Part (b) for 15 marks required a discussion of whether three subsequent events in the scenario required the financial statements to be amended, as well as audit procedures to form a conclusion on the amendment and an explanation of the impact on the audit report if these issues remain unresolved.

Candidates’ performance was unsatisfactory on this question. There were a significant number of candidates who did not devote sufficient time and effort to this question bearing in mind it was worth 15 marks.

Each of the three issues had a maximum of 5 marks available and in order to score well candidates needed to consider the following in their answer:

• A discussion of whether the event was adjusting or non-adjusting and why 
• A calculation of whether the event was material or not, using the financial information provided in the scenario 
• Subsequent events audit procedures 
• A description of the type of audit report required 
• An explanation of the impact on the audit report.

A significant proportion of candidates were able to correctly state whether an event was adjusting or not, however they could not explain why. In order to maximise marks candidates needed to link into their F3 Financial Accounting knowledge, and focus on whether there were any pre-existing conditions at the year end date, as this was required for the event to be adjusting.

A significant minority of candidates ignored the materiality calculation completely. Some candidates stated the event was material but without using the financial information provided. What was required was a calculation, for example, the receivable balance was $0.3m and so represented 4% of profit before tax and 0.4% of revenue, and then an explanation of whether this was material or not.

Having assessed the materiality, many candidates then struggled to link the implications of this to whether the financial statements should be amended and possible implications for the audit report if not correctly treated. If an error is immaterial then the financial statements do not require amendment and an unmodified audit report would be given. Many candidates stated than an error was material, but that the audit report would be unmodified and vica versa.

In relation to the audit procedures, many candidates were able to suggest a few appropriate tests. However there still tended to be vague and unrealistic procedures given, such as “write to the receivable and ask them if they will pay the outstanding balance”; the receivable is not going to give this information to the auditor.

Of the three events, candidates performed best on the receivable and worst on the warehouse. Very few understood the implication of the insurance cover meaning that it was only if uninsured losses were material then they would potentially need disclosure.

With regards to the type of audit report required, many candidates provided a scatter gun approach of suggesting every possible audit report option. Giving every possible audit report option will not allow candidates to score well. Candidates seemed unable to decide whether for each of the three events the opinion should be modified or not.

A significant proportion of candidates do not understand when an “emphasis of matter” paragraph is relevant, and seemed to think that it was an alternative to an unmodified opinion or an “except for” qualification.

Alternatively rather than amending the financial statements, candidates felt an emphasis of matter paragraph would be sufficient.

In relation to the impact on the audit report, many candidates were unable to describe how the opinion paragraph would change and that a basis for qualified opinion paragraph was necessary for the lawsuit and the warehouse if the disclosure of uninsured losses was inadequate.

Future candidates are once again reminded that audit reports are the only output of a statutory audit and hence an understanding of how an audit report can be modified and in which circumstances, is considered very important for this exam.