Examiners’ commentaries 2021

Examiners’ commentaries 2021

AC3093 Auditing and assurance

Important note

This commentary reflects the examination and assessment arrangements for

this course in the academic year 2020–2021. The format and structure of the
examination may change in future years, and any such changes will be
publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading references
Unless otherwise stated, all cross-references will be to the latest version of the
subject guide (2020). You should always attempt to use the most recent edition
of any Essential reading textbook, even if the commentary and/or online reading
list and/or subject guide refer to an earlier edition. If different editions of
Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to
find the relevant section.

General remarks

Learning outcomes
At the end of this course and having completed the Essential reading and Activities,
you should be able to:
• explain why external audits and other types of assurance services are
conducted
• discuss the duties of auditors and other assurance providers and how these
have changed over time
• explain the meaning of concepts that are fundamental to auditing and
assurance services, such a ‘independence’, ‘evidence’, ‘risk’, ‘materiality’
• describe, in general terms, the processes involved in auditing and other
assurance services
• distinguish between compliance and substantive testing and describe various
audit tests
• discuss the form, content and importance of the reports provided at the end of
the audit or assurance service.

Considering the circumstances under which the exam papers were sat, the
examiners had expected a higher overall standard of answer than typically they had
seen under conventional exam conditions. In fact, the overall performance was
very similar to that seen pre-Covid, although the number of outstanding

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performances showing depth of understanding, originality of thought, quality of

presentation was lower than in the past.
It appeared that many candidates were reluctant to break away from their lecture
notes and often even cited their lecturers by name to support their answers to
questions which the lecturer could never have foreseen. It was almost as if that
justified the student’s answer or at least absolved the student of responsibility
should the answer have been wrong.
Too often much of the discussion is generic and lacks discussion in the context of
the question. Even for discussion that was relevant candidates missed out on
scoring high marks due to a lack of depth of discussion and evaluation of some of
the statements made. Candidates seem to find it difficult to move beyond the level
of purely descriptive writing, to treat subjects critically and evaluate findings.
In response to the high number of cases of academic misconduct reported last
year, candidates this year seemed keen to cite not only their lecturers’ notes but
also sources such as Wikipedia, Wikiaccounting, Investopedia and ebooksKenya.
None of these sources impressed the examiners. It seemed that candidates were
less able or less willing to adapt their knowledge to the question set, preferring
instead to produce long lists of points of a generic nature.
A few candidates appeared to have altered key words (e.g. ‘examiner’ was used
instead of ‘auditor’ and ‘accomplice’ replaced ‘partner’) in material lifted from certain
sources, presumably to avoid charges of plagiarism. That effort was wasted since
such heavy reliance on a source still counts as plagiarism and would call for an
investigation; and anyway, the result read so oddly that the material would have
failed to gain much credit.
The relative few who not only had acquired a good understanding of the discipline
but were also able to focus on the key points and to create some original responses
stood out quite dramatically.

Essential reading
The subject guide lists two key textbooks as the Essential reading for this course.
You should obtain or have regular access to one or other of these two textbooks:
• Gray, I., S. Manson and L. Crawford The audit process: principles, practice and
cases. (London: Thomson, 2019) 7th edition [ISBN 9781473760189].
• Porter, B., J. Simon and D. Hatherly Principles of external auditing. (Chichester:
John Wiley & Sons, 2014) 4th edition [ISBN 9780470974452].

These texts will be referred to throughout as ‘Gray et al. 7th edition’ and ‘Porter et
al. 4th edition’.

Issues with presentation and structure of answers

In terms of general presentation, it seems strange that a generation of candidates
who have never known an IT-free environment showed a surprisingly poor grasp of
how to use even the most basic facilities of Microsoft Word. To pinpoint just a few
of the most obvious weaknesses in presentation:
• There was all too often evidence of a complete inability to use the spell-check
and grammar-check functions.
• Presentation was often dire with badly aligned paragraphs (sometimes no
paragraph breaks at all).

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• Lines were tightly spaced making the text difficult to read.

• To ‘force’ a new page, the Enter key was used repeatedly rather than simply
using the Insert/Page Break option.

Candidates need to realise that presentation matters and that they should strive to
produce work that looks professional and competent.
Other candidates needlessly repeated details from the case study questions rather
than focusing on discussing the implications of the circumstances in a particular
case study.
More than in previous years, the examiners noted how many candidates seemed to
think that they had to include an introduction to each answer. Often this
‘introduction’ consisted of nothing more than a paraphrasing of the question which
obviously added nothing to the quality of the answer, simply wasted the candidates’
time and detracted from the available word count.
Other candidates wasted both time and words on conclusions that simply repeated
what had already been said or made no sense. The principle that should guide
candidates is that everything they write should add something new – repeating
points already made or making vacuous statements can never improve the quality
of an answer.

What the examiners are looking for

Candidates should be prepared to devote time not just to learning material but most
importantly to understanding the nature of the problems faced by auditors and how
they can hope to overcome those problems. It often appears to examiners that
candidates have spent a long time committing to memory long lists of bullet points
which are then regurgitated in the exam room with little thought being given to
whether and how each point is relevant to the particular question set.
At the heart of the problem of poor examination performance is a lack of genuine
commitment and enthusiasm to the chosen subject. Candidates who come to the
Auditing and Assurance module with an enquiring mind and an eagerness quickly
find that there is a lot more to it than simply a long list of dry tests and procedures.
Such candidates invariably find it is no longer a chore to study the recommended
reading. The more they read, the more they find of interest and the better prepared
they are for the examination. Their investment of time and energy is nearly always
rewarded with above average scores.

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Examination revision strategy

Many candidates are disappointed to find that their examination performance is

poorer than they expected. This can be due to a number of different reasons
and the Examiners’ commentaries suggest ways of addressing common
problems and improving your performance. We want to draw your attention to
one particular failing – ‘question spotting’, that is, confining your examination
preparation to a few question topics which have come up in past papers for the
course. This can have very serious consequences.
We recognise that candidates may not cover all topics in the syllabus in the
same depth, but you need to be aware that examiners are free to set questions
on any aspect of the syllabus. This means that you need to study enough of the
syllabus to enable you to answer the required number of examination questions.
The syllabus can be found in the Course information sheet in the section of the
VLE dedicated to this course. You should read the syllabus very carefully and
ensure that you cover sufficient material in preparation for the examination.
Examiners will vary the topics and questions from year to year and may well set
questions that have not appeared in past papers – every topic on the syllabus is
a legitimate examination target. So although past papers can be helpful in
revision, you cannot assume that topics or specific questions that have come up
in past examinations will occur again.
If you rely on a question spotting strategy, it is likely you will find yourself
in difficulties when you sit the examination paper. We strongly advise you
not to adopt this strategy.

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 Examiners’ commentaries 2021

Examiners’ commentaries 2021

AC3093 Auditing and assurance – Zone A

Important note
This commentary reflects the examination and assessment arrangements for
this course in the academic year 2020–2021. The format and structure of the
examination may change in future years, and any such changes will be
publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading references
Unless otherwise stated, all cross-references will be to the latest version of the
subject guide (2020). You should always attempt to use the most recent edition
of any Essential reading textbook, even if the commentary and/or online reading
list and/or subject guide refer to an earlier edition. If different editions of
Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to
find the relevant section.

Comments on specific questions

Candidates should answer FOUR of the following EIGHT questions: TWO
from Section A, ONE from Section B and ONE further question from either
section. All questions carry equal marks.
SECTION A
Answer AT LEAST TWO questions, and NO MORE THAN THREE questions
from this section.
Question 1
Berio Ltd has a year-end of 30th June 2019. During the final review stages of
the audit, the audit manager overhears the accounts staff discussing a
rumour that one of their major customers is having serious financial
difficulties. The customer owes Berio Ltd £840,000 as at the year-end, which
is material to the accounts.
Pestle plc has a year-end of 31st December 2019. The company manufactures
products such as plastic straws, containers and packaging. An increase in
awareness of the environmental issues around plastic has resulted in a
substantial reduction in orders for the company during the year ended 31st
December 2019.
Graze Ltd has a year-end of 30th September 2019. The auditors were
appointed late for the audit and so were not able to attend the year-end
inventory count. When they asked to see the company’s records, they were
only given photocopies and no original documentation of the inventory count.
Mortar plc is in need of re-structuring. It is negotiating with its bank in order
to obtain new loans. Those negotiations were not complete at the time the

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financial statements had to be finalised. The directors have made a complete

and fair disclosure of the situation in the notes to the financial statements.
Chow Ltd. appointed new auditors who discover that the depreciation policy
used by the company is not the most appropriate given the nature and use of
the company’s non-current assets. Chow Ltd.’s directors are not prepared to
change their policy. The effect of the difference between the existing policy
and the auditors’ preferred method is above the auditors’ materiality
threshold.
Required:
a) For each situation above detail the audit issue, explain what action the
auditors need to take and suggest the potential outcome for the auditors’
report.

b) Auditors use a sampling approach when conducting audit testing. What

are the risks associated with sampling and how do auditors try to mitigate
these risks?

Reading for this question

• Porter et al. 4th edition, Chapters 12 and 14.
• Gray et al. 7th edition, Chapters 12 and 18.
• Subject guide 2020, Chapters 5, 6 and 7.

Approaching the question

a) If candidates scored less than full marks it was usually down to giving an
incomplete answer e.g. not specifying the effect on the audit report. Good
answers discussed/explained the inappropriateness of the different audit
opinions and given the circumstances of the question suggested a better, more
appropriate audit opinion.

b) Generally, answers tended to be too brief and what was written was not that
good. The better scripts made a point of emphasising that to improve the
chances of the sample being representative of the whole population, auditors
need to take care that the selection of sample items has to be random. Good
answers discussed the impact on a sampling approach of evaluating risk and
materiality at the planning stage of the audit.

Question 2
ReCharge Ltd is a UK company specialising in the manufacture of batteries
for electric vehicles (EV batteries). The company is new to the market and
was started by two engineers with experience in the development and
production of EV batteries. The EV battery market is challenging for new
companies due to the dominance of large corporations with big budgets for
research and development.
ReCharge Ltd’s niche is that it is a fresh face to the market with a strong
focus on being environmentally-friendly in its production processes and in its
desire to promote green motoring. Whilst it is expected that the market for EV
batteries will continue to grow as the demand for EVs increases, market
research has shown that customers are reluctant to purchase an EV.
Potential customers’ top three concerns are the range between battery re-

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charge, the cost of EVs and the small number of charging stations in the UK.
The directors of ReCharge are keen to address these issues and this year
they have already invested large sums of money in research and development
projects to produce smaller, lower cost batteries with a greater range. Whilst
increasing range should reduce concerns about the lack of charging stations
the directors are in talks with a larger competitor about the feasibility of
working together to build more charging stations.
ReCharge Ltd is based in the South of England and in recent months two
cities in close proximity to ReCharge Ltd’s headquarters have announced
plans to ban diesel and petrol cars from their city centres within the next 5
years.
Funds have so far come from a loan from a local bank and capital invested by
the existing directors/shareholders. However, given the scale of the project
to develop lower cost, higher range batteries, ReCharge is now looking for
alternative sources of investment. They have approached funding bodies in
the UK and Europe with their plans. In order to support these applications
they require audited accounts. The directors consider this funding to be
essential to their future plans due to the increasing threat of overseas
companies entering the market.
Required:
a) Detail at least six potential audit risks associated with the audit of
ReCharge Ltd. Having detailed the risks, make an assessment of whether
your audit firm should accept or reject this audit appointment. Give an
explanation of your decision.

b) In accordance with the ISAs, auditors take a risk-based approach to their

audit work. What do you understand by the term ‘risk-based’ and what
are the potential disadvantages of such an approach?

Reading for this question

• Porter et al. 4th edition, Chapters 8 and 9.
• Gray et al. 7th edition, Chapters 6 and 7.
• Subject guide 2020, Chapter 7.

Approaching the question

a) Candidates did well at identifying most if not all of the risks and were able to
give some discussion of each. Poor answers provided little depth of explanation
of the risk, or simply explained some of the different types of audit risk,
(inherent, control, detection, going concern, intimidation, self-interest,
advocacy), but with limited/no discussion in the context of the question. Good
answers discussed the risks identified from the question in the context of the
different types of audit risk. If there were a common weakness, it was that a
number seemed reluctant to make a decision on whether or not the audit firm
should take on the client. Markers gave credit whatever the decision provided it
was unequivocal and justified.

b) Normally, candidates are keen to trot out the old formula – AR=IR+CR+DR, but
oddly this year when such a reference would have earned 2 marks relatively
few actually reverted to this formula. Good answers discussed the importance
and implication for the audit of evaluating risk at the planning stage of the audit.
Discussions regarding the disadvantages of a risk-based audit approach were

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disappointing, a surprising number seemed to think that a risk-based approach

required large numbers and therefore would not be suitable for smaller
companies. Marks for this part were quite low.

Question 3
You have just been promoted to the position of ethics partner for a large
international firm of accountants. You have been made aware of five recent
cases involving possible ethical misconduct within your firm.
Staff Member A: downloaded private data relating to a client onto a USB
memory stick which was then lost on the way home by public transport. The
staff member claimed that their work laptop had crashed and so they planned
on working on the client’s matter from home on their personal laptop.
Staff Member B: claimed from the firm reimbursement for expenses incurred
in entertaining a client. It later became apparent that the person being
entertained was B’s sister. B claimed that it was possible that the sister
might one day become a client.
Staff Member C: is a senior financial advisor in the firm, specialising on
giving investment advice to high net-worth clients. One wealthy client was so
impressed with C’s advice that they gave C a gold Rolex watch with a retail
value of £25,000. C claimed that the value of the watch was trivial in the
context of the client’s wealth.
Staff Member D: was found to have been the beneficial owner of shares in one
of the firm’s listed company clients. In their defence, D claimed that they had
never been involved in the audit of the company and were never likely to be,
given that they specialised in a completely different industry.
Staff Member E: was discovered to have altered audit working papers to give
the impression that the proper audit tests on a sample of purchase invoices
had been conducted when, in fact, no work had been done on that sample of
invoices. E argued that too little time had been allocated for the test and the
whole team was being pressed by the audit manager to complete the job by
the deadline.
Required:
a) Identify in each case the breach of professional ethics and evaluate the
effectiveness of the defence offered by the relevant staff member.

b) Explain why a Code of Professional Ethics is necessary and suggest ways

in which firms can reduce the risk of staff members breaching the Code.

Reading for this question

• Porter et al. 4th edition, Chapters 4 and 5.
• Gray et al. 7th edition, Chapter 3.
• Subject Guide 2020, Chapter 4.

Approaching the question

a) Generally, candidates were on the right track regarding the ethical breaches in
the various scenarios even if they were not specific in the details. Good
answers framed their discussion using the principles of integrity, objectivity and

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 Examiners’ commentaries 2021

independence as established by the Ethical Standard. The really good

candidates were able to say for example that in the case of Staff Member D it
did not matter that they were not part of the audit team, D might influence those
who are on the team and that there must be no visible link between audit firm
and audit client i.e. staff members should not hold shares in any audit clients.

b) The better candidates got the point that a code of ethics is part of the
professionalisation process – it is part of what makes a professional body
professional. They also did rather better on how firms can instil good ethical
principles as set out in requirements of the Ethical Standard, for example
Ethical Standard guidance on compliance and breaches.

Question 4
You are the litigation support partner for your firm, which in 2019 won the
contract for the audit of JDL Shipping Ltd, (JDL). JDL is owned by a large
American conglomerate, US International Traders Inc. (USIT). Bernt Jansen is
the audit partner in charge of the JDL audit who encountered the following
problems during the first audit for the year ending 31st December 2020:
The Chief Executive Officer of JDL, Ms. Rebuis, was appointed by and reports
to the board of USIT. She is a domineering character who appeared to resent
the audit team and failed to respond to their enquiries, claiming that they
distracted her from running JDL. Ms. Rebuis could not produce a copy of her
contract of employment under which she said she was entitled to a salary of
£1m, a bonus of £250,000 and various benefits including the extensive and
expensive renovation of her private apartment in central London. This lack of
evidence was reported to the Chief Financial Officer of USIT, who instructed
Bernt Jansen ‘just to get on with it’ and sign off an unmodified audit report
within the next day, or ‘there would be trouble’.
Further, Bernt Jansen’s team had been concerned about the large amount of
petty cash expenditure but under such time pressure no more work was
done. Instead of completing the evidence collection process, the audit team
sought and received a letter of representation from Ms. Rebuis to the effect
that all transactions for which she had been unable to produce evidence were
allowed under the terms of her contract. She also confirmed that the
accounting records, including the petty cash records, fully and fairly reflected
genuine transactions for the benefit of JDL. On the basis of this document,
Bernt Jansen signed off the unmodified audit report on the 21st January 2021.
Bernt Jansen emailed a management letter to the USIT board outlining his
concerns and calling for tighter controls to be imposed on Ms. Rebuis and
JDL. For some reason, this email ended up in the spam folder of the
secretary to the board of USIT where it remained unopened.
In March 2021, USIT’s internal auditors visited JDL. They discovered that not
only had Ms. Rebuis breached the terms of her contract by overpaying herself
remuneration and by charging the company for her renovations but that she
had taken out more than £100,000 through the petty cash system. Ms. Rebuis
was dismissed on the spot.

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USIT have now filed a lawsuit against your firm claiming that the audit of JDL
for 2020 was negligently conducted allowing Ms. Rebuis to extract in total
nearly £1m from JDL. USIT is seeking damages from your firm.
Required:
a) Make an assessment of the strengths and weaknesses of the legal
position of your firm in this lawsuit.

b) Explain the purpose and value of auditors asking management to provide

them with letters of representation.

Reading for this question

• Porter et al. 4th edition, Chapters 13 and 15.
• Gray et al. 7th edition, Chapters 16 and 21.
• Subject Guide 2020, Chapter 8.

Approaching the question

a) The small number of candidates who attempted this question did a reasonable
job of teasing out the key points and were able to cite a number of cases in
support. Goods answers assessed the legal position in the context of the audit
risk, (inherent, control, detection) and, given the audit risk, the quality of the
audit evidence gathered.

b) The answers to this part were pretty good with candidates showing a good
understanding of the purpose of the management letter. Goods answers
assessed the appropriateness of the letter of representation as audit evidence
in its own right and the effect of the letter of representation on the nature or
extent of other audit evidence.

SECTION B
Answer ONE question and NO MORE THAN ONE further question from this
section. Each question is worth 25 marks.
Question 5
Auditors of financial statements have often been regarded as ‘fraud
detectives’. Critically examine the accuracy of this image.
Reading for this question
• Porter et al. 4th edition, Chapter 6.
• Gray et al. 7th edition, Chapter 19.
• Subject Guide 2020, Chapter 2.

Approaching the question

Several the answers tried to turn this into a pure ‘expectations gap’ question without
specifically addressing just the fraud point. It was expected that candidates would
explain the role of management in preventing and detecting frauds in their
companies and contrast this with the role of the auditor in detecting fraud. Good
answers explained the limitations of the audit in detecting fraud and why there are
bounds to an auditor’s responsibility for being held liable for detecting fraud. At least
here there were fewer claims than in the Zone B answers that auditors are
professionally trained to detect fraud.

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 Examiners’ commentaries 2021

Question 6
Audit evidence comes in a number of forms. Consider the various forms of
evidence and how different forms may be suitable to meet different audit
objectives.
Reading for this question
• Porter et al. 4th edition, Chapter 7.
• Gray et al. 7th edition, Chapter 7.
• Subject Guide 2020, Chapter 6.

Approaching the question

Candidates who attempted this question were generally well versed in the different
types of audit evidence though most did less well on aligning audit evidence to audit
objectives, failing to relate the relevance and appropriateness of the audit evidence
being relied upon for the required audit objective.

Question 7
The audit profession in the UK has come under regulatory scrutiny in the last
twelve years. Examine the causes of this scrutiny and the changes which
have been proposed for the future regulation and organisation of the audit
profession.
Reading for this question
• Porter et al. 4th edition, Chapter 18.
• Gray et al. 7th edition, Chapter 22.
• Subject Guide 2020, Chapter 9.

Approaching the question

Only two candidates attempted this question and so it is impossible to give a
generic impression of candidates’ performances. Candidates have always been
encouraged to take a wider interest in their chosen subjects rather than simply
focus on learning from textbooks which quickly become out-of-date. A dedicated
student would have been aware of the discussions about the future of the auditing
profession, the concern about provision of other services by auditors to audit
clients, the domination of the audit market by the Big Four, the need for a more
robust regulator to improve auditing standards and deal effectively with audit
failures, etc. The question provided candidates with the opportunity to discuss and
evaluate recent developments introduced by the regulatory authorities to try to
ensure the health and resilience of the audit market. The well-informed student’s
biggest problem would have been in condensing the vast array of material into a 45-
minute essay.

Question 8
Auditors should aim to obtain ‘sufficient and appropriate audit evidence’.
Explain what this term means and how auditors attempt to obtain such
evidence.
Reading for this question
• Porter et al. 4th edition, Chapters 7 and 9.
• Gray et al. 7th edition, Chapters 7 and 14.
• Subject guide 2020, Chapter 6.

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Approaching the question

This question proved quite popular and generally candidates did a good job of
defining the terms ‘sufficient’ and ‘appropriate’. They were also well able to explain
the different methods of obtaining evidence. Greater critical evaluation regarding
the need professional judgement and limitations of gathering audit evidence and
how this can impact upon the audit opinion would have helped.

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Examiners’ commentaries 2021

AC3093 Auditing and assurance – Zone B

Important note
This commentary reflects the examination and assessment arrangements for
this course in the academic year 2020–2021. The format and structure of the
examination may change in future years, and any such changes will be
publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading references
Unless otherwise stated, all cross-references will be to the latest version of the
subject guide (2020). You should always attempt to use the most recent edition
of any Essential reading textbook, even if the commentary and/or online reading
list and/or subject guide refer to an earlier edition. If different editions of
Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to
find the relevant section.

Comments on specific questions

Candidates should answer FOUR of the following EIGHT questions: TWO
from Section A, ONE from Section B and ONE further question from either
section. All questions carry equal marks.
SECTION A
Answer AT LEAST TWO questions, and NO MORE THAN THREE questions
from this section.
Question 1
You are the audit partner for Anthony’s Building Company Ltd. (ABC), a
property developer specialising mainly in residential housing. At the end of
2019, the assets of the company were valued at cost at £250m. Sales totalled
£100m for the year with ABC 10% net profit. Seeking to diversify, in the first
two months of 2020, ABC borrowed extensively to finance the acquisition of
several out-dated high street stores for re-development. The additional
borrowing took the company close to the gearing limits imposed by the bank.
In March 2020, the UK entered a two-month lockdown because of the Covid
pandemic. Sales of houses collapsed and high street stores were forced to
close. Subsequently, UK restrictions have been relaxed and then re-imposed.
With an increased demand for outdoor space, house prices rose but business
in high street stores remained low with one industry expert predicting that the
British high street will never be the same.
In August 2020, ABC featured in a consumer programme on a local TV
network in which ABC customers complained about the build quality of ABC
housing. The largest estate still being developed was highlighted for defects

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in workmanship including one house which was so badly built that it had to
be demolished and rebuilt. ABC paid for this and for rehousing the
occupants in the meantime. ABC’s insurer refused to cover these costs
saying that such extreme carelessness was not covered by its policy. The
site manager attempted to calm other complainants by offering cash rebates
of up to 10% of the purchase price if the complaint was dropped. Potential
interest in all ABC’s houses decreased after the programme aired.
On another development site, initial construction work was stopped when the
remains of a rare type of Roman villa were uncovered. Early investigations
suggest that the historic remains cover 90% of the site and that
archaeological investigations will take at least two years to complete.
ABC’s directors are convinced that ABC is a going concern and assure you
that exciting alternative uses will be found for the town centre properties
recently acquired though they are unable to provide you with any definite
plans.
Required:
a) By undertaking a risk analysis, identify and explain your main concerns
regarding the audit of ABC?

b) To what extent can auditors be held liable if a company were to collapse

shortly after receiving an unmodified opinion?

Reading for this question

• Porter et al. 4th edition, Chapters 9 and 15.
• Gray et al. 7th edition, Chapters 6 and 19.
• Subject guide 2020, Chapters 2 and 7.

Approaching the question

a) Generally, the candidates who attempted this question were quite good at
picking up the various problem areas of the client’s business and many scored
high marks. Those who fared less well were either content to identify only a few
of the issues or simply recited the question, with limited/no explanation of the
risk.

b) Even if a student had done really well on part (a), they were often let down by
their answers to part b. Hardly any answers addressed directly the situation
where a company goes out of business unexpectedly because of external
factors beyond the control of management and beyond the reasonable
anticipation of the auditors. Even though the scenario in part a) made specific
reference to the pandemic and to an unexpected discovery of an item of
antiquity both of which halted the company’s plans, candidates still thought that
this question was about fraud! Too many candidates discussed the respective
responsibilities of auditors and directors with regard to the detection of fraud,
and case law regarding when the auditors can be held liable for not detecting
fraud. Only a few candidates discussed the responsibilities of directors
regarding the monitoring and reporting of going concern. There was limited
discussion around the auditor’s need to collect and evaluate evidence regarding
going concern. Answers lacked consideration as to the possible audit opinions
the auditor could give as a result of weighing up the evidence found.

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 Examiners’ commentaries 2021

Question 2
ReCharge Ltd is a UK company specialising in the manufacture of batteries
for electric vehicles (EV batteries). The company is new to the market and
was started by two engineers with experience in the development and
production of EV batteries. The EV battery market is challenging for new
companies due to the dominance of large corporations with big budgets for
research and development.
ReCharge Ltd’s niche is that it is a fresh face to the market with a strong
focus on being environmentally-friendly in its production processes and in its
desire to promote green motoring. Whilst it is expected that the market for EV
batteries will continue to grow as the demand for EVs increases, market
research has shown that customers are reluctant to purchase an EV.
Potential customers’ top three concerns are the range between battery re-
charge, the cost of EVs and the small number of charging stations in the UK.
The directors of ReCharge are keen to address these issues and this year
they have already invested large sums of money in research and development
projects to produce smaller, lower cost batteries with a greater range. Whilst
increasing range should reduce concerns about the lack of charging stations
the directors are in talks with a larger competitor about the feasibility of
working together to build more charging stations.
ReCharge Ltd is based in the South of England and in recent months two
cities in close proximity to ReCharge Ltd’s headquarters have announced
plans to ban diesel and petrol cars from their city centres within the next 5
years.
Funds have so far come from a loan from a local bank and capital invested by
the existing directors/shareholders. However, given the scale of the project
to develop lower cost, higher range batteries, ReCharge is now looking for
alternative sources of investment. They have approached funding bodies in
the UK and Europe with their plans. In order to support these applications
they require audited accounts. The directors consider this funding to be
essential to their future plans due to the increasing threat of overseas
companies entering the market.
Required:
a) Detail at least six potential audit risks associated with the audit of
ReCharge Ltd. Having detailed the risks, make an assessment of whether
your audit firm should accept or reject this audit appointment. Give an
explanation of your decision.

b) In accordance with the International Standards on Auditing, auditors take

a risk-based approach to their audit work. What do you understand by the
term ‘risk-based’ and what are the potential disadvantages of such an
approach?

Reading for this question

• Porter et al. 4th edition, Chapter 9.
• Gray et al. 7th edition, Chapter 6.
• Subject guide 2020, Chapter 7.

Approaching the question

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AC3093 Auditing and assurance

a) Once again, candidates did well at identifying most if not all of the risks and
were able to give some discussion of each. Poor answers provided little depth
of explanation of the risk, or simply explained some of the different types of
audit risk, (inherent, control, detection, going concern, intimidation, self-interest,
advocacy), but with limited/no discussion in the context of the question. Good
answers discussed the risks identified from the question in the context of the
different types of audit risk. If there were a common weakness, it was that a
number of candidates seemed reluctant to make a decision on whether or not
the audit firm should take on the client. Markers gave credit whatever the
decision provided it was unequivocal and justified.

b) Normally, candidates are keen to trot out the old formula – AR=IR+CR+DR, but
oddly this year when such a reference would have earned 2 marks relatively
few actually reverted to this formula. Good answers discussed the importance
and implication for the audit of evaluating risk at the planning stage of the audit.
Discussions regarding the disadvantages of a risk-based audit approach were
disappointing, a surprising number seemed to think that a risk-based approach
required large numbers and therefore would not be suitable for smaller
companies. Equally puzzling was the claim that clients could predict where an
auditor would expect risk and then perpetrate misstatements in other areas.
So, marks for this part were quite low.

Question 3
You are the technical partner of a medium-sized firm of auditors. Your senior
partner has become concerned about the increased exposure to legal liability
in the event that the firm issues an inappropriate audit opinion. You have
been instructed to examine a random sample of audit files and to review the
appropriateness of the opinion signed in each case by different audit
partners.
Your selection included the following cases:
Client Alpha: certain disclosures required by the Companies Act in relation to
the directors’ remuneration had been omitted. The audit partner considered
that the total amount involved was not material and signed an unmodified
opinion.
Client Bravo: inventory records relating to one of its depots could not be
found. The depot accounted for 1% of Bravo’s sales and 0.5% of the total
profit. The audit partner had modified the opinion on the financial statements
using the ‘except for’ style and had modified the opinion on the keeping of
proper books and records.
Client Charlie: minor errors had come to light at the very end of the audit.
The effect of the errors was to understate non-current assets by 0.5% or 5%
of the materiality threshold. The audit partner had signed an unmodified
report.
Client Delta: Delta is in the middle of a lawsuit brought against it by one if its
major customers demanding that extensive repairs be carried out to faulty
equipment supplied by Delta. Delta’s directors made no mention of the case
in their report or in the notes to the financial statements. The audit partner
signed an unmodified report, after having seen correspondence from Delta’s
lawyers to the effect that the customer’s case against Delta is weak.

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Client Echo: faced with a liquidity crisis before its year-end, Echo’s directors
were looking for sources of new finance. Their search had not proved
successful by the time the accounts had to be signed off. The directors
prepared the financial statements on a going concern basis but made a full
and frank disclosure of the position and the effect if no further finance could
be found. Nevertheless, the audit partner modified the opinion on the
grounds of disagreement with the going concern assumption.
Required:
a) Assess the appropriateness of each of the audit opinions stating your
reasons for agreeing or disagreeing with the style of opinion given.

b) Write a brief training memo for the firm’s new trainees explaining to them
what ‘a true and fair view’ means and what an audit partner must consider
before signing an unmodified opinion on financial statements.

Reading for this question

• Porter et al. 4th edition Chapter 14.
• Gray et al. 7th edition, Chapter 18.
• Subject guide 2020, Chapter 5.

Approaching the question

a) Audit reports: although this topic has featured on successive papers for a
number of years, many candidates continue to find this type of question very
challenging. Marks would have been lost if a student selected an incorrect form
of opinion or if they failed to justify their decision. A disappointing number of
candidates simply stated they agree or disagree with the appropriateness of the
opinion given in the question, but with limited/no explanation as to why they
agree or disagree. For Client C, which was very clearly set up to lead to an
unmodified opinion, a large number of candidates nevertheless opted for some
form of modification, seemingly unable to grasp the levels of materiality given in
the question. As in the past, the Emphasis of Matter option was the ‘go to’
choice for those candidates who were less familiar with the material and
consequently were nearly always wrong.

b) The answers to this part were generally pretty good with marks being awarded
for presenting the answer as a memo and for giving some definition of ‘a true
and fair view’, good answers went beyond discussing compliance with
regulations and referred to the need to be unbiased and to discuss commercial
substance over legal form. Additional marks were gained if candidates could
say that auditors needed to be satisfied that sufficient evidence had been
collected, that no fundamental uncertainty existed and that the requirements of
the Companies Act had been met.

Question 4
WBB is a charity which operates a motorcycle courier service for hospitals.
Starting with just one city in 2011, it now covers the whole country. The
charity has 500 volunteer members who either ride the motorcycles, raise
funds or act as ‘controllers’ directing the riders to locations for pick-up and
delivery. The main source of income is voluntary donations; the current year
is the first time that income is high enough to require an audit. The charity is
managed by a committee of ten trustees, not all of whom take their duties

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AC3093 Auditing and assurance

seriously, for example, two of them missed a training session explaining the
legal duties and liabilities of being a trustee.
In preparation for a bid for the audit work of WBB, you make initial
investigations and find the following:
For operational purposes the country is divided into 8 areas. Each area has a
regional manager and its own small fleet of motorcycles.
Each regional manager is issued with a laptop, an electronic pad and a card
reader so that donations can be made by bank card. Sometimes one or more
of these items goes missing. Often the missing equipment is found but only
after the charity has paid for a replacement. You have not been able to
ascertain how many of the items the charity currently has.
Collection boxes have been left in shops and restaurants to enable customers
to make cash donations. The area manager will occasionally visit these
locations, empty the boxes and bank the money when convenient. Again, no
one can say how many boxes exist.
It was suggested that the charity should have T-shirts printed with the
charity’s logo. Sale proceeds of the T-shirts would add another income
stream. The committee delegated merchandising to a single member five
years ago and took no further interest in the matter. Over the years, new lines
of merchandise were added but sales have never matched the member’s
predictions. No inventory count has ever been conducted.
The treasurer has sole control of the bank account. She produces a monthly
spreadsheet to show the committee the transactions going through the bank
account. The committee authorises large purchases such as new
motorcycles. All other payments are made on the authority of the treasurer
who pays the bills on receipt of an invoice from a supplier.
The motorcycles have a number of accessories such as a satnav, a 2-way
radio or mobile phone. Occasionally, such items go missing and are replaced
immediately as they are essential for operations.
Under the motor insurance policy, the motorcycles must be kept in a locked
garage when not in use. Not all riders comply and there have been cases
when a motorcycle has been damaged when left on the street. Since the
damage is not covered by insurance, the charity has to pay for repairs.
Required:
a) Identify and explain your main concerns about the control environment of
the charity?

b) Make suggestions for improving the operational and financial

management of the charity.

Reading for this question

• Porter et al. 4th edition, Chapter 10.
• Gray et al. 7th edition, Chapters 8 and 9.
• Subject guide 2020, Chapter 7.

Approaching the question

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 Examiners’ commentaries 2021

a) The examiners did not expect so many candidates to opt for this question and
the majority of those making that choice the outcome was favourable.
Candidates successfully identified the problems and explained the
consequences for the financial statements. If there was one disappointing
aspect to these answers, it was the large number of candidates who seemed
unable to grasp that this was a not-for-profit organisation. Good answers tended
to go beyond simply stating a concern, they went on to explain the weakness
identified in the context of the control environment. For example, going beyond
stating the treasurer had sole control of the bank account and explaining this
weakness in the context of the need for some segregation of duties or at least
some oversight of an individual’s activities.

b) If a student had done well on part a, they generally also did well on part b, being
able to suggest a number of practical solutions to the problems identified in part
a. We noticed evidence of a degree of naivety in answers which simply said
hire more staff and we were not inclined to reward such impractical answers.
Many candidates tended to suggest one-off actions to address specific
problems, for example remove the two trustees who missed the training
session, as opposed to suggesting controls that could be put in place to
safeguard assets and control behaviour on an ongoing basis.

SECTION B
Answer ONE question and NO MORE THAN ONE further question from this
section. Each question is worth 25 marks.
Question 5
Identify and explain the similarities and differences between the audit of
financial statements and an assurance engagement on a corporate social
responsibility report.
Reading for this question
• Porter et al. 4th edition, Chapter 17.
• Gray et al. 7th edition, Chapter 17.
• Subject guide 2020, Chapter 9.

Approaching the question

This essay question was particularly poorly attempted with very few candidates
being able to do more than describe an audit. It seemed that only a handful of
candidates understood what a CSR report was and what constituted an assurance
engagement. Few candidates were able to explain the main aims of an assurance
engagement in the context of assessing the quality of information, controls,
processes and procedures and contrasting these aims with that of the audit of
financial statements.

Question 6
Critically assess the factors which a court will take into account when
deciding whether auditors should be held liable to pay damages to a third
party for negligence in the conduct of an audit.
Reading for this question
• Porter et al. 4th edition, Chapters 15 and 16.
• Gray et al. 7th edition, Chapter 21.

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AC3093 Auditing and assurance

• Subject guide 2020, Chapter 8.

Approaching the question

Legal liability has never been a favourite of candidates so it was a little unexpected
that quite so many candidates attempted this essay. Sadly, the quality of the
answers suggested that this choice was made out of desperation. A good number
of answers identified the Caparo criteria almost in passing, even though those
criteria would have formed a perfect structure for an essay. Good essays built upon
Caparo using additional case law to illustrate factors which courts will consider
when deciding if an auditor has been negligent and is liable to pay damages to a
third party. The fact that the candidates then went on to discuss any and every
aspect of legal liability suggested that few had really appreciated the key point of
the question – that courts have imposed natural bounds to third party liability and
why these bounds are important.

Question 7
Identify the personal qualities which make for an effective auditor of financial
statements and illustrate the value of each one with an example of a situation
where that quality would enhance the value of the audit.
Reading for this question
• Porter et al. 4th edition, Chapter 5.
• Gray et al. 7th edition, Chapter 3.
• Subject guide 2020, Chapters 2 and 4.

Approaching the question

This question seemed, more than any other, to invite answers to be presented in
tabular form. The examiners were not inclined to give excellent marks even if the
points being made were on the right track. Again, this seemed to point to
candidates simply repeating material handed out by lecturers. Markers were
prepared to give marks for originality even if the number of characteristics was less
than in some other answers. Good answers provided depth of explanation of the
personal qualities that help make an effective auditor. For example, good answers
explained independence in the context of the different types of independence,
(independence of mind and independence of appearance) and/or threats to
independence, for example a self-review threat.

Question 8
Critically examine the advantages and disadvantages of having concentration
in the market for audit services where a small number of audit firms conduct
the majority of the audits of large listed companies.
Reading for this question
• Porter et al. 4th edition, Chapter 18.
• Gray et al. 7th edition, Chapter 22.
• Subject guide 2020, Chapter 9.

Approaching the question

This question was a deliberate invitation to those candidates who make the effort to
keep up-to-date, to show off their knowledge. High-profile discussions about the
downsides to the Big 4 dominance of the audit market have been given plenty of
prominence and provided candidates with the opportunity to discuss and evaluate

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 Examiners’ commentaries 2021

recent developments introduced by the regulatory authorities to try to ensure the

health and resilience of the audit market. From the number of answers which talked
of the small company audit market, it would seem that the central point of this essay
was often missed.

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