Fundamentals Level – Skills Module
Audit and Assurance
Section A – ALL THREE questions are compulsory and MUST be attempted
1 Green Co grows crops on a large farm according to strict organic principles that prohibits the use of artificial pesticides
and fertilizers. The farm has an ‘organic certification’, which guarantees its products are to be organic. The certification
has increased its sales of flour, potatoes and other products, as customers seek to eat more healthily.
Green Co is run by two managers who are the only shareholders. Annual revenue is $50 million with a net profit of
5%. Both managers have run other businesses in the last 10 years. One business was closed due to suspected tax
fraud (although no case was ever brought to court).
Green Co’s current auditors provide audit services. Additional assurance on business controls and the preparation of
financial statements are provided by a different accountancy firm.
Last year, a neighbouring farm, Black Co started growing genetically modified (GM) crops, the pollen from which
blows over Green Co’s fields on a regular basis. This is a threat to Green Co’s organic status because organic crops
must not be contaminated with GM material. Green Co is considering court action against Black Co for loss of income
and to stop Black Co growing GM crops.
You are an audit partner in Lime & Co, a 15 partner firm of auditors and business advisors. You have been friends
with the managers of Green Co for the last 15 years, advising them on an informal basis. The managers of Green Co
have indicated that the audit will be put out to tender next month and have asked your audit firm to tender for the
audit and the provision of other professional services.
(a) Using the information provided, identify and explain the ethical threats that could affect Lime & Co.
(b) In respect of the going concern concept:
(i) Define ‘going concern’ and state two situations in which it should NOT be applied in the preparation of
financial statements; (3 marks)
(ii) Explain the directors’ responsibilities and the auditors’ responsibilities regarding financial statements
prepared on the going concern principle. (4 marks)
(c) List the audit procedures that should be carried out to determine whether or not the going concern basis is
appropriate for Green Co. (5 marks)