Audit and

Assurance (AA)
September/
December 2022
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 ..............................................................................3
Question 1 ........................................................................4
Question 2 ........................................................................5
Question 3 ........................................................................6
Question 4 ........................................................................6
Question 5 ........................................................................7
Section B ..............................................................................8
Daley Co ...........................................................................8
Requirement (a) – 5 marks ...........................................8
Requirement (b) – 15 marks .........................................9
Requirement (c) – 4 marks .........................................12
Requirement (d) – 6 marks .........................................14
Magpie Co ......................................................................16
Requirement (a) – 4 marks .........................................16
Requirement (b) – 2 marks .........................................17
Requirement (c) – 14 marks .......................................18
Pacific Co .......................................................................22
Requirement (a) – 5 marks .........................................22
Requirement (b) – 6 marks .........................................24
Examiner’s(c)
Requirement report – AA September/December
– 4 marks 2022
.........................................25 1
Requirement (d) – 5 marks .........................................26
General comments
This examiner’s report should be used in conjunction with the published
September/December 2022 sample exam which can be found on the ACCA Practice
Platform.

In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted these
questions. Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform, reviewing
the published answers alongside this report.

The Audit and Assurance exam is offered in computer-based (CBE) format. The
model of delivery for the CBE exam 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 – here we provide commentary
around some of the main themes that have affected candidates’ performance
in this section of the exam, identifying common knowledge gaps and offering
guidance on where exam technique could be improved, including in the use of
the CBE functionality in answering these questions.
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 constructive response question worth 30 marks and two
constructive 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. Candidates who do
not spend sufficient time practising questions are unlikely to be successful as the
written questions in particular aim to test candidate’s application skills.

Examiner’s report – AA September/December 2022 2

Section A

Example of a case scenario

You are an audit supervisor at the firm Pickering & Co, currently working on the audit
of Walker Co, which is a long-standing audit client of your firm. You have been
assigned responsibility for auditing bank and cash and share capital.

Bank and cash

Walker Co operates a number of retail shops in one country, selling outdoor leisure
clothes, footwear and other walking-related accessories. Each shop accepts cash or
debit card transactions. As a result, at any one time, the company holds a significant
amount of cash at its head office. Walker Co performs a year-end cash count to
verify the year-end cash balance.

From the audit planning meeting with Walker Co, you have ascertained that it has
four bank accounts with International Bank Co which consist of a current account, a
deposit account and two loan accounts. International Bank Co has provided direct
confirmation to Pickering & Co of the balances in each account at the year end.
During the year, Walker Co opened a deposit account with a foreign bank, Southern
Bank Co, and at the year end a material balance is held in this account. Southern
Bank Co provided a letter to the financial controller of Walker Co to confirm the
balance at the year end.

Share capital
Walker Co plans to expand its operation into online retailing next year and has
undertaken a rights issue in the current year to fund the new venture.

Examiner’s report – AA September/December 2022 3

Question 1

Auditors use a variety of methods to obtain evidence, using procedures detailed

within ISA 500 Audit Evidence.

Which of the following statements demonstrates the use of the audit

procedure 'enquiry' when auditing bank and cash?

(1) The auditor watches the cashier performing the daily bank reconciliation
process
(2) The auditor reviews year-end bank balances against prior year total to identify
significant fluctuations and discusses any unusual movements with
management
(3) The auditor confirms directly with management whether any new bank
accounts have been opened in this financial year
(4) The auditor obtains a standard bank letter from each bank used by the
company

A. 2 and 3
B. 3 only
C. 1
D. 2 and 4

The correct answer is: B

This question tests candidates’ understanding of the forms of evidence available to

the auditor. Discussing a matter with knowledgeable persons is an example of
enquiry. In this instance, only the discussions with management are an enquiry.
Watching a process is observation, obtaining a bank letter is confirmation and
comparing annual balances is an analytical procedure.

Examiner’s report – AA September/December 2022 4

Question 2

In relation to the bank account with Southern Bank Co, which of the
following factors will reduce the reliability of the evidence which can be
obtained?

(1) Southern Bank Co issued the standard bank confirmation letter to the financial
controller of Walker Co
(2) The original year-end bank statement has been lost but a photocopy has
been provided by the accounts clerk
(3) The account was only opened in the year and therefore was not subject to
prior year audit procedures
(4) The year-end bank reconciliation shows an immaterial unreconciled difference
which the accounts clerk has advised will not be investigated

A. 1 and 2 only
B. 2 and 3 only
C. 1, 2 and 4 only
D. 1, 2, 3 and 4

The correct answer is: C

The auditor is required to obtain sufficient and appropriate audit evidence in order to
be able to draw reasonable conclusions on which to base the audit opinion.
Therefore, the source and reliability of this evidence is crucial. In this instance, the
bank confirmation letter being received via the client means that the auditor is not
receiving directly from a third party, therefore reducing the reliability of the audit
evidence. The loss of the original and replacement with a photocopy also reduces
the reliability of this piece of evidence, as the risk of tampering increases. The
unreconciled difference means that this key control is not operating as effectively as
it should and therefore reduces the reliability. The fact that the bank account is new
does not reduce the reliability of the audit evidence; the year-end balance is what is
being tested and therefore the fact that it has not been subjected to audit in the prior
year is irrelevant.

Examiner’s report – AA September/December 2022 5

Question 3

In respect of the loan accounts held with International Bank Co, which of the
following audit procedures would provide the best evidence to verify
accrued interest at the accounting period end?

A. Inspect the year-end bank reconciliation and confirm accrued interest is

included
B. Agree the interest charges per the cash book to the pre year-end bank
statements
C. Inspect the bank confirmation letter to confirm the loan account interest rate
is consistent with prior year
D. Recalculate the accrued interest based on the outstanding loan value, interest
rate and accrual period

The correct answer is: D

Recalculating the accrued interest will be the best procedure to verify the accuracy of
accrued interest at the accounting period end. Testing an internal control, such as
the bank reconciliation, is not relevant to the issue. Interest charges are not yet
showing on pre year-end bank statements. The analytical comparison of the loan
interest rate is not specific to the calculation of year-end accrued interest.

Question 4

Which of the following audit procedures included in the audit programme

tests for the EXISTENCE of bank and cash?

A. Attend the cash count at the year end and reperform the count
B. Review all relevant bank statements to verify that the accounts are held under
the name of Walker Co
C. Agree a sample of account balances detailed on the bank confirmation letters
to the trial balance
D. Review the disclosure included in the financial statements to verify only bank
accounts per the bank letters are disclosed

The correct answer is: A

Gathering evidence of the existence of bank and cash is a crucial procedure,

undertaken during the audit to ensure the assets (or liabilities) truly exist and there
has been no overstatement. Attending the cash count at the year end and
reperforming the count would be a test for existence and therefore the correct
answer. Reviewing all relevant bank statements to verify that the accounts are held

Examiner’s report – AA September/December 2022 6

under Walker Co is a test for rights and obligations. Agreeing a sample of accounts
detailed on the bank confirmation letter to the trial balance is a completeness test.
Reviewing the disclosures included in the financial statements to verify only bank
accounts per the bank letter are disclosed is a test of presentation.

Question 5

Which of the following audit procedures provide relevant evidence for the
ACCURACY, VALUATION & ALLOCATION assertion for share capital in the
financial statements of Walker Co?

(1) Review board meeting minutes to identify matters relating to share capital,
including ensuring proper authority was given for any share capital changes
(2) Agree the authorised share capital disclosed in the financial statements to the
company's constitution documents
(3) Agree closing share capital balances in the trial balance to statutory records
and current year draft financial statements
(4) Inspect cash book to confirm cash receipts from rights issue have been
appropriately recorded

A. 1 and 2
B. 1 and 3
C. 2 and 4
D. 3 and 4

The correct answer is: D

When testing for accuracy, valuation and allocation, the auditor is ensuring that
assets, liabilities and equity are included in the financial statements at appropriate
amounts, ensuring that any resulting adjustments have been appropriately recorded
and related disclosures have been appropriately measured and described. The key
to answering this question is to focus on the stated assertions. Tracing the balances
from the closing trial balance to statutory records and draft financial statements and
also confirming cash receipts from the share issue and will both go towards
confirming valuation. Reviewing board minutes and agreeing to constitution
documents will not give assurance over the accuracy, valuation and allocation.

Examiner’s report – AA September/December 2022 7

Section B

Daley Co

This 30-mark question is based around Daley Co, a manufacturer of double glazed
windows and doors. This question tests candidates’ knowledge of the components of
an entity’s system of internal control; control deficiencies, recommendations and
tests of control; substantive procedures for bank balances and corporate governance
deficiencies and recommendations.

Requirement (a) – 5 marks

Describe the five components of an entity’s system of internal control.

This is a knowledge requirement which has been tested in previous exam sessions.
Knowledge requirements such as this often have an opening statement, sometimes
referenced to an ISA, which is useful for setting the scene and providing clarification
on the aim of the question requirement. It is especially important that candidates
understand exactly what the question is asking, especially for knowledge questions,
where candidates should be aiming to score full marks.

For this session, candidates were required to describe the components of an entity’s
system of internal control. As the requirement verb was ‘describe’ candidates
needed to ensure that they wrote enough detail in their answers. Simply providing a
few words such as ‘identification of risk’ is not sufficient as a description. Therefore,
when reviewing their answers, candidates need to consider whether they have
written enough.

Candidates were provided the five components from ISA 315 (Revised 2019)
Identifying and Assessing the Risks of Material Misstatement in a table, with one
mark available for each description. However, a significant proportion of candidates

Examiner’s report – AA September/December 2022 8

did not gain credit as their answers were circular. For example, ‘the risk assessment
process relates to managements method for assessing risk’ is simply a repetition of
the words for the risk assessment process component, and therefore would not gain
any credit.

Commonly awarded points included ‘management’s attitude or awareness,’ ‘process

to assess effectiveness of internal control’ and ‘process for identifying risk.’ However,
these points would each only gain ½ marks as they are too brief or only part of the
description. The component most candidates struggled with was information system
and communication. Many candidates incorrectly assumed that this related to an
information technology (IT) system rather than relating to records to process
transactions, assets and liabilities to maintain accountability.

It is imperative that future candidates ensure that they devote adequate time to
learning the knowledge areas of the syllabus as well as practicing this style of
knowledge question. Good example questions to practice are Whittaker Co from the
Sample March/June 2022 Questions, Pomeranian Co from the Sample
September/December 2021 Questions, Castle Couriers Co from the Sample
March/June 2021 Questions, Swift Co from the Sample September/December 2020
Questions, Snowdon Co from the Sample March/June 2020 Questions, Amberjack
Co from the Sample September/December 2019 Questions and Freesia Co from the
Sample March/June 2019 Questions.

Requirement (b) – 15 marks

In respect of the system of Daley Co:

(i) Identify and explain FIVE deficiencies;

(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a TEST OF CONTROL the external auditors should perform to
assess if each of these controls, if implemented, is operating effectively.

Examiner’s report – AA September/December 2022 9

Marks are awarded for identification of deficiencies (½ mark each), explanation of
the implication of the deficiency to Daley Co (½ mark each), an appropriate control
recommendation to address each deficiency (1 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 deficiencies 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 crucial.

The first step in tackling a control deficiencies question is to read through the
scenario in full. This gives an understanding of what the potential answer points are
as some deficiencies are easier to explain than others. Having read the whole
scenario then candidates should re-read it, 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 a multi-cycle question such as Daley Co there is
likely to be a good cross section of points across each of the three cycles presented
and only five deficiencies are required.

In identifying deficiencies, it is important to record what the actual deficiency from the
scenario is. Candidates can pick the fact from the scenario but fail to spot what the
actual deficiency is. Candidates must also be careful not to identify irrelevant
deficiencies. In this diet it was pleasing to see that most candidates were able to
appropriately identify relevant deficiencies. The least commonly provided
deficiencies related to the physical verification of sites not being completed regularly
enough and the bank accounts only being reconciled quarterly. The deficiency
relating to the bank reconciliations was quite straightforward and candidates who
identified this point often scored well, therefore it is surprising that so few candidates
provided this point. It is possible that, as it was detailed at the end of the scenario,
some candidates simply did not read the whole scenario before they began to write
their answer. This demonstrates weak exam technique. With each deficiency being
worth three marks, it is important to pick the five most straightforward points to
maximise marks.

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 ‘accounting policy changed resulting in capital items under $20,000 being
expensed rather than capitalised’ (identification ½ mark awarded), would have been
‘this limit is too high and could result in capital expenditure incorrectly written off to
profit and loss resulting in understated property, plant and equipment.’ Answers
which just stated ‘that this is not in line with IAS® 16 Property, Plant and Equipment’

Examiner’s report – AA September/December 2022 10

would not have gained credit as it does not explain why this is not in accordance with
the standard, or how it will impact the business.

The explanation needs to be specific to each deficiency. It is not sufficient to state

‘this will result in fraud/error’ as all deficiencies lead to increased chance of fraud
and/or error. A clear understanding of how the deficiency will result in ‘fraud and
error’ is needed. In particular, for the deficiency of ‘FD only reviews the bank
payments list totals,’ the explanation needs to focus on how this could lead to an
increased risk of payments to fictious suppliers rather than a generic comment
relating to ‘an increased risk of fraud and error.’

The next part of the requirement is for candidates to describe control

recommendations. To gain the 1 mark available, it’s imperative that the descriptions
of the controls are detailed enough. Additionally, recommendations must be actions
rather than just objectives. Recommendations which are phrased as ‘ensure that….’
are unlikely to gain much credit, as the recommendations must be clear and
actionable.

Candidates must take care to ensure that their 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,
though to obtain the recommendation mark more detail is needed. For the ‘edit
report of amendments not being reviewed’ deficiency, the recommendation of ‘the
payroll manager should review the edit reports’ would only gain ½ marks as its
needs to state that this review should be evidenced, and any unusual amendments
investigated. Additionally for this same deficiency some candidates recommended
that only the payroll manager should make amendments to the payroll. This would
not have gained credit as the deficiency relates to an edit report not being reviewed
rather than the seniority of the person amending the payroll.

The last part of the requirement is for candidates to describe a test of controls for
each control recommended. To gain the 1 mark available it is important 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 must ensure that they focus on what the auditor
should do rather than provide recommendations for management.

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 which document is being inspected and also for what purpose. In this session

Examiner’s report – AA September/December 2022 11

the scenario contained a deficiency where only the totals on the bank payments list
were reviewed. In testing the control recommendation of ‘the FD should review the
payments list for unfamiliar items and evidence this review by signature,’ an
appropriate response would be that the ‘bank payments lists are inspected’ and in
this case that it is ‘for evidence of review by the FD.’

In addition, tests such as ‘observe’ do not score as well as inspection or some

enquiry type procedures. Where more reliable evidence sources are available they
should be used to test the controls. In this session, ‘observation’ was not credited for
any of the deficiency recommendations as in each case more reliable evidence could
be generated through enquiry or inspection. In addition, candidates should ensure
that they do not confuse tests of control with substantive procedures.

Good internal control deficiencies and recommendations questions to practice

include: Whittaker Co from the Sample March/June 2022 Questions, Pomeranian Co
from the Sample September/December 2021 Questions, Castle Couriers Co from
the Sample March/June 2021 Questions, Snowdon Co from the Sample March/June
2020 Questions, Amberjack Co from the Sample September/December 2019
Questions, Freesia Co from the Sample March/June 2019 Questions and Camomile
Co from the Sample September/December 2018 Questions.

Requirement (c) – 4 marks

Describe substantive procedures the auditor should perform to obtain

sufficient and appropriate audit evidence in relation to Daley Co’s bank
balances.

For substantive procedures requirements, one mark is available for each well-
described procedure, therefore candidates should aim to produce four tests for this
requirement. Candidates should plan their time accordingly. Also, candidates should

Examiner’s report – AA September/December 2022 12

note that it is not necessary to write out the question requirement at the beginning of
their answer. This does not gain any credit and wastes candidates’ 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 and for what purpose.

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. Where substantive procedures are required for an
account balance subject to an accounting standard then considering the rules of the
standard can help in generating targeted substantive procedures.

It is important when auditing bank balances to consider in detail the elements of the
bank reconciliation as this is the main focus of the auditor’s testing. Utilising
knowledge from Financial Accounting, about how the bank statement is reconciled to
the year-end balance as per the cash book, should provide candidates with sufficient
points to audit. When auditing the reconciliation candidates must be clear as to
which time period the various source documents relate to. For example, in testing
outstanding lodgements, to be a valid reconciling item on the reconciliation, the audit
test should be to ‘agree to the pre year-end cash book and the post year-end bank
statements.’ Where candidates were not specific as to whether the bank statements
were pre or post year-end then full credit could not be awarded.

Candidates who focused on ‘obtaining a bank letter and agreeing the balance per
the bank to the reconciliation,’ ‘agreeing the cash book balance at the year end to
the trial balance and financial statements,’ ‘reviewing the year-end bank statements
for unusual items or window dressing,’ and ‘reviewing disclosure’ as well as testing
outstanding lodgements and payments were able to gain credit.

Incorrect answers focused on auditing opening balances or the petty cash balance
despite the requirement only being for bank balances. In many substantive
procedure questions analytical procedures can be an important source of evidence,
but for one off types of expenditure and bank balances then analytical review is
unlikely to be useful.

Examiner’s report – AA September/December 2022 13

Requirement (d) – 6 marks

Describe THREE corporate governance deficiencies faced by Daley Co and

provide a recommendation to address each deficiency to ensure compliance
with corporate governance principles.

For corporate governance questions candidates are generally asked to identify and
explain a set number of corporate governance deficiencies from a given scenario
and give a relevant recommendation to ensure compliance with corporate
governance principles. Candidates are awarded ½ marks for identifying the
deficiency and ½ marks for explaining the implication of the deficiency. Candidates
are awarded 1 mark for each well explained recommendation.

In order to be awarded the identification ½ marks, candidates are required to identify

the deficiency from the scenario and it was pleasing to see that most candidates
were able to confidently undertake this.

The next step is to clearly explain the implication of the deficiency. Candidates often
fail to do this and miss out on the ½ marks available. The explanation needs to be
clear about how this results in a corporate governance issue. For example, just
stating that ‘this is poor corporate governance’ would not be awarded credit. For the
deficiency of Chair and CEO being the same individual, many candidates struggled
to explain why this would be an issue. To gain the ½ marks available they needed to
explain that there could be an abuse of power by one individual as both are key
roles. Even where candidates attempted an explanation, these were often weak as
they did not explain adequately why the deficiency causes poor corporate
governance.

The final step is to then suggest a recommendation to ensure compliance with

corporate governance principles. It is important that this is phrased as an action;

Examiner’s report – AA September/December 2022 14

often candidates provide objectives rather than actions. For example, for the
deficiency relating to non-executive’s remuneration being based on pre-tax profits, a
recommendation of ‘remuneration should not be based on short-term profits’ will not
be awarded credit. In order to gain the one mark available, the recommendation
must give a clear action, for example ‘non-executive’s remuneration should be based
on their time commitment, responsibilities or on a fixed annual fee.’

Freesia Co from the Sample March/June 2019 Questions is a good scenario-based

question to practice the skill of describing corporate governance deficiencies and
making relevant recommendations.

Examiner’s report – AA September/December 2022 15

Magpie Co

This 20-mark question is based around Magpie Co, a retailer of garden supplies
operating across 20 stores. This question tests candidates’ knowledge of audit
engagement letters; ratio calculations and audit risks and responses.

Requirement (a) – 4 marks

Explain the PURPOSE of an audit engagement letter and list FOUR items
which should be included in an audit engagement letter.

One mark was available for each well-explained point regarding the purpose to a
maximum of two marks and ½ marks for each of four items included in an
engagement letter. This is a knowledge area that has been tested in previous diets.

Candidates were able to confidently list four items which should be included and so
scored the two available marks. In fact, many candidates listed more than four
points, with the most common correct answers being scope, fees and auditor and
management responsibilities. However, few candidates scored well in relation to the
purpose of an engagement letter, as they simply ignored this part of the requirement
or repeated items which would be included in the letter. Where credit was awarded, it
was normally for the engagement letter ‘minimising the risk of misunderstandings of
the engagement terms’ and that ‘it forms a written agreement or contract between
the firm and client.’ Candidates are reminded that they must take care in carefully
reading the requirement and answering each sub-requirement carefully whilst
avoiding overlap or repetition of points.

Examiner’s report – AA September/December 2022 16

Requirement (b) – 2 marks

Calculate the following TWO ratios, for BOTH years, to assist you in planning
the audit of Magpie Co: operating profit margin and payables payment period.

Marks are awarded for the calculation of the relevant ratio for each year (½ mark
each) and so four ratios should be calculated in just under four minutes. The marks
are only awarded for the correct answer and the requirement clearly stated that
formulas are not required to be shown.

With only ½ marks available per ratio, credit is not awarded for the calculations.
Therefore, if a candidate simply provides the calculation without the final answer, no
credit will be given. It is clear from reviewing candidates’ answers that some fail to
bring a calculator into the exam, as they only list the calculations. Candidates are
reminded that a calculator is required for ratio calculations as well as to assess
materiality in audit report requirements.

In this session candidates were able to confidently calculate both of the required
ratios, relating to profitability and liquidity in this case. However, candidates must
ensure that they are able to calculate all ratios within the syllabus, and not just the
main profitability and liquidity ratios.

Examiner’s report – AA September/December 2022 17

Requirement (c) – 14 marks

Using the information provided and the ratios calculated, describe SEVEN
audit risks and explain the auditor’s response to each risk in planning the
audit of Magpie Co.

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). With a scenario-based requirement such as this good exam technique is
critical.

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, as
was the case in Magpie Co, and has in the past often been 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 their
seven strongest points, re-read them from the scenario, drafting their answer as they
go along. Candidates often use the copy and paste function when drafting their
answers for the identification of the risk. However, care should be taken to ensure
that the risk is actually identified.

Financial accounting knowledge is also important as audit risks will often focus on
the accounting treatment used in the financial statements. In Magpie Co accounting

Examiner’s report – AA September/December 2022 18

issues which give rise to audit risks include those relating to property, plant and
equipment and inventory valuation. The risk least identified by candidates related to
the operating margins and gross margins changing. Candidates should expect a
range of topic areas within an audit risk scenario, some of which may be more
challenging than others.

When tackling audit risk questions which also include ratios from an earlier
requirement, the results of the calculations should be considered when identifying
the risks. In this case the significant movement of the inventory holding period along
with the information in the scenario about the damaged inventory identifies a
possible risk of overvaluation of inventory. Some candidates incorrectly used this
information to generate two separate audit risks, both relating to overstated inventory
with similar auditor responses. Candidates should note that if two pieces of
information result in the same audit risk then credit is only available once as the
information should be used in conjunction.

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. For
the damaged inventory risk some candidates explained that inventory could be under
or overstated. However, in order to gain credit they needed to be clear that the
balance could be overstated. The explanation of the risk must also clearly state the
specific area of the financial statements impacted.

In addition, some risk explanations were inappropriate. For example, candidates

explained the issue of the cash shortages on daily reports not being investigated as
being a risk that cash is misstated. Instead, this risk should have been explained as
leading to a control risk and increased fraud risk as cash shortages could be
indicative of fraudulent behaviour. In addition, for the damaged inventory some
candidates incorrectly assumed that the plants impacted by the contaminated soil
were plant and equipment rather than inventory for a garden supplier, therefore their
explanations incorrectly focused on the risk to property, plant and equipment, and no
credit was awarded. Candidates must take the time to carefully read the scenario,
noting any relevant information, to ensure that they correctly understand and
describe the audit risks arising.

Having identified and explained the risk, the next step is to provide the auditor’s
response. Responses must be practical within the context of the scenario and care

Examiner’s report – AA September/December 2022 19

should be taken to ensure the response is one an auditor would make and not a
management response. In this session candidates provided management responses
for the audit risks relating to the cash shortages, new sales system and supplier
statements not being reconciled. Candidates are advised to take a moment to read
their responses. Suggesting that ‘the company focus on training staff on the new
sales system’ will not help the auditor to form a conclusion on whether revenue or
receivables are misstated due to the new system.

In this diet some candidates struggled to produce valid auditor responses for the
risks relating to the cash shortages, supplier statement reconciliations, changes in
operating and gross margin and the management report deficiencies in the payroll
cycle. In some instances, candidates’ answers were vague and too brief, indicating a
lack of practice in tackling different risks and responses questions from previous
exams.

Auditor responses do 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 any credit as candidates need
to be very clear exactly what they are asking management about. For the
refurbishment of the stores risk, responses which simply stated ‘review the
breakdown of capitalised expenditure’ were only awarded ½ marks as they also
needed to agree the costs to invoices/supporting documentation to confirm the
nature of the expenditure to gain the full 1 mark available.

Where further documentary evidence is available to the auditor candidates need to

refer to this to gain the available 1 mark per response. Also, consideration should be
given to the reliability of audit evidence gained; for example evidence gained via
confirmation from a third party will be more reliable than verbal assertions from
management.

Candidates often suggest ‘increased professional scepticism’ for a whole range of

audit risks, and whilst valid, it is not on its own a suitable auditor’s response for 1
mark. This is because increasing scepticism does not, on its own, help the auditor to
gain suitable audit evidence over the identified audit risk. For the cash shortages not
being investigated risk, simply stating ‘increase professional scepticism’ will only gain
½ marks. To gain the full 1 mark candidates need to focus on additional testing of
the cash shortages and whether they relate to a fraud.

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.

Examiner’s report – AA September/December 2022 20

Esk Co from the Sample March/June 2022 Questions, Peach Co from the Sample
September/December 2021 Questions, Corley Appliances Co from the Sample
March/June 2021 Questions, Scarlet Co from the Sample March/June 2020
Questions, Hart Co from the Sample September/December 2020 Questions, Harlem
Co from the Sample September/December 2019 Questions and Peony Co from the
Sample March/June 2019 Questions are all good scenario-based question on audit
risks and responses to practice.

Examiner’s report – AA September/December 2022 21

Pacific Co

This 20-mark question is based around Caribbean & Co, an audit firm due to
commence the audit of Pacific Co, a retail company which sells cosmetic products.
This question tests candidates’ knowledge of substantive procedures and auditor’s
reports.

Parts (a) – (c) examine substantive procedures for trade payables and accruals,
legal claims and revenue. Requirement (a) is for 5 marks, (b) for 6 marks and (c) for
4 marks and time allocation should be based on 1.8 minutes per mark. Therefore,
the available time should be split as follows: 9 minutes for requirement (a), 11
minutes for (b) and 7 minutes for (c).

One mark is available for each well-explained procedure therefore candidates should
aim to produce 5 tests for requirement (a), 6 for (b) and 4 for (c). Candidates must
strive to understand substantive procedures and apply 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 ‘obtain a written
representation’ without explaining what for will not generate any marks.

Requirement (a) – 5 marks

Describe substantive procedures the auditor should perform to obtain

sufficient and appropriate audit evidence in relation to the COMPLETENESS of
Pacific Co’s trade payables and accruals.

Examiner’s report – AA September/December 2022 22

The scenario for this requirement detailed that Pacific Co had kept the payables
ledger open in error for one day after the year end, and as a result a significant
payment run for suppliers had been made on 1 June 20X5 and recorded in the year-
end payables ledger. The finance director had corrected the error via a journal. It is
important to consider what issue the scenario contains, and then compare this to the
question requirement. As in this case, question requirements can sometimes focus
on a specific assertion such as valuation or completeness and where this is the
case, care must be taken to ensure that any substantive procedures listed only relate
to this assertion.

Spending time understanding the issue and carefully reading the question
requirement ensures that any procedures listed are tailored and more likely to score
marks. As the requirement was only for completeness, procedures needed to focus
on this specific assertion, as any procedures not related to completeness would not
gain credit. Procedures such as ‘casting the payables listing and agreeing to the trial
balance and financial statements,’ ‘reviewing after date cash payments and agreeing
to the payables ledger for the relevant period,’ ‘reperforming supplier statement
reconciliations,’ ‘undertaking a payables circularisation’ and analytical review would
all gain credit.

In this session some candidates included procedures such as ‘review whether the
disclosure is in accordance with accounting standards’ or ‘obtain written
representations.’ These procedures would not gain credit as they do not help to
gather sufficient evidence as to the completeness of trade payables and accruals.
Requesting written representation should be restricted to areas where the auditor is
relying on management’s judgement or there is little independent evidence available.
This is not the case with completeness of payables and tests must be tailored to fit
with the requirement and scenario.

When generating substantive procedures, it is important to ensure the tests have

sufficient detail and are clear. For example, ‘perform a trade payables circularisation’
would only be awarded ½ marks. For the full mark candidates had to also say ‘and
investigate any reconciling items between the balance confirmed and trade payables
balance.’

Examiner’s report – AA September/December 2022 23

Requirement (b) – 6 marks

Describe substantive procedures the auditor should perform to obtain

sufficient and appropriate audit evidence in relation to Pacific Co’s provision
for legal claims.

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.

Straightforward procedures which gained credit in this session included ‘reviewing

customer correspondence,’ ‘contact the lawyers to establish the likely outcome of the
claims,’ ‘reviewing the post year-end cashbook for payments made and agreeing this
to the provision,’ ‘obtaining written representations on managements view of the
outcome of the claims’ and ‘reviewing the disclosures for compliance with IAS
37/accounting standards.’

Careful thought should be given to the nature of the legal claims and the context of
the scenario. It was clear from the scenario that a number of claims had been
received from customers by the year end, each alleging an allergic reaction,
therefore it was possible that further claims relating to products sold pre year-end
could arise subsequent to the year end. Therefore, substantive procedures are
needed to confirm the amounts claimed by the year end, as well as considering
whether this provision is complete as further claims could arise. This session, many
candidates did not consider this issue of future of claims.

Examiner’s report – AA September/December 2022 24

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 audit 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.

Requirement (c) – 4 marks

Describe SUBSTANTIVE ANALYTICAL procedures the auditor should perform

to obtain sufficient and appropriate audit evidence in relation to Pacific Co’s
revenue.

It is important to carefully consider any element of the requirement which is

capitalised when tackling substantive procedure questions. Here ‘substantive
analytical’ is capitalised, therefore only analytical review procedures, and not tests of
detail, will gain credit. To gain full credit, four well explained analytical procedures
are required.

The next step is to review the scenario to consider whether there is any information
which will help to tailor the procedures. In the case of Pacific Co the scenario details
that there has been an increase in revenue over the prior year, that management
information is available across the eight key product lines as well as per store, and
that there have been some new product lines launched as well as a new store
opening. Using this information should help candidates to produce procedures such
as ‘compare revenue by each of the eight main products lines and compare this to
the prior year or budget’ and ‘compare monthly revenue for the original 13 stores to
the prior year.’ Additionally, a detailed proof in total procedure which incorporates the
changes in product lines and store numbers would also gain credit.

Examiner’s report – AA September/December 2022 25

In addition to the above scenario specific points, ‘comparing total or monthly revenue
to the prior year and budget’ as well a review of gross margins would all be awarded
credit. To be awarded the full 1 mark per analytical review procedure it is important
that having compared revenue to prior year or budget then any significant
fluctuations are investigated/discussed with management. Without reviewing the
fluctuations only ½ marks are awarded.

Unfortunately, many candidates this diet struggled to generate more than two
analytical review procedures and then instead listed tests of detail, such as ‘casting
the sales book’ or ‘agreeing to sales invoices and good dispatched notes.’ No credit
was awarded as this was not the question requirement.

Good examples to also practice are Spinach Co from the Sample March/June 2022
Questions, Danube Co from the Sample September/December 2021 Questions,
Purrfect Co from the Sample March/June 2021 Questions, Sagitarrii & Co from the
Sample September/December 2020, Encore Co in the Sample March/June 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 September/December 2018 Questions and Gooseberry Co from the Sample
March/June 2018 Questions.

Requirement (d) – 5 marks

Discuss the issue and describe the impact on the auditor’s report, if any,
should this issue remain unresolved.

Although audit reports feature regularly in the AA exam, there are several ways in
which they can be tested, and candidates must be prepared for any type of question
on audit reports. In this diet, the issue which needed to be considered related to the
provision for legal claims being understated by $0.3m, as it should be $0.8m rather

Examiner’s report – AA September/December 2022 26

than the $0.5m provided in the financial statements. Auditor’s report questions have
shown a gradual improvement in recent diets and performance for this question was
satisfactory.

Marks are awarded for a discussion of the issue (1 mark), assessment of the
materiality of the issue (1 mark), a description of the type of modification (2 marks)
and the resultant impact on the auditor’s report (1 mark).

It was pleasing to see that more candidates attempted to discuss the issue. In order
to be awarded the mark for discussing the issue, candidates needed to not just re-
write the fact from the question. Candidates needed to explain that the provision
should be $0.8m rather than the $0.5m currently provided (½ marks), and that
without adjustment provisions would be understated and profit overstated (½ marks).

Unfortunately, some candidates did not correctly calculate materiality as they used
the full provision amount of $0.8m rather than the under provision of $0.3m. If
materiality had been correctly calculated, then ½ marks would have been awarded,
with a further ½ marks for the assessment that this was material.

Candidates satisfactorily described the type of modification and the impact on the
auditor’s report. When considering the type of modification candidates are reminded
that no credit is awarded for ‘qualified report’ or ‘the audit report is modified’ as it is
the opinion rather than the report which has been modified. Some candidates
continue to list all possible options in a scatter gun approach as seen in previous
diets, which simply wastes their time.

Auditor’s reports are a core area of the syllabus and knowledge of the ISAs in this
area is imperative. Good questions to practice are Sagitarrii & Co from the Sample
September/December 2020, Encore Co in the Sample March/June 2020 Questions,
Jasmine Co from the Sample September/December 2018 Questions and
Gooseberry Co from the Sample March/June 2018 Questions.

Examiner’s report – AA September/December 2022 27