This question focussed on the audit issues pertaining to fair values and estimates, and contained three short scenarios. Unfortunately for many candidates it was an inadequate choice of question, as answers to at least two of the three parts of the question were generally unsatisfactory.

The first scenario, for 8 marks, described an audit client involved in energy production, and the accounting issue was a provision for decommissioning of its nuclear power stations. The requirement (a) was to comment on the matters that should be considered, and to explain the audit evidence that should be found in a file review in respect of the decommissioning provision. This is standard wording for a requirement and should have been familiar to candidates.

Candidates performed best on this requirement of question three, but answers were still lacking in substance.

Many answers discussed the appropriate accounting treatment for the provision correctly, including the issue of measuring the provision at present value. But few identified that the reduction in the provision was a key issue, or that estimates generally give rise to audit risk due to their subjective nature, especially when dealing with a provision that will not give rise to a cash outflow for another 20 years.

Most of the evidence that was suggested should be on file focussed on an expert’s report and the inevitable written representation from management that the provision had been correctly accounted for. Very few answers used the approach of ISA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures in challenging the assumptions used by management in developing the estimate of decommissioning costs. Few answers considered the lack of disclosure of the provision, or that a provision may not even be needed at all.