Requirement (b) described a different audit client, Bulldog Co, which had expanded overseas and set up a treasury management function dealing with forward exchange contracts. The requirement was to discuss why the audit of financial statements is challenging and explain the matters to be considered in planning the audit of the forward exchange contracts.

Answers here were extremely mixed in quality. Satisfactory answers focused on why financial instruments generally are difficult to audit, discussing their complex nature, the changing landscape of financial reporting requirements, the potential for both client and auditor to lack appropriate knowledge and skills, and the frequent need to rely on an expert.

In terms of planning the audit, adequate answers focussed on simple matters such as managing resources, obtaining an understanding of the nature of the contracts and the controls in relation to them, and assessing how management value the financial instruments.

Inadequate answers did not include much reference to audit at all, and simply listed out financial reporting rules, with no consideration of audit implications other than saying that financial instruments are complex and subjective.

There were very few references to relevant ISA requirements, and little evidence that the audit of complex matters such as financial instruments had been studied at all, even though it is a topical current issue.