ACCA F8 Paper Review
ACCA Paper F8: Audit and Assurance
June 2012 Exam Commentary
The paper followed a similar format to the one that has been outlined by the examiner, and therefore was therefore a good test of candidate’s skills.
Q1: A scenario based question on the internal control deficiencies and tests of control for the sales process, substantive procedures relating to plant and equipment, levels of assurance and internal and external audit.
Q2: A short factual question based on the benefits of audit planning, sampling methods and modified audit opinions.
Q3: A scenario based question on the auditor’s responsibilities for the prevention and detection of fraud and error, ethical threats and safeguards and the benefits of establishing an audit committee.
Q4: A written question on financial statement assertions, substantive procedures and working papers.
Q5: A scenario based question covering analytical procedures, going concern and the impact on the auditor’s report of a specific going concern scenario.
Question 1 appeared to be less time pressured that it has been in previous sittings.
One major topic area: audit risk was not examined at all in the paper. A question on this area would have been anticipated by students given that it has been tested in each of the last four sittings and remains a core part of the syllabus.
Furthermore, there was no “standard” audit report question in the paper.
Question 1 – 30 marks
Part (a) for 15 marks required candidates to identify and explain five deficiencies in a company’s sales process and also to recommend a control to address each deficiency and a test of control that could be performed to verify that the control was operating effectively..
The sales process is one which candidates should be familiar with and there were eight or nine deficiencies within the scenario, most of which were relatively straightforward to identify.
Candidates should have been expecting a question of this nature and should also have considered that tests of controls might be examined given that they did not feature in the December 2011 exam.
Part (b) for 4 marks asked candidates to detail substantive procedures the auditor should perform to confirm the additions and disposals of plant and equipment. Candidates would have needed to describe two procedures for each area. Additions should have been a straightforward area although candidates may not have been as familiar with disposals. That said only two procedures were required and candidates should have been able to generate these.
Part (c) for 3 marks asked candidates to identify and explain the level of assurance provided by an external audit and other review engagements. Candidates who understood the difference between reasonable and negative assurance should have gained full marks here.
The company in the question was considering setting up an internal audit department and part (d), for 4 marks, required candidates to talk about the differences between internal and external audit. This is a topic which is widely discussed and candidates should have performed well here with many scoring full marks.
In part (e), for 4 marks, candidates needed to go on and consider how any work done by the internal audit department would affect the external auditor’s work at both the interim and final audit. Candidates who recognised that they needed to discuss both the interim and final audits and who tailored their answers accordingly would have produced focussed answers and scored well as a result.
Question 2 – 10 marks
Part (a) for 4 marks required candidates to explain the benefits of audit planning. This is a purely knowledge based requirement and candidates who had a good understanding of why it is necessary to plan an audit would have performed well.
Part (b) for 3 marks asked candidates to identify and explain 3 methods of selecting a sample. There are many methods of sampling which exist however candidates may have found it difficult to describe them adequately in the time available. There was only 1 mark available for identifying and explaining each method and some candidates may have found this difficult in the time allowed.
Part (c) for 3 marks required candidates to describe the 3 types of modified audit opinions. Again there would have been 1 mark available for each. This requirement was similar to Q2 (b) in the December 2011 paper (which tested the unmodified auditor’s report) and again whether or not candidates scored well here would depend entirely as to whether or not they read the question properly. Here the examiner was asking for the types of modified audit opinions rather than modified audit reports. Specifying the phrase audit opinions should have made candidates realise that the examiner wanted the answer qualified, adverse and disclaimer. She was not testing the emphasis of matter paragraph.
Question 3 – 20 marks
Part (a) for 4 marks was a knowledge based requirement asking candidates to explain the auditor’s responsibilities for the prevention and detection of fraud and error. This is a very common requirement and candidates should have scored well here.
Part (b) for 12 marks asked candidates to explain 6 ethical threats from a given scenario and to explain how each threat could be reduced to an acceptable level. Candidates often like ethics questions and perform well on these. Again the ethical threats were relatively straightforward to identify and candidates who then went on to apply their knowledge of the ethical code should have scored well.
Part (c) for 4 marks required candidates to explain the benefits of establishing an audit committee. Again this is a knowledge based area and so candidates should have been able to score well.
Question 4 – 20 marks
Part (a) for 8 marks required candidates to identify and explain 4 financial statement assertions relating to account balances at the year end and describe a substantive procedure for each of these relevant to the audit of inventory. Many candidates would have performed well here – whether they scored full marks would have depended on their ability to describe the substantive audit procedure in enough detail to score a full mark.
Part (b) for 8 marks asked candidates to describe further substantive audit procedures this time in relation to the depreciation charge and a legal claim. 4 marks is perhaps quite a number of marks in relation to depreciation but this was achievable in the time available, especially for those candidates who considered analytical procedures.
Part (c) for 4 marks required candidates to list and explain the purpose of 4 items included on audit working papers. Whilst this requirement would most definitely have been easier for those candidates working in audit, candidates who adopted a common sense approach and explained items such as the client name, who prepared and reviewed the working paper would also have been able to score well.
Question 5 – 20 marks
Part (a) for 3 marks was a straightforward requirement asking candidates to explain the 3 stages of an audit where analytical procedures are used. Candidates who understood how these can be used at the planning stage to identify audit risk, during the field work stage to gain audit evidence and also at the finalisation and review stage to ensure there is sufficient audit evidence to support the trends shown in the financial statements would have scored full marks.
Parts (b) and (c) for a total of 12 marks provided candidates with a short scenario and some financial information and asked candidates to explain the indicators that the company was not a going concern and the audit procedures that should be performed to assess this. Many candidates could have got weighed down in calculating lots of ratios from the financial information provided however there were several indicators highlighted in the written part of the scenario. Candidates needed to remember to explain the indicators rather than just list them out. Candidates who gave audit procedures that related to the hints in scenario would have performed well on part (c) although marks were available for more generic tests in relation to going concern.
Part (d) for 5 marks tested the auditor’s responsibility for reporting on going concern to the directors and also the impact on the auditor’s report where there is serious concern over going concern and no mention of going concern issues in the financial statements. The first part of the requirement may have been difficult for candidates to understand and they may not have been sure what they needed to do. The second part was a very technical requirement and illustrated one of the most clear cut scenarios when an adverse opinion would be issued.
Overall there were just 6 marks in this paper on the area of audit reports. This is quite low given that there are typically 12 – 15 marks on this area. Furthermore there was no “standard” audit report question as we have had in previous sittings.