Part (c) for 15 marks required a calculation of 5 ratios each for 2 years and an explanation of the related audit risks and responses. The ratios requirement was answered well by the majority of candidates. However there were a significant minority who did not have a calculator in the exam and hence were unable to calculate any ratios, they failed to score any of the available 5 marks.

Also some candidates were unable to calculate any relevant ratios, instead just calculating percentage increases or producing duplicating ratios such as gross margin as well as cost of sales as percentage of revenue.

In addition a significant minority confused the calculation of inventory days using inventory divided by revenue rather than cost of sales. Candidates are reminded that as part of an analytical review, going concern or audit risk question they must be able to calculate and then evaluate relevant ratios.

The question then required audit risks and responses for 10 of the 15 marks. Many candidates performed inadequately on this part of the question.

As stated in previous examiner’s reports, audit risk is a key element of the Audit & Assurance syllabus and candidates must understand audit risk.

The main area where candidates lost marks is that they did not actually understand what audit risk relates to.

Hence they provided answers which considered the risks the business would face or ‘business risks,’ which are outside the scope of the syllabus. Audit risks must be related to the risk arising in the audit of the financial statements. If candidates did not do this then they would have struggled to pass this part of the question as there were no marks available for business risks.

In addition many candidates chose to provide an interpretation of accounts and the ratios calculated rather than an assessment of audit risk. Comments such as “revenue has increased by 28% this could be as a result of the bonus scheme introduced” would not have scored any marks as there was no identification of the audit risk, which is overstatement of revenue.

Even if the audit risks were explained many candidates then failed to provide a relevant response to the audit risk, most chose to give a response that management would adopt rather than the auditor.

For example, in relation to the risk of valuation of receivables, as Redsmith Co had extended their credit terms to customers, many candidates suggested that customers should not be accepted without better credit checks, or offering an early settlement discount to encourage customers to pay quicker.

These are not responses that the auditor would adopt, as they would be focused on testing valuation through after date cash receipts or reviewing the aged receivables ledger. Also some responses were too vague such as “increase substantive testing” without making it clear how, or in what area, this would be addressed.

Future candidates must take note; audit risk is and will continue to be an important element of the syllabus and must be understood.