An audit risk question is always worth 20 or 30 marks in Section B of the AA exam. The "risk-and-response" requirement commonly asks for seven or eight risks and is often worth 14 or 16 marks. This article shows how to turn scenario information into complete, concise answers.
Recognise what is being asked
Requirements
A typical instruction is: “Describe EIGHT audit risks and explain the auditor's response to each risk in planning the audit of [client].”
Recent questions have also asked for:
ratios (Albatross Co and Survival Solutions Co)
components of audit risk (Albatross Co)
benefits of planning (Musitastic Co).
Keep the risk-and-response requirement separate from those other parts.
Mark allocation
For each risk, the usual two marks are:
Marks | What earns them |
|---|---|
½ | Identify a relevant risk factor from the scenario. |
½ | Explain the resulting audit risk: the affected assertion or balance and its possible misstatement, or the effect on inherent, control or detection risk. |
1 | Give an auditor's response that addresses that specific risk. |
The scenario will usually contain more potential points than the number requested. Select the strongest distinct risks; do not waste time repeating the same issue under different headings.
From fact to audit risk
Use this short chain:
scenario fact → what may "go wrong" → where the auditor could draw the wrong conclusion
Scenario fact | Explanation that completes the risk |
|---|---|
Albatross Co includes $0.3m of staff training in the cost of its new dispatch system. | Training does not form part of the asset's cost under IAS 16: therefore, PPE and profit are overstated and expenses understated. |
Pimento Co had technical problems linking website sales to its accounting system. | Online sales may not have been recorded, understating revenue. |
Survival Solutions Co has more warranty claims but expects a provision similar to last year's. | The provision and related expense may be understated if the increase in claims has not been reflected. |
Knight Electronics Co's credit controller was absent and collection days increased from 45 to 75. | Receivables may be overstated if overdue debts are not recoverable and the allowance is insufficient. |
Do not stop at the scenario fact
For a financial reporting risk, name the balance or disclosure affected and, where clear, whether it is overstated or understated. An assertion such as valuation, completeness or cut-off is another way to express the audit consequence.
Use “misstated” only where the direction genuinely could be either way: it is not a valid substitute when the scenario clearly points to one direction.
Financial reporting knowledge matters
Albatross Co's redeemable preference shares raise a classification risk: if recorded as equity rather than a liability, equity is overstated and liabilities understated.
Avoid assuming a misstatement that the scenario does not establish; state the risk as a possibility unless the accounting treatment described is clearly wrong.
Business risk is not automatically audit risk
A business problem becomes relevant when you can explain its effect on the financial statements or audit.
Customers taking longer to pay might reduce cash available to the company; the audit risk is that receivables may not be recoverable and could be overstated.
An overstated receivables balance is a mark-scoring audit consequence; “the company might lose customers” is not.
Some facts point directly to detection risk rather than to a particular balance.
Albatross Co is a new client, so the audit team’s unfamiliarity with its systems, transactions and balances increases the risk of failing to detect a material misstatement.
At Pimento Co, relying on unsuitable internal audit work could lead the external auditor to perform insufficient procedures and fail to detect a material misstatement.
Make the ratios work for you
Where ratios are requested, calculate them in the separate requirement, then interpret the movement alongside the scenario.
A percentage or a number of days on its own does not explain an audit risk.
Movement | Scenario context | Possible audit risk |
|---|---|---|
Inventory holding period: 23 to 36 days (Albatross) | Inventory is taking longer to sell | Some items may need writing down to net realisable value; inventory and profit may be overstated if write-downs are insufficient. |
Receivables collection period: 20 to 49 days (Survival Solutions | Extended credit terms may explain the increase | If some debts become irrecoverable and the allowance is insufficient, receivables will be overstated. |
Operating profit margin: 12% to 17% (Pimento) | Cut-off on selling costs was incorrect in prior year | Selling costs and accruals may be understated if the issue recurs. |
The Survival Solutions example is a useful caution: do not assume a longer collection period must mean customers cannot pay when the question gives another possible cause.
Two facts pointing to the same audit risk do not make two separate risks. Use the facts together to explain one potential misstatement; credit is available only once.
Match the auditor's response to the risk
An auditor's response is what the audit team should do to address the possible risk identified
It need not always be a fully specified substantive procedure, but it must say more than “discuss with management”, “increase testing” or “be sceptical”. If discussion is appropriate, state what the auditor will ask and what other evidence or work will follow.
A useful starting pattern is: “[Audit action] [specified information or records] to assess [the risk identified].”
Risk identified | Focused auditor's response |
|---|---|
Warranty provision may be understated (Survival Solutions) | Compare claims during the year and after year end with the provision, and assess whether the estimate reflects the higher claim rate. |
Website revenue may be incomplete (Pimento) | Test the website-to-ledger interface and trace a sample of website orders through to recorded sales. |
Training costs have been capitalised (Albatross) | Review the cost breakdown and invoices, discuss the treatment with management and inspect the correcting journal for the training costs. |
Receivables may be overstated (Knight Electronics) | Review aged debts and post-year-end receipts, and assess whether the receivables allowance needs increasing. |
key point
A management action such as “provide for the additional warranty claims” is not an auditor's response.
The auditor assesses the estimate and the evidence supporting it; if an adjustment is required, the response may also include requesting it and reviewing the correcting entry.
Four common ways to lose marks
Answer point | What is missing or wrong | Better approach |
|---|---|---|
“Collection days have increased.” | A fact, but no audit consequence. | Identify the risk of overstated receivables if overdue debts prove irrecoverable. |
“Receivables could be misstated.” | The direction should be clear. | State overstated where the reason is an inadequate allowance. |
“Switching to a cheaper materials supplier may cause loss of customers.” | A business consequence, with no financial statement link. | In Survival Solutions Co, link to potentially understated provision for warranty claims. |
“Discuss with management.” | It does not say what information is needed or how the risk will be addressed. | Ask how management estimated the warranty provision; compare the estimate with claims data. |
Do not answer a risk with a routine procedure that misses the point. A receivables risk about recoverability calls for evidence about collection or the allowance, not merely an agreement of the ledger total to the financial statements.
Further examiner feedback
Read the whole scenario, including its opening paragraph. A new audit appointment may give rise to detection risk even before any accounting issues are described.
If several facts point to the same risk, use them together. Do not expect two sets of marks for repeating substantially the same misstatement and response.
Follow an unusual event through to the correct accounting treatment. For example, a loan does not automatically create a going concern risk; consider the loan's terms and the particular financial reporting issue.
An auditor's response must be an action the auditor can take. Specify what is being compared, investigated, confirmed or assessed.
Question practice
Focus | Practice platform questions |
|---|---|
Ratios, classification and estimates | Albatross Co — March/June 2026 |
Ratios, provisions and control risk | Survival Solutions Co — September/December 2025 |
New sales channel, fraud and internal audit | Pimento Co — March/June 2025 |
Revenue in advance, inventory counts and provisions | Musitastic Co — September/December 2024 |
Accounting treatments and interpreting ratios | Green Co — March/June 2024 |
Revenue recognition, revaluation and payroll fraud | Knight Electronics Co — September/December 2023 |
For further guidance on how answers are marked, work through ACCA's Read the mind of an AA marker. It compares two candidates' answers and explains why marks were, or were not, awarded. Then apply the same approach to the more recent questions above.