Requirement (b) was for 8 marks and asked candidates to recommend the audit procedures that should be carried out in respect of an insurance claim that had been submitted by the client just before the year end. The wording of the requirement should have been familiar to candidates as it has been used in many previous exam questions.

The scenario contained a brief description which should have made candidates sceptical of the claim being eligible to be recognised as a receivable – particularly the fact that the claim was highly material, and if recognised would have turned the company’s loss into a profit, and also the fact that the amount being claimed seemed very unrealistic when compared to the annual revenue.

Unfortunately very few candidates picked up on these matters, and did not question the amount of the claim or the timing of it, and very few answers specified the impact that it would have on the financial statements. Most answers included one materiality calculation but not the impact the adjustment would have on the reported loss for the year.

While some answers correctly discussed the accounting and disclosure requirements for a contingent asset, a number of answers incorrectly thought that the claim should result in some kind of provision or liability.

The audit procedures that were recommended were mixed in quality. Most candidates suggested a review of the terms and conditions of the insurance policy to see if the situation was covered, and most also recommended reviewing the actual claim and contacting the insurance provider. All of these are valid and appropriate procedures and generally were well described.

Some answers tended to state that the matter should be “discussed with management” with no further explanation, or that “an expert should be consulted” but with no description of what evidence the expert should be asked to provide, or even who the expert should be. Too many candidates seemed to want to rely on representations and discussions about the possible outcome of the insurance claim when there were other stronger sources of audit evidence available.