This question was for 40 marks, and was split into four question requirements. As is typical for question one, the scenario and requirements involved the planning of the audit, and information was given on the business background and recent developments of the client company, as well as some financial information. There were also ethical issues embedded in the scenario.

It was clear that the majority of candidates were familiar with audit planning questions and seemed comfortable with the style of the question and with the amount of information that had been given in the scenario. There was little evidence of time pressure despite the length of the question.

Requirement (ai) was for 12 marks, and asked candidates to evaluate the business risks faced by the company. This was by far the best answered requirement of the exam, with most candidates identifying and explaining a range of relevant business risks, which on the whole were developed in enough detail.

Most candidates tended to be able to discuss at least six different business risks, with foreign exchange issues, the loss of several executives, reliance on a single supplier and too few customers, and the problems of operating in a high technology industry being the most commonly risks discussed.

For candidates who achieved lower marks on this requirement, the problem was that they did not develop their discussion enough to achieve the maximum marks per point. Some of the answers just repeated the business issue as stated in the question without discussing any of the impact on the business at all.

Most candidates discussed going concern, which was relevant, but instead of relating going concern to specific matters such as liquidity problems and the large loan, it was simply mentioned as a conclusion in relation to every business risk discussed, and therefore was not specific enough to earn credit.

Many answers could have been improved in relation to business risk evaluation by including some simple analysis of the financial information made available, for example through the calculation of profit margins and trends. This would have been an easy way to develop the point that financial performance was suffering, as well as liquidity being poor.

Requirement (aii) was for 8 marks, and was less well answered. Candidates were asked to identify and explain four risks of material misstatement to be considered in planning the audit. (Note the UK and IRL adapted papers had a slightly different requirement with no specific number of risks of material misstatement required and a mark allocation for (ai) and (aii) combined at 20 marks).

Answers were very mixed for this requirement. Some candidates clearly understood the meaning of a risk of material misstatement, and could apply their knowledge to the question requirement, resulting in sound explanations. However, despite this being a regularly examined topic and the cornerstone of audit planning under the Clarified ISAs, the majority of answers were unsatisfactory.

First, many candidates included a discussion about this being a first year audit which would result in a risk of material misstatement, but this was both incorrect and showed that the question had not been read carefully enough. Then, when attempting to explain a risk of material misstatement, many candidates could do little more than state a financial reporting rule, and then say the risk was that “this would be incorrectly accounted for”.

It was not clear if this type of vague statement was down to candidates being reluctant to come to a decision about whether a balance would be over or understated, or if they thought that their answer was specific enough. Very few answers were specific enough on the actual risk of misstatement to earn credit.

The matters that tended to be better explained were the risks of misstatement to do with inventory obsolescence, impairment of property plant and equipment, and the finance costs associated with the new loan.

On a general note, many candidates seemed confused between a business risk and a risk of material misstatement, and some answers mixed up the two. Candidates are reminded that it is an essential skill of an auditor to be able to identify both types of risk, and that they are related to each other, but they are not the same thing.