Part (b) for 10 marks required a description of the audit risks and responses for Donald Co. 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. This is the third session in a row where audit risk has been tested and where most candidates’ performance has been unsatisfactory.

A number of candidates wasted valuable time by describing the audit risk model along with definitions of audit risk, inherent risk, control and detection risk. This generated no marks as it was not part of the requirement.

Candidates are reminded that they must answer the question asked as opposed to the one they wish had been asked.

The main area where candidates continue to lose 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 and should include the financial statement assertion impacted. 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.

For those candidates who were able to identify audit risks, they mainly focused on going concern and the risk of bad debts arising from irrecoverable receivables. However the scenario did contain a number of other audit risks, such as existence of the planes at the year end and the capital v revenue treatment of the $15m spent on refurbishment.

Not many candidates identified other risks, which was unsatisfactory. The issue of the call centre closing and hence the workforce being made redundant was misunderstood by many. These candidates felt that this must mean that the company was having going concern issues, but there was no indication of this in the scenario. The risk related to the completeness of the redundancy provision.

Even if the audit risks were explained many candidates 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 Donald Co had a number of receivables who were struggling to pay, many candidates suggested that management needed to chase these outstanding customers.

This is not a response that the auditor would adopt, as they would be focused on testing valuation through after date cash receipts or reviewing the aged receivables ledger. In addition some responses were impractical, such as asking the bank to confirm to the auditors whether they would grant Donald the $25m loan.

The bank is not going to provide this type of information to the auditor especially if they have not yet told Donald. 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, and they would do well to practice audit risk questions.