ACCA FA: directors' responsibilities and governance
This outcome covers who is responsible for preparing financial statements and how governance arrangements make them reliable. The examiner likes it because scenarios ask you to match a management action to the specific duty it breaches, or to pick the arrangement that fixes a stated concern.
The rule
Directors are responsible for preparing financial statements that give a true and fair view and apply the applicable framework (IFRS), for keeping adequate accounting records, for safeguarding assets, and for assessing going concern over at least 12 months from the end of the reporting period. The auditor only gives an opinion; the auditor does not prepare the statements. Where a material uncertainty casts significant doubt on going concern, the directors keep the going concern basis and disclose the uncertainty (IAS 1), unless they intend to liquidate or have no realistic alternative. Governance fixes a problem of bias by adding independence: an audit committee of independent non-executive directors reviews the statements, oversees internal control and manages the relationship with the external auditor.
Worked example
Hartwood Co's finance director tells staff to leave out a $250,000 legal claim before a bank review. The claim is probable and can be measured reliably, and the accounting records already contain it.
Step 1: IAS 37 requires a provision when an outflow is probable and the amount is reliable, so $250,000 should be recognized.
Step 2: Omitting it understates liabilities by $250,000, so the statements are not true and fair.
Step 3: The instruction ignores IAS 37, so the duty to apply accounting standards is breached.
Step 4: The records are complete, so the duty to keep adequate accounting records is not breached. Assets are not being lost or misused, so safeguarding is not breached either.
Breaches: (1) true and fair view and (2) applying accounting standards.
Remember: the directors, not the auditor, are responsible for preparing the statements and assessing going concern, and you must match the exact duty to what went wrong (here the figures were wrong, not the records).
Where candidates lose marks
Choosing 'maintaining adequate accounting records' when the records exist and the problem is how figures are presented.
Treating a longer responsibility statement or more executive directors as a governance fix, when neither adds independence.
Switching automatically to the break-up basis, or disclosing nothing because the company is currently profitable, when a material going concern uncertainty exists.
Try it: 4 questions
Shareholders of Flexa Gyms Co, a listed fitness club company whose board is mostly executive directors, are worried that management may bias the reported profit to secure bonuses. Which governance arrangement best addresses the concern about the reliability of financial reporting?
Answer: A. The concern is a lack of independent challenge. An audit committee of independent non-executive directors reviews the financial statements and the accounting judgements, oversees internal control, and manages the relationship with the external auditor. This reduces management's scope to bias the reported profit. Why the others are wrong: A longer responsibility statement signed by the executives adds no independence, because the same people who benefit from the bonuses are still giving the assurance. More executives increase management influence rather than oversight. If the finance director controls the auditor's appointment and fees, the auditor's independence is weakened.
Hartwood Furniture Co is a furniture manufacturer. Its finance director has told the accounts team to leave out a $250,000 liability for a legal claim so that the statement of financial position looks stronger before a bank review. The claim is probable and its amount can be measured reliably. The accounting records already contain details of the claim. Which TWO of the following directors' responsibilities does this instruction breach?
Select the two that apply (each shows on its own).
Answer: A, C. Directors must prepare financial statements that give a true and fair view and comply with the applicable framework (IFRS). IAS 37 requires a provision when an outflow is probable and can be measured reliably. Omitting the $250,000 understates liabilities, so the statements are not true and fair. It also breaches the requirement to apply the accounting standard. Why the others are wrong: 'Maintaining adequate accounting records' is the tempting option, but the records exist and include the claim. The breach lies in how the figures are presented, not in the record-keeping. 'Safeguarding assets' concerns protecting the company's resources from loss or misuse, which is not at issue here. 'Appointing the external auditor' is a responsibility of the shareholders, not of the directors.
Peakform Ltd operates a chain of fitness clubs and is currently profitable. When the directors approve the financial statements, the company's main $2m loan facility expires within five months and renewal has not been agreed. Forecasts show that Peakform Ltd could not repay the loan without renewal. What must the directors do in the financial statements regarding going concern?
Answer: B. Directors must assess going concern, looking at least 12 months from the end of the reporting period. Where there are material uncertainties that cast significant doubt on the ability to continue, IAS 1 requires them to disclose those uncertainties. Here the loan is due to expire and cannot be repaid without renewal, so there is a material uncertainty. The statements stay on the going concern basis unless the directors intend to liquidate or have no realistic alternative, and the uncertainty is disclosed. Why the others are wrong: Option A relies on current profitability, which does not remove the repayment risk. Option C switches to the break-up basis automatically, but that is only required when the business is not a going concern, not whenever there is uncertainty. Option D is wrong because the assessment and disclosure are the directors' responsibility. The auditor only reports on them.
Spokeline Co is a bicycle maker. Which of the following statements about responsibility for its financial statements is NOT true?
Answer: C. The directors prepare the financial statements and select and apply the accounting policies. The auditor does not prepare them, because that would destroy independence. The auditor expresses an opinion on whether they give a true and fair view. Option C is therefore false. Options A and B are true, as they are core directors' responsibilities. Option D is true: shareholders appoint the auditor, and the auditor reports to them.
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What are the directors' responsibilities for financial statements?
They must prepare statements that give a true and fair view and comply with IFRS, keep adequate accounting records, safeguard the company's assets and assess going concern. The auditor's role is to give an opinion on the statements, not to prepare them.
What does an audit committee do?
It is made up of independent non-executive directors. It reviews the financial statements and accounting judgements, oversees internal control and manages the relationship with the external auditor, which reduces management's scope to bias reported profit.
What must directors do if there is a material uncertainty about going concern?
They continue to use the going concern basis and disclose the material uncertainty and the conditions that cast doubt on it. They only move to the break-up basis if they intend to liquidate or have no realistic alternative.