ACCA F8 - Audit and Assurance Revision Kit 2016

7 The correct answers are:
The significance of the assessed risks of material misstatement at the assertion level
The specific controls that were tested during the interim period, and significant changes to them since they
were tested, including changes in the information system, processes, and personnel
The length of the remaining period
The extent to which the auditor intends to reduce further substantive procedures based on the reliance of
internal controls
All of the factors should be taken in to account.
8 The correct answer is:
Whether the work performed by the internal audit department relates to specific audit assertions over which
UYE & Co have concerns
Where the external auditor plans to rely on the work of the internal audit department, they must ensure that
the internal auditors work has been performed to a good standard. However most important is the
requirement that the work performed by the internal audit department must be relevant to the evidence the
external auditor is trying to gather.
9 The correct answers are:
Direct assistance describes the use of internal auditors to perform audit procedures under the direction,
supervision and review of the external auditor
The external auditor should document their review of the work performed by the internal auditors
The external auditor is likely to be less inclined to use direct assistance where the assessed risk of material
misstatement is high, as this increases audit risk. The auditor must take full responsibility for their audit
opinion regardless of whether they rely on the work of others.
10 The correct answer is:
It prevents the auditor from being sued for negligence
Audit documentation in itself does not prevent the auditor from being sued, but would provide evidence in
court to support the work which had been performed.
11 The correct answers are:
The going concern assumption is that the entity will be able to continue in business for the foreseeable
future
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
The term ‘foreseeable future’ is not defined within ISA 570, but IAS 1 deems the foreseeable future to be a
period of 12 months from the end of the entity’s reporting period. When financial statements are prepared
using the going concern assumption, the assertion is that there is neither the intention nor the need to
liquidate the company’s operations.
12 The correct answers are:
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
Although all of the stated options are possible consequences, only these two options describe the most
direct effect on going concern: cash flow difficulties and reducing sales. The main concern with bank
covenants (which should already be in place) is that the bank can withdraw finance if and when the
covenants are breached – bank covenants do not usually restrict the way in which a company conducts its
business.
Mock exam 2: answers 227