ACCA Audit and Assurance (F8) Practice Exam

What should be ensured regarding provisions during an audit?

1. Provision amounts are understated

2. Previous provisions are reviewed for necessity

3. New provisions are created for every estimate

4. Provisions must be entirely based on past performance

The correct answer is: Previous provisions are reviewed for necessity

The focus during an audit with regard to provisions involves a thorough review of previous provisions to determine their necessity. This is crucial because provisions are estimates that are recognized in the financial statements based on expected future obligations. By reviewing previous provisions, an auditor can assess whether the amounts held are still valid or whether they need to be adjusted due to changes in circumstances or additional information that may have emerged. This process ensures that the financial statements provide a true and fair view of the entity’s financial position. If previous provisions are no longer needed, they should be reversed, and if they are inadequate, the amounts may need to be increased. The consideration of the need for provisions, in relation to current and expected future conditions, showcases the auditors’ responsibility in identifying potential risks and ensuring that financial reporting reflects them accurately. In contrast, focusing on whether provision amounts are understated does not encompass the necessary review process to validate or adjust them as required based on circumstances. Provisions should not be created for every estimate without context, as this could lead to misleading financial statements. Additionally, relying solely on past performance misses the dynamic nature of estimates that may need to reflect current conditions and future expectations. Thus, the practice of reviewing previous provisions for necessity is integral to ensuring the appropriateness of