Requirement (b) was for nine marks and focused on laws and regulations, continuing to use the Adder Group as the scenario. Information was provided about suspicious activity in the Group’s storage facility warehouses, where it was implied that internal controls were deficient and that hazardous materials were being kept, possibly against relevant laws and regulations.

An employee had threatened the audit senior when questioned about the situation. Candidates were asked to discuss the implications of this situation for the completion of the Group audit.

Most candidates identified the obvious issues, namely that this was likely to be a breach of laws and regulations, internal controls were poor, and that an intimidation threat existed. Beyond this, the quality of answers varied dramatically.

The best answers used a methodical approach to explain the auditor’s responsibilities in relation to a suspected breach of laws and regulations; including the need to obtain more evidence, the auditor’s reporting responsibilities, and the need to consider client confidentiality as well as possibly reporting the matter in the public interest.

It was pleasing to see many candidates deal well with these issues, as well as the ethical threat raised by the employee’s behaviour. Weaker answers focussed solely on the potential money laundering implications, which while not irrelevant should not have been the only matter discussed.

In addition, weaker answers simply stated facts without much attempt to apply the requirements of ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements, to the scenario.

Some candidates suggested that the audit firm was responsible for ensuring that the Group was complying with relevant laws and regulations, saying that the audit firm should “ensure compliance”, and there were occasionally suggestions that the audit senior should be “disciplined” for not taking further action when threatened by the employee of the Group.

These comments, especially the latter, demonstrate a lack of judgment or real understanding of the role of the auditor in this regard. Question Two was for many candidates the best attempted question on the exam.

For requirement (a) it was encouraging that so many scripts discussed financial reporting matters with confidence, and crucially, were able to link those matters to relevant audit evidence points; for requirement (b) it was pleasing to see candidates indicate knowledge of the relevant ISA and demonstrate some application skills.