In this question, candidates were required to identify and try and explain unusual changes in the income statement. An income statement was provided in the scenario, with what were hopefully some fairly obvious changes that should make an auditor question the accuracy of the figures.

The comment that the directors thought the company had had a difficult year, but the results appeared to be good was supposed to elicit this questioning attitude towards the income statement.

Many candidates did question the figures in the statement, as far as considering the possibility of window- dressing or fraudulent activity given the directors’ initial comments. However, many comments made only basic comments such as “sales have increased” which was really self-evident from the scenario.

Inadequate answers also typically covered a very limited range of points. Candidates needed to realise that because some very basic information was provided that, finding problems with that information should be relatively straight forward.

The question was worth 9 marks. The requirement verbs were identify and explain indicating, with the scenario, that identify was probably .5 mark and explain provided a further mark. Six good points would therefore provide full marks.

While basic calculations were helpful, these should not have taken very long. It was evident that many candidates did not have a calculator although the examiner has noted that questions required basic calculations can be set in this paper.

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

Answer comment
“An increase in turnover shows that sales have increased.”

Examiners assessment of comment
The answer does not really explain why turnover has increased – sales and turnover being the same thing. Valid explanations for increase in turnover include more marketing, changes in weather (perhaps more sunny days meaning people were outside more in their gardens, cheaper shed prices increasing demand, etc.)

Answer comment
“Selling and distribution costs increased by 20%.”

Examiners assessment of comment
This comment is correct regarding identifying a movement in an item of expenditure. However, reasons for this change are not mentioned. Linking the change to the sales increase – which was not in proportion to selling and distribution costs, to identify a potential problem would have been appropriate.

Similarly, suggesting reasons for distribution costs increasing from general knowledge would also be correct; many candidates noted that increase in fuel prices worldwide would have increased distribution costs for many companies.

Other common errors included:

• not understanding basic accounting principles meaning that some explanations were strange or in some cases simply incorrect. For example, simply stating that sales had increased because more goods were being sold on credit compared to cash (debtors may increase due to this mix change, sales would not unless linked to better credit terms being provided). Also, cost of sales falling due to stock being undervalued....

• Lack of structure or format to answers. Very few answers followed the structure of the income statement, but tended to make points in almost any order (e.g. selling costs, cash, cost of sales, etc.). This meant that there were serious omissions from most answers regarding the changes between the two years; following the format of the income statement would have to alleviate this error.

• Providing excessive detail on the cash and bank balances. The question requirement specifically mentioned the income statement; the cash balances were included to demonstrate that the interest paid and receivable may be suspect. Detailed speculation on why the bank balance had improved was therefore not required.

Overall, the standard of answers was unsatisfactory. Many candidates provided very brief answers with little or no explanation for changes in the income statement.