Part (b) for 10 marks required a description of five audit risks and responses for Abrahams Co. Many candidates performed inadequately on this part of the question. As stated in previous examiner’s reports, audit risk is a key element of the Audit & Assurance syllabus and candidates must understand audit risk.

This is now the fourth session in a row where audit risk has been tested and where most candidates’ performance has been unsatisfactory. This is unsatisfactory, especially as guidance was recently provided in an article on how to tackle audit risk questions.

The main area where candidates continue to go wrong is that they did not actually understand what audit risk relates to. Hence they provided answers which considered the risks the business would face or ‘business risks,’ which are outside the scope of the syllabus.

In addition many candidates correctly identified an issue from the scenario such as “the standard costs are set when a product is first manufactured and are not usually updated”, but this is all that they would state in their answer.

There was no attempt to link this issue to the audit risk which arises in the financial statements i.e. the risk that the inventory could be under or overvalued as the standard cost might be out of line with actual cost.

Audit risks must be related to the risk arising in the audit of the financial statements and should include the financial statement assertion impacted. Just stating that “this increases inherent risk” is not sufficient to gain the mark available. If candidates did not link the risk to the financial statement assertion then they would have struggled to pass this part of the question.

Even if the audit risks were explained many candidates failed to provide a relevant response to the audit risk, most chose to give a response that management would adopt rather than the auditor. For example, in relation to the issue of the new IT manager not starting until January, many candidates suggested that the auditor needed to discuss with management why the new manager was not starting for two months.

This is not a response that the auditor would adopt, as they would be focused on testing the risk of errors arising in the new system due to the lack of IT support. Also some responses were too vague such as “increase substantive testing” without making it clear how, or in what area, this would be addressed.

Future candidates must take note audit risk is and will continue to be an important element of the syllabus and must be understood, and they would do well to practice audit risk questions.