Evaluate the business risks arising from the scenario in the question, which focused on a new audit client.

It was pleasing to see that most candidates focused on the risks arising from the scenario and avoided speculative or generic risks.

There were 2 marks available for each business risk. It should be noted that risk factors can be described in various ways in order to attract credit.

• The scenario detailed a significant risk surrounding the revocation of the company’s broadcasting licence. Marks could be awarded for development of the risk from a risk of non-compliance and the licence being revoked or that a fine may be imposed which could lead to going concern implications.
• As is usual with Q1, marks were available in the question for calculating trends such as the percentage movement in revenue or the extrapolated revenue figure or EBITDA.
  • Many candidates failed to identify this and therefore did not calculate any relevant trends and were unable to gain these calculation marks.
  • It was disappointing to see those who did identify the opportunity to extrapolate the information also went onto extrapolate total assets which would not be appropriate.
• The scenario detailed that the Group had obtained a stock market listing 15 years ago.
  • Risks surrounding failure to adhere to corporate governance or listing rule requirements were deemed as non-significant, based on the length of time the Group had been listed.

Evaluate significant risks of material misstatement arising from the scenario.

This was generally well answered with majority able to follow a structured approach of :

• calculating materiality,
• stating the relevant accounting rule applied to the specifics of the scenario,
• describing the risk that arose and the resulting impact on the financial statements.

The scenario stated that the Group provided a guarantee for a loan taken out by a connected company.

• Several candidates incorrectly determined that loan is recognized within SOFP for the Group as liability with finance charges recognized within SPL.
• Significant number described this as risk of material misstatement, clearly wasting time on an area that was not a risk and missed the point that it should only be disclosed as contingent liability.

A further area of weakness was noted with regards to discussion of detection risk due to company being new audit client.

• Credit is not awarded for detection risks due to lack of knowledge of client, for risk of material misstatement requirement.
• Candidates discussing detection risks are failing to answer requirement as this would only be appropriate for an audit risk question.
• This demonstrates candidates identifying from scenario “a new audit client” and discussing rote learnt risks which do not answer the requirement.

The scenario also highlighted a Group was formed 35 years ago with no subsequent changes.

• discussion of risks of material misstatement surrounding calculation of goodwill on acquisition are deemed irrelevant and would not achieve credit.

Some other common issues noted in candidate answers for RoMM included:

• Discussing audit procedures to be performed which did not meet the requirement and therefore no credit could be awarded.
• If required, this will normally form a separate requirement within the question and should be answered where applicable.
• Lack of basic knowledge of IAS28 Investments in Associates, where candidates did not appreciate that significant influence can be present with less than 20% shareholding.
• Several candidates appear to have only a brief overview of the relevant standards without sufficient knowledge of the underlying principles.

Discuss ethical issues relevant to the details given in the scenario.

Candidate answers were stronger than in previous sittings for description of ethical threat and implication to auditor,

• yet many candidates failed to identify the client was listed and
  • discussions surrounding specific safeguards which were only suited to non-listed entities were inappropriate.

Candidates are reminded that they need to have a good understanding of the Ethical guidelines and how these are often tailored to reflect the type of entity.

Discuss the difficulties in the identification of related parties and to design specific procedures to be performed surrounding a transaction given in the scenario.

The final requirement required discussion on the difficulties in the identification of related parties and to design specific procedures to be performed surrounding a transaction given in the scenario.

• Generally, this was answered well as to why it is difficult to identify related parties
  • but many candidates only provided generic procedures which were not specifically tailored to the scenario.

Candidates would be advised to read the requirement carefully to ensure the answer given is relevant and not too generic to avoid losing marks, which would be easily achievable.

Critically appraise an extract from an auditor’s report which had been incorrectly prepared and required amendment.

The majority of responses were extremely disappointing and generally reflects weak knowledge of auditor reporting requirements.

There remain a number of candidates who continue to show lack of understanding of basic ISA requirements such as

• incorrectly suggesting that an unmodified opinion should have ‘unmodified’ in the title of the opinion or
• that a material uncertainty related to going concern should be included within an emphasis of matter paragraph.

Many candidates suggested that the use of “we believe” in the auditor’s report is not appropriate wording,

• or that the use of “in our opinion” suggests that the auditor is not independent from the client and
• therefore a familiarity threat is present.

This demonstrates a significant lack of understanding of auditor’s reports and ISA 700 Forming an Opinion and Reporting on Financial Statements.

Candidates were not expected to discuss what would or would not be present in a full report.

• Where candidates discussed, for example, “the signature of the partner is missing” or “responsibilities of the auditor are missing”, this was not relevant to requirement, which asked candidates to specifically critique the extract as presented.

Discussion of given extracts of auditor’s reports, again, should follow a structured approach and practicing questions of this nature should allow candidates to score strong marks in these requirements.

Candidates would benefit from increased knowledge of ISA 700, and in particular should review the appendices which show real examples of auditor’s report and typical wording which is appropriate.

Discuss, along with reasons for discussion, specific matters raised in the scenario which should be reported to those charged with governance.

Generally, candidates identified:

• the “matters to be included” and
• used an approach of
  • calculating the materiality of the issue,
  • discussing the relevant accounting standard and
  • how the matter had been dealt with incorrectly.

However, candidates were vague on why matters should be included within a report to those charged with governance and continued to answer the question as if it were asking about the impact on the audit opinion. This demonstrates a lack of understanding of the question requirement by a number of candidates.

Discuss accounting estimates as being an area of high risk and the reasons for the development of the exposure draft.

Overall candidates had a good attempt at this requirement, and candidates that had read the article written by the
examining team had the potential to score highly.

Evaluate the accounting treatment of three estimates given in the scenario.

A large number of candidates demonstrated a weak understanding of the SBR syllabus and scored very poor marks.

It was disappointing to note a lack of understanding of provisions.

Only a limited number of candidates correctly stated the rule under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, in relation to where the effect of the time value of money is material the provision should be recognized at present value. There was a clear indication in the question that this was relevant and it was disappointing that more candidates did not identify this.

The quality of answers for Question three was generally of a weaker standard and candidates were not able to demonstrate application of their knowledge of SBR in an audit context to the scenario.