ACCA AA · Chapter 12
Subsequent events, going concern and written representations MCQs with Answers
9 multiple-choice questions on Subsequent events, going concern and written representations for ACCA AA Audit and Assurance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following events occurring after the reporting period would normally be an adjusting event under IAS 10?
- A) A major customer that owed money at the year end goes into liquidation
- B) A fire destroys a warehouse two months after the year end
- C) The company announces a plan to close a division after the year end
- D) The company issues new shares after the year end
Show answer & explanation
Answer: A) A major customer that owed money at the year end goes into liquidation
An adjusting event provides evidence of conditions that existed at the reporting date. A customer's liquidation shortly after the year end usually confirms that the receivable was impaired at the year end. A post year-end fire, share issue or announced closure reflects new conditions and would be non-adjusting, though possibly requiring disclosure.
Question 2
Under ISA 560, what is the auditor's responsibility for subsequent events between the date of the financial statements and the date of the auditor's report?
- A) No responsibility, unless management informs the auditor of an event
- B) To review only events that occur in the first month after the year end
- C) To perform procedures designed to obtain sufficient appropriate evidence that all events requiring adjustment or disclosure have been identified
- D) To perform procedures only if the auditor suspects fraud
Show answer & explanation
Answer: C) To perform procedures designed to obtain sufficient appropriate evidence that all events requiring adjustment or disclosure have been identified
In this period the auditor has an active duty to perform procedures such as enquiring of management, reading board minutes and reviewing the latest management accounts. After the auditor's report is dated, the duty becomes passive: there is no obligation to perform procedures, but the auditor must respond to facts that become known.
Question 3
After the auditor's report has been dated but before the financial statements are issued, the auditor becomes aware of a fact that would have caused the report to be amended. What should the auditor do first under ISA 560?
- A) Issue a separate report directly to the shareholders
- B) Do nothing, because the auditor has no responsibilities after the report is dated
- C) Immediately withdraw the auditor's report and resign
- D) Discuss the matter with management and, where appropriate, those charged with governance, and determine whether the financial statements need amendment
Show answer & explanation
Answer: D) Discuss the matter with management and, where appropriate, those charged with governance, and determine whether the financial statements need amendment
Although there is no duty to search for events after the report date, a fact that becomes known must be addressed. The auditor discusses it with management, determines whether amendment is needed and, if so, how management intends to deal with it. If amended, the auditor performs procedures on the amendment and issues a new report.
Question 4
Which of the following is an operating indicator, rather than a financial indicator, that may cast doubt on an entity's ability to continue as a going concern?
- A) Loss of a key supplier with no alternative source of supply
- B) Inability to pay creditors on due dates
- C) Net current liabilities
- D) Substantial operating losses
Show answer & explanation
Answer: A) Loss of a key supplier with no alternative source of supply
ISA 570 groups going concern indicators into financial, operating and other. Loss of key management, a major market, key customers, licences or principal suppliers are operating indicators. Net current liabilities, operating losses and inability to pay creditors are financial indicators.
Question 5
Under ISA 570, if management's assessment of going concern covers less than a particular period, the auditor should ask management to extend it. What is that period?
- A) Twelve months from the date of the auditor's report
- B) Twelve months from the date of the financial statements
- C) Six months from the date of the financial statements
- D) Eighteen months from the date of the financial statements
Show answer & explanation
Answer: B) Twelve months from the date of the financial statements
ISA 570 requires the auditor to request that management extend its assessment if it covers less than twelve months from the date of the financial statements, consistent with IAS 1. Some jurisdictions require longer periods, but the ISA reference point is twelve months from the reporting date.
Question 6
At the year end, Fettle Co has current assets of $2.1 million and current liabilities of $3.0 million. Its overdraft facility is due for renewal shortly after the year end. What is the current ratio?
- A) 0.30:1
- B) 0.70:1
- C) 0.90:1
- D) 1.43:1
Show answer & explanation
Answer: B) 0.70:1
Current ratio = current assets / current liabilities = $2.1m / $3.0m = 0.70:1. Inverting the formula gives 1.43:1. A ratio below 1, combined with an overdraft awaiting renewal, is an indicator that the auditor should consider in assessing going concern under ISA 570.
Question 7
Under ISA 580, how should written representations be dated?
- A) At least one month after the date of the auditor's report
- B) On the date the audit engagement letter is signed
- C) On the last day of the reporting period
- D) As near as practicable to, but not after, the date of the auditor's report
Show answer & explanation
Answer: D) As near as practicable to, but not after, the date of the auditor's report
Written representations must cover all financial statements and periods referred to in the auditor's report, so they are dated as close as practicable to the report date but never after it. The auditor's report cannot be dated before the representations are received.
Question 8
Management refuses to provide a written representation confirming that it has fulfilled its responsibility for preparing the financial statements and for providing the auditor with all relevant information. What is the required effect on the auditor's report under ISA 580?
- A) The auditor must issue an adverse opinion
- B) The auditor must issue a qualified opinion
- C) The auditor must disclaim an opinion
- D) The auditor must issue an unmodified opinion with an Emphasis of Matter paragraph
Show answer & explanation
Answer: C) The auditor must disclaim an opinion
These representations are fundamental. If management refuses to provide them, ISA 580 requires the auditor to disclaim an opinion, because the auditor cannot rely on any of management's other representations and the possible effects are pervasive. An adverse opinion would only be appropriate if the financial statements were known to be materially and pervasively misstated.
Question 9
Which of the following statements about written representations is correct?
- A) They are only required where the auditor plans to modify the opinion
- B) They are provided by the auditor to the client
- C) They are necessary audit evidence but do not on their own provide sufficient appropriate evidence about matters they deal with
- D) They can replace other audit evidence that the auditor expects to be available
Show answer & explanation
Answer: C) They are necessary audit evidence but do not on their own provide sufficient appropriate evidence about matters they deal with
ISA 580 states that written representations are necessary information but are not sufficient appropriate evidence on their own. They cannot replace evidence the auditor expects to be available, they are obtained from management, and they are required on every audit.