This question was for 25 marks, and was based on audit completion issues. The candidate was placed in a role as audit manager of a client, with the first task in requirement (a) of reviewing the notes left by the audit senior in relation to three specific matters.

Specifically, the requirement was to assess the audit implications of three matters (inventory valuation, provision for a legal case, and a loan made to a related party) – considering the adequacy of the evidence obtained, explaining any adjustments necessary to the financial statements, and describing the impact on the audit report if those adjustments were not made. Further audit procedures were also asked for. This was for 15 marks.

Candidates responded well to the practical nature of this question, and a proportion of answers scored very well. These answers went through each of the three issues, and logically answered each part of the requirement, starting with a consideration of materiality (the materiality level was given in the question), then commenting on the appropriateness of the audit evidence already obtained and suggesting further audit procedures, and finally discussing the impact of the issue on the financial statements and the audit report. There was a lot to do for the marks available, and students who realised this, made their answers succinct, but well explained, and avoided irrelevant matters.

Good answers commented that the first two audit issues were immaterial by monetary value on an individual basis, but when aggregated the total adjustment to the financial statements would become material, therefore having an implication for the auditor’s opinion.

However, there were several common weaknesses in answers. First, a sizeable proportion of candidates did not realise that a materiality level had already been determined and given in the question. They then incorrectly calculated materiality on the wrong basis, leading to irrelevant discussions of qualifications to the auditor’s opinion for the first two issues in isolation. Second, many candidates did not answer the full set of requirements for each issue, with the most common problem being that no further audit procedures were recommended at all, limiting the marks available.

A further issue was that a significant number of candidates who had correctly identified that a matter such as the inventory valuation was immaterial in isolation then went on to state that the audit opinion should be modified because of that issue. This type of comment indicates that the candidate either does not understand when an audit opinion should be modified, or lacks the courage to base their comment on audit report implications on what they have already discussed.

A number of candidates suggested that a breach of an accounting standard of any kind was “material by nature”. This raises the concern that such candidates have no clear understanding of what is meant by materiality.

It is concerning that many candidates do not seem to have the fundamental knowledge needed on audit reports. Many answers confused qualified opinions with disclaimers, suggested adverse opinions for immaterial matters, and even more thought that an Emphasis of Matter or Other matter paragraph could be used to communicate just about any audit issue at all with shareholders. Candidates should be aware from reading past papers and examiner’s reports that audit reports is a very important part of the paper P7 syllabus, and can be examined in the compulsory questions. There is therefore no excuse for a lack of knowledge in this area.

Candidates are also encouraged to take time to carefully read through the scenario. Reading too quickly and not stopping to think before starting to write their answer may have caused a lot of candidates to mis-understand the information given about materiality, as discussed above, and also about the loan made to the financial controller, which many candidates suggested should be reclassified as a current liability rather than a current asset.