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ACCA Applied Knowledge · Financial Accounting · The context and purpose of financial statements for external reporting

The directors of Marlow Co discover that a material error in the prior year's financial statements arose because they did not maintain adequate accounting records. The auditor has issued a report on the current year. Which statement is correct?

The directors remain responsible for the financial statements and for maintaining adequate accounting records. An audit gives only an opinion with reasonable assurance and does not transfer responsibility to the auditor, shareholders or users such as banks who rely on the statements.

  1. AThe auditor is responsible for the error because the audit report was signed
  2. BThe directors remain responsible for the financial statements and records, and the audit does not transfer that responsibility to the auditorCorrect
  3. CResponsibility passes to the shareholders once they approve the financial statements at the annual general meeting
  4. DResponsibility lies with the company's bankers because they rely on the statements

Explanation

Preparation of the financial statements and maintenance of records remain the directors' responsibility regardless of the audit. The audit provides reasonable assurance only, and does not shift responsibility to the auditor. Shareholder approval or reliance by third parties also does not transfer it.

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