Many candidates chose to attempt Question 5, which focussed on audit completion and audit reports, despite clearly having very little knowledge and understanding of audit reports. Performance tended to be weak on this question overall.

The question was based in a Group audit scenario, in which three matters pertaining to the completion of the audit were described. The scenario made it clear that management was reluctant to adjust the consolidated financial statements in respect of the matters described.

Requirement (a) was for 7 marks and described the situation in relation to Toy Co, an overseas subsidiary of the Group, that was audited by local auditors and reported under the local financial reporting framework, not IFRS. The main issue was that under the local financial reporting rules a claim against the company would not result in the recognition of a provision, but under IFRS the provision should be recognised.

The amount was correctly identified by almost all as material to the Group financial statements, and answers were generally satisfactory, despite the slightly complex scenario. Most candidates explained how an adjustment should be made at Group level and that if not made, the audit opinion should be qualified due to material misstatement. Some answers insisted, incorrectly, that the adjustment should be made in the subsidiary’s individual financial statements.

The fact that the audit evidence so far obtained was insufficient was not always identified, and only a minority of answers suggested the further audit procedures that should be conducted. Some answers were confused about the impact on the opinion and suggested various options including adverse, disclaimer or in some cases, both.

Requirement (b) was also for 7 marks and provided a short description relating to a receivables balance outstanding in the parent company’s financial statements for which payment was unlikely to be received due to the insolvency of the company owing the amount. Many candidates correctly identified this as an adjusting event after the reporting period, and determined that the amount was highly material.

Some answers tended to focus on the going concern status of both companies, or suggested that the matter should be disclosed in both sets of financial statements but not adjusted for. Comments on the audit opinion were also mixed here, with many incorrectly stating that the issue should be highlighted in an emphasis of matter paragraph if not adjusted by Group management.

Before moving on to look at requirement (c) there are two other comments to make in relation to how candidates dealt with the audit report implications of requirements (a) and (b). The first point is that very few candidates considered the issues of (a) and (b) in aggregate. This was important because in aggregate the potential adjustments had a significant impact on Group results, and a discussion of whether this would result in an adverse opinion was relevant.

Candidates are encouraged to always look at the bigger picture and even though the scenarios are described separately, they should at some point in the answer be considered collectively.

The second issue is that very few answers went beyond discussing the impact on the audit opinion. However the question asked for impact on the audit report, so marks were available for describing the structure and content of the basis of opinion paragraph as well as the opinion itself.

Turning to requirement (c), this was for 6 marks and briefly described how the chairman’s statement to be published in the Group’s annual report, contained a statement that the Group’s revenue had increased by 20%.

The vast majority of answers correctly determined that this was incorrect, revenue had actually increased by 5.9% and that this constituted a misstatement of fact. While there were some sound answers here from candidates who clearly understood the implications, unfortunately in many answers there was little else to be said, indicating a lack of knowledge of the auditor’s responsibilities in relation to other information published with the financial statements, or the impact of such a misstatement on the auditor’s report.

Many answers suggested the use, incorrectly, of an emphasis of matter paragraph, but more suggested that there would be no impact at all on the auditor’s report, and that the chairman’s statement was nothing to do with the auditor’s responsibilities.