This 30-mark question was based on a light manufacturer, Chuck Industries Co, and tested candidates’ knowledge of the payroll cycle, substantive procedures for payroll and a redundancy provision, law and regulations and reliance on internal audit.

Part (a) for 12 marks required candidates to explain the implications and suggest recommendations for deficiencies identified in the scenario for the payroll cycle of Chuck Industries.

Most candidates performed well on this part of the question. They were able to confidently provide answers for five to six deficiencies identified from the scenario. The question did not specify the number of implications and recommendations required and hence some candidates provided more than six.

This meant that if some points were not specific enough to attain the 1 mark available for each of implications and recommendations, candidates were still able to achieve a strong overall score.

The scenario contained an abundance of deficiencies and so on the whole candidates were able to easily identify enough points. A small minority of candidates provided implications and recommendations for general deficiencies which were not specified within the scenario; these points would not have gained credit as the question requirement clearly stated that points needed to be raised for the deficiencies identified in the scenario.

A significant proportion of candidates wasted time by writing out the deficiencies from the scenario; there were no marks available for deficiencies, only for the implications and recommendations. It would have been better to use headings to identify to the marker which deficiency was being addressed, or to give brief details within the explanation of the implication.

Also many candidates felt that Chuck Industries paying wages in cash was in itself a deficiency; this is not the case as many businesses pay their employees in cash, and as long as the process is well controlled no issues should arise.

Common mistakes made by candidates were failing to explain the implications fully. Many just paraphrased the deficiency without considering how this would impact the company. For example, candidates’ easily identified the deficiency of joiners and leavers not being notified to the payroll department on time, leading to incorrect salaries being paid out.

However some candidates did not then consider what the implication, other than incorrect salaries being paid, would be to Chuck Industries. They could have explained that the payroll expense would be incorrect and also possible loss of employee goodwill.

Also for the deficiency of “no monitoring/supervision of the clocking in/out process” most candidates stated that the implication was that employees could clock in and out for each other, but this was not sufficient for 1 mark; they needed to link this to the implication, that this could result in wages being paid even though the employees had not worked.

In addition some candidates failed to provide sufficient detail in their recommendations and some answers were vague. Such as recommending that “the HR department should promptly inform payroll of joiners and leavers” but without detailing how and also how this would resolve the issue of HR staff members being on holiday and therefore failing to notify payroll on time.

A majority of candidates adopted a columnar approach with deficiency, implication and recommendation, or just implication and recommendation. If this was not done then most other candidates laid their answer out in paragraphs giving the implication and then the related recommendation.

This ensured that for each implication sufficient detail was provided for the recommendation. A minority of candidates listed out all the implications and then the recommendations. Where this approach was taken it was often difficult to link up which recommendation related to which implication, in addition the recommendations tended to become combined.

Future candidates should take note that where the requirements are linked it is advisable to use columns or to address an implication along with the related recommendation.

Part (b) for 6 marks required substantive procedures the auditor should perform to confirm the accuracy and completeness of Chuck Industries payroll charge. Performance was mixed on this part of the question.

The main area where candidates made mistakes was to provide tests of control rather than substantive procedures. As noted in previous examiner’s reports candidates are often confused with the differences between tests of controls and substantive tests. Both are methods for obtaining evidence and are key elements of the F8 syllabus.

Future candidates must ensure that they understand when tests of controls are required and when substantive procedures are needed. They need to learn the difference between them and should practice questions requiring the generation of both types of procedures.

Other common mistakes made by some candidates were: 
• Not considering analytical procedures, only tests of detail. 
• Providing vague tests which were not related to the payroll charge in the financial statements. 
• Not generating enough tests for 6 marks; it is 1 mark per valid procedure.

The requirement verb was to “describe” therefore sufficient detail was required to score the 1 mark available per test. Candidates are reminded that substantive procedures are a core topic area and they must be able to produce relevant detailed procedures.

An answer such as “perform analytical review of payroll” is far too vague as it does not explain how to undertake the analytical review, what is being compared and for what period. In addition answers such as “ensure tax deductions are correct” are objectives, if a test starts with “ensure that…” it is likely to be an objective rather than a substantive procedure.