Examiner’s report

P7 Advanced Audit and Assurance

December 2017

General Comments

The examination consisted of two sections. Section A contained one question for 35 marks and
one of 25 marks, both of which were compulsory. Section B contained three questions of 20 marks
each, from which candidates had to answer two questions.

This examination requires a sound understanding of the syllabus and builds on the assumed
knowledge from both F8 Audit and Assurance and P2 Corporate Reporting, reflective of what
would be expected of an auditor in practice. Candidates must ensure that their knowledge is up-to-
date and in line with the current versions of both auditing and financial reporting standards which
are included as examinable documents. Although less frequent than last session, there are still
candidates using outdated terminology from previous standards on revenue recognition and
auditor’s reports. This knowledge should then be developed into exam technique using question
practice along with relevant technical articles published on the ACCA website and past examiner’s
reports. These will help candidates interpret requirements better and keep their answers relevant
and mark focused.

This examination did not appear to be particularly time pressured with most candidates completing
all the requirements. Overall candidates appeared to have correctly interpreted the majority of
requirements although there was some evidence of candidates treating a given area as a repeat of
a previous exam question and giving rote learnt answers on that topic rather than answering the
requirement as set. This is particularly noticeable on group audit risks and other assurance
assignments.

Candidates will benefit in terms of examination technique from practising for themselves the skills
of time management, identifying the requirement and providing a concise answer before exam day
– simply seeing someone else work through a question or reviewing the answers to past questions
will not provide a good grounding for exam day.

From a technique perspective, candidates who started the examination with one of the optional
questions rather than the compulsory questions tended to write disproportionately long answers for
the number of marks available in their first response. In particular this strategy appears to attract
the stating of rote learnt theory not required for the question. It is recommended that candidates
take note of the marks available and tailor their responses appropriately

However, overall there appeared to be fewer scripts containing unnecessary theoretical

explanations than in the previous session which was pleasing.

Specific Comments

Question One
This question was set at the planning stage of an audit. The client was a clothing and jewellery
group selling via different outlets and had acquired a new subsidiary during the year which was
audited by another firm.

Candidates were asked to describe audit risks arising from the briefing notes provided by the audit

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engagement partner. This area was generally well answered as the majority of candidates were
able to pick out the key issues from the scenario and describe their impact on the financial
statements. In general, candidates focused more on risks of material misstatement than on the
detection risks but covered enough areas to attain good marks. However, control risks identified
were often poorly described. Far fewer candidates quoted the audit risk model than in previous
sessions and most of the technical areas such as consignment inventory and deferred
consideration for the acquisition were well addressed.

As has happened in previous examinations the examiner flagged that there was a brand which was
correctly not recognised in the statement of financial position because it was internally generated.
A significant portion of candidates described this as their first audit risk, wasting time on an area
that was clearly flagged as not a risk. Such candidates would do well to refresh on their knowledge
of intangible reporting rules. The other area of weakness in financial reporting knowledge was
regarding the fair values of assets and liabilities at the acquisition date. Almost universally
candidates stated that recognising the value of research and development costs and a customer
list as assets acquired with the purchase in the group accounts was incorrect and understated
expenses.

Some candidates continue to speculate about potential risks rather than focusing on the
information given and therefore unfortunately end up providing irrelevant answers. Such
candidates speculated that foreign exchange issues could potentially arise if the group happened
to be trading in foreign currencies despite there being no mention of this or that the client may not
know how to deal with consolidating its existing subsidiaries despite the fact that they had been in
the group for some time.

Candidates were also asked to provide audit procedures relating to consignment inventory held by
third parties and this requirement was generally well answered with candidates explaining the
procedures appropriately. Some candidates however did not read the specifics of the requirement
and discussed procedures for inventory held by the client or in some cases brand valuations.
Attention to the detail of the requirement is important for producing answers capable of attaining
marks. Many candidates continue to provide procedures which do not detail a source and a
purpose and therefore are not detailed enough to score full marks.

The final requirements asked for general considerations when relying on a component auditor and
for candidates to appraise extracts of the component auditor’s strategy. There were well
addressed where the requirement was correctly interpreted however some candidates interpreted
the first part as procedures or risks arising from an acquisition. Another error seen several times
was candidates missing that this was an extract rather than the full strategy so focusing on what
other elements should be included in a strategy document rather than weaknesses in the areas
given.

Question Two
This question focused on quality control and was comprised of two parts. Firstly candidates were
asked for the benefits of monitoring quality control and actions to take if deficiencies were found
and this was answered well by the majority of candidates. Common errors here were to either list
out quality controls which should be in place or to discuss client systems and controls rather than
those of the audit firm. These were misinterpretations of the requirement and candidates would
benefit from taking the time to fully understand what is being asked before answering the question

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A short answer with the right content will be worth more than a long answer which doesn’t address
the requirement.

Candidates were then presented with the outcomes of quality control reviews on a range of clients
and subjects. Candidates who interpreted the requirement correctly and explained why those
items raised were quality control deficiencies scored good marks. A common misunderstanding
was to simply discuss the implication of those defects on the audit rather than explaining why they
were breaches of quality control.

Question Three
This question was set in a public sector environment and was broken down into two parts. One
part examined procedures for assurance on a number of performance measures identified by the
entity in the scenario and was generally interpreted correctly. Candidates found this a tricky
requirement as the documents available would not be standard audit documents, however most
candidates who opted for this question made a good attempt at describing where they might find
the information. A minority of candidates did not address the requirement and instead discussed
why the performance measures given had been chosen or where risks arise in auditing this type of
information. This again suggests that a number of candidates failed to read the requirement
carefully or were not confident addressing it, reverting to a preplanned answer for a given topic.

The other section was a matters and evidence question similar to that in Question two of the June
2015 examination. The requirement was set at the review/completion stage of an audit and
candidates needed to discuss the contentious or risky items arising from the audit performed and
explain what evidence should be on file to help determine if the issue is appropriately resolved.
For matters, the sort of points a candidate is expected to raise here are the materiality of the issue,
the accounting treatment that would apply and the risks within the information provided on that
area. For instance a risk that a potential liability has not been provided in full or that an item might
be recognised in the wrong period or with the wrong classification. Candidates would then be
expected to describe the impact on the financial statements.

Candidates sitting this examination should have a good grasp of the principles of double entry and
be capable of describing the direction of a risk. For example if a provision has been omitted from
the financial statements candidates would score a mark for saying “expenses are understated and
liabilities understated if the provision is omitted”

Candidates who do not describe the correct direction of the risk eg “liabilities will be under/over
stated” or those who do not understand the impact of the double entry correctly (so assume every
double entry has one under and one over statement) eg “liabilities will be understated and
expenses overstated” do not attain credit.

Audit evidence was generally described well here but candidates too often rely on board approval
and written representations for items which are simple to audit and not judgmental and as such are
not appropriate.

Candidates were not asked to consider audit reporting implications in this question as the scenario
is set at review stage not the reporting stage of the audit and again a number of candidates wasted
time providing information which was not required.

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Question Four
This question was an ethics and professional issues question based around three different
scenarios similar to Question 4 from the Sample March/June 2016 Questions. Candidates can find
detailed discussion on how to address such requirements in the recent ethics technique article on
the ACCA website section for this examination. The description and identification of threats was
generally well done with the majority of answers being focused and concise. The quality of
answers was generally of a better standard than in previous sessions. The first two scenarios
were well covered concerning self-review and acceptance procedures however candidates often
missed either the conflict of interest or the listed status of the company in the third scenario.

Question Five
This was a reporting question and again was in two sections. Candidates who had read the
examiner’s article prior to the examination and who have a good understanding of materiality
should have found this question straightforward.

Candidates were asked for a discussion on the three types of misstatement described in ISA 450
Evaluation of Misstatements Identified During the Audit. Candidates were expected to define the
types of misstatement (factual, judgemental and projected) and could get full marks by describing
how to address each of those with management or through further audit work.

The second part of the scenario had an example of each type of misstatement and required
application of the knowledge demonstrated in the first part of the question, requiring candidates to
cover what should be discussed with management and the effect on the audit opinion. This was
well answered by well-prepared candidates however a significant portion of candidates failed to
calculate materiality correctly and concluded an immaterial depreciation error was material. There
was also a lack of appreciation that related party transactions are material by nature.

Candidates should note that the requirement specifically asked for the effect on the audit opinion
not the full auditor’s report so there was no credit available for describing the basis of opinion or
Key Audit Matters. There are still a number of candidates who show a lack of understanding of
misstatements and propose emphasis of matter paragraphs as an alternative to qualifying the
report for factual misstatements or to explain immaterial/trivial items.

Conclusion

There was an improvement in performance in this session, particularly in relation to audit risk and
ethics. However, it is clear that many candidates continue to not prepare properly for the exam and
failed to learn the topics in sufficient depth. A large number have a narrow focus on the topic that
they are studying and are not keeping up to date with changes to accounting standards, such as
revenue recognition and auditing standards in relation to auditor reporting and in some instances
are providing rote learned answers with little or no application to the specifics of the question.

Once again, candidates are urged to re-learn the basics of auditing – independence, ethics, robust
third party evidence, audit risks and understanding the proper use of audit opinions – and are
encouraged to use past questions to help them study and revise for the exam.

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