ACCA Applied Skills — Questions and Answers

Question 1: Which of the following is NOT a financial performance indicator?

Employee turnover rate (Correct answer)
Gross profit margin
Earnings per share
Return on capital employed

Correct answer: Employee turnover rate

Employee turnover rate is a non-financial HR metric. Gross profit margin, ROCE and EPS are all financial measures derived from accounting data.

Question 2: Privity of contract means:

Both parties must have equal bargaining power
All written contracts must be notarised
A contract must be signed by witnesses
Only parties to a contract can sue and be sued on it (Correct answer)

Correct answer: Only parties to a contract can sue and be sued on it

The doctrine of privity (Dunlop v Selfridge) means only parties to a contract have rights and obligations under it. Third parties cannot generally sue or be sued on it (subject to the Contracts (Rights of Third Parties) Act 1999).

Question 3: A company has annual credit sales of £1,200,000 and average trade receivables of £200,000. What is the receivables collection period?

6 days
12 days
60.8 days (Correct answer)
30.4 days

Correct answer: 60.8 days

Receivables collection period = (Average receivables / Credit sales) × 365 = (£200,000 / £1,200,000) × 365 = 0.1667 × 365 = 60.8 days. This means it takes approximately 61 days on average to collect payment from customers.

Question 4: Which of the following correctly describes a 'self-review threat' in professional ethics?

An accounting firm reviewing the effectiveness of its own internal quality control systems
A professional accountant being overly self-critical about their own technical competence
A professional accountant reviewing and critically evaluating work they previously performed when forming a current opinion or conclusion (Correct answer)
A professional accountant auditing a company where they were previously employed as an executive

Correct answer: A professional accountant reviewing and critically evaluating work they previously performed when forming a current opinion or conclusion

A self-review threat arises when a professional must critically assess their own prior work, making it difficult to remain objective and to identify and report errors or weaknesses.

Question 5: The weighted average cost of capital (WACC) represents:

The risk-free rate plus a market risk premium
The average after-tax cost of all long-term financing, weighted by market values (Correct answer)
The cost of new debt only
The return required by equity shareholders only

Correct answer: The average after-tax cost of all long-term financing, weighted by market values

WACC is the blended cost of all sources of capital (equity and debt), each weighted by its proportion of total capital at market value. It is used as the discount rate for investment appraisal.

Question 6: A director's duty to exercise reasonable care, skill and diligence under s174 Companies Act 2006 is measured against which standard?

A purely subjective standard based on the individual director's knowledge
A dual objective/subjective standard — whichever is higher (Correct answer)
A purely objective standard of a reasonably diligent person
The standard expected of a qualified accountant

Correct answer: A dual objective/subjective standard — whichever is higher

Section 174 applies a dual test: the general knowledge, skill and experience reasonably expected of a person in that role (objective), AND the actual knowledge, skill and experience of the specific director (subjective). The higher standard applies, so a director with specialist expertise is held to that higher standard.

Question 7: According to ISA 200, what level of assurance does a statutory audit provide?

No assurance
Limited assurance
Reasonable assurance (Correct answer)
Absolute assurance

Correct answer: Reasonable assurance

ISA 200 states that an audit provides reasonable assurance, which is a high but not absolute level of assurance. Absolute assurance is not attainable due to inherent limitations of an audit, including the use of sampling, the inherent limitations of internal controls, and the fact that much audit evidence is persuasive rather than conclusive.

Question 8: An auditor discovers a material misstatement that management refuses to correct. The misstatement is material but not pervasive. What type of audit opinion should be issued?

Disclaimer of opinion
Qualified opinion ('except for') (Correct answer)
Adverse opinion
Unmodified opinion

Correct answer: Qualified opinion ('except for')

Under ISA 705, when a material misstatement exists but is not pervasive to the financial statements, the auditor issues a qualified ('except for') opinion. An adverse opinion is issued when the misstatement is both material AND pervasive. A disclaimer is issued when the auditor is unable to obtain sufficient appropriate evidence and the possible effects are material and pervasive.

Question 9: A project requires an initial investment of £100,000 and generates equal annual cash inflows of £30,000 for 5 years. The cost of capital is 10%. The cumulative discount factor for 5 years at 10% is 3.791. What is the Net Present Value (NPV)?

£50,000
£30,000
−£86,270
£13,730 (Correct answer)

Correct answer: £13,730

NPV = (Annual cash flow × Annuity factor) − Initial investment = (£30,000 × 3.791) − £100,000 = £113,730 − £100,000 = £13,730. The positive NPV of £13,730 means the project earns more than the 10% required return and should be accepted.

Question 10: The internal rate of return (IRR) is:

The discount rate at which NPV equals zero (Correct answer)
The required rate of return set by the company
The discount rate that maximises NPV
The average accounting return over the project's life

Correct answer: The discount rate at which NPV equals zero

IRR is the discount rate that makes the NPV of a project exactly zero. If IRR > cost of capital, the project is acceptable; if IRR < cost of capital, reject.

Question 11: Which of the following is an example of a 'substantive procedure'?

Observing inventory count procedures
Reviewing the design of the IT system
Confirming year-end trade receivables balances directly with customers (Correct answer)
Testing the controls over the purchase ledger

Correct answer: Confirming year-end trade receivables balances directly with customers

Substantive procedures (ISA 330) include tests of detail (agreeing specific balances or transactions) and analytical procedures, aimed at detecting material misstatements. Circularising debtors is a test of detail.

Question 12: An increase in the receivables collection period (debtor days) would:

Increase working capital requirements (Correct answer)
Improve the current ratio
Reduce working capital requirements
Have no effect on cash flow

Correct answer: Increase working capital requirements

If receivables take longer to collect, more cash is tied up in working capital. This increases the operating cycle and the company's financing need for working capital.

Question 13: Which of the following correctly describes a 'contract'?

Any written agreement between two or more parties
A promise that is binding regardless of consideration
A legally binding agreement supported by offer, acceptance, consideration and intention to create legal relations (Correct answer)
An agreement that must always be witnessed by a solicitor

Correct answer: A legally binding agreement supported by offer, acceptance, consideration and intention to create legal relations

A valid contract requires: offer, acceptance, consideration, intention to create legal relations and capacity. Written form is not required for most contracts.

Question 14: IAS 2 Inventories prohibits which of the following methods of cost valuation?

First In, First Out (FIFO)
Weighted average cost
Last In, First Out (LIFO) (Correct answer)
Standard cost method

Correct answer: Last In, First Out (LIFO)

IAS 2.25 permits FIFO and weighted average cost as cost formulas. LIFO is specifically prohibited by IAS 2 because it often results in inventory being stated at outdated costs that do not reflect recent purchase prices, thereby distorting the financial position. Standard cost is acceptable if results approximate actual cost.

Question 15: An 'emphasis of matter' paragraph in an audit report:

Modifies the audit opinion
Replaces the auditor's conclusion
Indicates the auditor has found a material misstatement
Draws attention to a matter already adequately disclosed in the financial statements that is fundamental to users' understanding (Correct answer)

Correct answer: Draws attention to a matter already adequately disclosed in the financial statements that is fundamental to users' understanding

An emphasis of matter paragraph (ISA 706) highlights a matter properly presented and disclosed in the financial statements that the auditor considers fundamental to users' understanding. It does not modify the opinion.

Question 16: Under ISA 240, which of the following is a characteristic of fraud rather than error?

Accidental omission of a disclosure requirement
Misapplication of accounting policies due to lack of knowledge
Unintentional mistakes in gathering or processing data
Intentional manipulation of financial statements by those charged with governance (Correct answer)

Correct answer: Intentional manipulation of financial statements by those charged with governance

ISA 240 distinguishes fraud from error based on intent. Fraud involves intentional acts of deception, including fraudulent financial reporting (manipulation of statements) and misappropriation of assets. Errors are unintentional mistakes. Both may result in misstatements, but the presence of deliberate intent is the defining characteristic of fraud.

Question 17: Which of the following statements about the weighted average cost of capital (WACC) is correct?

WACC increases as the proportion of debt increases (ignoring tax)
WACC uses the book value of debt and equity as weights
WACC should use market values of debt and equity as weights (Correct answer)
WACC is always equal to the cost of equity

Correct answer: WACC should use market values of debt and equity as weights

WACC should use market values rather than book values as weights because market values reflect the current economic value of each source of finance. Book values may be outdated. Under Modigliani and Miller with no tax, WACC remains constant regardless of gearing. With tax, increasing debt initially reduces WACC due to the tax shield.

Question 18: Working capital management involves balancing:

Capital expenditure and revenue expenditure
The levels of current assets and current liabilities to maintain liquidity and profitability (Correct answer)
Long-term debt and equity
Dividend policy and retained earnings

Correct answer: The levels of current assets and current liabilities to maintain liquidity and profitability

Working capital management aims to optimise current assets (inventory, receivables, cash) and current liabilities (payables, overdraft) to maintain sufficient liquidity while maximising profitability.

Question 19: 'Materiality' in audit is best described as:

The threshold above which transactions are tested 100%
The size of the audit fee relative to audit firm revenue
The level of professional scepticism applied by the auditor
Information is material if its omission or misstatement could influence the economic decisions of users (Correct answer)

Correct answer: Information is material if its omission or misstatement could influence the economic decisions of users

Materiality (ISA 320) is defined by reference to whether omission or misstatement of information could influence users' economic decisions. It is both quantitative and qualitative.

Question 20: Under the Companies Act 2006, what is the minimum number of directors required for a public limited company?

Four
One
Three
Two (Correct answer)

Correct answer: Two

Section 154 of the Companies Act 2006 requires a public company to have at least two directors. A private company needs only one director.

Question 21: For the tax year 2025/26, what is the personal allowance for an individual with adjusted net income of £90,000?

£15,000
£12,570 (Correct answer)
£6,570
£0

Correct answer: £12,570

The personal allowance for 2025/26 is £12,570. It is only reduced when adjusted net income exceeds £100,000. Since £90,000 is below this threshold, the individual receives the full personal allowance. The reduction is £1 for every £2 of income above £100,000, meaning it is fully lost at £125,140.

Question 22: Under ISA 320, why does the auditor set performance materiality at a level lower than overall materiality?

To increase the amount of audit work performed
To ensure all transactions above a certain amount are tested
To satisfy regulatory requirements for conservative auditing
To reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality (Correct answer)

Correct answer: To reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality

Performance materiality is set below overall materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds overall materiality. It acts as a safety buffer, recognising that the auditor may not detect all misstatements.

Question 23: Integrated Reporting (<IR>), as promoted by the International Integrated Reporting Council (IIRC), is best described as:

A mandatory ESG disclosure requirement for all FTSE 100 companies under FCA listing rules
Combining financial statements from multiple subsidiaries into a single consolidated group report
The technical integration of corporate tax reporting with statutory financial reporting under IFRS
A concise communication showing how an organisation's strategy, governance, performance, and prospects create value over the short, medium, and long term across multiple capitals (Correct answer)

Correct answer: A concise communication showing how an organisation's strategy, governance, performance, and prospects create value over the short, medium, and long term across multiple capitals

Integrated reporting connects an organisation's financial and non-financial information to explain how it creates and sustains value over time, considering financial, manufactured, intellectual, human, social, and natural capitals.

Question 24: National Insurance Contributions (NICs) Class 1 employee contributions are paid on:

All income including bank interest
Self-employment profits
Employment income (earnings) above the primary threshold (Correct answer)
All dividend income

Correct answer: Employment income (earnings) above the primary threshold

Class 1 employee NICs are charged on employment earnings (salary, wages, bonuses) above the Primary Threshold. Investment income and self-employment income are not subject to Class 1.

Question 25: A VAT-registered business must submit VAT returns and pay VAT:

Annually
Quarterly (usually) (Correct answer)
Weekly
Monthly

Correct answer: Quarterly (usually)

Most VAT-registered businesses submit quarterly VAT returns and pay any VAT due within one month and seven days of the quarter end, under Making Tax Digital.

Question 26: Which of the following correctly describes a 'fraudulent misrepresentation'?

An untrue statement made without belief in its truth, or recklessly as to its truth (Correct answer)
A true statement that creates a false impression
An untrue statement made honestly
An untrue statement made carelessly

Correct answer: An untrue statement made without belief in its truth, or recklessly as to its truth

Fraudulent misrepresentation (per Derry v Peek) is a false statement made knowingly, without belief in its truth, or recklessly as to whether it is true or false.

Question 27: In English contract law, consideration must be:

Sufficient but need not be adequate (Correct answer)
Adequate and sufficient
Adequate but need not be sufficient
Provided in money only

Correct answer: Sufficient but need not be adequate

Consideration must be sufficient (have some value in law) but need not be adequate (it need not be a fair or equal exchange). Courts do not investigate adequacy.

Question 28: Substantive analytical procedures are MOST effective when:

The auditor expects relationships between data items to be predictable and stable (Correct answer)
The client has no prior year comparatives
The client operates in a rapidly changing industry
There is a high volume of unpredictable transactions

Correct answer: The auditor expects relationships between data items to be predictable and stable

Analytical procedures are most powerful when the auditor can establish a reliable expectation of a balance, which requires predictable and stable relationships between data (e.g., rent expense vs floor area).

Question 29: The operating cycle (cash conversion cycle) measures:

The number of days it takes to repay long-term debt
The time from paying for raw materials to collecting cash from customers (Correct answer)
The time taken to complete one production run
The duration of a capital expenditure project

Correct answer: The time from paying for raw materials to collecting cash from customers

The cash conversion cycle = inventory days + receivable days − payable days. It measures the net time a business's cash is tied up in working capital.

Question 30: A company's articles of association:

Must be registered at Companies House only when the company is wound up
Define the external capacity of the company
Govern the internal management and administration of the company (Correct answer)
Have no legal effect between shareholders

Correct answer: Govern the internal management and administration of the company

The articles of association constitute the internal rulebook of the company, governing matters such as directors' powers, share transfers and shareholder meetings.

Question 31: According to the Gordon Growth Model (dividend valuation model), what is the share price if the dividend just paid is £0.30, the cost of equity is 10%, and dividends are expected to grow at 4% per year?

£5.00
£5.20 (Correct answer)
£7.50
£3.00

Correct answer: £5.20

Using the Gordon Growth Model: P₀ = D₀(1+g) / (Ke − g) = £0.30 × 1.04 / (0.10 − 0.04) = £0.312 / 0.06 = £5.20. The formula uses the next expected dividend (D₁), so the dividend just paid must be grown by one period. The denominator is the cost of equity minus the growth rate.

Question 32: Which of the following audit procedures provides the MOST reliable audit evidence?

Inquiry of management about related party transactions
Inspection of internally generated sales invoices
Direct confirmation from a bank of the client's cash balances (Correct answer)
Analytical review of revenue trends

Correct answer: Direct confirmation from a bank of the client's cash balances

ISA 500 establishes that evidence is more reliable when obtained from independent external sources. Direct bank confirmation is the most reliable because it comes from an independent third party (the bank) and directly confirms the existence and amount of cash balances. Management inquiry is the least reliable, and internal documents are less reliable than external sources.

Question 33: Under the Insolvency Act 1986, a company voluntary arrangement (CVA) is:

A court-ordered liquidation
A merger with another company to avoid insolvency
A formal winding-up by the court
A compromise between the company and its creditors, supervised by a licensed insolvency practitioner (Correct answer)

Correct answer: A compromise between the company and its creditors, supervised by a licensed insolvency practitioner

A CVA is a legally binding arrangement under which the company agrees a repayment plan with creditors, supervised by an insolvency practitioner, avoiding formal insolvency proceedings.

Question 34: A company has earnings per share (EPS) of £0.50 and the industry average P/E ratio is 12. Using the P/E ratio method, what is the estimated value per share?

£12.00
£0.50
£6.00 (Correct answer)
£24.00

Correct answer: £6.00

Value per share = EPS × P/E ratio = £0.50 × 12 = £6.00. The P/E ratio method values the company by applying an appropriate earnings multiple to the company's earnings. Using the industry average P/E assumes the company should be valued similarly to its peers.

Question 35: Under ISA 315, which component of internal control encompasses the entity's attitudes, awareness, and actions regarding internal control?

Control environment (Correct answer)
Control activities
Monitoring of controls
Information system

Correct answer: Control environment

The control environment is the foundation of all other components of internal control. It includes governance and management functions, management's integrity and ethical values, organizational structure, assignment of authority, human resource policies, and the overall attitudes toward internal control. It sets the 'tone at the top'.

Question 36: A 'cost driver' in activity-based costing is:

The absorption rate per machine hour
The factor that causes the cost of an activity to change (Correct answer)
The total fixed overhead of a department
The variable cost per unit of output

Correct answer: The factor that causes the cost of an activity to change

A cost driver is the factor that causes the cost of an activity to vary (e.g., number of production runs drives set-up costs). ABC uses cost drivers to allocate overhead accurately.

Question 37: Which of the following describes 'apparent authority' of an agent?

Authority expressly given in the agency agreement
Authority arising automatically from the agent's position
Authority that a principal holds the agent out as having, though no actual authority exists (Correct answer)
Authority arising from the agent's conduct being ratified by the principal

Correct answer: Authority that a principal holds the agent out as having, though no actual authority exists

Apparent (ostensible) authority arises when the principal represents to a third party that the agent has authority, even if actual authority has been revoked or never given.

Question 38: Which of the following is a money market hedge for a future foreign currency receipt?

Buying the foreign currency forward
Entering into a forward contract to sell the foreign currency
Buying a call option on the foreign currency
Borrowing the foreign currency now, converting to domestic currency at spot, and investing domestically (Correct answer)

Correct answer: Borrowing the foreign currency now, converting to domestic currency at spot, and investing domestically

A money market hedge for a foreign currency receipt involves: (1) borrowing the present value of the expected foreign currency receipt now, (2) converting the borrowed amount to domestic currency at today's spot rate, and (3) investing the domestic currency. When the receipt arrives, it repays the foreign currency loan. This effectively locks in today's spot rate.

Question 39: Under IAS 16, property, plant and equipment is initially recognised at:

Cost (Correct answer)
Fair value
Net realisable value
Replacement cost

Correct answer: Cost

Under IAS 16, PPE is initially measured at cost, comprising purchase price plus directly attributable costs of bringing the asset to its intended location and condition.

Question 40: The personal allowance for income tax (standard amount) reduces by £1 for every £2 of adjusted net income above:

£50,000
£125,140
£100,000 (Correct answer)
£150,000

Correct answer: £100,000

The personal allowance is tapered by £1 for every £2 by which adjusted net income exceeds £100,000, meaning it is fully withdrawn at adjusted net income of £125,140.

Question 41: Under employment law, an employee is entitled to a written statement of employment particulars within:

Six months of starting work
On the first day of employment (Correct answer)
Two months of starting work
One month of starting work

Correct answer: On the first day of employment

Since April 2020, employees and workers are entitled to a written statement of particulars from day one of employment (Employment Rights Act 1996 as amended).

Question 42: Which of the following correctly describes 'detection risk'?

The risk that internal controls fail to prevent misstatements
The risk that the entity will commit fraud
The risk that material misstatements exist in the financial statements
The risk that the auditor's procedures fail to detect existing material misstatements (Correct answer)

Correct answer: The risk that the auditor's procedures fail to detect existing material misstatements

Detection risk is the risk that audit procedures will not detect a material misstatement that actually exists. The auditor controls detection risk by adjusting the nature, timing and extent of procedures.

Question 43: Under IAS 10 Events After the Reporting Period, which of the following is an adjusting event?

A decline in market value of investments after year end
Settlement after the reporting date of a court case confirming the entity had a present obligation at the reporting date (Correct answer)
A major acquisition of another entity announced after year end
Destruction of a factory by flood after the reporting date

Correct answer: Settlement after the reporting date of a court case confirming the entity had a present obligation at the reporting date

An adjusting event provides evidence of conditions that existed at the reporting date. The settlement of a court case after year end that confirms a liability existed at the reporting date is adjusting — the financial statements should be adjusted. A new acquisition, flood, and market decline are non-adjusting events (conditions arose after the reporting date).

Question 44: Under the Insolvency Act 1986, which of the following is the correct order of priority for distribution of assets in a compulsory liquidation?

Secured creditors (fixed charge), liquidator's costs, preferential creditors, unsecured creditors (Correct answer)
Liquidator's costs, secured creditors, unsecured creditors, preferential creditors
Preferential creditors, liquidator's costs, secured creditors, unsecured creditors
Unsecured creditors, preferential creditors, secured creditors, liquidator's costs

Correct answer: Secured creditors (fixed charge), liquidator's costs, preferential creditors, unsecured creditors

The correct priority is: (1) fixed charge holders, (2) costs of liquidation, (3) preferential creditors (e.g., employee wages), (4) floating charge holders, (5) unsecured creditors, (6) shareholders. Fixed charge holders rank first as their security attaches to specific assets.

Question 45: Under the Companies Act 2006, a private company limited by shares is denoted by:

plc
LLP
LP
Ltd (Correct answer)

Correct answer: Ltd

A private company limited by shares uses the suffix 'Ltd' (or 'Limited'). Public companies use 'plc' (or 'Public Limited Company').

Question 46: Residual income (RI) is calculated as:

Net profit after tax ÷ Number of shares
(Divisional profit − Depreciation) ÷ Capital employed
Divisional profit ÷ Capital employed
Divisional profit − (Capital employed × Cost of capital) (Correct answer)

Correct answer: Divisional profit − (Capital employed × Cost of capital)

RI = Divisional profit − (Capital employed × Imputed cost of capital). Unlike ROI, RI is an absolute measure that encourages investment in projects earning above the cost of capital.

Question 47: The primary objective of an external audit is to:

Express an opinion on whether the financial statements give a true and fair view (Correct answer)
Advise management on improving internal controls
Prepare the financial statements on behalf of management
Detect all fraud within the organisation

Correct answer: Express an opinion on whether the financial statements give a true and fair view

The external auditor's objective (ISA 200) is to obtain reasonable assurance that the financial statements as a whole are free from material misstatement and to express an opinion accordingly.

Question 48: A company can either lease or buy a machine costing £50,000. The lease requires annual payments of £12,000 for 5 years. The company's borrowing rate is 8% and the tax rate is 25%. In a lease-versus-buy decision, which discount rate should typically be used?

The risk-free rate
The company's WACC
The company's cost of equity
The after-tax cost of borrowing (Correct answer)

Correct answer: The after-tax cost of borrowing

In a lease-versus-buy decision, the appropriate discount rate is the after-tax cost of borrowing. This is because the lease replaces debt financing, so the cash flows should be compared using the cost of the alternative financing source. The after-tax borrowing rate here would be 8% × (1 − 0.25) = 6%. WACC is not appropriate as this is a financing decision, not an investment decision.

Question 49: Net present value (NPV) is calculated as:

The sum of undiscounted future cash flows minus initial investment
The sum of present values of future cash flows minus the initial investment (Correct answer)
The payback period expressed in present value terms
Annual profit divided by initial investment

Correct answer: The sum of present values of future cash flows minus the initial investment

NPV = Sum of discounted future cash inflows − Initial investment. A positive NPV indicates the investment earns more than the cost of capital, adding value to the firm.

Question 50: Under ISA 530, which sampling method gives every item in the population an equal chance of selection?

Haphazard selection
Judgemental selection
Random selection (Correct answer)
Block selection

Correct answer: Random selection

Random selection ensures every sampling unit has an equal probability of being selected, typically using random number generators or tables. Haphazard selection avoids conscious bias but does not guarantee equal probability. Block selection picks contiguous items. Judgemental selection is based on the auditor's criteria and is non-statistical.

Question 51: Which of the following correctly describes 'input VAT'?

VAT suffered by the business on its purchases (Correct answer)
VAT charged by the business on its sales
VAT on imports from outside the UK
The net VAT payable to HMRC

Correct answer: VAT suffered by the business on its purchases

Input VAT is the VAT a business pays on its purchases and expenses. It is reclaimable from HMRC (for VAT-registered businesses), reducing the net VAT payable.

Question 52: Which of the following is a systematic risk that cannot be diversified away?

A change in interest rates by the Bank of England (Correct answer)
The CEO of a company unexpectedly resigning
A fire destroying a company's main warehouse
A product recall affecting a single manufacturer

Correct answer: A change in interest rates by the Bank of England

Systematic (market) risk affects all companies in the market and cannot be eliminated through diversification. Interest rate changes by the Bank of England affect all businesses through borrowing costs, consumer spending, and investment decisions. The other options are unsystematic (specific) risks that affect individual companies and can be diversified away in a portfolio.

Question 53: Which of the following is an indicator of a 'going concern' problem?

The company has recently issued additional share capital
Net current liabilities (negative working capital) (Correct answer)
A high gross profit margin
Favourable year-on-year revenue growth

Correct answer: Net current liabilities (negative working capital)

Net current liabilities (current liabilities exceeding current assets) indicate potential liquidity problems and are a significant indicator of going concern uncertainty.

Question 54: A company is considering offering a 2% early settlement discount to customers who pay within 10 days instead of the normal 30 days. What is the approximate annualised cost of this discount?

36.7% (Correct answer)
73.4%
2%
24%

Correct answer: 36.7%

The annualised cost = [d / (100 − d)] × [365 / (normal terms − discount period)] = [2 / (100 − 2)] × [365 / (30 − 10)] = (2/98) × (365/20) = 0.0204 × 18.25 = 0.3724 = 37.2% (approximately 36.7%). The discount appears small but the annualised cost is substantial because payment is accelerated by only 20 days.

Question 55: The main rate of UK corporation tax (from April 2023) for companies with profits over £250,000 is:

20%
25% (Correct answer)
30%
19%

Correct answer: 25%

From 1 April 2023, the main corporation tax rate is 25% for companies with profits over £250,000. The small profits rate is 19% for profits up to £50,000, with marginal relief between.

Question 56: What is the effect of a exclusion clause that fails the 'reasonableness test' under the Unfair Contract Terms Act 1977?

It is void and unenforceable (Correct answer)
It becomes a warranty rather than a condition
It remains valid but can be challenged in court
It is enforceable only between businesses

Correct answer: It is void and unenforceable

Under UCTA 1977, certain exclusion clauses are subject to the reasonableness test (s11). If a clause fails the test, it is void and cannot be relied upon. The burden of proving reasonableness falls on the party seeking to rely on the clause.

Question 57: Sarah has chargeable gains of £45,000 and allowable capital losses brought forward of £10,000 in 2025/26. She has no other income. What is her taxable gain after the annual exempt amount (AEA)?

£28,000
£31,700 (Correct answer)
£32,000
£35,000

Correct answer: £31,700

Chargeable gains of £45,000 minus capital losses brought forward of £10,000 = £35,000. Then deduct the annual exempt amount (AEA) for 2025/26 of £3,300: £35,000 − £3,300 = £31,700 taxable gain. Note: losses brought forward are set against gains before the AEA is applied.

Question 58: A floating charge over a company's assets:

Attaches to specific identified assets immediately
Floats over a class of assets, crystallising on a specified event (e.g., insolvency) (Correct answer)
Is always invalid on insolvency
Requires registration within 21 days of creation

Correct answer: Floats over a class of assets, crystallising on a specified event (e.g., insolvency)

A floating charge hovers over a changing class of assets (e.g., stock, debtors) and crystallises (becomes fixed) upon a trigger event such as the appointment of a receiver or insolvency.

Question 59: Which of the following is the correct order of the audit risk model?

Audit risk = Detection risk ÷ (Inherent risk × Control risk)
Control risk = Audit risk − Inherent risk − Detection risk
Detection risk = Audit risk ÷ (Inherent risk × Control risk)
Audit risk = Inherent risk × Control risk × Detection risk (Correct answer)

Correct answer: Audit risk = Inherent risk × Control risk × Detection risk

Audit risk = Inherent risk × Control risk × Detection risk. The auditor assesses inherent and control risk, then sets detection risk to achieve an acceptable overall audit risk level.

Question 60: Which of the following correctly describes the doctrine of 'lifting the corporate veil'?

It is a statutory right available to all creditors
It permits courts to disregard the separate legal personality of a company in exceptional circumstances (Correct answer)
It automatically applies when a company becomes insolvent
It allows directors to avoid personal liability in all circumstances

Correct answer: It permits courts to disregard the separate legal personality of a company in exceptional circumstances

Lifting the corporate veil is an exception to the Salomon v Salomon principle of separate legal personality. Courts may look behind the company to its members/controllers in exceptional cases, such as fraud, evasion of legal obligations, or where the company is a mere façade (Prest v Petrodel Resources).

ACCA Applied Skills

The ACCA Applied Skills level comprises six computer-based exams (LW, PM, TX, FR, AA, FM) testing practical application of accounting, finance, law, and audit knowledge. Each paper is marked out of 100 with a 50% pass mark.

Questions

180 min

Time Limit

50%

To Pass

Checking for saved progress...

Exam Rules

You can skip questions and return to them later
Flag questions for review before submitting
No feedback shown until you submit the entire exam
Unanswered questions count as wrong — answer everything
10 pretest questions are mixed in and don't affect your score
Timer auto-submits when time runs out
Your progress is auto-saved every 30 seconds