Requirement (a) provided a scenario which described that an audit firm had given an unmodified audit opinion on Spaniel Co’s financial statements, and that subsequent to the audit report being issued a fraud had been discovered that had been operating during the period covered by the audit report.

The scenario also pointed out that the audit firm had not performed audit procedures in relation to the area in which the fraud was occurring, namely payroll. The requirement asked candidates to explain the matters to be considered in determining the audit firm’s liability to Spaniel Co in respect of the fraud.

There were some excellent answers to this requirement. The best ones clearly outlined the factors that have to be proven to determine negligence, and applied them methodically to the scenario. The materiality of the fraud was considered, the duty of care owed to the audit client, and the fact that the auditor may not have been exercising professional scepticism during the audit due to the long-standing nature of the audit appointment.

It was also appropriate to discuss the responsibilities of management and auditors in relation to fraud, and whether it is appropriate for auditors to rely on the conclusions reached in previous year’s audit.

Some answers tended to only provide a rote-learnt description of responsibilities in relation to fraud, and usually failed to reach an appropriate conclusion. With little application to the scenario there is limited scope for marks to be awarded.