auditor from being sued for negligence
It provides evidence for the basis of key conclusions
It enables senior team members to direct, supervise and review the audit work
It enables quality control reviews to be performed
Scenario 3
The following scenario relates to questions 11 – 15.
Medimade Co is an established pharmaceutical company that has for many years generated 90% of its revenue
through the sale of two specific cold and flu remedies. Medimade has lately seen a real growth in the level of
competition that it faces in its market and demand for its products has significantly declined.
You are the audit manager responsible for the audit of Medimade’s financial statements for the year ended
31 March 20X7.
11 Which TWO of the following statements are correct with regards to the going concern assumption?
The going concern assumption is that the entity will be able to continue in business for the
foreseeable future
The foreseeable future is defined for accounting purposes as 36 months from the company’s
reporting date.
The going concern basis of accounting assumes that the entity will be able to realise its assets and
discharge its liabilities in the normal course of business
Financial statements that are prepared on a going concern basis assert that the company intends to
liquidate its operations.
12 In addition to recruiting staff, Medimade also needed to invest $2m in plant and machinery. The company
wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its
overdraft facility, which carried a higher interest rate. Consequently, some of Medimade’s suppliers have
been paid much later than usual and hence some of them have withdrawn credit terms meaning the
company must pay cash on delivery.
Which TWO of the following statements describe the most direct impact the withdrawal of supplier credit
has on Medimade’s going concern assumption?
Medimade now has to pay cash on delivery and this adds further cash flow strain imposed by the
overdraft
Some suppliers may end their relationship with Medimade, preventing the company from producing
its products, thus further reducing sales
Medimade will have to seek alternative suppliers, who may not meet Medimade’s quality control
standards
The bank may impose strict covenants on the overdraft, restricting the way Medimade can conduct
its future operations
218 Mock exam 2: questions