Part (c) for 12 marks required a discussion of three issues in the scenario as well as a description of the impact on the audit report if these issues remain unresolved. Candidates’ performance was unsatisfactory on this question.

Each of the three issues had a maximum of 4 marks available and in order to score well candidates needed to consider the following in their answer:

• A description of the audit issue; such as incorrectly depreciating land, or lack of evidence to support wages or contingent liability disclosure. 
• A calculation of whether the issue was material or not, using the financial information provided in the scenario. 
• An explanation of the type of audit report required. 
• A description of the impact on the audit report.

A significant minority of candidates stated that it was acceptable to depreciate land, and the issue was that it should have been charged for the prior year as well. This demonstrates a fundamental lack of accounting knowledge.

In relation to the materiality calculation, some candidates stated the issue was material but without using the financial information provided. What was required was a calculation, for example, the land depreciation was $0.7m and so represented 7% of profit before tax, and then an explanation of whether this was material or not.

The benchmark from ISA 320 Materiality in Planning and Performing an Audit of 5% of profit before tax was taken as being material.

With regards to the type of audit report required, many candidates provided a scatter gun approach of suggesting every possible audit report option. Candidates often hedge their bets by saying “if management will make an amendment then we will give an unmodified opinion, however if they do not make the adjustment then we will give a qualified except for opinion.” Giving every possible audit report option will not allow candidates to score well.

Many candidates used terms such as “except for”, “modified” or “qualified” but the accompanying sentences demonstrated that candidates did not actually understand what these terms meant. In addition a significant proportion of candidates do not understand when an “emphasis of matter” paragraph is relevant, and seemed to think that it was an alternative to an “except for” qualification. Also candidates are reminded that since the clarified ISAs have been issued the old terminology of “disagreement” is no longer relevant and instead should refer to “material misstatement”.

In relation to the impact on the audit report, many candidates were unable to describe how the opinion paragraph would change and that a basis for qualified opinion paragraph was necessary for issues (i) and (ii).

In addition a significant proportion of candidates provided procedures the auditor would undertake in order to understand or resolve the issues. For example, alternative procedures for verifying wages were given, or the steps to take in contacting lawyers in relation to the lawsuit. Whilst valid procedures, they did not score any marks as they were not part of the question requirement. Candidates must answer the question asked and not the one they wish had been asked.

Future candidates are once again reminded that audit reports are the only output of a statutory audit and hence an understanding of how an audit report can be modified and in which circumstances, is considered very important for this exam.