Candidates were expected to identify areas of inherent risk in the charity scenario provided and then to explain the effect of each risk on the audit approach.

The question was worth 12 marks. Given that the question requirement contained two requirement verbs, namely list and explain, and was linked to a scenario, then the mark allocation is 2 marks per point made. 1 mark was available for finding the inherent risk and 1 for explaining the effect on the audit approach.

The question contained no upper limit on the number of points to make so marks could be accumulated from more than 6 points. A minority of candidates did mention more than 6 points, although most struggled to mention more than 4.

The standard of answer varied considerably. It appeared that the use of a charity was marginally concerning, although this was within the bounds of the study and followed the style of the examiner from previous diets (for the example the tennis club question from paper 2.6).

Example comments provided and reasons why those comments did not obtain a pass standard are noted below:

Answer comment
“Cash is collected by volunteers in a public place. The auditor will need to review the effectiveness of internal controls over this procedure.”

Examiners assessment of comment
This point was typical of many. “Cash being collected by volunteers” starts to identify the risk but does not show sufficient detail; mentioning the potential for fraud shows what the risk is. The effect on the audit approach is weak, at best. The internal control system is limited to non-existent, so reviewing the effectiveness of this has little benefit.

Other effects on the audit approach that could be mentioned would be the use of substantive analytical review to compare the trend of donations, or possibly observing the collectors to make sure they were not stealing donations for themselves.

Answer comment
“There are very few staff meaning that the control system will be weak”.

Examiners assessment of comment
The point is potentially correct, as few staff generally means lack of segregation of duties. However, the question requirement was to identify inherent risks, not control risks, hence the point is not relevant.

Other common errors included:
• Not being able to state a clear and logical effect on the audit approach for inherent risks identified, as noted above.
• Explaining control risks such as lack of segregation of duties, as mentioned above.
• Stating the effect on the audit approach in very general terms e.g. for each point stating that “additional substantive procedures will be required.” More focused comments were expected.
• In many situations, simply not stating the obvious. For example, the scenario stated that the taxation of charities was complicated in this specific jurisdiction. Many candidates explained the effect on the audit approach in terms of verifying income and expenditure to source documents, ensuring that the tax liability was paid, or even recommending the appointment of a qualified accountant at the charity to prepare the taxation computation. The obvious thing to do though was simply have a charity taxation specialist on the audit team.

Overall, this was a question that required some thinking but also use of common sense. As the last bullet point above suggested, stating the obvious for the weaknesses mentioned in the scenario would have provided some benefit to many candidates. The standard was therefore inadequate.