Part (bi) for 5 marks required candidates to calculate ratios for 2012 and 2013 to assist in planning the audit.

This question was answered very well by the vast majority of candidates with many scoring full marks.

Some candidates attempted to calculate ratios despite there being inadequate data available, namely return on capital employed and gearing. Candidates need to think about the information provided in the scenario prior to calculating ratios.

In order to gain the ½mark available for each year a relevant ratio had to be calculated. Some candidates did not bring a calculator into the exam and hence were unable to calculate the final ratios; these candidates would not be able to score the 5 available marks. Future candidates are reminded, once again, to bring a calculator into the F8 exam as they are often required.

Part (bii) for 10 marks required a description of five audit risks from the scenario and ratios calculated and the auditor’s response for each. Performance on this question was once again unsatisfactory.

The scenario contained more than five risks and so candidates were able to easily identify enough risks, they then went on to describe how the point identified from the scenario or movement in a ratio was an audit risk by referring to the assertion and the account balances impacted. The improvement in this area noted in December 12 has been reversed and the proportion of candidates who described the audit risk adequately has declined in this session.

Some candidates tended to only identify facts from the scenario such as “Kangaroo has completed houses in inventory where selling price may be below cost” but failed to explain how this could impact audit risk; this would only have scored ½ marks. To gain a full 1 mark they needed to refer to the risk of the inventory being overvalued. Where candidates did attempt to cover the assertion it was often vague; for example stating that “inventory may be misstated”, this is not sufficient to gain the ½ mark available.

Additionally, many candidates used the ratios calculated in part (bi) and then gave a detailed analytical review of the ratio movements, commenting on ratio increases and decreases, but with no link at all to the audit risks. It was not uncommon to see very lengthy answers with no audit risks; this just puts the candidate under time pressure.

Many candidates focused on business risks rather than audit risks and hence provided responses related to how management should address these business risks. For example, the scenario stated that “Kangaroo had changed their main supplier to a cheaper alternative and as a result warranty claims had increased”. Some candidates answered “this would lead to the company’s reputation suffering as the quality of their buildings would decline”.

The suggested auditor’s response was “to change back to a more expensive supplier”. Neither the risk nor the response has been related to the financial statements and hence would only gain a ½mark being the identification of the fact from the scenario.

Additionally, candidates performed inadequately with regards to the auditor’s responses. As detailed above some candidates gave business advice, other responses focused more on repeating what the appropriate accounting treatment should be, therefore for the risk of inventory valuation due to number of houses where selling price was below cost, the response given was “inventory should be valued at the lower of cost and NRV”, this is not a valid audit response.

Responses which start with “ensure that……” are unlikely to score marks as they usually fail to explain exactly how the auditor will address the audit risk. Also some responses were weak such as “discuss with the directors” without making it clear what would be discussed and how this would gather evidence. Audit responses need to be practical and should relate to the approach the auditor will adopt to assess whether the balance is materially misstated or not.

Most candidates presented their answers well as they adopted a two column approach with audit risk in one column and the related auditor’s response next to it.