This 20-mark question was based on a mobile phone company Recorder Communications Co (Recorder). The question tested the areas of audit risks and responses, procedures for placing reliance on continuous counts for inventory, substantive procedures for directors’ bonus payments and managing conflicts of interest.

Part (a) for 10 marks required identification and description of five audit risks from the scenario and the auditor’s response for each. Performance on this question was mixed, and unfortunately not as good as in December 2013 when audit risk was last tested.

The scenario contained significantly more than five risks and so candidates were able to easily identify enough risks, and strong answers went on to describe how the point identified from the scenario was an audit risk by referring to the assertion and the account balance impacted.

As in previous diets, some candidates tended to only identify facts from the scenario such as “Recorder purchases goods from a supplier in South Asia and the goods are in transit for two weeks” but failed to describe how this could impact audit risk; this would only have scored ½ marks. To gain 1 mark the point needed to be developed to also explain that this could result in issues over the completeness of inventory.

More so than in previous diets, candidates disappointingly provided business risks rather than audit risks with answers such as stock outs due to the two week transit period and possible damage to inventory during transit.

As a result these candidates then provided responses related to how management should address these business risks rather than how the auditor should respond. This meant that out of a potential 2 marks per point, candidates would only score ½ marks for the identification of the issue from the scenario.

Some candidates also identified irrelevant risks such as Recorder undertaking continuous inventory counts.

While an audit risk was present around inventory in relation to the effectiveness of the perpetual inventory system, very few candidates explained the risk in this manner instead focussing on the lack of a full year-end count. This demonstrated a lack of understanding of continuous inventory counts. 
Additionally, many candidates performed poorly with regards to the auditor’s responses.

Many candidates gave business advice, such as changing the salesmen’s bonus structure or provided vague responses such as perform detailed substantive testing or maintain professional scepticism. 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.

Audit responses need to be practical and should relate to the approach (ie what testing) the auditor will adopt to assess whether the balance is materially misstated or not.

Most candidates presented their answers well, adopting a two column approach with audit risk in one column and the related response next to it. This helps candidates to ensure that for every risk identified there is a related response and candidates are encouraged to continue to use this approach where appropriate.