Part (b) was for six marks and provided information on a completed contract in respect of which Darren Co was facing legal action due to problems that had arisen following completion.

The scenario stated that disclosure on the matter had been made in the notes to the financial statements and that the audit evidence on file concluded there to be a possibility of Darren Co having to pay the damages claimed.

Candidates again seemed confident of the accounting rules, yet many suggested that a provision should be made for the damages; this may be because candidates assumed that there “should” be some implication for the auditor’s opinion given the facts of the scenario, but this was not the case.

The other significant issue was that Darren Co could not afford to pay the damages given its small cash balance, and this could raise a threat to the going concern status of the company.

Only the strongest candidates made this connection and were able to explain clearly the implications for the audit report. In this scenario the issue was that a disclosure would be sufficient, as long as there was only a possibility that the claim would need to be paid, but the crucial aspect was that audit firm would need to audit the disclosure carefully to obtain evidence as to its sufficiency especially given the potential impact on going concern.

As in part (a), the further actions were generally not given, other than a generic suggestion to “discuss with management”.