Question 1c
Examiners Report

Requirement (c), for 7 marks, focussed on a suggestion by the Group’s finance director that the external audit firm should use Zennor Co’s internal audit team as much as possible in order to reduce the audit fee. Some information was provided about the internal audit team, the work they had performed, and the fact that it reports to the board of directors in the absence of an audit committee.

The finance director had also requested that the audit fee should not be increased from the previous year. Candidates were asked to discuss how the finance director’s suggestions impact on audit planning and to comment on relevant ethical issues.

This requirement was generally quite well answered. Most candidates knew the main requirements of the relevant ISA and could to some extent apply them to the scenario. Many candidates picked up on the fact that Zennor Co not having an audit committee would impact on the control environment of the company, and that the work of the internal audit team would need to be evaluated before any reliance could be placed on it.

Most candidates could describe the impact that using the work of internal audit could have on the overall audit strategy, though this was often only very briefly mentioned, and few candidates suggested the type of work that the internal audit team could perform with relevance to the audit. On the whole though, this issue was quite well dealt with.

The issue in relation to the audit fee was also generally well answered. Almost all candidates could identify the ethical threats raised, and attempted to evaluate them in the context of the scenario.

However a significant minority of candidates thought that the finance director’s suggestion was some kind of contingent fee arrangement, which was not correct, and there were the usual suggestions that the finance director should be “disciplined” or “sacked” due to her improper suggestions, which did not earn credit.

To summarise on this question, the answers on risk of material misstatement were unsatisfactory, especially given that this is a regularly examined area. Candidates need to improve on the quality of their explanations of the risks identified. Simply stating that a balance or transaction may be “risky” without explaining why, and calculating its materiality is not enough to score well in this type of question.

There were also relatively easy marks lost in many scripts where candidates had failed to provide any additional information requests, or due to audit procedures being inadequately described. For many candidates the requirement where they demonstrated the best level of understanding was in relation to internal audit and ethical matters.