Audit and
Assurance (AA)
March/July 2020
Detailed
commentary
The aim of this commentary is to provide constructive
guidance for future candidates and their tutors by
giving insight into what markers are looking for and
identifying issues encountered by candidates who sat
these questions.
Contents
General comments ............................................................... 2
Scarlet Co ............................................................................ 2
Snowdon Co ........................................................................ 5
Encore Co ............................................................................ 8
Examiner’s report – AA March/July 2020
1
General comments
This detailed commentary should be used in conjunction with the published
March/July 2020 sample exam which can be found on the ACCA website.
Scarlet Co
This 30-mark question was based on Scarlet Co, a manufacturer of chemicals for
use in domestic and commercial cleaning products. This question tested candidates’
knowledge of engagement letters, pre-acceptance factors, audit risks and responses
and substantive procedures. Overall performance was satisfactory.
Part (a) for four marks required candidates to explain the purpose of an audit
engagement letter and list four items which should be included in an audit
engagement letter. One mark was available for each well explained point regarding
the purpose and ½ mark for each item to be included. This is a knowledge area that
has been tested in previous sessions. Performance was mixed.
Candidates were able to confidently list four items which should be included and so
scored the two available marks. In fact, many candidates listed more than four
points, the most common correct answers were scope, fees, auditor and
management responsibilities. However, few candidates scored well in relation to the
purpose of an engagement letter. Many provided vague answers and focused their
responses on what an engagement letter is rather than why it is required.
Candidates are reminded that they must take care in carefully reading the
requirement and only answering the question asked.
Part (b) for five marks required an explanation of why five specified pre-acceptance
factors should have been considered by the auditor prior to accepting Scarlet Co as
a new audit client. One mark was available for each well explained point.
Candidates were required to focus their answers on why pre-acceptance factors
such as ‘management integrity’ and ‘the outgoing auditor’s response’ should be
considered. Unfortunately, many focused on what the factors were rather than why
they were considered. In addition, many of the explanations given were circular in
nature. For example, in explaining why ‘management integrity’ was considered it was
common to see answers such as, ‘it is important because we need to consider if
management have integrity’. This would not have gained any credit because it did
not explain why management integrity was important, that for example if
management lack integrity there is a greater risk of fraud and intimidation.
For the factor of ‘independence and objectivity’ many candidates simply listed types
of ethical threats, rather than explaining that independence needed to be considered
so that ethical threats could be assessed and relevant safeguards could be applied
where relevant.
The factor of ‘resources available at the time of the audit’ should have focused on
whether sufficient audit staff of appropriate technical knowledge and experience
Examiner’s report – AA March/July 2020
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were available. However, many answers focused on whether management had staff
available to answer auditor’s queries.
Part (c) for 16 marks required candidates to identify and describe eight audit risks
and to explain the auditor’s response to each in planning the audit of Scarlet Co.
Performance was satisfactory.
Marks were awarded for identification of audit risks (½ mark each), explanation of
audit risks (½ mark each) and an appropriate auditor’s responses to each risk (1
mark each).
The scenario contained more than eight risks, so it was pleasing that most
candidates planned their time carefully and generally only attempted to list the
required number of points.
Candidates generally identified the risks well. This session it was pleasing to see that
many candidates identified from the opening paragraph of the scenario that Scarlet
Co was a new client and therefore resulted in an increased detection risk. The main
risk which was not identified or misunderstood by candidates related to the payment
run made to suppliers on the first day after the year end. This created a window
dressing risk in relation to bank and trade payables, but few candidates who
identified this risk understood that. Candidates must take the time to carefully read
the scenario, noting dates and other relevant information, to ensure that they
correctly understand the audit risks arising.
As in previous sessions, many candidates did not adequately explain the risk. To
explain the risk candidates need to state the specific area of the financial statements
impacted with an assertion (for example cut-off, valuation etc.), or, a reference to
over/under/misstated, or, a reference to inherent/ control/ detection risk. ‘Misstated’
was only awarded if it was clear the balance could be either over/understated.
As stated in previous examiner’s reports, a significant proportion of candidates did
not clearly state the specific area of the financial statement impacted. As an
example, for the issue relating to the training costs capitalised within the addition of
the specialised machine, only noting ‘assets could be overstated’ was not awarded
credit. Candidates must demonstrate adequate understanding of the accounting
issues and clearly state the specific area of the financial statements, in this case
‘property plant and equipment could be overstated’ to be awarded the ½ implication
mark.
Candidates’ performance in relation to auditor’s responses continues to be mixed.
While an auditor’s response does not have to be a detailed procedure, rather an
approach the audit team will take to address the identified risk, the responses given
were often too weak or not related to the actual audit risk. For example, in response
to the risk of the directors’ bonus, many candidates focused on auditing a profit
figure on which they believed the bonus was based or recalculating the bonus.
However, there was no indication in the scenario that the bonus was based on profit
or that there was a calculation issue. Instead the response should have focused on
the actual risk of separate disclosure as indicated in the scenario and therefore
Examiner’s report – AA March/July 2020
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should have considered ‘reviewing the disclosure of the bonus for compliance with
legislation’.
Additionally, there was an increase in management rather than auditor responses.
For example, for the risk of goods in transit, rather than focusing on auditing
completeness of inventory and trade payables at the year end, many responses
considered what would happen if inventory was damaged in transit or the risk of
stockouts due to the three week delivery time.
Future candidates are advised that audit risk is and will continue to be an important
element in the syllabus and must be understood. Candidates must ensure that they
include adequate question practice as part of their revision on this key topic.
Part (d) for five marks required candidates to describe substantive procedures the
auditor should perform in relation to the redundancy costs. One mark was available
for each well-described procedure.
Many candidates failed to provide sufficient detail in their procedures, or they were
too brief. For example, many candidates stated ‘review board minutes’ without
specifying that this was being done to confirm whether the redundancy had been
announced pre year end. Failing to provide the required detail meant that this test
would not have scored any marks. In addition, many irrelevant tests such as
‘compare the redundancy provision to prior year’ or ‘write to the lawyers for
confirmation of the provision’ demonstrated a lack of understanding of the scenario
and gained no marks.
Candidates who scored marks focused on recalculation of the provision, confirming
the redundancy payment to post year-end bank statements and agreeing the
redundancies to employment records.
Candidates are reminded they must take the time to read the question requirements
carefully and spend time thinking about what is needed prior to writing their answers.
Examiner’s report – AA March/July 2020
4
Snowdon Co
This 20-mark question was based on Snowdon Co, a company providing training
services. This question tested candidates’ knowledge of significant deficiencies, key
controls and tests of control and control deficiencies and recommendations.
Part (a) for four marks required candidates to describe matters the auditor may
consider in determining if a deficiency was significant.
Many candidates did not attempt this part of the question and where it was
answered, many provided irrelevant points. A significant number of candidates
provided answers around the components of internal control, such as control
environment and monitoring of controls. Others focused on what a ‘good’ or ‘bad’
internal control was. A significant minority listed deficiencies from the scenario, which
was required for part (c) of the question.
For those candidates who provided valid answers, most tended to pick up ½ mark
per point rather than one mark, due to a lack of detail. Correct answers tended to
focus on matters related to ‘an increased risk of fraud’ or ‘material misstatements’.
Candidates are reminded once again that questions in this syllabus area usually
contain a knowledge-based requirement. These are straightforward marks, provided
candidates spend the necessary time learning the knowledge and practicing past
questions.
Part (b) for 6 marks required candidates to identify and explain from the scenario
three key controls and tests of control to assess if the key controls were operating
effectively in the internal control system of Snowdon Co. The scenario was multicycle and covered the non-current asset, payroll, sales and bank cycles.
Key control questions such as this typically require key controls to be identified (½
mark each), explained (½ mark each) which must cover the implication of the key
control for the company and a relevant test of control to test if the control is operating
effectively (1 mark).
Candidates struggled to identify correct key controls from the scenario. There were
more controls than were required to be discussed. However, in many instances,
candidates confused deficiencies with key controls. For example, a commonly
provided incorrect point was ‘credit limits are set for new customers by the sales
director’. In this instance this was not a key control as the lack of subsequent review
meant that the control was not operating effectively. Instead the correct conclusion
would be that the lack of review was a control deficiency. For a key control to gain
credit, it must be complete. It must be appropriately designed and, if operating
effectively, would prevent or detect a material misstatement. If the credit limits
referred to above had been regularly reviewed, then this would have been a valid
key control.
Other examples of key controls incorrectly identified included ‘having an internal
audit (IA) department’. As this was understaffed it was not operating effectively as a
control and therefore should have been recognised as a deficiency. Another
identified by many candidates was ‘the payroll manager reviews the list of bank
Examiner’s report – AA March/July 2020
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payments’, however as the scenario went on to say that if discrepancies arose the
manager always changed the payroll without first investigating the differences this
gave rise to a deficiency rather than a key control. Similarly, ‘each training centre
having a capex budget’, was not an effective control as the scenario stated that
these budgets were being exceeded. Again, the lack of control over capital
expenditure should have been identified as a control deficiency.
Valid key controls identified were bank reconciliations being reviewed, and the need
for the unique employee number to process new joiners in the payroll system. The
identification of a key control would have scored ½ mark. In order to gain the other ½
mark candidates needed to clearly explain the implication of the control and many
appeared to struggle with this. For example, having a separate HR and payroll
department carrying out the tasks described means that there is a reduced risk of
fictious employees being set up. Candidates must clearly explain what the control is
aiming to prevent to be awarded the ½ explanation mark.
Candidates’ answers for the tests of control were adequate and where one mark per
test was not awarded this tended to be due to a lack of detail.
Candidates must ensure that they are as prepared for a question on key controls as
they are for deficiencies as they are both highly examinable. Future candidates need
to ensure that they have undertaken adequate question practice of all examinable
control systems.
Part (c) for 10 marks required candidates to identify and explain from the scenario
five deficiencies and to provide a control recommendation to address each of these
deficiencies. Performance was satisfactory.
Internal control deficiency questions such as this typically require internal control
deficiencies to be identified (½ mark each), explained (½ mark each) which must
cover the implication of the deficiency to the company and a relevant
recommendation to address the deficiency (1 mark).
The scenario in the exam contained more issues than were required to be
discussed. It was pleasing that the majority of students were able to identify five
deficiencies.
However, a significant proportion of candidates had already addressed a number of
deficiencies incorrectly as key controls in part (b) and therefore failed to identify them
for part (c) of the question requirement and so did not gain credit. Additionally, some
candidates identified key controls as deficiencies. For example, a common incorrect
answer was ‘bank reconciliations are undertaken by the cashier and reviewed by the
financial controller’ with candidates believing that the financial controller should
undertake the reconciliations rather than the cashier. This was not a deficiency but
rather a key control. The cashier undertaking the reconciliation process is perfectly
acceptable, and together with the review by the financial controller constitutes a key
control. A number of points did score well, however. These included the deficiencies
relating to access to standing data, physical inspection of assets and lack of regular
review of credit limits.
Examiner’s report – AA March/July 2020
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Some candidates were able to identify the deficiencies but clearly did not understand
them as they were unable to explain the implication of these deficiencies.
Candidates are required to explain the implication to the business to be awarded
credit. For example, a valid explanation for the deficiency ‘sales invoices only chased
after 90 days’ (identification ½ mark awarded), would have been ‘this could increase
the risk of irrecoverable receivables/ result in poor cash flow management’.
Candidates were able to provide recommendations to address the deficiencies
identified however the recommendations were often not described in enough detail
or were phrased as objectives. For the IA department deficiency, the
recommendation of ‘ensure enough staff’ is an objective and did not explain how this
should be undertaken to address the staff shortages in the IA department.
Examiner’s report – AA March/July 2020
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Encore Co
This 20-mark question was based on Encore Co, a waste management company.
This question tested candidates’ knowledge of substantive procedures for vehicle
additions and disposals, trade receivables and a breach of regulations. The question
also tested candidates’ knowledge of auditor’s reports. Overall performance was
mixed.
Part (a) for six marks required the candidate to describe substantive procedures for
Encore Co’s vehicle additions and disposals. Performance on this requirement was
satisfactory. One mark was awarded for each well-described audit procedure.
Those candidates who had practiced past questions scored well, noting procedures
such as ‘agreeing additions to invoices to ensure in company name and correct
value capitalised’, ‘physically inspecting the addition’, and ‘recalculation of
depreciation for correct time period’.
Weaker candidates either did not provide sufficient detail in their tests or were vague
such as, ‘review relevant documents to ensure the accuracy of the amount
capitalised’ however this did not detail what documents should be reviewed. In
addition, some provided test of controls such as ‘reviewing board minutes for
evidence of authorisation of the additions. The scenario contained a part exchange
and some candidates were confused by this. However, if candidates had focused on
standard additions and disposals tests then they would have comfortably passed this
requirement.
Candidates are reminded that substantive procedures are an important part of the
syllabus and it is imperative they are able to provide relevant procedures for all areas
of the financial statements listed in the syllabus.
Part (b) for five marks required the candidate to describe substantive procedures in
relation to the valuation of Encore Co’s trade receivables. Performance on this
requirement was mixed. One mark was awarded for each well-described audit
procedure.
While the question required procedures for valuation, a significant number of
candidates listed generic procedures for trade receivables such as reviewing
disclosure. Others included procedures which focused on auditing revenue rather
than trade receivables such as agreeing back to sales orders and invoices. These
procedures were not awarded any credit as they were not focused on valuation of
trade receivables. Candidates must carefully read the requirement of the question
and tailor their answers accordingly.
The most common procedures which gained credit included ‘after date cash
receipts’, ‘review of aged receivables balances’ and ‘recalculation of the allowance’.
Analytical review of ‘comparing receivables to the prior year and investigating
significant differences’ would have gained 1 mark. No credit was awarded for
‘calculating receivables collection period’ as this information was already provided in
the scenario.
Examiner’s report – AA March/July 2020
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Additionally, some of the procedures provided lacked detail, for example ‘review
correspondence with customers’ with little detail of what the correspondence is being
reviewed for would have gained no credit. To gain the one mark available it needed
to be clear that ‘the correspondence was reviewed to identify any balances in
dispute, and these should be discussed with management’.
As addressed in previous examiner’s reports candidates must strive to understand
substantive procedures. Learning a generic list of tests will not translate to exam
success, as they must be applied to the question requirements.
Part (c) for four marks required the candidate to describe substantive procedures in
relation to the potential breach in traffic regulations by Encore Co. One mark was
awarded for each well-described audit procedure.
Many candidate answers were incomplete. For a requirement of four marks, four
well-described substantive procedures are required. However, many answers
contained only a few procedures, some of which were either inappropriate, vague or
lacking sufficient detail. Common inappropriate tests included ‘contacting the
transport authority’ rather than reviewing correspondence with the authority and
‘comparing the fine to the prior year’ which would not have been appropriate as the
breach of regulation was not an event which occurred annually.
Those candidates who gained credit focused on reviewing bank statements for post
year-end payment of the fine, enquiries with the lawyer and discussions with
management relating to the likelihood of payment.
Part (d) for five marks required a discussion of an issue and the impact on the
auditor’s report if the issue remained unresolved. The issue presented related to a
post year-end notification of transport regulation having been breached, and
therefore a provision was required.
Auditor’s report questions have shown a gradual improvement in recent sessions but
the performance for this question was mixed.
Marks are awarded for a discussion of the issue (1 mark), assessment of the
materiality of the issue (1 mark), a description of the type of modification (up to 2
marks) and the resultant impact on the auditor’s report (1 mark).
Many candidates did not discuss the issue. In order to be awarded the mark for
discussing the issue candidates should not just re-write the fact from the question.
Candidates needed to explain that the announcement of legal action by the authority
post year end was an adjusting subsequent event (½ mark), and that without
adjustment provisions would be understated and profit overstated (½ mark).
In addition, unfortunately many candidates did not correctly calculate materiality. The
scenario was clear that the impact of one breach was $50,000 and there were 17
breaches. Hence the error was $850,000 and not $50,000. If the error and then
materiality had been correctly calculated, then ½ mark would have been awarded
with a further ½ mark for the assessment that this was material.
Examiner’s report – AA March/July 2020
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Candidates satisfactorily described the type of modification and the impact on the
auditor’s report. When considering the type of modification candidates are reminded
that they must state whether the audit opinion is modified or not, and if modified, the
type of modification required. In addition, a minority of candidates included reference
to Emphasis of Matter paragraphs as part of their answers, this was incorrect and
would not have gained credit.
It was pleasing to note that many answers only provided one option for the auditor’s
report, rather than providing all possible options in a scatter gun approach as seen in
previous sessions.
Examiner’s report – AA March/July 2020
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