Audit and Assurance Practice Questions-ACCA
June 2008
1. Smithson Co provides scientific services to a wide range of clients. Typical assignments range
from testing food for illegal additives to providing forensic analysis on items used to commit
crimes to assist law enforcement officers.
The annual audit is nearly complete. As audit senior you have reported to the engagement
partner that Smithson is having some financial difficulties. Income has fallen due to the adverse
effect of two high profile court cases, where Smithson's services to assist the prosecution were
found to be in error.
Not only did this provide adverse publicity for Smithson, but a number of clients withdrew their
contracts. A senior employee then left Smithson, stating lack of investment in new analysis
machines was increasing the risk of incorrect information being provided by the company.
A cash flow forecast prepared internally shows Smithson requiring significant additional cash
within the next 12 months to maintain even the current level of services. Smithson's auditors
have been asked to provide a negative assurance report on this forecast.
Required:
(a) Define 'going concern' and discuss the auditor's responsibilities in respect of going concern.
(4 marks)
(b) State the audit procedures that may be carried out to try to determine whether or not
Smithson Co is a going concern. (8 marks)
(c) Explain the audit procedures the auditor may take where the auditor has decided that
Smithson Co is unlikely to be a going concern. (4 marks)
(d) In the context of the cash flow forecast, define the term 'negative assurance' and explain
how this differs from the assurance provided by an audit report on statutory financial
statements. (4 marks)
Total marks (20 marks)
June 2008
1. Smithson Co provides scientific services to a wide range of clients. Typical assignments range
from testing food for illegal additives to providing forensic analysis on items used to commit
crimes to assist law enforcement officers.
The annual audit is nearly complete. As audit senior you have reported to the engagement
partner that Smithson is having some financial difficulties. Income has fallen due to the adverse
effect of two high profile court cases, where Smithson's services to assist the prosecution were
found to be in error.
Not only did this provide adverse publicity for Smithson, but a number of clients withdrew their
contracts. A senior employee then left Smithson, stating lack of investment in new analysis
machines was increasing the risk of incorrect information being provided by the company.
A cash flow forecast prepared internally shows Smithson requiring significant additional cash
within the next 12 months to maintain even the current level of services. Smithson's auditors
have been asked to provide a negative assurance report on this forecast.
Required:
(a) Define 'going concern' and discuss the auditor's responsibilities in respect of going concern.
(4 marks)
(b) State the audit procedures that may be carried out to try to determine whether or not
Smithson Co is a going concern. (8 marks)
(c) Explain the audit procedures the auditor may take where the auditor has decided that
Smithson Co is unlikely to be a going concern. (4 marks)
(d) In the context of the cash flow forecast, define the term 'negative assurance' and explain
how this differs from the assurance provided by an audit report on statutory financial
statements. (4 marks)
Total marks (20 marks)
