Examiners’ commentaries 2022

Examiners’ commentaries 2022

AC3093 Auditing and assurance

Important note

This commentary reflects the examination and assessment arrangements for this course in the
academic year 2021–22. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).

Information about the subject guide and the Essential reading

references

Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2016).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
different editions of Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to find the relevant
section.

General remarks

Learning outcomes

At the end of the course, and having completed the Essential reading and activities, candidates
should be able to:

explain why external audits and other types of assurance services are conducted
discuss the duties of auditors and other assurance providers and how these have changed
over time
explain the meaning of concepts that are fundamental to auditing and assurance services,
such a ‘independence’, ‘evidence’, ‘risk’, ‘materiality’
describe, in general terms, the processes involved in auditing and other assurance services
distinguish between compliance and substantive testing and describe various audit tests
discuss the form, content and importance of the reports provided at the end of the audit or
assurance service
discuss the issue of legal liability arising from audits and other assurance services
discuss current developments in auditing and assurance services.

General comments

The overall standard of presentation continues to improve with many candidates setting out their
answers in a neat and thoughtful way. There were, however, still a significant number who do not
understand how to use paragraph breaks and who think it is acceptable to provide the examiners

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with an entire answer in one single block of solid text. Such a presentation looks poor and is very
difficult to mark. The basic principle is to present each point in a separate paragraph – it does not
matter if that paragraph is only two or three lines of text.

Another common error in presentation was the production of bullet-point lists in answer to the essay
questions in Section B. A good essay should consist of a logical, well-balanced argument presented in
a series of paragraphs which naturally flow from one point to the next. The numbering of
paragraphs is not appropriate, neither is the tedious repetition of the same introductory word or
phrase such as ‘Next . . .’ or ‘Another point is . . .’ for a succession of paragraphs. Candidates need to
be more imaginative and creative in their use of language if they want to produce first-class work.

It is disappointing to report that the continuation of the practice of citing a lecturer’s notes as if
that was material from an authoritative source. In some cases, such citations were so frequent that
the candidate’s script appeared to contain no original comment whatsoever. Acceptable sources
which may be cited are academic journal articles, textbooks, law reports and media reports, but not
lecturers’ notes.

In terms of the technical content, if there was one error that was repeatedly made it was failing to
answer the specific question asked. Often it appeared that candidates had memorised or copied
answers to a previous year’s question and then simply regurgitated that answer without a moment’s
thought as to whether that answer addressed the current question.

Many candidates attempting Question 2 (b) and Question 3 (b) showed scant knowledge of details of
the sorts of audit tests that could have been applied in those situations. These candidates appeared
to think that it was sufficient simply to say things like ‘I would perform analytical procedures’ or ‘I
would carry out substantive tests’. The examiners expected – and only rewarded – answers that
contained appropriately detailed audit procedures.

As in past examination papers, this year’s contained one question, Question 4 (b), that required
candidates to write a memo. The examiners were surprised to see how few candidates appeared to
know how to present a memo. While only two marks were awarded for proper presentation, it was
wasteful to disregard this simple instruction. Candidates in future examinations are recommended
to find out how to set out a memo if they do not already know.

Generally, the quality of the written expressions was high but a number of candidates were too fond
of using colloquial phrases such as ‘last but not least’, ‘nowadays’, ‘besides’ or ‘meanwhile’.
Examiners expect a professional tone to be used.

One final note on presentational matters, if a question presents a series of scenarios such as in
Question 1 (a) and Question 4 (a), it is best for candidates to give their answers in the exact same
sequence. Candidates presenting answers in a different sequence ran the risk of omitting one or other
of the scenarios and such omissions lost them marks.

Examination revision strategy

Many candidates are disappointed to find that their examination performance is poorer than they
expected. This may be due to a number of reasons, but one particular failing is ‘question
spotting’, that is, confining your examination preparation to a few questions and/or topics which
have come up in past papers for the course. This can have serious consequences.

We recognise that candidates might not cover all topics in the syllabus in the same depth, but you
need to be aware that examiners are free to set questions on any aspect of the syllabus. This
means that you need to study enough of the syllabus to enable you to answer the required number of
examination questions.

The syllabus can be found in the Course information sheet available on the VLE. You should read

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the syllabus carefully and ensure that you cover sufficient material in preparation for the
examination. Examiners will vary the topics and questions from year to year and may well set
questions that have not appeared in past papers. Examination papers may legitimately include
questions on any topic in the syllabus. So, although past papers can be helpful during your revision,
you cannot assume that topics or specific questions that have come up in past examinations will
occur again.

If you rely on a question-spotting strategy, it is likely you will find yourself in difficulties
when you sit the examination. We strongly advise you not to adopt this strategy.

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AC3093 Auditing and assurance

Examiners’ commentaries 2022

AC3093 Auditing and assurance

Important note

This commentary reflects the examination and assessment arrangements for this course in the
academic year 2021–22. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).

Information about the subject guide and the Essential reading

references

Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2016).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
different editions of Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to find the relevant
section.

Comments on specific questions

Candidates should answer FOUR of the following EIGHT questions: TWO from Section A, ONE
from Section B and ONE further question from either section. All questions carry equal marks.

Section A

Answer AT LEAST TWO but NO MORE THAN THREE questions from this section.

Question 1

You are the audit partner in charge of five audits which have recently been
completed. All that remains to be done is for the category of the audit report to be
decided upon in each case.

Client A is controlled by its majority shareholder, Mr Fudd, who is also the chief
executive officer. The audit work revealed significant transactions between Client A
and another company controlled by Mr Fudd. Mr Fudd has been told that
accounting standards require disclosure of these transactions but he refuses to make
such disclosures in the notes to Client A’s financial statements.

Client B is a holding company based in the UK. It has an overseas subsidiary

located in Freedonya, a country which has recently undergone a military coup and
has closed its borders to visitors. There was no way for the audit team to access the
management, the premises or the accounting records of this subsidiary. Transactions
through the Freedonyan subsidiary accounted for 80% of the group’s revenues and
90% of its profits.

Client C appointed your firm after its year-end, consequently the audit team were

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not able to attend the inventory count. The nature of the inventory and the extent
of the records are such that it is not possible to work backwards to what the
inventory might have been at the year-end.

Client D is involved in long-term construction projects. Its accounting records show

that some of these projects are very likely to produce a loss on completion. The
directors refuse to write down the carrying value of the projects because there are
other projects which are very likely to produce a profit on completion which will
cancel out the expected losses on the other projects.

Client E was unable to locate a purchase invoice selected in the audit sample.
Extended tests were done and it was concluded that it was unlikely that there were
other missing invoices. The missing invoice accounted for 0.0001% of the total
purchases in the year. No other problems were encountered.

Required

(a) State, with reasons, which category of audit opinion is most appropriate for
each client.
(15 marks)
(b) Explain what other opinions auditors are required to form following their audit
of a company’s financial statements.
(10 marks)

Reading for this question

For (a):

Gray et al. The Audit Process, 7th edition, 2019, Chapter 18.
Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 14.

For (b):

Gray et al. The Audit Process, 7th edition, 2019, pp. 655–59, pp. 686–89.
Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 14.
Subject guide, Chapter 5.

Approaching the question

(a) Many of the answers would have benefitted from greater depth of explanation and reasoning
in the context of the applicable auditing standard. For example, for Client A some
candidates explained the audit report should be qualified on the grounds of going concern,
however the applicable grounds for qualifying are based around a lack of disclosure. So
whilst the candidates were correct in stating there was a need for qualification, their
reasoning for the need for the qualification was wrong. Candidates also provided general
opinions, for example, stating that the report should be ‘modified’ or the report should be
‘qualified’ without discussing the specific type of qualification that is most applicable. Too
many candidates suggested more than one possible audit opinion, yet the question
specifically asked for the most appropriate audit opinion. The examiners expected
candidates to have the confidence to come down on one side or the other – not to hedge
their bets.

(b) This question was poorly answered; too many candidates simply restated the paragraphs
included within the audit report, which was not what the question asked for. A number of
candidates discussed the need for auditors to form opinions regarding true and fair, however
the question asked for ‘other opinions’ auditors are required to form. Many candidates also
discussed opinions auditors form prior to the audit, for example the assessment of risk

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during the planning stage, and opinions auditors form during the audit, for example the
impact of the auditor’s assessment of the control environment on the level of substantive
testing, however the question specifically asked for ‘other opinions auditors are required to
form following their audit’. The examiners expected candidates to know that auditors have
to form other opinions such as whether proper books and records had been kept, whether
the financial statements agreed with the underlying records and whether the financial
statements complied with companies legislation.

Question 2

You are in charge of the audit of Purl1 Ltd’s financial statements for the year ended
31 December 2021. Purl1 Ltd manufactures and sells a range of clothing products
made from locally sourced wool. Most sales are to retail outlets and are made on
credit but some customers prefer to pay in cash. The following describes the system
for credit sales and cash sales.

Credit sales

Most customers settle their accounts by bank transfer. A few send a cheque by
mail. The mail is opened by the secretary/receptionist who records the received
cheques in a spreadsheet which is shared with the chief accountant. The
cheques themselves are passed to the chief accountant at the end of the week.
Until then the cheques sit in the secretary’s in-tray.
At the end of the week, the chief accountant makes the appropriate entries in
the ledger accounts on the computer system and banks the cheques that day.
The spreadsheet showing the details of the cheques received is shared with the
sales department who can update their records concerning the performance of
customer accounts.
If a customer complains about the finish or quality of the goods received, a
credit note is automatically raised and the customer is asked to return the
defective goods.

Cash sales

Some customers like to visit the factory where there is a small shop.
The customer selects the items they want to buy and pays the counter clerk by
credit card, cheque or cash.
The sales are recorded in a manual sales register by the counter clerk who
banks any cheques or cash takings at the end of the week.

The chief financial officer admits that the system may look a little ‘casual’ but that
he has complete faith in the employees concerned, he reviews the figures being
recorded and satisfies himself that the amounts look reasonable and, anyway, to
institute a tighter system would cost more money than it would save.

Required

(a) Identify the risks present in the current system and suggest what might be done
to improve the system without employing extra staff or buying extra security
equipment.
(15 marks)
(b) What audit procedures could you undertake to gain assurance that the recorded
amounts for revenue and accounts receivable are not materially mis-stated?
(10 marks)

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Reading for this question

For (a):

Gray et al. The Audit Process, 7th edition, 2019, Chapter 8.

Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 8.
Subject guide, Chapter 7.

For (b):

Gray et al. The Audit Process, 7th edition, 2019, Chapter 11.
Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 11.
Subject guide, Chapter 7.

Approaching the question

(a) Candidates identified well the risks present in the control environment, although candidates
lost marks for not explaining the consequences of the risks/weaknesses. For example, the
examiners expected candidates to go beyond stating that the chief accountant had sole
control of the bank account and therefore without an oversight control could misappropriate
company money. Also, a number of failed to suggest improvements to the system which
would reduce the identified risk.

(b) Part (b) of the question was not well answered. The question required explanation of audit
procedures, whereas too many candidates discussed how management could improve internal
controls, hence they did not address the question set. The question also asked for an
explanation of audit procedures in the context of revenue and receivables, whereas a number
of candidates discussed much broader audit procedures relevant to other financial statement
items.

Question 3

Just before its year end, Home Ladders Ltd, appointed your firm as its auditor. The
company buys and sells a range of ladders suitable for both the professional
construction industry and the amateur home decorator. The company is owned and
managed by Mrs Brent who took over the running of the company on the death of
her husband 10 years ago. Home Ladders reports a small profit each year.

You attended the inventory count on the last day of the financial year and
performed various test counts with satisfactory results. However, late in the day
you noticed several suppliers’ trucks carrying inventory for delivery coming in to the
warehouse and about the same time several Home Ladders’ trucks leaving the
warehouse carrying inventory despatched for delivery to customers. No record was
made of these last-minute inventory movements. The warehouse staff who had been
conducting the count had left. Mrs Brent told you to ignore the matter since the
suppliers’ deliveries probably amounted to the same as the despatches to customers.
She also said that when the same thing had happened last year, the previous firm of
auditors were not concerned and, anyway, the amounts involved were not significant
in terms of total inventory moving through the warehouse in the year.

In one corner of the warehouse, you noticed that there were a large number of
ladders marked as ‘defective’ or ‘unsafe’. Although they looked in good condition to
you, Mrs Brent explained that these ladders would have to be written off because
they could not be returned to the supplier who had gone out of business.

In another corner of the warehouse, you discovered a very expensive sports car. It
was brand new. Mrs Brent explained that she was storing it for a friend.

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Next to the warehouse, Home Ladders has a trade counter where customers place
their orders. Most pay in cash because Mrs Brent gives a good discount compared
to prices charged for credit card sales. Mrs Brent deals with all sales noting cash
takings on a small pad of paper.

Required

(a) What concerns do you have about Mrs Brent’s responses to your queries and
the things that you noticed in the warehouse and their possible impact on the
financial statements?
(15 marks)
(b) What possible audit tests could you perform in response to your concerns and
what would be your options if your tests did not provide satisfactory assurance?
(10 marks)

Reading for this question

For (a):

Gray et al. The Audit Process, 7th edition, 2019, Chapter 8.

Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 8.
Subject guide, Chapter 7.

For (b):

Gray et al. The Audit Process, 7th edition, 2019, Chapter 11.
Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 11.
Subject guide, Chapters 6 and 7.

Approaching the question

(a) A disappointingly low number of candidates picked up on the central theme within the
question – Mrs Brent’s potentially fraudulent behaviour. Many candidates instead
highlighted more generic audit concerns. For example, many candidates raised the issue of
including the expensive car not owned by Home Ladders Ltd in inventory, thereby inflating
the inventory value. Why would a company selling ladders include a car in its inventory?
Others worried about the car being damaged. Most candidates simply seemed unaware of
the possibility that the car could have been owned by Mrs Brent having been purchased
from unrecorded cash sales or the sales proceeds of ‘defective’ ladders.

(b) Audit tests suggested by many candidates tended not to pick up on the need to check for
Mrs Brent’s potentially fraudulent behaviour. For example, whilst many candidates
suggested that audit tests be performed to see that the expensive car was excluded from the
inventory, only a few candidates highlighted the need for audit checks around the true
ownership of the car and to identify how the car purchase had been funded. Few candidates
suggested that documents accompanying the incoming and outgoing deliveries could have
been checked to test that the inventory movements on the day of the inventory count were
correctly accounted for.

Question 4

Ming LLP is an established independent audit firm operating solely in the south
west region of the country and provides audit and professional services primarily to
local manufacturing businesses. Ming LLP has six partners and an annual turnover

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of £2 million. You have been provided below with scenarios regarding either tenders
for new engagements or continuation of existing engagements.

Opportunities to Tender for Engagements with New Clients:

1. Fung plc is a fast growing business specialising in the provision of data analytics
for large high street retailers.
2. Singh Ltd is a newly established, fast growing business manufacturing scooters.
The business is refinancing and requires audited accounts to support the bank
loan application.
3. Guo plc manufactures large turbines for electricity generation. Guo plc have
indicated that annual audit fees will be in the region of £400,000.
4. Hui Ltd is suffering severe cash flow problems; its bank has urgently requested a
set of audited interim accounts. Initial enquires by Ming LLP establish that Hui
Ltd is likely to be in breach of bank loan covenants, a fact the directors of Hui
Ltd failed to disclose to Ming LLP.
5. Gigantic plc manufactures motor vehicle components with factories in Europe,
America and the Far East.

Existing Audit Clients:

6. Ming LLP has audited Liu plc for a number of years and has been approached
by Liu plc to promote a new share issue.
7. A junior member of the audit team working on Wei plc audit recently resigned
from Ming LLP and took up a senior management post with Wei plc.
8. Ming LLP has recently been approached by the directors of Jiu Ltd to prepare
the monthly and annual financial statements of Jiu Ltd.

Required

(a) For each of the scenarios, state with reasons ONE type of threat in accepting or
continuing with the engagement and discuss any mitigating factor Ming LLP
could take to remove that threat.
(15 marks)
(b) Write a memo explaining to new graduate recruits why it is vital that they
learn and comply with the highest professional and ethical values.
(10 marks)

Reading for this question

For (a):

Gray et al. The Audit Process, 7th edition, 2019, Chapter 3.

Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 5.
Subject guide, Chapter 4.

For (b):

Gray et al. The Audit Process, 7th edition, 2019, Chapter 3.

Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 5.
Subject guide, Chapter 4.

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AC3093 Auditing and assurance

Approaching the question

(a) This part produced the best answers on the paper. Candidates correctly identified the
nature of the engagement risk for each of the scenarios; however, many candidates failed to
give the correct response to the perceived risk and whether or not the assignment should be
accepted by the auditor. For example, candidates addressing the situation where a junior
auditor takes up a senior post in the audit client stated that the audit firm would have to
resign and not be re-appointed for at least two years. Such a response is appropriate only
where a senior individual such as an audit partner joins the audit client in a senior position.
Equally incorrect was the suggestion that audit firms should prohibit their employees from
taking up employment with audit clients. Some candidates naively suggested that the firm
should expand its client base in order to prevent the fee income from one client exceeding
the threshold; if only it were that easy to get new business!

(b) In the main this question was well-answered; good answers framed their discussion using the
principles of integrity, objectivity and independence as established by the Ethical Standards.
Good answers also referred to the need for the work of auditors to be trusted by a broad set
of stakeholders as well as the legal implications for auditors who failed to comply with
professional standards.

Section B

Answer AT LEAST ONE but NO MORE THAN TWO questions from this section.

Question 5

Critically examine the main lessons for auditors which are provided by decided cases
involving alleged negligence.

Reading for this question

Gray et al. The Audit Process, 7th edition, 2019, Chapter 21.
Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 15.
Subject guide, Chapter 8.

Approaching the question

The question was answered by a relatively small number of candidates. Their answers were
generally limited to a small number of cases. A disappointingly low number of candidates drew
upon case law regarding when the auditors can be held liable for not detecting fraud. Few
candidates correctly identified the Caparo criteria, regarding exposure to third party liability
suits. A few good essays built upon Caparo using additional case law to illustrate the factors
which courts will consider when deciding if an auditor has been negligent and is liable to pay
damages to a third party.

Question 6

Critically assess the value of the standard auditor’s report on a listed company’s
financial statements.

Reading for this question

Gray et al. The Audit Process, 7th edition, 2019, Chapters 1 and 18.

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 Examiners’ commentaries 2022

Porter et al. Principles of External Auditing, 4th edition, 2014, Chapters 1 and 14.
Subject guide, Chapter 2.

Approaching the question

This question was attempted by many candidates and was reasonably well-answered. Answers
which focused on merely listing the contents of the audit report were poorly rewarded. Good
answers explained why auditing is important and how the audit report conveys valuable
information to stakeholders as well as the implications of the different audit report opinions. A
disappointingly low number of candidates addressed limitations of the audit report; there was
only limited critical evaluation regarding the need for professional judgement and limitations to
the process of gathering audit evidence.

Question 7

Commentators sometimes make a distinction between frauds committed by

management and frauds committed by employees. Discuss the basis for this
distinction and assess the extent of auditors’ responsibilities in relation to each of
these two types of fraud.

Reading for this question

Gray et al. The Audit Process, 7th edition, 2019, Chapter 19.
Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 6.
Subject guide, Chapter 8.

Approaching the question

In the main candidates were able to explain the distinction between management fraud and
frauds committed by employees. Many answers would have benefitted from greater depth of
explanation of the role of management in preventing and detecting fraud in the context of
internal controls. Most candidates explained the role of auditors in detecting fraud. Good
answers explained the limitations of the audit in detecting fraud and why there are bounds to an
auditor’s responsibility for being held liable for failing to detect fraud.

Question 8

Provide an objective review of the arguments for and against imposing a ban on
auditors providing certain non-audit services to an audit client.

Reading for this question

Gray et al. The Audit Process, 7th edition, 2019, Chapter 3.

Porter et al. Principles of External Auditing, 4th edition, 2014, Chapter 4.
Subject guide, Chapter 4.

Approaching the question

Most candidates answering the question were able to provide arguments for and against imposing
a ban on auditors providing non-audit services. Good answers focused on the need for auditor
independence in the context of the different types of independence, (independence of mind and
independence of appearance) and/or threats to independence, for example a self-review threat

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and self-interest threats. The question provided candidates with the opportunity to discuss and
evaluate recent developments introduced by the regulatory authorities to try to address concerns
around the provision of other services by auditors to audit clients; however, not many candidates
exploited this opportunity. Some answers contained inconsistencies such as arguing on the one
hand that providing other services gave auditors a better insight into a client while on the other
hand claiming that completely separate teams would be used to carry out both functions. A
prevalent but incorrect notion was that banning non-audit services would cause accounting firms
to shrink; it seems not to have occurred to many candidates with this notion that an accounting
firm would still provide non-audit services to other clients; the ban would only prevent firms
providing audit clients with these other services.

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