Audit and
Assurance (AA)
March / June 2021
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.
Contents
General comments .............................................................. 2
Section A ............................................................................. 2
Question 1 ........................................................................ 3
Question 2 ........................................................................ 4
Question 3 ........................................................................ 5
Question 4 ........................................................................ 5
Question 5 ........................................................................ 6
Section B ............................................................................. 8
Castle Courier Co............................................................. 8
Requirement (a) – 4 marks ........................................... 8
Requirement (b) – 8 marks ........................................... 9
Requirement (c) – 12 marks ....................................... 11
Requirement (d) – 6 marks ......................................... 13
Corley Appliances Co..................................................... 14
Requirement (a) – 3 marks ......................................... 14
Requirement (b) – 14 marks....................................... 15
Requirement (c) – 3 marks ......................................... 17
Purrfect Co ..................................................................... 18
Requirement (a) – 6 marks ......................................... 18
Examiner’s
report
March/June
2021
Requirement
(b) ––4AA
marks
.........................................
19
Requirement (c) – 5 marks ......................................... 20
Requirement (d) – 5 marks ......................................... 21
1
General comments
This examiner’s report should be used in conjunction with the published March/June
2021 sample exam which can be found on the ACCA Practice Platform.
The Audit and Assurance exam is offered in computer-based (CBE) format. The
model of delivery for the CBE means that candidates do not always receive the
same set of questions. In this report, the examining team share their observations
from the marking process to highlight strengths and weaknesses in candidates’
performance, and to offer constructive advice for future candidates.
•
•
Section A objective test case questions – here we look at the key challenge
areas for this section in the exam.
Section B constructed response questions – guidance on how to complete all
published CR questions from the sample exam.
There are two sections to the examination and all the questions are compulsory.
Section A consists of three OT cases each comprising five OT questions for a total of
30 marks, which cover a broad range of syllabus topics. In Section B, candidates are
presented with one constructed response question worth 30 marks and two
constructed response questions worth 20 marks each; testing the candidates’
understanding and application of audit and assurance in more depth.
In order to pass this examination, candidates should ensure they devote adequate
time to obtain the required level of knowledge and application.
Section A
Candidates preparing for future sessions are advised to work through the past
exams which are available and to carefully review how each of the correct answers
were derived. Section A questions aim to provide a broad coverage of the syllabus,
and future candidates should aim to revise all areas of the AA syllabus, rather than
attempting to question spot.
Sample questions for discussion
The following questions are reviewed with the aim of giving future candidates an
indication of the types of questions asked, guidance on dealing with exam questions
and to provide a technical debrief on the topics covered by the specific questions
selected. Candidates are reminded that there will be a mix of application and
knowledge questions in Section A and it is imperative that they ensure their
knowledge of the International Standards on Auditing (ISAs), relevant financial
accounting and important areas of the syllabus such as auditors’ reports is at an
appropriate level. Questions may test specific details of examinable documents
including ISAs, ACCA’s Code of Ethics and Conduct and the UK Corporate
Governance Code, therefore candidates must ensure that they have studied these in
sufficient depth. Candidates must also ensure that they have studied all areas of the
syllabus. The syllabus includes audit evidence learning outcomes relating to a wide
range of specific items, any of which may be examined.
Examiner’s report – AA March/June 2021
2
Example of a case scenario
It is 1 July 20X5. You are an audit supervisor at York & Co and you are involved in
the audit of Lancaster Co for the year ended 31 May 20X5. The company owns a
significant amount of non-current assets including a number of properties.
Additions, disposal and depreciation
Lancaster Co depreciates its properties, on the straight-line basis, at a rate of 5% per
annum. The draft depreciation charge on buildings for 20X5 is $2m compared with
$1.7m in 20X4.
On 31 May 20X5, Property A was sold for sales proceeds equal to 40% of its original
cost. The property initially cost $6m and had been owned and depreciated for seven
years.
The audit programme includes the following tests to be carried out in relation to
additions made during the year:
(1)
Agree a sample of additions recorded in the non-current asset register to the
cash book and purchase invoice ensuring that the purchase date is accurate and it is
recorded at the correct amount
(2)
Compare total budgeted additions to actual additions in the year and
investigate and corroborate any significant differences
Revaluation
On 31 May 20X5, the directors had all of the company’s remaining buildings
revalued by an external expert. In the detailed audit approach it states that York &
Co will rely on this valuation as part of the current year audit procedures.
Question 1
Which TWO of the following audit procedures would test for
OVERSTATEMENT of Lancaster Co's non-current assets?
A. Agree disposals recorded in the non-current asset register to cash book and sales
invoice
B. Physically inspect a sample of assets selected from the non-current asset register
C. Inspect a sample of assets found at a location and agree to the non-current asset
register
D. Inspect the condition of assets held to determine the need for any impairment
Examiner’s report – AA March/June 2021
3
The correct answers are B and D.
This question tests candidates’ understanding of the purpose of specific audit
procedures relating to non-current assets with the focus being overstatement. When
testing for overstatement it is essential to work from the financial statements to
source documents or assets. (Working from source documents or assets to the
financial statements would test for understatement). Candidates should also note the
number of responses required. In this case two correct answers from four options
are required. Selecting assets from the non-current asset register and inspecting
them tests the existence assertion which provides evidence regarding potential
overstatement – the balance will be overstated if assets included do not exist.
Assessing the need for impairment is a valuation test. If an asset is impaired but the
impairment has not been recognised the balance will be overstated.
Option A provides evidence that disposals which are recorded have actually taken
place. This tests for understatement and is therefore not an appropriate response.
Option C also tests for understatement by confirming that assets physically
inspected are recorded in the non-current asset register.
Question 2
Which of the following assertions are tested by the procedures included in the
audit programme for additions?
(1) Completeness
(2) Classification
(3) Existence
(4) Accuracy, valuation and allocation
A. 1 and 3 only
B. 2 and 4 only
C. 1, 3 and 4 only
D. 1, 2, 3 and 4
The correct answer is C.
In respect of test (1), tracing additions per the non-current asset register to the cash
book and invoice, checking that the date is correct is an existence check providing
evidence that the asset was held by Lancaster Co from that date. Confirming the
amount at which the asset is recorded to the cash book and invoice is a valuation
test. Test (2) is an analytical procedure. It therefore provides evidence in respect of
all the assertions listed with the exception of classification. As the comparison is
being performed based on totals, this test would not provide evidence relating to
classification.
Examiner’s report – AA March/June 2021
4
Question 3
You are now considering substantive audit procedures for depreciation across all
categories of non-current assets held by Lancaster Co.
Which TWO of the following are substantive audit procedures for testing
depreciation?
A. Review the non-current asset register to ensure that all assets are assigned a
useful life
B. Perform a proof in total for the depreciation charge of $2m included in the
financial statements and investigate any significant differences
C. Review the board minutes for evidence of approval of useful lives
D. Discuss with management the reasons for the $300,000 difference in the
current year depreciation compared to the prior year
The correct answers are B and D.
Options B and D, a proof in total and a comparison with the prior year are both
analytical procedures and are therefore substantive procedures. Reviewing the noncurrent asset register to ensure that assets have been assigned a useful life and
reviewing board minutes for evidence of approval of useful lives are both examples
of tests of controls.
This question tests candidates’ understanding of the different types of procedures
which the auditor may perform during the audit, and in particular the distinction
between tests of controls and substantive procedures. Substantive procedures are
designed to detect material misstatement at the assertion level whereas tests of
controls are designed to evaluate the operating effectiveness of controls. It is
essential that candidates understand the purpose of these two types of procedure
and can distinguish between them, both for Section A and Section B questions.
Candidates also need to be aware that substantive procedures include both
analytical procedures and tests of detail.
Question 4
Recalculate the expected loss on disposal of Property A, giving your answer
to ONE decimal place.
$ ____________ m
The correct answer is $1.5m.
Examiner’s report – AA March/June 2021
5
At the disposal date accumulated depreciation would be:
$6m x 0.05 x 7 = $2.1m
The carrying amount of the asset at the date of disposal would be:
$6m - $2.1m = $3.9m
Disposal proceeds are:
$6m x 40% = $2.4m
The loss on disposal is therefore:
$3.9m - $2.4m = $1.5m
This question highlights the importance of candidates having the required Financial
Accounting knowledge which underpins the ability to perform an effective audit. The
auditor must understand the basis on which the financial statements being audited
should have been prepared if misstatements are to be identified. In this instance, if
the auditor is to audit the profit or loss on disposal they must be familiar with the
components which make up this balance. This particular calculation could be
relevant, for example, as part of the analytical procedures performed. The auditor
would form their own expectation of the profit or loss on disposal of an asset and
then compare this with the profit or loss recognised in the financial statements.
Candidates should also take note of the specific instruction provided with this
question ie that the answer should be provided to one decimal place. Where specific
instructions like this are given in a question it is essential that candidates follow
these to avoid losing marks unnecessarily.
Question 5
In respect of the revaluation, which TWO of the following statements regarding
reliance on the external expert are TRUE?
A. In line with ISA 620 Using the Work of an Auditor's Expert, reliance can only be
placed on an expert appointed by York & Co
B. Obtaining the valuation report would constitute sufficient and appropriate
evidence over the carrying amount of the buildings
C. Reference to the work of the external expert should not be included in the
auditor's report
D. The objectivity of the valuer must be assessed before placing reliance on the
valuation report
The correct answers are C and D.
This question tests candidates’ understanding of the issues for the auditor when
placing reliance on the work of an expert. There are two types of expert which the
auditor may rely on during the course of the audit, a management’s expert or an
Examiner’s report – AA March/June 2021
6
auditor’s expert. In this instance the expert has been used by Lancaster Co to assist
it with the valuation of the buildings which will appear in the financial statements. The
expert is therefore a management’s expert in accordance with ISA 500 Audit
Evidence. If information is to be used as audit evidence that has been prepared
using the work of a management’s expert the auditor must evaluate the objectivity of
that expert. The competence and capabilities should also be evaluated. The auditor
takes sole responsibility for the audit opinion. If the auditor is to rely on the work of
the expert the evidence would have been evaluated with the conclusion that it
provides appropriate evidence to support the valuation. No reference therefore to the
expert should be made in the auditor’s report.
Option A is incorrect as in accordance with ISA 500 there may be circumstances
where it is appropriate for the auditor to place reliance on a management’s expert.
Simply obtaining the valuation report would not constitute sufficient and appropriate
evidence over the carrying amount of the buildings. In accordance with ISA 500 the
auditor would be required to evaluate whether the information is sufficiently reliable
for the purposes of the audit. This would include obtaining evidence about the
accuracy and completeness of the information and evaluating whether it is
sufficiently precise and detailed. Option B is therefore incorrect.
Examiner’s report – AA March/June 2021
7
Section B
Castle Courier Co
This 30-mark question is based on Castle Courier Co, a package delivery company
which operates from a large distribution centre. This question tests candidates’
knowledge of methods for documenting internal control systems, key controls, tests
of controls, control deficiencies, control recommendations and substantive
procedures for payroll.
Requirement (a) – 4 marks
This is a relatively straightforward knowledge requirement which has been tested in
previous exam sessions. For knowledge requirements such as this it is important
that candidates understand exactly what the question is asking, especially where
candidates should be aiming to score full marks. For this session two methods for
documenting systems were provided in a table; narrative notes and questionnaires.
The first part of the requirement was a description of the method and 1 mark was
available for each method. Where the requirement verb is ‘describe’ as was the case
in this instance, candidates need to ensure that they include enough detail in their
answers.
When describing a given method it is important to think about the words used; for
example stating that ‘internal control questionnaires are questionnaires’ does not
give any additional detail on what the method actually is as it just repeats the words
given in the question. An appropriate response would have been ‘a list of questions
used to assess if the controls exist’. Similarly, in this session some candidates only
gained ½ mark for the description of the narrative notes as they simply stated that
they ‘were written’. To gain a full mark a response would need to provide further
explanation, for example ‘they provide detail of what happens at each stage in the
system’.
Examiner’s report – AA March/June 2021
8
Having described the method, the next part of the requirement is to provide an
explanation of a disadvantage. It is important to read the requirement carefully and
highlight key parts, in this case that only disadvantages are required. This session
some candidates incorrectly provided advantages as well as disadvantages or
provided advantages instead of disadvantages. The requirement asked for ‘a’
disadvantage and so only one per method is needed and if well explained would gain
1 mark. As with the description of the method it is important to provide sufficient
detail in answers. Stating ‘time consuming’ or ‘cumbersome’ without any further
development is not a sufficiently detailed response to gain 1 mark.
It is imperative that future candidates ensure that they devote adequate time to
learning the knowledge areas of the syllabus as well as practising this style of question.
Good example questions to practise are Swift Co from the ‘Sample
September/December 2020 Questions’, Snowdon Co from the ‘Sample March/July
2020 Questions’, Amberjack Co from the ‘Sample September/December 2019
Questions’ and Freesia Co from the ‘Sample March/June 2019 Questions.’
Requirement (b) – 8 marks
Marks are awarded for identification of key controls (½ mark each), explanation of
the key control (½ mark each) and an appropriate test of control for each control (1
mark each).
In common with risks questions the scenario will typically contain more than the
number of key controls required, so it is important that candidates plan their time
carefully and only attempt to list the required number of points. With this type of
requirement good exam technique is absolutely critical.
As stated in previous Examiner’s reports candidates should be prepared to answer
questions which cover key controls and tests of controls, control deficiencies and
recommendations or a combination of both. Castle Courier Co examines both key
controls and deficiencies and focuses solely on the payroll system. Questions may
also be set where key controls and deficiencies are tested but in relation to different
parts of a company’s system, for example key controls in the sales system and
deficiencies in the purchases system.
The first step in tackling a single system key controls and deficiencies question, such
as Castle Courier Co, is to read through the whole scenario in full. This gives an
understanding of what the potential answer points are for both key controls and
deficiencies. It is critical in a question like this that candidates can distinguish
between key controls and deficiencies. Candidates must take care not to identify a
key control where in fact there is a deficiency. If the scenario includes a description
of a control which is not operating effectively then this is a deficiency and NOT a key
control. For example, in Castle Courier Co the scenario states that ‘an edit report is
generated which records the changes made to the payroll system, but this report is
Examiner’s report – AA March/June 2021
9
not reviewed.’ In this case the fact that ‘an edit report of changes to the system is
generated’, is not a key control. This control is not operating correctly as the report is
not reviewed. This should instead be identified as a deficiency.
When undertaking the first read through of the scenario it would be good exam
technique to use the highlight function, using one colour for key controls and a
different colour for deficiencies. This would provide a visual aid for quickly spotting
both controls and deficiencies. Having looked at the whole scenario and highlighted
relevant points candidates should pick their strongest points based on the number
set out in the requirement (in this case four), re-read them from the scenario, drafting
their answer as they go along. Do not be daunted by the length of the scenario, be
methodical and keep re-reading the requirement to stay focused.
In order to be a key control, candidates need to consider whether the control as
described has been appropriately designed and is being operated in such a way that
it would in fact prevent or detect a material misstatement. Therefore, when
identifying key controls, it is important that the control described is complete. For
example, the fact that the payroll system automatically calculates gross and net pay
is not in itself a key control. Additional checks would need to be undertaken to
ensure that the system is correctly calculating the wages and any deductions.
Similarly, some candidates simply focused on the employee key cards being
sequentially numbered. To be effective as a key control sequence checks would
need to be carried out to identify any gaps to ensure completeness of the records.
The sequential numbering is an important element of the system as it allows the
sequence checking to take place, but in itself is not a control.
Some candidates are under the misconception that each sentence in the scenario
contains a key control. This is not the case. The scenario will include information
which describes the way in which the system operates but not all of this information
will indicate a key control. Candidates who then break down each line into a different
point end up wasting time and not gaining credit. In this session some candidates
split one key control into two or three points. As only four controls were required this
resulted in very few marks being gained.
Having identified key controls, candidates then need to explain each control. In
considering this it is important to think about what the aim of the control is, what
potential misstatement is being prevented or detected. The explanation needs to be
specific to each control. It is not sufficient to state ‘this will prevent fraud and error’ as
all controls aim to prevent or detect fraud and error in some way. A clear
understanding of specifically how the control will prevent fraud and error is needed.
For example, in this session the scenario contained a control whereby HR review
video footage of the clocking-in process. An appropriate explanation would be that
the aim of this control is to ensure that staff members cannot clock-in other
employees, resulting in staff only being paid for actual hours worked.
The last part of the requirement is for candidates to describe tests of controls for
each key control identified. To gain the 1 mark available it is imperative that the
descriptions of the tests are detailed enough. A test which starts with ‘check’ is
unlikely to provide sufficient detail as to how exactly the auditor will test the control.
In addition, it must be remembered that tests of controls are procedures carried out
by the auditor, therefore candidates need to ensure that they focus on what the
auditor should do rather than provide recommendations for management.
Examiner’s report – AA March/June 2021
10
In considering how to test the control, a useful starting point is to consider if there are
any documents which can be inspected as this is likely to provide strong evidence
the control is operating. However, when describing the test it is important to clearly
state what document is being inspected and also for what purpose. In this session
the scenario contained a key control where the payroll tax liability is calculated by the
payroll supervisor and reviewed by the financial controller. In testing this control an
appropriate response would be that the ‘monthly tax liability calculations are being
inspected’ and in this case that it is ‘for evidence of review by the financial controller’.
In addition, in describing tests of controls, it is important that key elements of the
control are tested. This session the scenario contained a key control over passwords
being changed monthly. Some candidates recommended that in order to test this ‘a
fictious password should be used to attempt to enter the system, which should then
be rejected’. This is not a valid test in this situation. A fictious password would of
course not access the system but this would not confirm that passwords are
changed on a monthly basis. An appropriate way to test that the passwords are
changed each month is to use one of the expired passwords to attempt to access the
system. In addition, tests such as ‘observe’ do not score as well as inspection or
some enquiry type procedures.
Key controls and tests of controls are a key requirement in internal control questions
and future candidates must ensure they practise these types of questions in advance
of their exam. Swift Co from the ‘Sample September/December 2020 Questions’ and
Snowdon Co from the ‘Sample March/July 2020 Questions’ are good questions to
practise.
Requirement (c) – 12 marks
Marks are awarded for identification of deficiencies (½ mark each), explanation of
the implication of the deficiency to the company (½ mark each) and an appropriate
control recommendation to address each deficiency (1 mark each).
In common with key controls requirements the scenario will typically contain more
than the number of deficiencies required and it remains important that candidates
plan their time carefully and only attempt to list the specified number of points.
Continuing to apply good exam technique and time management skills is critical.
Having completed the key controls requirement candidates should complete their
second read through of the scenario, transferring the highlighted deficiencies into
their answer.
In this session some candidates had already addressed a number of deficiencies
incorrectly as key controls in part (b) and therefore failed to identify them in their
response for part (c) of the question requirement and so were not able to gain credit.
Additionally, a significant proportion of candidates identified deficiencies where in
fact a control was operating. For example, a common incorrect answer was ‘the
payroll clerk recalculates gross to net pay’ with candidates believing that the payroll
clerk was too junior to undertake these checks. This was not a deficiency but instead
part of a key control including the subsequent review of this process by a supervisor.
Examiner’s report – AA March/June 2021
11
In identifying deficiencies, it is important to record what the actual deficiency from the
scenario is. Candidates appear able to pick the relevant fact from the scenario but
often fail to describe it in terms of a deficiency. For example, in Castle Courier Co,
candidates identified from the scenario ‘overtime over five hours is authorised’ but
the actual issue was that overtime under five hours is not authorised. This was
required for the ½ mark available for identification of the deficiency.
Candidates must also be careful not to identify irrelevant deficiencies. For example,
in the scenario it stated that some temporary drivers were paid in cash. This in itself
is not a deficiency. How a company chooses to pay its wages and salaries is a
business decision, the auditor would only be focused on whether the payment
method is well controlled. Other incorrect answers focused on monthly processes
and reconciliations not being frequent enough and clerks being too junior to
undertake any tasks.
Having identified deficiencies candidates are required to explain the implication to
the business to be awarded credit. For example, a valid explanation for the
deficiency ‘holiday request forms are not always authorised’ (identification ½ mark
awarded), would have been ‘this could result in employees taking unauthorised leave
which could lead to staff shortages and operational difficulties.’ In common with key
control requirements, the explanation needs to be specific to each deficiency, as it is
not sufficient to state ‘this will result in fraud/error’ as all deficiencies can lead to
increased fraud and error. A clear understanding of how the deficiency will result in
‘fraud and error’ is needed.
The last part of the requirement is for candidates to describe control
recommendations. To gain the 1 mark available it is imperative that the descriptions
of the controls are detailed enough. Details to consider would include what needs to
be done, who does it need to be done by and how often does this need to take
place. Additionally, recommendations must be actions rather than just objectives.
Recommendations which are phrased as ‘ensure that….’ are unlikely to gain much
credit. For the holiday forms deficiency, the recommendation of ‘ensure that holiday
request forms are authorised’ is an objective and does not explain how this should
be undertaken.
Candidates need to take care to ensure that recommendations are well described,
clearly address the specific control deficiency identified and are practical
suggestions. Many candidates often just repeat the converse of the deficiency, and
to obtain the recommendation mark more detail is needed.
Good questions to practise include Snowdon Co from the ‘Sample March/July 2020
Questions’, Amberjack Co from the ‘Sample September/December 2019 Questions’,
Freesia Co from the ‘Sample March/June 2019 Questions’, Camomile Co from the
‘Sample September/December 2018 Questions’ and Equestrian Co from the ‘Sample
March/June 2017 Questions’.
Examiner’s report – AA March/June 2021
12
Requirement (d) – 6 marks
For substantive procedures requirements, one mark is available for each welldescribed procedure, therefore candidates should aim to produce six tests for this
requirement. Candidates should plan their time accordingly. Also, candidates should
note that it is not necessary to write out the question requirement at the beginning of
their answer, it does not gain any credit and is a waste of time.
When describing substantive procedures one of the key things to consider is the
level of detail provided. Many candidates fail to score well in this type of requirement
because their procedures are vague or too brief. Tests must be sufficiently detailed
noting clearly which source document should be used. For example, in this session
many candidates included, ‘agree to cash book and bank statements’ without
specifying that this was being done to agree the net pay or statutory deductions. Also
‘recalculate gross to net pay for a sample of employees’ would only gain ½ mark as it
needs to be agreed back to the underlying payroll records to ensure payroll is
accurate.
Candidates must ensure that they can distinguish between a substantive procedure
and a test of control. Many candidates lose marks in this type of requirement by
mixing up these procedures. For example, in this session some candidates provided
tests of controls such as ‘reviewing that the drivers’ bonuses have been authorised.’
The purpose of this procedures is to ensure that the controls over the bonus
allocations are operating effectively, therefore this is not a substantive procedure.
Analytical procedures are an important source of evidence when auditing payroll and
there are a number of examples which would be relevant in this case for example,
comparison of monthly payroll with the prior year and investigation of any significant
differences. Candidates who included analytical procedures in their answers were
able to gain credit.
In this session many candidates included irrelevant tests such as ‘obtaining written
representations’, ‘reviewing disclosure’ or focused on authorisation of overtime and
bonuses. This demonstrates a lack of understanding of the scenario and the purpose
of substantive procedures.
Take the time to read the question requirements carefully and spend time thinking
about what is needed prior to producing an answer.
Examiner’s report – AA March/June 2021
13
Corley Appliances Co
This 20-mark question is based on Corley Appliances Co, a company which sells
domestic electrical appliances such as fridge freezers and TVs. This question tests
candidates’ knowledge of the preconditions required for an audit, audit risks and
responses and professional scepticism.
Requirement (a) – 3 marks
Knowledge requirements such as this often have an opening statement, sometimes
referenced to an ISA, and this is useful for setting the scene and providing
clarification on the aim of the question requirement. It is particularly important that
candidates understand exactly what the question is asking, especially for knowledge
questions, where candidates should be aiming to score full marks.
Question requirements such as this demonstrate the importance of having a detailed
understanding of the ISAs, and in this case ISA 210 Agreeing the Terms of Audit
Engagements. For a three-mark knowledge requirement such as this, candidates
should aim to provide three well-explained points. Care should be taken when
reading the requirement to ensure that answer points focus on the right issues. For
example, in this session some candidates incorrectly focused their answers on pre
acceptance procedures such as ensuring adequate staff were available, obtaining
professional clearance from the previous auditors, independence issues and
preparing engagement letters all of which were not relevant. Instead candidates
should have made reference to the preconditions as set out in ISA 210.
Examiner’s report – AA March/June 2021
14
Requirement (b) – 14 marks
With this type of requirement good exam technique is critical. Marks are awarded for
identification of audit risks (½ mark each), explanation of audit risks (½ mark each)
and an appropriate auditor’s response to each risk (1 mark each). The scenario will
typically contain more than the number of risks required, so it is important that
candidates plan their time carefully and only attempt to list the required number of
points.
The first step is to identify the factors which will give rise to an audit risk. This
information can be found in the scenario. All of the information in the scenario should
be read carefully, including the opening paragraph as this may include information
relevant to the identification of audit risks, such as whether this is a new client, which
is often overlooked. When undertaking this read through it would be good exam
technique to use the highlight function as this provides a visual aid for quickly
spotting audit risks. Having looked at the whole scenario and highlighted relevant
points candidates should pick the points they are best able to develop, based on the
number stated in the requirement (in this case seven), re-read them from the
scenario, drafting their answer as they work through the points.
Financial accounting knowledge is also important as audit risks will often focus on
the accounting treatment used in the financial statements. In Corley Appliances Co
accounting issues which give rise to audit risks include risks relating to revenue
recognition, goods in transit and a warranty provision.
In identifying the audit risk, it is important candidates use the specific information in
the scenario rather than making general statements. For example, in Corley
Appliances Co stating that ‘the company has a warranty provision’ would not have
been sufficient to gain credit. In this instance the key issue relates to the fact that the
warranty provision is expected to be lower than the prior year.
Examiner’s report – AA March/June 2021
15
Having identified the risk factor the next step is to explain the risk. To do this,
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’
will only be awarded if it is clear the balance could be either over or understated. For
example, if the risk should have been described in terms of an understated balance,
then no credit would be awarded if candidates referred to a misstated balance.
Candidates cannot hedge their bets by providing both options.
The explanation of the risk must also clearly state the specific area of the financial
statements impacted. For example, in respect of the issue relating to training costs
being capitalised as part of property, plant and equipment (PPE), only noting ‘assets
could be overstated’ would not be awarded credit. An appropriate explanation in this
instance would be ‘PPE could be overstated’.
In addition, a number of candidates explained the issue of goods in transit as
inventory being overstated, however the company has responsibility for goods in
transit from the point of dispatch by the supplier and therefore the risk was that
inventory could be understated. Candidates must take the time to carefully read the
scenario, noting any dates and other relevant information, to ensure that they
correctly understand and describe the audit risks arising.
In order to correctly explain the risk, candidates must take the time to carefully read
the information provided to ensure that they describe risks from the auditor’s
perspective. Where this is not done candidates often describe business risks which
do not gain credit. For example, for the goods in transit issue some candidates
explained the risk as ‘leading to damaged or lost goods.’ This is a business risk
focus rather than audit risk and does not gain credit. To gain credit the focus should
be on the potential impact on the inventory balance in the financial statements.
Having identified and explained the risk, the third step is to provide the auditor’s
response. An auditor’s response does not have to be a detailed procedure, rather it
is an approach the audit team will take. Care must be taken however, to ensure that
the approach suggested actually addresses the risk identified and contains sufficient
detail. A response of ‘discuss with management’ will not gain credit as candidates
need to be very clear as to exactly ‘what’ they are ‘asking management’ about. In
addition, where further documentary evidence is available to the auditor, candidates
need to refer to this to gain the available 1 mark per response. For example,
‘reviewing the aged reports and discussing the appropriateness of the allowance’
would be an appropriate response to the receivable’s valuation risk.
A common error is for candidates to confuse the auditor’s response and
management’s response. For example, in response to the risk of the fraud
committed by the payables ledger supervisor, many candidates focused on how the
company could avoid future frauds. This is not an auditor’s response and therefore
would not be awarded credit. From the audit perspective, the risk is that there may
be other undetected frauds resulting in overstated profit. The auditor’s response
would need to address this risk. Candidates should also consider whether their
response is practical within the context of the scenario. Suggesting that the auditor
ask the bank if they will continue to provide the overdraft facility would not be
feasible, as the bank would not respond to this request.
Examiner’s report – AA March/June 2021
16
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.
Hart Co from the ‘Sample September/December 2020 Questions’, Harlem Co from the
‘Sample September/December 2019 Questions’, Peony Co from the ‘Sample
March/June 2019 Questions’ and Scarlet Co from the ‘Sample March/July 2020
Questions’ are also all good scenario-based question on audit risks and responses to
practise.
Requirement (c) – 3 marks
This question tests candidates’ understanding of professional scepticism. One mark
is available for each well explained point so candidates should aim for three points. A
brief definition/explanation of professional scepticism is required and there would be
one mark available for this. Correct answers included ‘having a questioning mind’ or
‘being alert to possible areas of misstatement in the financial statements’ and both of
these would gain the available one mark. Candidates need to be careful not to use
circular language in their explanation, for example ‘professional scepticism means
being sceptical’ would not gain any credit.
Having defined professional scepticism, candidates need to explain two examples
from the scenario where scepticism is applied. As the requirement is ‘explain’ it
would not be sufficient for one mark to simply list the area impacted. For example,
stating that ‘the warranty provision would be considered when applying scepticism’
would only gain ½ mark as a full explanation needs to consider why or how the
auditor should approach the area with scepticism. In this case that the provision may
be subject to management bias would be an appropriate response.
It is important that candidates only identify examples from the scenario of Corley
Appliances Co as indicated in the requirement, as opposed to general financial
statement transactions and balances where scepticism is required. This requirement
also highlights the range of topics which the exam can cover.
Examiner’s report – AA March/June 2021
17
Purrfect Co
This 20-mark question is based on Kirano & Co, an audit firm due to commence the
audit of Purrfect Co, a dog and cat food manufacturer. This question tests
candidates’ knowledge of substantive procedures and auditors’ reports.
Parts (a) – (c) examine substantive procedures for inventory valuation, receivables
and legal claims. Requirement (a) is for 6 marks, (b) for 4 marks and (c) for 5 marks
and time allocation should be based on 1.8 minutes per mark. Therefore, the
available time should be split as follows; 11 minutes for requirement (a), seven
minutes for (b) and nine minutes for (c).
1 mark is available for each well-explained procedure therefore candidates should
aim to produce six tests for requirement (a), four for (b) and five for (c). Candidates
must think carefully about applying good exam technique. This includes tailoring
procedures to the specific requirements of the question. Additionally, tests must be
sufficiently detailed noting clearly which source document should be used. For
example, tests such as ‘review disclosures’ would only score ½ mark. To score a full
mark the procedure should go on to say, ‘in accordance with accounting
standards/relevant legislation’. Also recommending that the auditor should ‘obtain a
written representation’ without explaining what for, will not generate any marks.
Requirement (a) – 6 marks
The scenario for this requirement detailed that a new product line had been launched
in the year, but sales were lower than expected and there is a material amount of
finished goods in inventory at the year end. One of the key words in requirement (a)
is ‘valuation’ and combined with the scenario it is clear that the substantive
procedures must focus on whether the inventory of this specific product line is
overvalued at the year end. Also, it is important to have noted that the inventory was
all finished goods. Therefore, any tests relating to work in progress (WIP) would not
be relevant.
Examiner’s report – AA March/June 2021
18
Spending time understanding the issue and carefully reading the question
requirement ensures that any procedures listed are tailored and therefore more likely
to score marks. As the requirement asks for procedures relating to valuation
specifically then the procedures need to focus on confirming the cost of the
inventory, confirming the net realisable value (NRV) and considering whether any
write down or allowance is required. Additionally, any other procedures which might
flag that this new product line is overvalued would also gain credit. It is also
important to appreciate that the requirement only relates to the Vego Dog product
line, therefore any general inventory wide procedures are not relevant. This clearly
highlights the need to tailor tests to the specifics of the scenario and requirement
rather than producing lists of rote-learned procedures.
In this session however many candidates included procedures which did not address
the specifics of the scenario or the requirement. Many included procedures relating
to WIP such as ‘recalculate WIP based on stage of completion,’ ‘discuss the basis of
the WIP with management’, or procedures which would have been carried out at the
inventory count. Similarly, ‘review the disclosure of this inventory in the financial
statements’ would not have gained credit as it does not provide evidence relating to
valuation.
When generating the substantive procedures for valuation a logical approach would
be to firstly consider how to verify cost and then how to assess the NRV. Welldescribed procedures relating to the standard cost include; ‘agreeing the material
costs to recent purchase invoices,’ ‘agreeing labour costs to payroll or wage records’
and ‘reviewing the nature of the overheads allocated to ensure they are production
related’. To establish NRV ‘reviewing a sample of post year end invoices for this
product line to assess if the NRV is above cost’ would be a suitable response. When
considering NRV it is important to ensure that the tests provided are focused and
detailed, as procedures such as ‘confirm inventory is valued at lower of cost and
NRV’ will not gain credit as there are no details as to how this confirmation will occur
or how the evidence is obtained.
Candidates must ensure that they can distinguish between a substantive procedure
and a test of control. Many candidates lose marks in this type of requirement by
mixing up these procedures. For example, in this session some candidates provided
tests of controls which would be undertaken when attending the inventory count,
rather than providing substantive procedures for valuation.
Requirement (b) – 4 marks
In common with part (a) it is important to carefully consider the requirement.
Although substantive procedures for receivables are required, this question only
relates to one receivable balance which is owing from a customer, Ellah Co. A
review of the scenario reinforces that Ellah Co is struggling and is therefore less
likely to be able to pay the sum of $2.6m owing.
The substantive procedures which will gain credit are those which are targeted on
confirming whether Ellah Co is likely to, or has, paid any of the sum owing.
Examiner’s report – AA March/June 2021
19
Therefore, any general receivable procedures which relate to all receivables would
not gain credit. For example, ‘calculate receivable collection period and compare to
the prior year and investigate any significant differences,’ and ‘reviewing the
disclosure in the financial statements’ are procedures relevant for receivables as a
whole as opposed to addressing the issues relating to Ellah Co.
Procedures which can confirm whether Ellah Co has paid any of the sums owing,
such as after date cash receipts testing and comparison to the sum now owing would
gain credit, as well as reviewing correspondence with Ellah Co, evidence obtained
through discussions with management or reviewing of board minutes. However, the
level of detail included is important, as ‘discuss with management’ with little detail of
what is being discussed would have gained no credit. To gain the 1 mark available it
needs to be clear what is being discussed and that this is relevant to the receivable
due from Ellah Co.
Requirement (c) – 5 marks
Good exam technique is important for a requirement like this. While some knowledge
of accounting for legal claims would have been helpful the key here is to think
logically. It is possible to produce a good answer by thinking through the issues
which are relevant for any provision, for example whether it should be recognised
and if so, at what amount. Procedures can then be designed to address these issues
using the information from the scenario to add detail. For example, the information
provides a sum of $1.9m for claims to date. Agreement of these to relevant
supporting claims/documentation would form the basis of an appropriate test.
Other procedures which gained credit in this session included casting the provision,
reviewing customer correspondence, contacting the lawyers to establish the likely
outcome of the claims reviewing the disclosures for compliance with IAS
37/accounting standards and agreeing the provision to the financial statements.
Careful thought should be given to the nature of the legal claims and the context of
the scenario. It is clear from the scenario that the amount of $1.9m only relates to
claims received by the year end, however due to the nature of the circumstances it is
possible that further claims relating to goods sold pre year end would arise.
Therefore, appropriate substantive procedures would include those which provide
evidence as to whether the provision is complete.
Additionally, some candidates did not consider the ‘one-off’ nature of this claim and
therefore suggested ‘comparing the provision for the current year to the prior year’.
This is unlikely to provide useful evidence as it is unlikely the company had a similar
claim in the prior year. Candidates must carefully read the information in the question
and tailor their answers accordingly.
Good examples of questions to practise are, Sagitarrii & Co from the ‘Sample
September/December 2020’, Encore Co in the ‘Sample March/July 2020 Questions’,
Spadefish Co from the ‘Sample September/December 2019 Questions’, Hyacinth Co
from the ‘Sample March/June 2019 Questions’, Jasmine Co from the ‘Sample
Examiner’s report – AA March/June 2021
20
September/December 2018 Questions’ and Gooseberry Co from the ‘Sample
March/June 2018 Questions’.
Requirement (d) – 5 marks
There are several ways in which auditors’ reports can be examined, and candidates
must be prepared for a range of question types on this area of the syllabus. For this
requirement marks are awarded for a discussion of the issue (1 mark), and the
impact on the auditor’s report of adequate disclosure (2 marks) and inadequate
disclosure (2 marks).
The starting point with this type of requirement is to identify the issue. This should be
relatively straightforward as the details will be provided in the additional information.
In this case the issue presented relates to whether the contingent liability for future
contamination legal claims has been adequately disclosed in the financial
statements. Many candidates still do not attempt this part and therefore cannot be
awarded the 1 mark available for this. In order to be awarded the mark for discussing
the issue however, candidates should not just re-write the fact from the question but
need to explain what the impact is. In this case this would include an explanation that
the contingent liability should be disclosed as it is a possible obligation (½ mark) and
that the effect on the auditor’s report depends on the adequacy of the disclosure (½
mark).
In this requirement there is no need to consider materiality as no financial data has
been provided in the scenario and the information states that the engagement
partner has confirmed that the contingent liability requires disclosure, therefore the
accounting treatment has been agreed.
The question then requires candidates to consider the impact on the auditor’s report
of adequate and inadequate disclosure. Therefore, answers should be clearly split
into two parts. In this session candidates that structured their answers in this way
generated more relevant answers and ensured that they considered both aspects of
the requirement. Those who did not clearly address the two outcomes separately
often failed to consider the impact of adequate disclosure or produced answers
where it was not clear which aspect of the requirement was being answered.
If the contingent liability has been adequately disclosed, then the key point is that the
auditor’s report would contain an unmodified opinion as the financial statements are
true and fair. However, candidates should also consider whether any additional
information would be required in the auditor’s report. If this issue is fundamental to
users understanding, then an emphasis of matter paragraph which is cross
referenced to the notes in the financial statements would be necessary.
If the opinion is to be modified, the type of modified opinion which is appropriate
should be identified (i.e. qualified opinion, adverse opinion, disclaimer of opinion)
and whether this is due to a material misstatement or due to an inability to obtain
sufficient and appropriate audit evidence. In respect of Purrfect Co if the disclosure is
inadequate then there is a material misstatement which is likely to be material not
pervasive and therefore a qualified opinion is appropriate. It should also be
Examiner’s report – AA March/June 2021
21
remembered that a modified opinion will affect the basis for opinion paragraph. For
example, it will include an explanation of why the opinion is modified. The sample
answer shows the key points which should be included.
Auditors’ reports are a core area of the syllabus. Knowledge of the ISAs in this area
is imperative and candidates must ensure that they are familiar with, and use the
terminology as set out in the ISAs.
Good questions to practise are, Sagitarrii & Co from the ‘Sample
September/December 2020’, Encore Co in the ‘Sample March/July 2020 Questions’,
Jasmine Co from the ‘Sample September/December 2018 Questions’, Gooseberry
Co from the ‘Sample March/June 2018 Questions’ and Airsoft Co from the ‘Sample
March/June 2017 Questions’.
Examiner’s report – AA March/June 2021
22