Audit and Assurance

International version

June 2015

Examination Guide

The Examination Guide contains all questions from the June 2015 examination paper
together with the marking scheme answers and comments from the examiner.

The answers detailed below show some but not all possible answers that were
accepted by the marking team. Marks were awarded for other valid answers that
might not be included in this guide.

The Examination Guide has been created and should be used as a study aid.

© 2015 Chartered Institute of Public Finance and Accountancy

AUDIT AND ASSURANCE

(International version)

02 June 2015
Reading time: 10 minutes
Writing time: 3 hours

Instructions to candidates

10 minutes of reading time is allowed before starting this examination.

There are two sections in the examination.

Section A contains 20 multiple choice questions, each worth 2 marks. Answer all questions
using the answer sheet provided.

Section B contains four questions, each worth 20 marks. Answer three of four questions.

All workings should be shown. Where calculations are required using formulae, calculators may
be used but steps in the workings must be shown. Calculations with no evidence of this (for
example, using the scientific functions of calculators) will receive no credit. Programmable
calculators are not permitted in the examinations room.

Where a question asks for a specific format or style, such as a letter, report or layout of
accounts, marks will be awarded for presentation and written communication.

In this paper the unit of currency used is the pound (£), however the currency itself does not
affect the calculations, and no knowledge of the UK currency or currency market is required.

© 2015 Chartered Institute of Public Finance and Accountancy

IPFM AA Examination Guide June 2015

SECTION A Select one correct answer per question.

Use the separate answer sheet provided.

1 Which of the following statements does NOT describe conduct required of an auditor
under ISSAI 30 the INTOSAI Code of Ethics?

(a) Auditors should refuse gifts or gratuities which could be perceived as influencing their
independence and integrity.

(b) Auditors should not disclose information obtained in the auditing process to third
parties under any circumstances.

(c) Auditors should maintain their independence from political influence in order to
discharge their audit responsibilities in an impartial way.

(d) Auditors should update and improve the skills required for the discharge of their
professional duties.

2 Which of the following duties is only likely to be carried out by an auditor of a public
sector body, and not by an auditor of a private company?

(a) The identification of errors detected in the financial statements.

(b) The review of the effectiveness of internal controls relating to the financial
statements.

(c) The assessment of the impact of fraud and error on the financial statements.

(d) A review of reported performance indicators.

3 Which of the following is NOT a valid consequence of carrying out an interim audit?

(a) The overall amount of audit testing required will be reduced.

(b) Audit testing can be better focused on key risk areas in the final audit.

(c) Changes may be made to internal controls that will reduce the level of control risk by
the time of the final audit.

(d) Where the results of interim controls testing are satisfactory, the amount of
substantive testing in the final audit can be reduced.

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4 Which of the following statements about the external auditor’s responsibilities with
respect to fraud in financial statements is true?

(a) An auditor’s suspicions of fraud in financial statements should always be reported to

the police.

(b) An auditor’s suspicions of fraud in financial statements should always be reported to

the audit client’s senior management.

(c) Audit planning is not intended to ensure that all fraud will be detected.

(d) All suspicions of fraud, whether deliberate or accidental, should be investigated

thoroughly.

5 Which of the following would NOT form part of the review carried out by a senior
member of the audit team or the audit engagement partner at the end of the audit as
part of the quality control process under ISSAI 1220?

(a) Ensuring that the evidence obtained is sufficient and appropriate to support the
auditor’s report.

(b) Consideration of whether there is a need to revise the nature, timing and extent of
work performed.

(c) Consideration of whether appropriate consultations have taken place and the
resulting conclusions have been documented and implemented.

(d) Ensuring that all matters raised by the audit team have been addressed by the client
management in the final version of the financial statements.

6 Maintaining independence and objectivity is vital to effective reporting of internal audit

findings. With this objective in mind, place the following four options for internal audit
reporting in order of preference from most to least preferred.

A) The operational manager whose service has been audited;

B) The Chief Executive of the organisation;
C) The Finance Director of the organisation;
D) The audit committee.

(a) A, B, C, D.

(b) D, C, B, A.

(c) D, B, C, A.

(d) B, D, A, C.

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7 Which of the following would be an appropriate test for efficiency in a value for money
audit?

(a) Benchmarking the prices paid for raw materials against those achieved by
organisations of a similar size and delivering similar services in the same area.

(b) Scrutinising management performance reports detailing the achievement of key

organisational objectives in a municipality.

(c) Establishing and applying performance indicators based on the percentage of

available operating theatre hours used in a public hospital.

(d) Comparing annual salaries of teaching staff at various grades between public
colleges in the same geographical area.

8 Which of the following is NOT an internal audit objective when investigating a

suspected fraud?

(a) To collect sufficient evidence to prove or disprove the suspicion of fraud.

(b) To provide evidence admissible for a disciplinary hearing and/or criminal

proceedings.

(c) To minimise possible losses to the organisation, where a fraud is suspected to be

on-going.

(d) To implement appropriate control measures to ensure that similar frauds do not
occur in the future.

9 Which of the following is NOT an advantage of data retrieval?

(a) It is a non-destructive form of testing, that is it uses data without changing it.

(b) The output from such data retrieval is audit evidence; if a test discovers faulty data,
the auditor has proved that a weakness has affected the data in the system.

(c) It potentially represents long-term processing; data in the system may have been
there for the whole accounting period under review, and potentially for much longer.

(d) It reduces the intervention an auditor needs to make to obtain useful audit
information from the live system.

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IPFM AA Examination Guide June 2015

10 Which of the following are ALL identified by ISSAI 1315 as assertions about classes of
transactions and events for the period?

(a) Occurrence; completeness; cut-off; valuation and allocation.

(b) Existence; rights and obligations; completeness; classification.

(c) Occurrence; completeness; accuracy; classification.

(d) Classification and understandability; completeness; existence; accuracy.

11 Which one of the following factors would lead an auditor to question the
appropriateness of audit evidence obtained?

(a) When interviewed, a payroll manager states that receipts are always issued to staff
collecting expense payments in cash.

(b) The validity of payroll payments has been tested by checking that all staff on the
client’s staff list have received a payment for a particular period.

(c) There is no link in the audit schedule between the risks of material misstatement
and the amount of audit testing undertaken.

(d) Audit matters classified as highly material are not subject to more types of audit
testing than those classified as of average materiality.

12 You are testing the valuation of the trade payables balance in an audit client’s
statement of financial position. Which of the following tests would provide the most
reliable audit evidence?

(a) Carry out a check of the outstanding balances to details of invoices issued by the
creditors in the payables ledger and payments made to them by the client.

(b) Ask the audit client to provide details of payments made to creditors in the first four
weeks after the accounting year-end.

(c) Inspect the audit client’s records of the monthly reconciliation carried out on the
payables balance.

(d) Inquire about the procedures for checking statements issued by suppliers with the
payables section manager.

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IPFM AA Examination Guide June 2015

13 Which of the following does NOT describe a category of sampling risk?

(a) The sample selected is too small and therefore the auditor does not have sufficient
evidence to form a conclusion relating to the population.

(b) The auditor selects a population that does not provide evidence to support the audit
objectives.

(c) The auditor fails to spot errors in the sample of items that they test.

(d) The auditor selects a sample from an incomplete population.

14 On reviewing audit evidence obtained an auditor discovers errors and omissions which
they consider could reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements and which are confined to specific
elements, accounts or items of the financial statements.

Which of the following statements best describes these errors and omissions?

(a) They are material but not pervasive.

(b) They are material and pervasive.

(c) They are material and may be pervasive.

(d) They are neither material nor pervasive.

15 A public hospital has failed to apply accounting standards correctly in that it has not
made provisions for cost overruns in respect of a building scheme which commenced
during the financial year.

Which of the following responses is LEAST likely to be chosen by the auditor?

(a) Adverse opinion.

(b) An unqualified audit opinion.

(c) Qualified opinion on the basis of misstatement.

(d) Disclaimer opinion.

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IPFM AA Examination Guide June 2015

16 Which one of the following statements about International Standards for Supreme
Audit Institutions (ISSAIs) and International Standard on Auditing (ISAs) is correct?

(a) Each ISSAI contains the full verbatim text of the related ISA plus a supporting
Practice Note (PN) which deals with specific considerations relating to the audit of
public sector entities.

(b) Each ISSAI is an adaptation of the relevant ISA to suit the requirements of public
audits.

(c) Each ISSAI contains some general commentary on the differences between audits
of public and other entities.

(d) The main purpose of auditing guidelines is ‘to provide INTOSAI members with a
comprehensive set of instructions for the audit of financial statements of public
sector entities.’

17 Which of the following is a requirement of CIPFA’s Public Sector Internal Audit

Standards (PSIAS)?

(a) The chief executive of all public bodies should hold an appropriate professional
qualification.

(b) External assessment of the quality and effectiveness of internal audit must be
carried out at least every four years.

(c) The annual internal audit opinion report must contain confirmation that PSIAS
have been complied with.

(d) Each internal audit service must have an internal audit charter and a risk based
audit plan.

18 Which of the following types of risk assessment procedures are NOT required by ISSAI
1315?

(a) Inquiries of management and others within the audited body.

(b) Observation and inspection.

(c) Risk indexation.

(d) Analytical procedures.

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19 Which of the following are ALL matters which must be considered when evaluating the
objectivity of the internal audit function under ISSAI 1610?

(a) The status of the internal audit function within the organisation; freedom to
communicate with external audit; freedom from operating responsibility; restrictions
on activity; management action on recommendations made.

(b) The status of the internal audit function within the organisation; internal audit
reporting lines; freedom from operating responsibility; restrictions on activity;
management action on recommendations made.

(c) The status of the internal audit function within the organisation; internal audit
reporting lines; freedom to communicate with external audit; restrictions on activity;
management action on recommendations made.

(d) The status of the internal audit function within the organisation; internal audit
reporting lines; freedom from operating responsibility; freedom to communicate with
external audit; management action on recommendations made.

20 According to ISSAI 1500 which of the following techniques can ALL be used to carry out
tests of control AND substantive procedures?

(a) Inspection; observation; inquiry; external confirmation; recalculation.

(b) Inspection; observation; inquiry; reperformance; recalculation.

(c) Analytical procedures; observation; inquiry; external confirmation; recalculation.

(d) Inspection; reperformance; inquiry; external confirmation; analytical procedures.

Total marks (40)

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IPFM AA Examination Guide June 2015

SECTION B (Answer THREE from four questions)

1
You are an external audit team leader carrying out a review of the corporate governance
arrangements at a large municipality. As part of this review, you are examining the
constitution and membership of the municipality’s audit committee.
The following is an extract from the audit committee standing orders:
• The audit committee are responsible for ensuring that the annual financial
statements present fairly the financial performance and position of the municipality;
• The audit committee are responsible for reviewing and monitoring the risk
management processes of the organisation;
• The audit committee are responsible for appointing the Head of Internal Audit and
for determining the annual work programme of the Internal Audit Service;
• The audit committee are responsible for approving the executive board’s
recommendation on the appointment of the external auditor.
The current membership of the audit committee is as follows:
• Member A – The Chief Executive Officer of the municipality;
• Member B – The Head of Internal Audit;
• Member C – The former Chief Financial Officer of the municipality;
• Member D – A partner in a local firm of external auditors.

• Requirement for question 1

(a) Review the statement of responsibilities of the municipality’s audit

committee and identify its strengths together with any problems with the
nature and scope of the committee’s role. Make clear recommendations
for any amendments and additions you consider necessary.
(9)

(b) Review the current membership of the audit committee, identifying its
strengths and weaknesses and making recommendations for changes you
consider desirable. (8)

(c) Briefly describe three different models for the delivery of internal audit
services. (3)

(20)

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IPFM AA Examination Guide June 2015

2
You are an internal audit manager in a central government department that pays subsidies
to agricultural businesses involved in the production of basic foodstuffs. You will soon be
undertaking an internal audit of the claims processing unit in your department. In
preparation for the assignment you are reviewing the audit file on the previous audit
carried out three years earlier.
You find the following extract from one of the previous internal audit’s planning schedules:
“The unit receives periodic subsidy claims from agricultural businesses on form S100,
together with the documentary evidence required to support the claim.
These forms are given a unique reference number on receipt and the details of the claim
are recorded in a computerised register by the claims clerk.
The claim forms and the documentary evidence are examined by a case officer, who
approves the claim for payment by completing the relevant section of the computer record,
once they have verified the completeness and validity of the documentary evidence
provided.
The claims unit supervisor receives a weekly schedule of claims approved for payment and
carries out a pre-payment review of a specified percentage of claims according to a number
of claims value bandings.
The internal audit review in this area will take the form of a stratified sample of claim forms
according to value drawn from the computer register of approved claims. These sample
claim forms will be verified by reference to the supporting documentary evidence provided
by the claimant.”
After considering this extract, you are concerned that the approach taken previously was
more appropriate for an external rather than an internal audit, and you decide to design a
new suite of tests for the upcoming audit.

• Requirement for question 2

(a) Describe one inherent risk, one control risk and one detection risk relating
to the claims processing system. (3)

(b) (i) Discuss the view that the audit activity adopted in the previous audit
was more appropriate for an external, rather than an internal audit. (5)

(ii) Describe three additional tests that you would adopt this time,
indicating for each test how you would assess the effectiveness of the
process. (6)

(c) Briefly describe the main categories of risk associated with major capital
contracts in the public services. (6)

(20)

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IPFM AA Examination Guide June 2015

3
ISSAI 1230, Audit Documentation, states that ‘the auditor shall prepare audit
documentation that is sufficient to enable an experienced auditor, having no previous
connection with the audit, to understand:
a) The nature, timing and extent of the audit procedures performed;
b) The results of the audit procedures performed, and the audit evidence obtained; and
c) Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions’ .
Although these requirements are open to different interpretations in different organisations,
the types of audit documentation typically used are as follows:
• Overall objectives;
• Audit programme;
• Lead schedule;
• Audit files (permanent and current files).
ISSA1 1450, Evaluation of Misstatements Identified During the Audit, contains the actions
required by auditors finding errors in financial statements.

• Requirement for question 3

(a) Explain how each type of audit documentation listed above helps to meet
the requirements of ISSAI 1230. (10)

(b) Describe the responses required by ISSAI 1450 from an auditor discovering
an error in a non-current asset balance in a client’s financial statements.
(10)

(20)

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IPFM AA Examination Guide June 2015

4
ISSAI 1315 requires the auditor to perform risk assessment procedures to provide a basis
for identifying and assessing the risk of material misstatement. These risk assessment
procedures should include appropriate analytical procedures.
You are an audit team leader at an audit firm undertaking an external audit of the financial
statements of a large public hospital. As part of your planning you are designing some
analytical procedures to perform prior to the first visit to the hospital to begin the on-site
audit.
Public hospitals are subject to a funding system called “Income by Outcome” under which
a set fee is paid for each procedure performed according to a nationally determined tariff.
Currently your focus is on the revenue and costs from providing surgical services as this
area is particularly closely regulated by central government and the focus of ever more
stringent efficiency requirements. Your audit objectives in this area include the following;
i) To verify that all the relevant costs of the provision of surgical procedures have
been included in the financial statements;
ii) To verify that the hospital’s costs of providing surgical services are sustainable in
the context of the fees received for providing the different types of surgical
procedure; and
iii) To verify that appropriate management control has been exercised over the costs of
the provision of surgical procedures.
ISSAI 1700, Forming an Opinion and Reporting on Financial Statements, contains a
number of requirements that must be met before an unmodified opinion on the financial
statements may be provided.

• Requirement for question 4

(a) Formulate and describe an appropriate analytical procedure to meet each

of the audit objectives listed above, clearly explaining what further action
you would take after undertaking the procedure. (10)

(b) Briefly describe the areas auditors are required to consider under ISSAI
1700. (6)

(c) Explain why ISSAI 1320, Materiality in Planning and Performing an Audit,
makes a distinction between planning and performance materiality.
(4)

(20)

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IPFM AA Examination Guide June 2015

SECTION A Multiple choice answers

Question (a) (b) (c) (d)

number

1 X

2 X

3 X

4 X

5 X

6 X

7 X

8 X

9 X

10 X

11 X

12 X

13 X

14 X

15 X

16 X

17 X

18 X

19 X

20 X

2 marks per correct answer.

Total marks for part (a): 40

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IPFM AA Examination Guide June 2015

SECTION B

Marking Scheme for question 1

(a) It should not be the responsibility of the audit committee to ensure the integrity of the
financial statements. This should be the responsibility of the executive board. The audit
committee should be responsible for monitoring the integrity of the organization, but this
responsibility would stop at raising concerns about the financial statements with the
executive board and the internal and external auditors. 2
The responsibility for monitoring the risk management processes of the organization lies
correctly with the audit committee. 1
The audit committee should monitor and review the effectiveness of the internal audit
function, but this responsibility should not extend as far as appointing the Head of
Internal Audit, or determining the work programme of the service. The audit committee
should use the work of the internal audit service in reviewing the internal controls of the
organization. 2
The executive board should not make a recommendation on the appointment of the
external auditor, as this would give the board too much control over the appointment and
potentially compromise the auditors’ independence. The audit committee should make a
recommendation on the appointment and terms of engagement of the external auditors
instead. 2
The scope of the audit committee should be extended to review and monitor the external
auditor’s independence and objectivity and the effectiveness of the audit process, and to
develop policy on the engagement of the external auditor to deliver non-audit services.2
(9)
(b) The Chief Executive Officer should not be on the audit committee since he/she holds
executive responsibility in the municipality and therefore this will compromise the
independence of the committee as the committee will review internal controls, risk
management processes and financial statements for which the Chief Executive Officer
has ultimate responsibility. 2
Although the Head of Internal Audit will bring valuable knowledge and skills of audit to
the committee, their membership of the committee will compromise the committee’s
independence in its role of monitoring the effectiveness of the function. An alternative
might be to appoint someone with experience as the Head of Internal Audit of another
municipality. 2
The former Chief Financial Officer of the municipality will also bring valuable skills,
knowledge and experience to the committee, but they may lack objectivity if they have a
long or close past involvement in running the municipality. A former Chief Financial
Officer of another municipality would be a better option. 2
The partner in a local firm of external auditors would bring valuable knowledge and
experience to the committee, and would be a good appointment as long as it was
understood that that firm of auditors were ineligible for consideration for appointment as
external auditors to the municipality. 2
(8)
(c) The service could be delivered by an internal function of the organization, staffed by its
own employees, with only internal clients who work for the same organization. 1
Delivery of the service could be outsourced to an external company either a profit-
making concern, or a mutual often staffed by former employees of the organization. 1

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IPFM AA Examination Guide June 2015

The service could be delivered by a consortium arrangement or a similar ‘shared services’

arrangement, popular where a number of smaller organisations are each unable to
support a viable, effective internal audit service on their own. 1
(3)
(Total 20 marks)

Examiner’s comments on question 1

This question was the best answered of all Section B questions and was also answered by the
highest number of candidates.

Even so many candidates struggled to identify which of the responsibilities and members of the
audit committee were appropriate and inappropriate and to explain why. It appears that many
candidates simply learn the lists of principles governing this and other areas, but are
unprepared to apply the principles in circumstances that they have not been presented with
before. Such application needs to feature strongly in preparation for examinations as it is a key
feature of the syllabus.

I reiterate the suggestion I made in my last report that effective learning activities for applying
principles and standards should include application in different scenarios followed by discussion
of suggested responses, rather than simply testing recall of information in the study materials.

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IPFM AA Examination Guide June 2015

Marking scheme for question 2

(a) Inherent risk – claimants submit fraudulent claims for amounts to which they are not
entitled under the grant-funding legislation in order to extract funds from the public
purse. 1
Control risk – A single claim form may be allocated duplicate reference numbers and as a
result is processed twice leading to the claimant being paid twice. 1
Detection risk - Since the test is based on a sample, claim forms with significant errors
either in completion or processing are not selected, and consequently errors in
processing are not identified. 1
Other appropriate risks identified should receive credit.
(3)
(b) (i) The audit activity described in the audit schedule from the previous audit falls into the
category of a substantive procedure. A substantive procedure tests that the output from
the system complies with a particular control objective or range of objectives, and thus is
designed to detect errors and misstatements rather than to test whether internal controls
are applied effectively and consistently. 2
However it could be argued that the procedure indirectly tests the effectiveness of the
control procedures detailed in the extract from the audit schedule. 1
Although such substantive procedures are a necessary part of internal audit, there should
also be significant tests of control since examining, evaluating and monitoring the
adequacy and effectiveness of internal control is a core function of internal audit. 1
Thus for an internal audit further direct testing is required focusing on the conduct of the
control procedures detailed in the extract. 1
(5)
(ii) Observe the process of receipting and recording new grant claims with particular
emphasis on the allocation of the reference number. You would expect to find that the
unique reference number is physically marked on the original copy of the form on receipt.
2
Conduct an interview with a number of claims officers to inquire about their
understanding of the reasons for the verification checks they carry out and their
knowledge of the legislation and regulation governing the grant claims, and their access
to relevant information and advice in cases of doubt. 2
Obtain a copy of the weekly schedule of claims received by the claims supervisor for a
sample of weeks, and reperform the review undertaken for the same and a different
sample of claims ensuring that the specified percentage was reviewed and that the
necessary documentary evidence was properly checked. 2
Other appropriate tests should receive credit.
(6)
(c) The major risks fall into the following categories:
• Cost overruns due to poor contact specifications or poor controls over stage payments;
• Delays in completion of contracts leading to an inability to deliver services or delays in
the receipt of revenue;
• Fraud or corruption on the part of contractors, public officials or both;
• Poor value for money due to poor specifications or a lack of suitably qualified contractors;
• Damage to the reputation of the public body due to poor quality of assets or perceived
poor value for money;

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• A failure to learn the lessons of past problems by the same or other public authorities
leading to problems being repeated.
1 mark per risk, or two marks may be awarded for fuller descriptions of a narrower range of
risks
(6)
(Total 20 marks)

Examiner’s comments on question 2

This was on average the most poorly answered question in section B and was attempted by
the lowest number of candidates.

Many candidates were unable to clearly describe an inherent, control and detection risk
relating to the scenario, indicating a lack of understanding of these simple concepts and an
inability to apply them. This is extremely disappointing.

Part b)(i) of the question asked students to discuss why the audit activity described in the
scenario was more appropriate to an external rather than an internal audit. The reason for this
was that the activity described consisted entirely of substantive procedures rather than tests of
control, which would be much more prominent in an internal audit.

Part b)(ii) asked candidates to describe three additional tests they would apply this time. Few
candidates realised that these tests should be tests of control rather than substantive
procedures, despite the clue in the terminology used. This highlights the need for candidates to
think carefully about the response required by the question and to interpret the requirements
in the context of the scenario.

Many of the tests suggested were vague or poorly specified. The design of audit tests is a
requirement of most examination papers and will continue to be so. Candidates need to be
well-practised in designing and describing tests, and in making a clear differentiation between
tests of control and substantive procedures. As I have commented before, pre-prepared
generic descriptions, which do not draw on the information given in the scenario, will not be
sufficient to score well. Candidates need to be able to respond accurately and even
imaginatively, to the information provided.

Part c) of the question required simple recall of the workbook material on risks to capital
projects in the public services. It was disappointing to note how many candidates could not
perform this task well.

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Marking scheme for question 3

(a) Overall objectives

The objectives explain why the auditors chose to focus on some aspects of the
assignment rather than others and the materiality and level and type of risk associated
with particular systems or balances. 1
This will help an experienced auditor subsequently reviewing the documentation to
understand the nature, timing and extent of the audit procedures performed. 1
Audit programme
This section translates the overall objectives into a detailed document setting out the
exact tasks and tests to be carried out and the techniques that will be used to gather the
audit evidence required. 1

This will help the auditor to understand the audit procedures performed as well as the
results and audit evidence obtained. 1
Lead schedule
This working paper shows the method and results of the tests and the auditor’s
conclusions on them. 1
This will help the auditor to understand the results of the audit procedures and the audit
evidence. 1
It will also help the auditor to understand significant matters arising during the audit, and
professional judgments made in reaching conclusions about them. 1
Audit Files
Audit files help the auditor meet all three requirements of ISSAI 1230 as follows:
Permanent audit files provide background on legislation, standing financial instructions,
accounting/auditing standards and the organization, helping understanding of the nature,
timing and extent of audit procedures; 1
Current audit files contain records of all the audit work carried out, thus helping
understanding of the results of audit procedures and the evidence obtained. 1
Current audit files also contain details of any discussions with the client or within the
audit team and with their advisers about significant audit judgments and conclusions. 1
(10)
(b) The auditor should first determine whether the error is material. Materiality criteria
should have been set out by the auditor at the planning stage of the audit. In considering
materiality, all errors of a similar type should be accumulated, as misstatements that are
not individually material might become so when aggregated. 2
The auditor should communicate any material misstatements with an appropriate level of
management, as long as disclosure is permitted by law, and request that management
correct the errors. An example of where disclosure may not be permitted by law is where
a fraud may have occurred in which management are implicated. 2
It is not the responsibility of the auditors to correct the errors, nor can they compel
management to do so, and there may be circumstances where management are unable
to correct errors, even though they wish to do so. 1
Where management agree to correct misstatements, the auditor must perform additional
audit procedures to determine whether any misstatements remain. 1
Where management refuse to or are unable to correct misstatements, the auditor is must
obtain an understanding of management’s reasons for not making the corrections and

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take that understanding into account when evaluating whether the financial statements
as a whole are free from material misstatement. 2
They must also obtain a written representation from management as to whether they
believe the effects of uncorrected misstatements are immaterial, individually and in
aggregate, to the financial statements as a whole. 1
The auditor must communicate with those charged with governance about the effect
uncorrected misstatements will have on the audit opinion and again requesting that the
misstatements be corrected. 1
(10)
(Total 20 marks)

Examiner’s comments on question 3

This was on average the second best answered question in section B.

Many candidates were able to describe the types of audit documentation listed in the question,
but many were also unable to explain how they help to meet the requirements of ISSAI 1230,
which were also listed in the question. High marks could only be achieved if these explanations
were provided.

This indicates a need for candidates to consider the purpose of audit documentation rather
than just to learn the lists in the learning materials. This point has wider application though to
all auditing standards covered in the learning materials. I will continue to assess candidates’
understanding of how audit practice helps to achieve compliance with auditing standards.

Part b) required candidates to know the appropriate responses to an error discovered in the
financial statements to comply with ISSAI 1450. A significant number of candidates described
potential modifications to the audit report under ISSAI 1705, which received no credit. Where
the question refers to a specific ISSAI, credit will only be given for responses appropriate to
that ISSAI. Candidates should therefore ensure that they learn the ISSAI titles or numbers
alongside the content.

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IPFM AA Examination Guide June 2015

Marking scheme for question 4

(a) The following are possible procedures, but other appropriate answers should receive
credit.
(i) A trend analysis of the total costs of the provision of surgical procedures with the cost
in previous financial years. Any deviation from the trend may indicate errors in the
allocation of costs and should be presented to management for them to provide
explanations for the deviation. The persuasiveness of the explanations provided will help
to determine the assessed risk to this objective and subsequent audit activity. 3
(ii) Calculate the unit costs of the provision of each type of surgical procedure and
compare with the fee paid for the delivery of the procedure. Although surpluses in one
type of procedure can be used to offset deficits in the delivery of others, in the longer-
term this will put pressure on the overall cost of delivery, particularly if the direction of
travel on fees is downward. Trend analysis of costs and fees for different procedures
would help to further assess sustainability in this area. Where problems are apparent,
management should be asked to provide details of their action plans to address the
problems. 4
(iii) Expenditure and income on the provision of different types of procedure should be
profiled over the year and compared with the hospital’s budget for the procedures.
Significant variances from budget may indicate problems in planning or cost/revenue
control. Where variances occur, management should be asked to provide details of their
analysis of the causes, and the action taken to bring actuals back into line with the
budget, or to reallocate resources to meet requirements. 3
The 10 marks are allocated for all three objectives and maybe reallocated over the three
answers as appropriate with no more than 4 marks awarded for a single objective.
Other reasonable points will attract credit.
(10)
(b) The areas that must be considered are as follows:
The financial statements adequately disclose the significant accounting policies selected
and applied. 1
The accounting policies selected are consistent with applicable financial reporting
framework and are appropriate. 1
The accounting estimates made by management are reasonable. 1
The information presented in the financial statements is relevant, reliable, comparable
and understandable. 1
The financial statements contain adequate disclosures to enable the intended users the
effect of material transactions and events on the information conveyed in the financial
statements. 1
The terminology used in the financial statements, including the title of each financial
statement, is appropriate. 1
Discussion of modified audit opinions from ISSAI 1705 should receive half marks.
(6)
(c) Performance materiality is defined as the ‘amount or amounts set by the auditor at less
than materiality for the financial statements as a whole to reduce to an appropriately low
level the probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality for the financial statements as a whole’. 2
This means that several misstatements, each below a materiality threshold, could add up
to one that is above such a threshold. The auditor must thus plan such that they are
likely, when performing the audit, to identity such multiple, smaller misstatements by
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setting ‘performance materiality’ somewhat lower. 2

A broad range of potential answers are possible here, and marks should be awarded flexibly.
(4) (Total 20 marks)

Examiner’s comments on question 4

This was the third best answered question in section B.

In part a) many candidates struggled to clearly describe an analytical procedure that was
appropriate for each of the audit objectives given. This reemphasises the point I made on
question 2 about the design and description of audit procedures particularly in response to a
given scenario. It is not sufficient preparation for candidates to rote learn definitions and
descriptions from the learning materials and practice of application should form a significant
part of exam preparation by candidates.

Part b) required candidates to briefly describe the areas auditors are required to consider
under ISSAI 1700. Possibly because this question required nothing more than rote learning, a
significant number of candidates answered this question well.

Similarly most candidates were able to distinguish between planning and performance
materiality in part c).

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Summary

A strong feature of the performance of candidates in this exam, as in previous sittings, is a

failure to adequately apply study material content in the context of hypothetical audit
situations.

Students and educators should take the opportunity to examine recent examination papers
and marking schemes to better understand the requirements of questions and the features of
answers that will score well. They should note that although I will continue to assess recall of
study material and syllabus content, I will also seek to assess candidates’ understanding of the
material by requiring candidates to respond to practical problems that auditors face in real life.

A strong feature of this approach is the provision of scenario information in the question, but
also the provision of basic information from the study materials for candidates to apply in the
scenario. A clear implication of this is that marks will not always be awarded for simple recall
of the study material information, as this is likely to be given in the question. This means that
preparation for the examination requires less rote learning of the study materials and more
application of the syllabus content in practical situations, and also the analysis of the content
of ISSAIs so that candidates can explain their implications, rather than just describing their
content.

Effective learning activities are therefore likely to be more active than passive, focussing on
more than simple recall and should feature discussion between educators and students and
amongst students themselves. Candidates and educators should note that judgment and
imagination are key audit skills and are required to score well in this examination. These skills
should be practised and honed in preparing for the examination.

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