ACCA Audit and Assurance (F8) Practice Exam

Which account is most likely to represent a significant accumulated estimate for a company?

1. Cash account

2. Receivables

3. Provisions for lawsuits

4. Share capital

The correct answer is: Provisions for lawsuits

The account that is most likely to represent a significant accumulated estimate for a company is the provision for lawsuits. This account reflects the company's obligations related to legal claims that have been made against it, which may require significant financial resources to settle. Provisions are estimations made by management to account for future liabilities that are likely to occur but are uncertain in timing or amount. In the case of lawsuits, companies often have to estimate potential settlement amounts or damages that they may be required to pay, based on factors such as the nature of the claims, past experiences, legal advice, and the likelihood of a successful defense. This kind of estimate is inherently subject to judgment and can fluctuate significantly as cases evolve. This differs from other accounts listed. For example, the cash account typically reflects actual cash available and does not involve estimates. Receivables represent amounts owed to the company for goods or services already delivered but also do not involve significant estimates regarding future obligations. Share capital is based on actual amounts invested by shareholders and does not require estimation in the way provisions do. Therefore, the provision for lawsuits stands out as an account where estimation plays a critical role in representing potential future liabilities, making it a significant accumulated estimate for a company.