Audit and

Assurance
(AA)
September/
December 2023
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 ................................................................... 2
Section B ................................................................... 6
Knight Electronics Co ............................................. 6
Requirement (a) – 5 marks ................................. 7
Requirement (b) – 16 marks................................ 7
Part (c) – 5 marks ............................................. 10
Part (d) – 4 marks ............................................. 11
Silver Co .............................................................. 12
Requirement (a) – 4 marks ............................... 12
Requirement (b) – 16 marks.............................. 13
Latte Co ............................................................... 14
Part (a) – 6 marks ............................................. 15
Part (b) – 4 marks ............................................. 16
Part (c) – 5 marks ............................................. 17
Part (d) – 5 marks ............................................. 18
General comments

The Audit and Assurance exam is offered in computer-based (CBE) format. The model of
delivery for the CBE 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.
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 candidates’ application skills.

Section A
Example of a case scenario
It is 1 July 20X5. You are an audit supervisor with Tunnel & Co and you are reviewing the
audit of Scraper Co for the year ended 30 April 20X5. The audit of trade receivables and
prepayments was performed by the audit assistant, Colin Walsh. The audit planning
document required that a positive trade receivables confirmation (circularisation) be
performed. The total value of trade receivables was $2.15m.
Results of the receivables confirmation
Confirmation letters were sent out to the 10 largest customers, totalling $409,000, together
with 30 other balances which Colin selected using statistical sampling. After analysing the
responses, the following working paper was prepared:

Examiner’s report AA September/December 2023 2

Number Total Number Total of Differences
of amount of items balances
accounts confirmed confirmed

$ $ $

10 largest customers 10 409,000 10 409,000 17,910

Other customers 253 1,741,000 30 149,220 5,040

263 2,150,000 40 558,220 22,950

Largest customers
Colin identified that Stale Co replied stating that the balance due was $41,310 and that a
payment of $8,640 was made to Scraper Co on 29 April 20X5. Scraper Co's accounting
records showed that the balance outstanding was $59,220. Five of the other largest
customers initially failed to respond.
Other customers
Following investigation, Colin discovered invoicing errors in three of the accounts which had
been selected using statistical sampling. The errors resulted in an overstatement of the
customers' balances of $5,040 in total.
Prepayments
Included in prepayments are advertising costs of $76,500. The finance director advised Colin
that the company started using the services of a new advertising company during the year
and signed an annual contract which commenced on 1 February 20X5. The full amount of
the contract was paid in advance.

1. Indicate, by clicking on the relevant boxes in the table below, whether each of
the following statements applies to a positive receivables confirmation, a
negative receivables confirmation or both.

Examiner’s report AA September/December 2023 3

The correct answers are:
Statement 1: BOTH
Statement 2: NEGATIVE CONFIRMATION
Statement 3: POSITIVE CONFIRMATION
Both positive and negative receivables confirmations (circularisations) provide evidence of
existence of receivables.
ISA 505.15 states that a negative confirmation cannot be used as the sole substantive
procedure unless the population consists of a large number of small homogeneous
balances.
In a positive receivables confirmation, customers confirm whether they agree or disagree
with the balance stated. In a negative confirmation, customers only respond if they disagree.

2. Which of the following actions should Colin Walsh have taken on initial receipt
of the response from Stale Co?
(1) Inspect pre-year-end invoices and goods dispatched notes for evidence of an
order for $9,270 sent to Stale Co
(2) Inspect correspondence with Stale Co for evidence of disputed invoices and
discuss with management
(3) Agree receipt of the $8,640 to the post-year-end bank statements
(4) Ask management to adjust the year-end balance for the difference of $17,910
A. 2 and 3
B. 1 and 3
C. 2 and 4
D. 1 and 4
The correct answer is: B
(1) and (3) are correct as they both relate to reconciling items.
(2) is incorrect, as although it is a test which may be performed, it would not be the initial test
in these circumstances.
(4) is incorrect, as it is not yet clear that this is an error.

3. Identify, by clicking on the relevant boxes in the table below, whether each of the
following are suitable alternative procedures to confirm the year-end balance in
respect of the five customers who did not respond to the confirmation.

Examiner’s report AA September/December 2023 4

The correct answers are:
Statement 1: NO.
Looking at invoices and GDNs after the year end will not allow for the year-end balance to
be confirmed and therefore is not relevant.
Statement 2: YES.
Reviewing the position after the year end and confirming cash receipts would allow the
auditor to obtain assurance over the existence and valuation of the year-end balance so
should be performed.
Statement 3: NO.
A reply from the customer does not confirm that the balance will be paid. Therefore, there is
no indication that these balances should be included in the allowance.

4. Based on the error discovered in the statistical sample of OTHER CUSTOMERS,

which of the following amounts, to the nearest $, would be the estimated total
error in the population of trade receivables?
A. $88,393
B. $50,400
C. $58,803
D. 72,618
The correct answer is: C
Estimated error = 5,040/149,220 × 1,741,000 = $58,803.38.
Option A is incorrect (treating as single population rather than two sub-populations) =
22,950/558,220 × 2,150,000 = $88,392.57.
Option B is incorrect: (extrapolating based on number of accounts rather than amounts) =
5,040/3 × 30 = $50,400.
Option D is incorrect: (extrapolating error rate in sub-population to whole population) =
5,040/149,220 × 2,150,000 = $72,617.61.

5. Which of the following procedures should be carried out to determine whether

the prepayment in relation to the advertising costs is UNDERSTATED?
(1) Compare the prepayment to the prior year and investigate any significant
differences
(2) Review the signed contract for details of the services provided and confirm that
Scraper Co will receive future economic benefits as a result of the contract

Examiner’s report AA September/December 2023 5

(3) Inspect the cash book/bank ledger for evidence of the amount paid to the
advertising company and agree to the signed contract
(4) Inspect the signed contract and confirm the commencement date and recalculate
the contract cost for May 20X5 to January 20X6
A. 2 and 3
B. 4 only
C. 1, 3 and 4
D. 1, 2 and 4
The correct answer is: B
Confirming the period of the contract and recalculating the relevant portion will be the only
test which allows the auditor to confirm that the correct amount has been included in
prepayments.
(1) is incorrect as the contract did not exist in the prior year so analytical review cannot be
performed on the balance.
(2) would not provide evidence of whether the balance was understated but rather would
give assurance about the rights to the asset and whether the balance will generate benefits
in the subsequent year.
(3) will confirm that the amount was paid pre year end and therefore give comfort that this is
a genuine prepayment but will not allow the auditor to consider if it is understated.

Section B

Knight Electronics Co

This 30-mark question is based on Knight Electronics Co, which sells products enabling
smart building systems. This question tests candidates’ knowledge of understanding an
entity, audit risks and responses, substantive procedures for revenue and procedures for a
payroll fraud.

Examiner’s report AA September/December 2023 6

Requirement (a) – 5 marks

Briefly explain how each of the following sources of information will be used by
Hercules & Co to gain an understanding of Knight Electronics Co at the planning
stage of the audit: prior year audited financial statements, current year budgets and
management accounts, prior year report to management, board meeting minutes and
company website.

Knowledge requirements can sometimes have an opening statement referenced to an

International Standard on Auditing (ISA), and this is useful for setting the scene and
providing clarification on the aim of the question requirement. Also, when reviewing
knowledge requirements, it is important to identify whether an understanding of the scenario
is required to attempt the question. Where the knowledge requirement is not linked to the
scenario a note is included confirming this. It is especially important that candidates
understand exactly what the question is asking, and whether they need to apply their
knowledge to a scenario, as candidates should be aiming to score full marks for knowledge
requirements.

Some knowledge questions include a prepopulated table, and candidates are required to
provide an explanation/description of the phrase/term included in the table. For a five-mark
knowledge requirement such as this, candidates should aim to provide a well-explained point
for each of the five terms included within the table. It is important to understand what the aim
of the table is. In this case, five sources of information were available to the auditor to use in
gaining an understanding of their new client Knight Electronics Co. Candidates were tasked
with explaining HOW each piece of information could be used to achieve the aim of gaining
an understanding of the new audit client.

When attempting this requirement candidates should consider each source of information,
what they are and what information is available within them, then consider how this
information could be used by the auditor. Without considering both elements of what the
information is and how it can be used, it is difficult to achieve the available 1 mark per point.
Considering how each of the sources of information differs will also ensure that there is not
too much repetition of answer points.

Credit was awarded for prior year financial statements for gaining an understanding of the
company’s performance and position, and to undertake preliminary analytical review.
Commonly awarded points in relation to budgets and management accounts included
providing information for going concern, risk identification, or analytical review.

It was disappointing that many candidates confused the prior year report to management
with the prior year audit report and so explained that they were looking for modifications to
the opinion, no credit was awarded for this. For board minutes, credit was awarded for
identification of key issues occurring during the year. To gain the 1 mark, this point needed
to be expanded to also cover how those charged with governance had addressed these
issues as this would be needed to assess whether audit risk has increased. The company’s
website could be used to review press releases and background on Knight Electronics Co’s
products and services. Candidates must take the time to carefully read and underline key
words in the requirement to ensure their answer is relevant.

Requirement (b) – 16 marks

Describe EIGHT audit risks and explain the auditor’s response to each risk in
planning the audit of Knight Electronics Co.

Examiner’s report AA September/December 2023 7

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). Good
exam technique is critical with a scenario-based requirement such as this.

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. When undertaking this read through, it is 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 eight
strongest points, re-read them from the scenario, and draft 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. Simply stating a fact from the scenario is not the same as identifying an audit risk.
For example, stating that ‘the company’s credit controller was ill and absent from work for
four months’ is not in itself an audit risk, as if other members of the finance team are
undertaking this work during the absence of the credit controller, then the audit risk is
mitigated. However, in this case the scenario went on to state that the receivables collection
period has increased from 45 to 75 days. Therefore, both facts together are required for the
identify ½ mark, stating one without the other will not gain credit. Similarly, for the legal
action raised against the company’s supplier, it is the fact that a receivable for the likely
damages has been included within the draft financial statements that creates the audit risk
as this is a contingent asset.

Financial accounting knowledge is also important as audit risks will often focus on the
accounting treatment used in the financial statements. In Knight Electronics Co, accounting
issues which give rise to audit risks include those relating to revenue, inventory, revaluation
of property, plant and equipment and contingent assets. Hence a strong knowledge of
relevant accounting standards is required to fully understand the audit risk and therefore a
relevant auditor response.

The risks least identified by candidates related to the audit timetable and potential stock
exchange listing. Candidates should expect a range of topic areas within an audit risk
scenario, some of which may be more challenging than others.

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. Candidates
cannot hedge their bets by providing both options.

The explanation of the risk must also clearly state the specific area of the financial
statements impacted. For example, in respect of the issue relating to the change in useful
lives, only noting ‘non-current assets or assets could be overstated’ would not be awarded
credit. An appropriate explanation in this instance would be property, plant and equipment
could be overstated.

Examiner’s report AA September/December 2023 8

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 should be taken to
ensure the response is one an auditor would make and not a management response. In this
session candidates often provided management responses for the audit risk relating to the
increased receivables collection period, such as recruit a new credit controller. Candidates
are advised to take a moment to read their responses and ensure that what they are
recommending will help the auditor to form a conclusion on the identified audit risk.

In this session some candidates struggled to produce valid auditor responses for the risk
relating to the audit timetable completion date of 31 October. Those candidates who
attempted this risk suggested requesting the audit timetable be extended or that the audit
engagement be declined. What was actually required was a focus on how sufficient and
appropriate evidence could be obtained within the tight reporting deadline, such as
undertaking an interim audit or increasing the size of the audit engagement team.

Additionally, some candidates gave general statements of the required accounting

treatment. For example, for the inventory risk, it was common to see ‘complete net realisable
value (NRV) testing’ rather than how the auditor would test whether the recent cost of the
inventory was above or below NRV. This general statement approach indicates a lack of
practise in tackling different risks and responses questions from previous exams.

Candidates often suggest ‘increased professional scepticism’ for a whole range of audit
risks, and whilst valid, on its own it is not 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 payroll fraud risk, simply stating ‘increase
professional scepticism’ will only gain ½ mark. To gain the full 1 mark, candidates need to
focus on additional testing of payroll and the additional procedures adopted to identify the
fraud and any necessary adjustments. Additionally, credit for increased professional
scepticism, was only credited in relation to the payroll fraud and the potential stock exchange
listing, it was not a valid response for any of the other audit risks.

Auditor responses do not have to be a detailed procedure, rather it is an approach the audit
team will take. Care must be taken 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 receivables risk, responses which simply stated
‘discuss with management the appropriateness of any allowances’ were only awarded ½
mark as they also needed to first review the aged receivables report for long outstanding
balances to gain the 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.
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.
The following published sample questions are all good scenario-based questions on audit
risks and responses: Lapis Co March/June 2023, Magpie September/December 2022, Esk
Co March/June 2022, Peach Co September/December 2021, Corley Appliances Co
March/June 2021, Scarlet Co March/June 2020, Hart Co September/December 2020,
Harlem Co September/December 2019, and Peony Co March/June 2019.

Examiner’s report AA September/December 2023 9

Part (c) – 5 marks

Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Knight Electronics Co’s revenue.

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

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 what for. 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.

Candidates who focused on casting the breakdown of sales and agreeing to financial
statements, recalculating sales invoices, analytical review of total/monthly sales to prior
year/budget, and ‘cut-off testing’ were able to gain credit.

Analytical procedures are very useful when auditing revenue and can be used to generate
several valid tests. Comparisons can be made between total or monthly revenue and the
prior year or budget; a breakdown of key product lines or customers can be compared to the
prior year as well as a review of the gross margin for the current and prior year. In all cases,
any significant fluctuations must be investigated, not just identified, and discussed with
management. Without reviewing the fluctuations, only ½ mark is awarded. Another useful
analytical review procedure is a proof in total where the prior year is adjusted for any known
fluctuations in the year such as any new product lines, and then compared to the actual
revenue in the year with significant fluctuations investigated.

Where the question requirement is for revenue, then no credit will be awarded for any
receivables procedures. In this session it was common to see candidates stray into
receivables tests such as reviewing after-date cash receipts and considering whether an
allowance for receivables was necessary. Also, where detailed tests were provided, rather
than testing to or from the listing of sales invoices, incorrect answers focused on the
receivables ledger/detailed list of customer balances when agreeing to sales invoices and
goods dispatched notes (GDNs). This was not valid and so would not have gained the
available 1 mark. Additionally, when listing these types of detailed tests, the key point when
the sale should be recognised is when the goods have been dispatched and so tests should
begin or end with the GDN rather than the sales order.

When generating substantive procedures, it is important to ensure the tests have sufficient
detail and are clear. For example, ‘perform a cut-off test’ without describing what the actual
test is and what documents should be used will not gain any marks. It is important to stress
that the source document is GDNs before and after the year end and that these need to be
agreed to sales invoices to ensure they have been included in the correct accounting period.
If sales invoices had been used as the source document rather than GDNs, then only ½
mark would have been awarded.

Care must also be taken not to produce tests of controls as these are not substantive
procedures and would not gain any credit. Also, many candidates suggested reviewing

Examiner’s report AA September/December 2023 10

disclosure of revenue, however this would not have gained any credit as revenue, along with
most profit or loss account items, does not require disclosure notes.

Part (d) – 4 marks

Describe procedures which should be undertaken during the audit of Knight

Electronics Co as a result of the payroll fraud.

When attempting a question such as this, it is important that candidates spend a few minutes
considering the aim of the requirement. They should consider whether the procedures
required are for the management of Knight Electronics Co or the auditor, Hercules & Co.
Whether this is a knowledge requirement solely based on ISA 240 The Auditors
Responsibilities Relating to Fraud in and Audit of Financial Statements, or whether it is an
application of knowledge from the ISA to the specific scenario.
The requirement is clear that what is needed are procedures to be undertaken during the
audit, therefore only auditor procedures should be considered and not those of
management. The requirement does not contain a note specifying that the scenario is not
needed, and therefore an application of knowledge to the scenario is required.
The scenario contains details of an instance of payroll fraud where fictious employees were
set up by a payroll clerk who then made payments into their own bank account. In addition,
the scenario states that controls have now been implemented to prevent this from
reoccurring. The requirement is for four marks and so four well described procedures, which
could be substantive or tests of control, would score full marks.
In considering the instance of fraud, the auditor would wish to understand how it occurred
and its financial impact, what the new controls are which have been implemented, and how
well they are now operating to prevent the risk of further payroll frauds.
Where attempted, candidates were able to gain some credit for discussing with management
how the fraud occurred and discussing with management what new controls have been
adopted. Some attempts at generating tests of control such as reviewing for duplicate
payments to the same bank account and comparing the list of employees to contracts of
employment gained credit. However, the tests of control were often too brief or vague and so
only gained ½ mark. Obtaining a written representation was often suggested but with little
detail as to what the auditor would be gaining representation for. To gain the available 1
mark, they needed to specify that management had notified all knowledge of actual and
suspected fraud to the auditors.

Many candidates did not score well on this requirement. Incorrect answers focused on listing
generic substantive procedures for auditing payroll expense, rather than the fraud, or they
focused on the knowledge area of auditors’ responsibilities relating to fraud, which did not
gain any credit. Other incorrect answers focused on the controls management should adopt
to prevent further frauds. This is the wrong focus as it does not consider what the auditors
should do. Also, some candidates provided vague comments such as ‘increase substantive
testing’ without any detail of what the increased testing would be. Candidates who
suggested increasing professional scepticism did not gain any credit, as this is not an audit
procedure, but an auditor response.

This requirement was challenging to many candidates as it was slightly unusual. However,
those who considered the aim of the auditor in carrying out the procedures, and used the
information available in the scenario, were able to score a sufficient number of points.
Candidates should be prepared for unusual requirements and take a common-sense
approach in tackling them.

Examiner’s report AA September/December 2023 11

Silver Co

This 20-mark question is based on Silver Co, which is a manufacturer of household furniture.
This question tests candidates’ knowledge of significant deficiencies in internal control and
control deficiencies and recommendations.

Requirement (a) – 4 marks

Describe FOUR matters the auditor should consider in determining whether a

deficiency in internal controls is significant.

This is a knowledge requirement and has been tested in previous exam sessions. Some
knowledge requirements, such as this one, have an opening statement, sometimes
referenced to an ISA, and this is useful for setting the scene and providing clarification on
the aim of the question requirement. Question requirements such as this demonstrate the
importance of having a detailed understanding of the ISAs, and in this case ISA 265
Communicating Deficiencies in Internal Control to Those Charged with Governance and
Management.

It is important that candidates understand exactly what the question is asking, especially for
knowledge questions, where they should be aiming to score full marks. It is also important
that candidates note that they do not need to use the scenario to answer this requirement.

For this session candidates were required to describe matters in determining whether a
deficiency is significant for 4 marks. As the requirement verb was ‘describe’, candidates
need to ensure that they include sufficient detail in their answers. Simply providing a few
words such as ‘materiality of deficiency’ is not enough for a description. Candidates
therefore need to consider whether they have written enough.

Commonly awarded points included complexity of deficiencies and frequency of deficiencies.

However, these points would only gain ½ mark as they are too brief. To gain the additional ½
mark, candidates need to consider the complexity when determining estimates and the
frequency of exceptions identified as a result of the deficiencies.

It is also important that candidates pay attention to any elements of the requirement which
are highlighted. In this session the word FOUR was in capitals. This was specifically done to

Examiner’s report AA September/December 2023 12

focus candidates’ answers, so that they would know to provide four well described answers.
Additionally, there was a note under the requirement which stressed that the scenario did not
need to be referred to in answering this requirement. Notes and capitalisation of words in
requirements are there to guide candidates and to help, candidates should be careful not to
ignore them.

It is imperative that future candidates ensure that they devote adequate time to learning the
knowledge areas of the syllabus as well as practising knowledge questions.

The following published sample questions are all good scenario-based questions on
controls: Petra Co March/June 2023, Daley Co September/December 2022, Whittaker Co
March/June 2022, Pomeranian Co September/December 2021, Castle Couriers Co
March/June 2021, Swift Co September/December 2020, Snowdon Co March/June 2020,
Amberjack Co September/December 2019 and Freesia Co March/June 2019.

Requirement (b) – 16 marks

Identify and explain EIGHT DEFICIENCIES in Silver Co’s inventory count

arrangements and provide a recommendation to address of these deficiencies.

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

The first step in tackling a 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 looked at the whole scenario, 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 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. For example, in this session some candidates stated that ‘the company
manufactures goods 24 hours a day, seven days a week’. This is not a deficiency. When
copying and pasting facts from the scenario, care must be taken to identify a relevant
deficiency. It was pleasing to see that candidates did not identify as many irrelevant
deficiencies as has been seen in other sessions.

The least commonly provided deficiency related to inventory records being updated without
investigation of any count differences. To gain the ID marks for the warehouse supervisor
valuing the work in progress (WIP) deficiency, it was important to note that the issue related
WIP. Some candidates simply stated the warehouse supervisor has suggested that he
undertake this valuation this year, without linking this to WIP. No credit was given for this.

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 ‘the count
is overseen by the warehouse supervisor’ (identification ½ mark awarded), would have been
‘the warehouse supervisor is not independent and so may conceal errors or potential fraud.’
Answers which just stated ‘the supervisor is not independent’ would not have gained credit
as it does not explain how a lack of independence will impact the business.

The explanation needs to be specific to each deficiency, as it is not sufficient to state ‘this
will result in fraud/error’ as all deficiencies can lead to increased fraud and error. A clear
understanding of how the deficiency will result in fraud and error is needed. Also, it was

Examiner’s report AA September/December 2023 13

apparent that some deficiencies were misunderstood by candidates. For the deficiency
‘inventory records are updated without investigation of count difference’ candidates
incorrectly explained that the warehouse assistant who updated the records was too junior to
undertake this role and therefore recommended that someone more senior do this. No credit
was given for this explanation or the recommendation as the seniority of the individual
updating the records was not what the deficiency related to.

The next part of the requirement is for candidates to describe control recommendations. To
gain the 1 mark available it is imperative that the descriptions of the recommendations 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.

Candidates need to take care to ensure that recommendations are well described, clearly
address the specific control deficiency identified and are practical suggestions. For the
deficiency relating to movements of goods in/out of the warehouse during the count, many
candidates incorrectly recommended that the company should stop all movements of goods
during the count, despite the scenario clearly stating that movements would need to continue
for operational reasons. Candidates must read the scenario carefully when making
recommendations.

It is important that recommendations are as complete as possible. For the deficiency of ‘no
clear division of responsibilities within the team’, the recommendation of ‘responsibilities
should be allocated within the team’ would not gain any credit, as they have not said HOW
these responsibilities should be allocated. The recommendation needs to state that ‘one
team member should count and the other record the quantities’ to gain the available 1 mark.

Good questions to practice from the published sample questions include: Petra Co
March/June 2023, Daley Co September/December 2022, Whittaker Co March/June 2022,
Pomeranian Co September/December 2021, Castle Couriers Co March/June 2021,
Snowdon Co March/June 2020, Amberjack Co September/December 2019, Freesia Co
March/June 2019, and Camomile Co September/December 2018.

Latte Co

This 20-mark question is based on Macchiato & Co, an audit firm due to commence the audit
of Latte Co, a listed company which supplies catering equipment. This question tests
candidates’ knowledge of substantive procedures and auditor’s reports.

Examiner’s report AA September/December 2023 14

Requirements (a) and (c) examine substantive procedures for trade receivables, a legal
claim and a bank loan. Requirement (a) is for 6 marks, (b) for 4 marks and (c) for 5 marks
and time allocation should be based on 1.8 minutes per mark. Therefore, the available time
should be split as follows; 11 minutes for requirement (a), 7 minutes for (b) and 9 minutes for
(c).

One mark is available for each well-explained procedure therefore candidates should aim to
produce 6 tests for requirement (a), 4 for (b) and 5 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. Too often candidates have rote
learnt a set of standard tests and these are then produced for each requirement without
consideration of their relevance to the scenario provided. This approach tends to generate
few marks. Audit procedures 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’.

Part (a) – 6 marks

Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the EXISTENCE and VALUATION of Latte
Co’s trade receivables.

For substantive procedures requirements, one mark is available for each well described
procedure, therefore candidates should aim to produce six tests for this requirement.
Candidates should plan their time accordingly. The question was tailored to two assertions,
existence and valuation, and these were capitalised in the requirement to aid candidates.
Any procedures not related to these assertions, such as ‘review disclosures’ will not gain
credit.

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.

For example, in this session some candidates included, ‘review after-date cash receipts’ and
would have only gained ½ mark. To gain the 1 mark available, this test would need to be
expanded to ‘follow these receipts through to the pre year end receivables balance’.
‘Reviewing customer correspondence for disputed balances’ would only have gained ½
mark, as this needs to be ‘discussed with management with regards to whether an
allowance may be required’ to gain 1 mark.

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.

In many substantive procedure questions analytical procedures can be an important source

of evidence, but for one-off types of expenditure, analytical review is unlikely to be useful.
For trade receivables, valid analytical procedures such as comparing the trade receivables
to the prior year with significant differences being discussed with management would gain

Examiner’s report AA September/December 2023 15

the full one mark. Candidates who compare the balance to the prior year to identify any
significant differences only gained ½ mark as the process of comparing current to prior year
only identifies the differences. To gain the other ½ mark these significant differences need to
be investigated or discussed further with management.

Candidates who focused on casting the receivables listing and agreeing to financial
statements, reviewing after-date cash receipts, reviewing the aged receivables reports for
slow-moving balances and discussing with management the need for an allowance,
reviewing customer correspondence for balances in dispute and undertaking analytical
review procedures were able to gain credit.

Some candidates had not read the scenario carefully as it clearly stated that a trade
receivables confirmation (circularisation) would not be performed, therefore no credit was
awarded for this procedure. Additionally, some candidates went further and listed the steps
which should be followed when undertaking a confirmation.

When generating substantive procedures for trade receivables or trade payables, it is

imperative that the focus of the tests is on the statement of financial position balance rather
than on revenue or purchases. In this session some candidates incorrectly provided revenue
procedures such as recalculate the total on the sales invoices and agree goods dispatched
notes to the sales invoice and listing of sales invoices. These did not gain credit. Take the
time to read the question requirements carefully and spend time thinking about what is
needed prior to producing an answer.

Part (b) – 4 marks

Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Latte Co’s provision for the legal claim.

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 employee
correspondence, contact the lawyers to establish the likely outcome of the claim, reviewing
board minutes to ascertain the probable amount and likelihood of payment, reviewing the
post-year-end cash book/bank ledger for payments made and agreeing this to the provision,’
obtaining written representations on management’s view of the outcome of the claim, and
reviewing the disclosures for compliance with IAS 37/accounting standards.

Careful thought should be given to the nature of the legal claim and the context of the
scenario. This claim related to an employee claiming for an injury sustained at work,
therefore, as it related to an individual employee injury it is unlikely that further claims from
other employees exist. Hence, any procedures which considered the issue of other or future
claims would not gain any credit.

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 evidence as it is unlikely the company had a similar claim in the prior year.

Examiner’s report AA September/December 2023 16

Also, this was a single claim and therefore no credit was awarded for recalculating the
provision or casting the list of legal claim provisions. Candidates must carefully read the
information in the question and tailor their answers accordingly.

Part (c) – 5 marks

Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Latte Co’s bank loans.

The scenario for this part of the question was quite brief. Key points included that a new
three-year loan had been taken out to finance the purchase of new equipment, the loan
attracts interest at 5%, quarterly repayments are due, and the March repayment was paid
late after the year end. Candidates should consider how this information could be used to
tailor the procedures, the impact they would have on the financial statements and then the
evidence which would be available.

When generating procedures for bank loans, it's important to note that it is the year-end
balance which is audited but this will be made up of $1m initially received, plus interest at
5% less any capital repaid. In this case, the question states that the quarterly instalment of
$105,000 includes interest. By considering each of these issues, appropriate substantive
procedures can be derived. For example, the initial loan proceeds can be agreed to the cash
book/bank ledger and bank statement, and the split of the loan repayment between capital
and interest can be recalculated. The loan can also be agreed to a loan agreement which
would contain such details as the repayment period and interest to be charged. The scenario
also states that it is a three-year loan which means that part of the loan will be a current
liability and part will be a non-current liability. As part of the review of the disclosure of the
loan, the auditor will need to recalculate the split between current and non-current liabilities
to confirm it is correct. The model answer shows other relevant procedures.

Using the information in the scenario carefully will ensure that answers are focussed on the
right issues and avoids inappropriate procedures being included. A number of candidates
incorrectly assumed that the March repayment being paid 15 days late meant there was a
going concern issue and so listed several going concern procedures.

No credit was awarded for this as the payment was simply late, therefore no going concern
issues arose and candidates should instead have focused on late payment penalties. Some
candidates focused on auditing the new equipment, which was purchased by the company.
No credit was awarded for this as the requirement was clearly for the bank loan.

Other common inappropriate tests included discussing with management why they were
obtaining new loans, bank reconciliation procedures, comparing the loans to the prior year,
or obtaining a written representation, even this was not a judgemental audit area. Others
included a procedure reviewing board minutes for authorisation of the loans. This is a test of
control and not a substantive procedure.

Good questions to practice from the published sample questions are: Heron Co March/June
2023, Pacific Co September/December 2022, Spinach Co March/June 2022, Danube Co
September/December 2021, Purrfect Co March/June 2021, Sagitarrii & Co
September/December 2020, Encore Co March/June 2020, Spadefish Co
September/December 2019, Hyacinth Co March/June 2019, Jasmine Co
September/December 2018 and Gooseberry Co March/June 2018.

Examiner’s report AA September/December 2023 17

Part (d) – 5 marks

Describe the factors which the audit engagement partner would have considered in
determining that this issue is a KAM; and describe the content of the KAM section of
the auditor’s report for Latte Co.

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.
For this session, 5 marks were awarded for the factors to be considered and for the contents
of the KAM section.

The starting point with this type of requirement is to consider what knowledge a candidate
has with regards to ISA 701 Communicating Key Audit Matters in the Independent Auditor’s
Report. Knowledge of this standard will help in considering what influences the decision as
to whether an issue is a KAM or not. Although the scenario related to the legal claim,
knowledge marks could be easily obtained without reference to the scenario.

Candidates should focus on three to four points that the engagement partner would consider
such as the level of risk relating to this issue, whether it would be reported to those charged
with governance, the significance of the matter and the level of judgement required in
forming a conclusion on the truth and fairness of this issue.

The next step would be to move onto the content of the KAM section of the audit report.
Here candidates should consider reporting WHAT the issue is – that there was a risk over
the valuation of the legal claim provision. WHY the issue is considered a KAM – due to the
fact it was high risk with significant auditor judgement required. HOW the issue was
addressed during the audit – with details of audit procedures adopted along with a review of
the disclosures.

One point for each of these would have been sufficient to maximise the available marks. The
model answer shows the key points which should be included for each of these.
It was pleasing to see that some candidates had revised the area of KAM for this session.
These candidates were generally able to consider factors in determining if the issue was a
KAM but still struggled with the contents.
Some candidates incorrectly assumed they needed to attempt to draft the KAM paragraph
rather than just describing its content. Other common incorrect answers attempted to answer
this question as if it related to a modified audit opinion. It is important to revise all audit report
options and not to simply assume that the focus of the question will contain a modified
opinion.

Auditor’s reports are a core area of the syllabus and knowledge of the ISAs in this area is
imperative. Good questions to practise from the published sample questions are: Pacific Co
September/December 2022, Spinach Co March/June 2022, Danube Co
September/December 2021, Purrfect Co March/June 2021, Sagitarrii & Co
September/December 2020, and Encore Co March/June 2020.

Examiner’s report AA September/December 2023 18