ACCA Audit and Assurance (F8) Practice Exam

What is indicated by the presence of substantial operating losses in a company?

1. Increased management efficiency

2. A significant risk to the going concern assumption

3. Potential for investor interest

4. Guaranteed future profitability

The correct answer is: A significant risk to the going concern assumption

The presence of substantial operating losses in a company is a strong indicator of a significant risk to the going concern assumption. When a company consistently reports losses, it raises concerns about its ability to continue operating in the foreseeable future, typically defined as at least 12 months from the balance sheet date. This assumption is critical in audit and financial reporting, as it affects how a company's assets and liabilities are valued and presented. Auditors must assess whether there are significant doubts about the entity's ability to continue as a going concern. If there are doubts, they may need to disclose this uncertainty in the financial statements and audit report, potentially leading to a modified opinion. In contrast, other options such as increased management efficiency, potential for investor interest, or guaranteed future profitability do not accurately reflect the implications of ongoing substantial losses. These choices either present an overly optimistic view of the situation or imply conditions that are not typically associated with substantial operating losses.