Part (d) for 4 marks considered how the claim should be reported in the financial statements and the effect on the audit report. The majority of candidates correctly identified that as the matter was material a contingent liability disclosure was required.

However a significant minority incorrectly assumed that a provision was necessary despite the question stating that management felt they had good defences against the claim. This demonstrates a failure to apply knowledge of IAS 37 Provisions, Contingent Liabilities and Contingent Assets to the scenario.

The requirement to explain the effect on the audit report produced some mixed answers, a significant proportion correctly identified that if the disclosures were not made than an ‘except for’ opinion would be required. However many candidates gave every audit report option including disclaimer of opinion and adverse opinion.

This lack of focus demonstrates a lack of understanding of audit reports, as the audit report is the only output to shareholders after the audit then this is disappointing. Future candidates are reminded of the need to understand audit reports and possible modifications.