BPP Blog

P7: Advanced Audit and Assurance
June 2012 Exam Commentary

General impression

This was the tenth sitting of Paper P7 and again we were treated to a firm but fair examination of candidates’ ability to apply the syllabus to some imaginative and topical scenarios.

Syllabus coverage was again thorough and even across all five questions. It is worth noting that some key areas not examined in the previous sitting – most notably consolidated groups, prospective financial information and social/environmental reporting – were all covered in the compulsory section of this paper. UK candidates were treated to an almost identical exam to their INT counterparts again, although insolvency was tested in Question 2 of the UK variant.

Following on from the changes introduced in 2011, this paper was quite conservative in approach, continuing with the same formats and requirement styles, while the new syllabus content for 2012 was tested as outlined in the examiner’s two recent articles. The proportion of theory to application was less straightforward to clarify than previously seen, but should have left candidates of future sittings in no doubt that application is critical for success here.

Having practised a wide selection of past paper questions and absorbed the points made by the examiner in her recent articles, candidates could have scored highly on this paper by adopting a logical application to Section A and a bold question selection policy in Section B: it will be interesting to see if pass-rates rise after this sitting.

Question Review

SECTION A – 2 compulsory questions (70 marks overall)

Question 1 (37 marks)

On opening up their exam papers, candidates should have felt quite comfortable seeing a group audit scenario with embedded requirements that reflected both the style of recent sittings and the updated technical content. Part (a) demanded a response that first required an explanation of the implications for a long standing audit client that has acquired a component during the year (8 marks) before more familiar territory for 18 marks of a risk assessment to both individual and group financial statements.

The 2012 syllabus updates were very much in evidence here as both group audits and the risks of material misstatement featured prominently in the examiner’s article of March 2012, so candidates reading this should have scored quite well here, albeit with some support from their brought-forward knowledge of IFRS. The remaining 5 mark requirement in part (a) was similar to a past paper question on accounting for goodwill which should have rounded off a solid start to this paper.

Part (b) moved onto ethical issues where management threats to independence and assisting the client with recruitment matters were revisited – again, rewarding those who had attempted past paper questions in depth with a straightforward 6 marks. This was another solid start to a good paper.

Question 2 (33 marks)

The examiner continued to test candidates’ ability to respond appropriately to financial data, commencing with a test of assurance in the context of Prospective Financial Information (PFI) for part (a). After a straightforward explanation of the matters that should be considered as part of agreeing the terms of the engagement for 6 marks, a further 13 marks were available for recommending procedures for reporting on the PFI presented in the question.

Some candidates might have walked out of the exam hall feeling quite confident here – however, success in such questions does not just come from a summary of the key ratios calculated as the examiner wants to know what information is lacking, so success here would have come from a good list of questions not answers. As ever, the examiner’s report on candidate performance here will be interesting.

Part (b) saw different requirements depending on the exam variant sat – INT candidates used a factory closure scenario requiring principal audit procedures on the costs of closure for 6 marks before considering the difficulties in measuring and reporting on social and environmental performance for a further 4 marks. Neither should have caused too many concerns and mirrored past papers quite closely. UK students were presented with financial information for a new company and asked to determine whether that company was insolvent or not before evaluating the directors’ future options. It is worth noting that although this did not mirror sample questions on this topic, this is only the third sitting of P7 UK that has tested insolvency so the question was quite a logical addition to the examination process provided candidates had remembered their brought-forward knowledge.

In addition to these requirements, both variants offered 4 professional marks for the presentation and clarity of answers in line with the new question layout adopted for 2012. Overall, this question should have presented plenty of mark-scoring potential for candidates, although as before, feedback on candidate performance will make for interesting reading.

SECTION B – choice of 2 questions from 3 (15 marks each)

Question 3

Traditionally, the first optional question in P7 tests either financial reporting issues or a more discrete topic, as ethics and audit reports are often examined in the two later questions – this paper followed suit by presenting a good blend of topical theory and application by testing money laundering and professional scepticism, both in the context of fraud-based scenarios.

For 9 marks in part (a), candidates were presented with a scenario where money laundering was implied and a discussion was required to consider both the implications of the events described and whether or not any further reporting should be carried out. This would have been very popular and should have scored high marks.

Part (b) for 6 marks may have dragged some candidates’ scores down however, as although they could discuss scepticism in the context of a payroll fraud, the depth of discussion required might not have been enough to score highly. Overall though, this question should still have seen good scores.

Question 4

Candidates were presented with just two practice-related scenarios for this sitting and asked to consider the ethical, commercial and other professional issues raised by two situations at audit clients – a potential business opportunity with a client to develop tax and accounting software to sell to other clients (8 marks) and a potential claim for medical negligence from a patient of another audit client (7 marks).

Both scenarios were straightforward but would have required good answers to score well, as the examiner was looking not only for analysis of the ethical and other professional issues raised but also recommendations of any actions that should be taken as a result. This was probably the next most popular question but scores might not have matched the expectations of candidates again.

Question 5

The final optional question of this paper was likely to have been the least popular as audit reports were tested along with a typical IFRS-based reporting scenario of a non-current asset and the associated costs of construction. For 8 marks in part (a) candidates needed to comment on the matters that should have been considered during the audit, including some basic analysis of the treatment of loan financing, and then describe the evidence that should have been collected to address such matters.

The remaining 7 marks in part (b) were offered for a critical appraisal of a proposed audit report where a company pension plan deficit was not recognised on the statement of financial position. Since P7 was introduced in 2007 this is only the third such critique-style question but was probably the most straightforward. Similarly knowledge required for part (a) was also straightforward – however, the sight of anything related to audit reports would have put many candidates off this question, which is a shame as this was probably the most straightforward of the optional questions.