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Hello, Kim, hope you are well.
When I working with questions relate to analytical procedure, the ratios used in the answer are exact and perfectly matched with the note and the FS
I just wonder what ratios I should choose to match the information from the question’s background and the FS and also its note. Should I choose some ratios then matched with those information; or Using the information given as a guidance and then choose the ratios that could explain the audit risk?
for example, the’ 40 Vancouver (P7 Mar/Jun 16)’ from BPP Kit, the ratios choosed in the answer, could perfectly matched with the note from the FS.
This is a comment from the examiner:
“Candidates should be aware that unless a ratio, trend or calculation is discussed in the context of a risk then that calculation will not be awarded marks as it is only through this discussion that the calculation becomes relevant. Hence candidates should not spend time calculating lots of figures they will not use.” This is why you see that they “match” in published answers.
As you will see in published marking scheme, marks for calculations will also be “capped”.
There’s no point making a calculation and then speculating why it might have changed in the absence of any information. Rather – use the information to think what your expectations might be – e.g. you might expect modernisation (note 1) to increase profitability as measured by OP margin and ROCE – but both have decreased. Hence sales may be u/stated (1) and/or costs o/stated (2).
(2) seems like the greater risk because (1) appears to be contradicted by the FD’s comment and increase in revenue ….
Well, I think now I have understand the basic logic is that, from the note of FS, I could raise my expectation (whether increase in relevant ratios or decrease in relevant ratios) and compare my expectation to the FS, if there is contradict, there is risk
Is that right?
Yes – that is a sound approach and will probably get you marks most efficiently.
There isn’t time to start at the top of the financial statements and work your way down calculating “everything” and then trying to decide what might be a risk that isn’t mere speculation. Also, for example, if (say in a different Q) you were to calculate GP% first (because the first #s you’re given were revenue and profit) – they might be unchanged. So you quickly dismiss commenting on any risk because there’s no movement. You might then completely overlook in the scenario or notes that you have been given some reason why it should have changed. It’s the things that don’t change in line with expectation that identify risks.
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