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Examtechnique|ACCAQualification|Students|ACCAGlobal

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Home > Students > Examresources > Professionallevel > P7AdvancedAuditandAssurance > Technicalarticles

EXAM TECHNIQUE
13

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Examtechniqueforauditandassuranceservices:howtoreduceyourriskin
Question1
P7,AdvancedAuditandAssuranceisundoubtedlyachallengingexam,howeveritisonewhere
significantadvantagecanbegainedfromananalysisofpastpapersandpracticinggoodexamtechnique.
Questionstendtofocusonparticulartopicsandformatsthatcanbewellpreparedforinadvance.This
articleseekstoprovideguidanceontheauditplanningelementsofQuestion1whereemployinggood
techniquecangiveyouastrongstarttotheexam.
Question1isthelargestofthecompulsorySectionAquestions,worth35marks.Itisascenariobased
questionsetattheplanningstageofanauditengagement.Oneelementoftenexaminedistherisks
relatingtothatassignmentthatshouldbeconsideredattheplanningstageanditislikelytoalsocover
ethicalissues,furtherinformationrequestsandsometimesproceduresyoumayexpecttoundertake
duringtheassignment.ThekeytoagoodQuestion1answeristwofold.Firstlyyouhavetobereadyto
answertherightquestion,thatisinterprettherequirementcorrectlyinthecontextofthescenario,and
secondlyyouhavetopresenttheanswerinanappropriatemanneranddepth.

OBTAINING THE PROFESSIONAL MARKS

InQuestion1therewillbefourprofessionalmarksavailable.Thesemarksareawardedbasedonafixed
criteriaandareeasytoachieveandarelargelytodowithhowtheanswerispresented.Thefirstmarkis
foranappropriateformatthismeansidentifyingwhethertherequirementisaskingforamemo,anemail
orareportandputtingthisasyourtitletotheanswer.Itshouldincludeato/from/dateandsubjectas
illustratedbelowfortheDecember2013exam:

Thesecondmarkisforanintroductionbeforethebodyoftheansweritcanbeasimplesentencetoset
outthepurposeofthedocument.Whatitshouldntbeisanymorethanacoupleofsentences.Some
studentsfallbackonknowledgeoftheoryhereandstarttowritelengthyintroductionsrunningsometimes
toseveralpagesexplainingthetheoryofrisk,auditriskortheauditriskmodel.Thisisnotnecessary.In
thecontextoftheexamyouarewritingtotheauditpartnerandtheyhavealreadydonetheirexamsand
learntthetheory.Thisisnotanessay,itsabusinessdocumentandthepartneronlywantstoread
informationrelevanttotheinstructionsgiveninthequestionscenario.
Thethirdmarkisforstructurehavingheadingsforeachsectionoftheanswerorforeachriskand
definedparagraphs.Thelastisforaconclusion.Againasentenceortwoundertheheadingconclusion
willattractthemark.

RISK EVALUATION
Oncethesefourmarksareobtained,thefocuscanmoveontothecontentoftheansweritself.Thefirst
partoftheanswerwillgenerallybeaboutrisks.ThetablebelowanalysestheQuestion1requirements

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fromsomepastsittings:
Examsitting

Context

Riskrequirement
(marks)

Ethicsrequirement
(marks)

Otherrequirement
(marks)

December2011

Listedcompany

Analytical
Practicemanagement
proceduresandaudit andqualitycontrols
risk(23)
issues(6)

Procedures(8)

June2012

Groupofcompanies
withanacquisitionof
anewsubsidiary

Riskofmaterial
misstatement(18)

Impactofthe
acquisitionon
planning(8)
Procedureson
goodwill(5)

December2012

Newauditmanager

Businessrisk(12)
Riskofmaterial
misstatement(8)

Ethicalissuesand
actions(8)

June2013

Newclient

Analytical
Identifyethicalissues
proceduresandaudit andrecommend
risk(24)
actionstotake(8)

December2013

Groupwithan
acquisitionand
disposal

Riskofmaterial
misstatement(12)

Furtherinformation
required(4)
Procedureson
disposalof
subsidiary(8)

Useofinternalaudit
andfees(8)

InQuestion1,anumberofriskswillbeclearlyflaggedwithinthescenario.Otherrisksmaybeidentified
throughanalyticalreviewwherecalculatingratioswillhighlightfurtherareasofconcern,forexample
increasinginventorydaysmaysignalobsoleteinventoryordecliningmarginsandinterestcoveroran
increaseingearingmayhighlightgoingconcernuncertainties.
Onewaytomakesurethekeyrisksareidentifiedistoreadthroughthequestionwithapeninhandand
notedownthemainrisktopics.Iftherearenumbersinaquestion,forexampleextractsfromfinancial
statements,thesewillrequireanalysisbeforeconcludingonrisks.InthiscaseheadupapageAppendix
andstartcalculatingtheratiostheretosavetime.Eachratiocalculatedislikelytoscoreamarksofor
example,calculatingthisyearsinterestcoverandlastyearswillscoreafullmark.Atrendcalculationis
likelytoscoremark.Insomecasesatrendcalculationcanshowusefulinformation,forexamplefalling
salesbutusuallyacomparisonofratioswillbeneededtofullyunderstandtheriskstheexaminerwants
youtoidentify.Agoodrangeofratiosandanexampleoftheircalculationcanbefoundinany
recommendedstudytextorinthemodelanswers,forexampletotheJune2013exam.Itisimportantto
learntheseratiosandbeabletocalculatethemproperly.
Oncethekeyrisksareidentifiedfromthescenarioorthenumbers,pauseandconsiderwhetherthereisa
biggerpicturetoconsiderforexample,doesgoingconcernbecomemoreimportantnow?Does
somethingfromthecalculationsaddtosomeoftherisksidentifiedinthetext?Doesmanagements
explanationinoneareahaveanimplicationelsewhere?Trytogrouptogetherthetopicsyouwantto
discuss.
Oncetheseareasareidentifiedtheybecomethebasisfortheheadingsofparagraphsintheansweron
riskforexample,inventoryvaluationprovisionsgoingconcern.Puttingthemunderheadingsmakes
theanswereasiertokeeptrackofandscorestheprofessionalstructuremarks.Bythisstage,the
componentsareinplaceforacomprehensiveanswer.Thetricknowistowritetherisksupinsuchaway
astoscorethedevelopmentmarksidentifyingariskwillscoreamark,itsthediscussionofthatrisk
thatscorestheother11/2marksoneacharea.
Thekeythinghereistoreadthequestioncarefully.Theexaminerasksforrisksindifferentways,with
businessrisk,auditriskortheriskofmaterialmisstatementbeingthemostcommon.Businessriskisthe
riskoflowerprofits,lossesorbusinessfailurearisingfrominternalandexternalfactorstothebusiness.
Auditrisktheriskthattheauditorformsthewrongopinionandcancomefromtheinherentriskofanitem
(forexamplecomplexityofaccountingtreatment,subjectivityofamount),controlrisk(theclientscontrols
dontidentifyandcorrecttheerror)anddetectionrisk(theauditordoesntdetecttheerror).Theexaminer
doesntwantadefinitionofauditriskbutademonstrationofunderstandingwhichcomponentofauditrisk
somethingrepresentswillgaincredit.Theriskofmaterialmisstatementistheriskafigureintheaccounts
maybeincorrectandis'before'detectionriskistakenintoaccountitstheriskthefigureiswrongforthe
auditortofind.
ToseehowthetypeofriskrequirementshouldaffecttheanswerconsiderthisextractfromtheDecember
2013exam:
ZennorCoissuppliedwithcarsfromtheGroupsmanufacturingplant.Thecarsaresentoncargoships
andtakeapproximatelysixweekstoreachthemainportinFarland,wheretheyarestoreduntildelivered
tothedealerships.AttodaysdatetherearecarsintransittoZennorCowithasellingpriceof$58m.

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Iftheinstructionrelatedtobusinessriskthenthemattersthatshouldbeconsideredmightincludethe
following.Thecarsoncargoshipsthiscouldincludetheriskofdamageatseawhichwouldreducethe
profitabilityofthecarsandthereforethecompany.Riskcouldalsoarisefromdelaysatsea,whichmay
resultinlostsalesorlossofcustomergoodwill.Notethatthisisaprofitfocusbusinessrisksoftencome
downtothingsthatreduceprofitsorthingsthataffectbusinesssurvival,accountingtreatmentisnot
discussed.Accountingtreatmentsrelatetotheriskofmaterialmisstatementandwhilstbusinessriskscan
helpidentifytheseriskstheyarenotthemselvesbusinessrisks.
Alternatively,iftheinstructionrelatedtoauditrisk,theeffectoftheinitialbusinessriskonthefinancial
statementsshouldbeconsidereddamagetocarswouldpotentiallyreducetheirnetrealisablevalueand
couldmeantheyareoverstatedintheaccounts.Controlrisksshouldalsobeconsidered.Thereisarisk
thattheaccountingsystemsacrossthetwocompaniesdonotcorrectlyrecordthisinventory.Itmaybe
derecognisedinonecompanybutnotyetrecognisedbytheotherresultinginunderstatementof
inventories,oritmaybedoublecounted.Theremaybecutoffissueswiththemovementsbeingrecorded
atthewrongdate.Becauseitisanauditriskrequirementdetectionrisksareconsideredheretoothe
auditteamwontbeabletoverifytheseamountsatthestockcountandthereforemaynotpickuperrors
relatingtothequantityandvaluationofthosecarsintransit.Ifthesewereexternalsalestherewouldalso
betheriskofassociatedrevenueandcostofsaleserrorsarisingfromcutoffproblemsbutatthegroup
levelthesecarswillneedtobereconciledandthesale/costeliminatedsorevenuerecognitionwillbeless
ofanissueinthisscenario.Theriskrelatingtotheeliminationofintercompanybalancesandremovalof
unrealisedprofitswillbeariskthatcanbeaddressedhereorlaterintheanswertothequestion.
Iftherequirementweretoidentifyriskofmaterialmisstatementthefocusisonwherethefigurescanbe
incorrectintheaccountsbeforeauditprocedureshappenthatisdetectionrisksarenotrelevanttothis
requirement.Theinherentandcontrolriskswillbe.Onewaytoaddresstheriskofmaterialmisstatement
istotryandexplainhowafigureordisclosureintheaccountsmaybeincorrect.Intheexampleabove,
inventorymaybeimpairedifcarsaredamaged,revenueandprofitsmaybeoverstatedifintercompany
transactionsandunrealisedprofitarenoteliminated.
Wheneverthelattertwotypesofriskareexamined,areasonableknowledgeoffinancialreportingwillbe
required.Thishastoberelevanttotherisksinthequestionitisimportanttobeabletodiscusswhich
figuresintheaccountsmaybeincorrectandhowtheyshouldbeaccountedfor.Acommonmistakemade
bystudentsistomakegeneralcommentslike'itneedstobeaccountedforcorrectly'or'inaccordance
withaccountingstandards'.Thisscoresnocreditasthepointsaretoovague.
Thatdoesnotmeanhoweverthataccountingrulesshouldbedetailedwheretheyareirrelevant.Itis
commontoseeanswersthatcontainalotofinformationonfinancialreportingmattersthataresimplynot
relevanttothequestionscenario.Forexample,justbecauseaquestionmentionsabrandname,this
doesnotnecessarymeanthatitisrecognisedinthestatementoffinancialpositionandneedstobe
testedforimpairment.Similarly,ifthequestionstatesthatacompanysoldasubsidiaryduringtheyear
thenitcannotbeheldforsalesoitwouldbeirrelevanttodetailalltherulesonheldforsalefromIFRS5,
AssetsHeldforSaleandDiscontinuedOperations.
Onasimilarnoteitisunlikelythattherearesignificantrisksnothintedatineitherthetextorthefigures.If
thecompanyishealthyfinancially,inasecuremarketandhasnoreferencemadetoplantandmachinery
thenimpairmentofplantandmachineryisunlikelytoberelevanttotheanswer

TYPICAL ANSWER POINTS AND THE MARKS THEY ATTRACT

Notidentifyingtherisktyperequiredbythequestioncanmeanthispartofthequestionisfailedevenifall
thecorrectriskshavebeenidentifiedsimplybecausetheexplanationsarenotansweringthequestion
asked.Otherreasonstofailthispartoftherequirementareusingupthetimeonirrelevantissuessuchas
acceptanceproceduresforanewclient(thisoccurspriortoplanningtheauditsoisassumedtobe
completedbeforethetimeperiodintherequirement),repeatinginformationfromthequestionratherthan
addingvaluetoitornotgivingenoughdepthofexplanation.Considertheissuewithcarsaboveandthe
followingillustrativeanswersforrisksofmaterialmisstatement.
Typicalcommentseeninanswer

Typicalmarksallocatedtotheanswer
point

Inventoryintransit
ThegroupcarsshippedtoZennortakesixweekstoreachtheir
destination.
Iftherearedelayscustomersmaybeunhappy

0thisissimplyrepeatedfromthe
question
0thisisabusinessrisknotariskof
materialmisstatement

Inventoryintransit
Carsatseamaybedamaged

theriskofdamagehasbeenidentified
butthereisnofurtherdevelopmentor
explanation

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Typicalcommentseeninanswer

Typicalmarksallocatedtotheanswer
point

Inventoryintransit
Thecarsintransitattheyearendmaybedamagedandrequire
writingdowntonetrealisablevalue

1theriskisidentifiedanda
consequenceforthefinancialstatements
hasbeenidentified

Inventoryintransit
Thecarsintransitattheyearendmaybedamaged.Thismayresult
inthecarsnetrealisablevaluebeinglessthancost.Inventorymust
bevaluedatthelowerofcostandnetrealisablevalue
Thiscouldleadtoanoverstatementofinventory
Thevalueofinventoryintransitattheyearendis2.3%ofGroup
totalassets(58/2500)andismaterial

1theriskisidentified,theaccounting
rulehasbeengivenandtheconsequence
shown

fortheeffectonthefinancial
statements
1formaterialitycalculationand
conclusion

Thewelldevelopedanswergivenaboveisntamodelansweroraperfectanswerandcouldhavebeen
writtenwithmoredetailandprecisionbutitisananswerthatisachievableinexamtimeandconditionsto
scorefullmarks.
Notehowinthisexampletherewasalsoanadditionalmarkformateriality.Thisarisesfromthecalculation
ofmaterialitywithreferencetoasuitablebalance(heretotalassetsorrevenuesnotprofitasweonly
knowthesellingpricenotprofitonthesale)andaconclusionastowhethertheitemismaterial.Thisis
thewaytheexaminerexpectsyoutocalculatemateriality.
Afinalpointonriskiswithregardtogoingconcern.Thistopicisalludedtoinmostexamsandinmany
riskquestions.Thereareoftengoingconcernissueswithinriskquestions.Thisisalwaysanareathat
auditorsmustconsiderindetailforeveryclient.Theunderlyingpresumptionisthatabusinessisgoing
concern.Itsnotagoingconcernifitwillnotbetradingintheforeseeablefuture.Itisonlyifthisisthe
casethattheaccountsarepreparedonabreakupbasis.Thisisinfactquiterare.Mostofthetimewhen
youseegoingconcernissuesinariskquestiontheriskassociatedwithitisthatthedoubtssurrounding
goingconcernarenotadequatelydisclosedinthenotestothefinancialstatements.

CONCLUSION
ThisarticleshouldhavegivenyouaninsightintohowtomakeastrongstartonQuestion1inP7,
AdvancedAuditandAssurance,tacklingthepresentationandriskelementsofthequestion.

Lastupdated:31Aug2016

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