Candidates were expected to state and discuss various responsibilities, reporting options and safeguards regarding fraud affecting the external auditor.

The question was worth 12 marks over three sub-sections.

In part (i), candidates were required to state the responsibilities of the external auditor regarding fraud. Given revisions to ISA 240 this was a relatively topical question. Many candidates managed to state 3 or sometimes 4 responsibilities to obtain a clear pass standard.

Common weaknesses in this section included:

• Talking around the main issue. For example, many candidates explained the responsibilities of management, internal audit and even the audit committee without managing to bring external auditors into their answers. 
• Providing comments that were not quite correct. For example, stating that external auditors were responsible to detect all fraud, or in some cases that they had no responsibility at all. 
• Providing lengthy explanations of actual watch-dogs and blood-hounds rather than auditor responsibilities.

Overall, the question was fairly well answered.

In part (ii), candidates were required to discuss groups who could be informed regarding the fictitious inventory.

6 marks were available with up to 2 marks for each group discussed.

There were two key issues that limited the marks obtained from this question;

• Firstly, identifying the appropriate groups. The directors appear to have entrenched their view that the inventory is to be revalued; reporting back to the directors appears therefore to be inappropriate. Other reporting options are also limited by confidentiality issues; hence reporting to the bank or payables is probably not acceptable. However, there are still plenty of groups to report to including the audit committee, various authorities potentially including fraud reporting, etc. Many candidates obtained 3 or 4 marks by simply identifying the groups.

• Secondly, discussing why each group was being reported to. Almost all candidates found this discussion element of the question difficult. For example, candidates did mention that reporting to the audit committee was appropriate, but not that the committee as independent NEDs could hopefully persuade the board that simply making up a inventory figure was wrong and could provide grounds for the members to remove the directors (let alone mentioning the legal implications of the act).

Most candidates therefore obtained marks for identifying groups, but few marks were obtained for stating why those groups were being reported.