Chapter 7 accountancy, accounts and auditor (f1 acca)

Chapter 7 – Accountancy, Accounts and Auditors: Practice Exam Questions and

Answers with Explanations

August 11, 2025

1 Questions

1.1 Part A: Multiple Choice Questions (1–15)

1 What are the ACCA’s FIVE fundamental ethical principles? (Select five)

A Confidentiality

B Expedition

C Professional competence and due care

D Professional behaviour

E Risk management

F Honesty

G Objectivity

H Integrity

2 Which FOUR of the following are characteristics of management accounts?

A Audited

B Comply with accounting standards

C External use

D Not regulated

E Look forward and backwards

F Internal use

G Historical information only

H Not audited

3 Financial statements consist of:

A Directors’ report, statement of financial position, income statement, notes, cash flow statement

B Statement of financial position, income statement, notes, cash flow statement, statement of reserves

C Directors’ report, statement of financial position, income statement, notes, audit report

D Statement of financial position, income statement, notes, cash flow statement, statement of reserves and audit report

4 Which body is responsible for issuing the ethical guide for accountants?

A IAASB

B IESBA

C PIOB

D GAAP

5 Internal auditors have their work defined by statute and report to share-holders on matters relating to internal control

A False

B True

6 Audit reports refer to TWO qualities that should be possessed by financial statements These are:

A Transparent

B Correct

C True

D Fair

E Accurate

7 Which of the following is a primary objective of financial accounting?

A To provide information for internal decision-making

B To provide information to external stakeholders

C To forecast future business performance

D To manage day-to-day operations

8 Which of the following best describes the role of an external auditor?

A Preparing financial statements

B Providing assurance on financial statements

C Managing company finances

D Advising on tax planning

9 Which financial statement shows a company’s revenues and expenses over

a period of time?

A Statement of financial position

B Income statement

C Cash flow statement

D Statement of changes in equity

10 Which of the following is NOT a component of the conceptual framework for financial reporting?

A Qualitative characteristics

B Elements of financial statements

C Recognition and measurement

D Tax compliance

11 The principle of ‘going concern’ assumes that:

A The business will cease operations soon

B The business will continue to operate indefinitely

C The business will be sold in the next year

D The business is insolvent

12 Which of the following is a key difference between financial and manage-ment accounting?

A Financial accounting is forward-looking

B Management accounting is regulated by standards

C Financial accounting is for external reporting

D Management accounting is audited

13 Which body sets International Financial Reporting Standards (IFRS)?

A IASB

B FASB

C IESBA

D IAASB

14 The accrual basis of accounting means:

A Revenues and expenses are recorded when cash changes hands

B Revenues and expenses are recorded when they are earned or incurred

C Only cash transactions are recorded

D Only non-cash transactions are recorded

15 Which of the following is a key characteristic of internal auditing?

A Reporting to external stakeholders

B Evaluating internal controls and risk management

C Preparing financial statements

D Ensuring compliance with tax laws

1.2 Part B: True/False Questions (16–30)

16 The statement of financial position is also known as the balance sheet

A True

B False

17 Management accounts must comply with International Financial Report-ing Standards (IFRS)

A True

B False

18 External auditors are employees of the company they audit

A True

B False

19 The cash flow statement is divided into operating, investing, and financing activities

A True

B False

20 The IESBA Code of Ethics applies only to external auditors

A True

B False

21 Financial statements must be prepared annually for public companies

A True

B False

22 The statement of changes in equity shows the movement in reserves over

a period

A True

B False

23 Internal auditors report directly to shareholders

A True

B False

24 The principle of objectivity requires accountants to avoid bias in their work

A True

B False

25 The statement of financial position provides a snapshot of a company’s fi-nancial status at a point in time

A True

B False

26 Management accounts are typically prepared monthly or quarterly

A True

B False

27 The audit report expresses an opinion on whether financial statements are free from material misstatement

A True

B False

28 The directors’ report is a mandatory component of financial statements for all companies

A True

B False

29 The principle of professional competence and due care requires accoun-tants to maintain their skills and knowledge

A True

B False

30 Financial accounting focuses solely on historical data

A True

B False

2 Answers and Explanations

2.1 Part A: Multiple Choice Questions

1 Answer: A, C, D, G, H (Confidentiality, Professional competence and

due care, Professional behaviour, Objectivity, Integrity)

Explanation: The ACCA’s five fundamental ethical principles are Integrity,

Objectivity, Professional competence and due care, Confidentiality, and Pro-fessional behaviour Expedition, Risk management, and Honesty are not part of these principles

2 Answer: D, E, F, H (Not regulated, Look forward and backwards,

Inter-nal use, Not audited)

Explanation: Management accounts are prepared for internal use, are not

regulated, are not audited, and include both historical and forward-looking information Financial accounts, not management accounts, are audited and comply with accounting standards

3 Answer: A (Directors’ report, statement of financial position, income

statement, notes, cash flow statement)

Explanation: Financial statements typically include the directors’ report,

statement of financial position, income statement, notes, and cash flow statement The audit report is separate, and the statement of reserves is not a standard component

4 Answer: B (IESBA)

Explanation: The International Ethics Standards Board for Accountants

(IESBA) issues the ethical guide for accountants IAASB focuses on auditing standards, PIOB oversees standard-setting, and GAAP refers to accounting principles

5 Answer: A (False)

Explanation: Internal auditors’ work is not defined by statute, and they

report to management or the audit committee, not shareholders External auditors report to shareholders

6 Answer: C, D (True, Fair)

Explanation: Audit reports assess whether financial statements give a true

and fair view Transparent, Correct, and Accurate are not the specific qual-ities referenced

7 Answer: B (To provide information to external stakeholders)

Explanation: Financial accounting provides information for external

stake-holders, such as investors and regulators, unlike management accounting, which is for internal decision-making

8 Answer: B (Providing assurance on financial statements)

Explanation: External auditors provide assurance on the accuracy and

fairness of financial statements, not preparing them or managing finances

9 Answer: B (Income statement)

Explanation: The income statement shows revenues and expenses over a

period, unlike the statement of financial position (assets, liabilities, equity)

or cash flow statement (cash movements)

10 Answer: D (Tax compliance)

Explanation: The conceptual framework includes qualitative

character-istics, elements, and recognition/measurement, but tax compliance is not part of it

11 Answer: B (The business will continue to operate indefinitely)

Explanation: The going concern principle assumes the business will

con-tinue operating without the need to liquidate assets or cease operations

12 Answer: C (Financial accounting is for external reporting)

Explanation: Financial accounting is for external reporting and regulated,

while management accounting is internal and not regulated

13 Answer: A (IASB)

Explanation: The International Accounting Standards Board (IASB) sets

IFRS FASB sets US GAAP, IESBA sets ethics, and IAASB sets auditing stan-dards

14 Answer: B (Revenues and expenses are recorded when they are earned

or incurred)

Explanation: The accrual basis records revenues and expenses when earned

or incurred, not when cash changes hands

15 Answer: B (Evaluating internal controls and risk management)

Explanation: Internal auditing focuses on evaluating internal controls and

risk management, not preparing financial statements or tax compliance

2.2 Part B: True/False Questions

16 Answer: A (True)

Explanation: The statement of financial position is commonly known as

the balance sheet.

17 Answer: B (False)

Explanation: Management accounts are not required to comply with IFRS,

as they are for internal use and not regulated

18 Answer: B (False)

Explanation: External auditors are independent and not employees of the

company they audit

19 Answer: A (True)

Explanation: The cash flow statement is divided into operating, investing,

and financing activities

20 Answer: B (False)

Explanation: The IESBA Code of Ethics applies to all professional

accoun-tants, not just external auditors

21 Answer: A (True)

Explanation: Public companies are required to prepare financial

state-ments annually

22 Answer: A (True)

Explanation: The statement of changes in equity shows movements in

re-serves and equity over a period

23 Answer: B (False)

Explanation: Internal auditors report to management or the audit

com-mittee, not shareholders

24 Answer: A (True)

Explanation: Objectivity requires accountants to avoid bias and maintain

impartiality

25 Answer: A (True)

Explanation: The statement of financial position provides a snapshot of

financial status at a specific point in time

26 Answer: A (True)

Explanation: Management accounts are often prepared monthly or

quar-terly for internal use

27 Answer: A (True)

Explanation: The audit report expresses an opinion on whether financial

statements are free from material misstatement

28 Answer: B (False)

Explanation: The directors’ report is mandatory for public companies but

not for all companies

29 Answer: A (True)

Explanation: Professional competence and due care require accountants

to maintain and update their skills and knowledge

30 Answer: A (True)

Explanation: Financial accounting focuses on historical data for external

reporting, unlike management accounting, which may include forecasts