Part (b) for 10 marks required a description of five audit risks from the scenario and the auditor’s response for each. Performance on this question was mixed, although slightly better than December 2011 when audit risk was last tested.

The scenario contained many more than five risks and so many candidates were able to easily identify enough risks, they then went on to describe how the point identified from the scenario was an audit risk by referring to the assertion and the account balance impacted. There seemed to be a higher proportion of candidates this session who described the audit risk adequately.

Some candidates tended to only identify facts from the scenario such as “Sunflower has spent $1.6 million in refurbishing all of its supermarkets” but failed to explain how this could impact audit risk; this would only have scored ½ marks.

To gain 1 mark they needed to refer to the risk of the expenditure not being correctly classified between capital and repairs resulting in misstated expenses or non-current assets. Additionally, candidates were able to identify the fact from the question but then focused on categorising this into an element of the audit risk model such as inherent or control risk.

The problem with this approach is that just because they have stated an issue could increase control risk does not mean that they have described the audit risk and so this does not tend to score well.

The area where most candidates performed inadequately is with regards to the auditor’s responses. Some candidates gave business advice such as, for the risk of the finance director (FD) leaving early, that “the auditor should ask management to replace the FD quicker” this is not a valid audit response.

Other responses focused more on repeating what the appropriate accounting treatment should be, therefore for the risk of inventory valuation due to the policy of valuing at selling price less margin, the response given was “inventory should be valued at the lower of cost and NRV”, again this is not a valid audit response.

Responses which start with “ensure that……” are unlikely to score marks as they usually fail to explain exactly how the auditor will address the audit risk. Also some responses were too vague such as “increase substantive testing” without making it clear how, or in what area, this would be addressed. Audit responses need to be practical and should relate to the approach the auditor will adopt to assess whether the balance is materially misstated or not.

A significant minority of candidates misread the scenario and where it stated that it was the first year on this audit for the senior, candidates seemed to think that it was the first year for the firm as a whole and so identified an audit risk of Sunflower being a new client with higher detection risk. This scored no marks as it was not the first year of the audit, candidates must read the scenario more carefully.

Most candidates presented their answers well as they adopted a two column approach with audit risk in one column and the related response next to it.