June 2013 P7 Commentary

Question 1 31 marks with 4 further professional marks

The question is of the type which should by now be familiar to students at this level. It’s split into parts a) and b) and is based on replying to a partner’s email asking for briefing notes to bring the partner up-to-date following your meeting with a client whilst planning “the forthcoming audit”

Information in the question is a draft Statement of Income and Comprehensive Income together with a draft Statement of Financial Position and includes your notes concerning the client’s business review, financial matters, human resources and expansion plans.

Part a) required an analytical review AND audit risk evaluation to be considered when planning the audit TOGETHER WITH (ie AND) the identification AND explanation of any additional information relevant to the evaluation

Part b) required a discussion about any ethical issues raised in the scenario TOGETHER WITH a recommendation about the relevant actions to be taken by the firm of auditors

The danger in this type of question (other than over-running the time allocation through poor time management) is that it is easy to miss that important word “AND”.  In this question, you are required to “review AND evaluate”, “identify AND explain”, “discuss AND recommend” … that’s 6 questions and there are marks attributable to ALL those elements

In addition, of course, you need to address each of the 4 parts of the question …business review, financial matters, human resources and expansion plans.This is a big “ask” within the 63 minutes’ time allocation and you must NOT get carried away with your extensive knowledge about any single part of these requirements

Question 2 part a) for 13 marks asked for an evaluation of quality control, ethics and other professional matters which arise in the planning of the audit of the Retriever Group.  A mini scenario was given and substantially all the relevant issues should have been pretty obvious – certainly to those students with audit experience but equally, for those without audit experience, for those who were prepared to apply common sense and F8 knowledge (as well as using some imagination!)

Part b. i) for 12 marks involved forensic accounting work after a theft was notified to the auditors by the client’s audit committee.  You were asked to identify AND explain (my upper case letters) the matters to be considered AND the steps to be taken in planning the forensic accounting service and part b.ii) asked for procedures to be performed when determining the amount of the claim against the insurance company as a result of the burglary

Surely we all have either claimed on insurance at some time in our lives or at least we know someone who has.  Apply practical knowledge (gained through being an under-graduate of the University of Life!)

Question 3 (8, 7 and 5 marks for the three separate elements) The three elements considered Assets Held for Sale, a Sale and Leaseback arrangement and a Distribution Licence. The question required you to “Comment on the matters to be considered AND explain the audit evidence you should expect to find during your file review”  “Discuss the points with management” will score NOTHING!

That’s an audit procedure – it’s not audit evidence!  But it’s easily converted …”A memorandum record of the matters discussed with management” should score. It’s the same point …. just twisted round a little bit.  Note, you were asked for an EXPLANATION of the matters you should expect to find – not simply an identification

This has become a standard question for this examiner and needs to be treated with care – make sure what the question is asking for.  This time, it’s evidence you should expect to find.  On other occasions, the question asks for “identify the procedures that should be followed”  Beware!

Question 4 – split into 2 parts for 12 and 8 marks respectively

Part a) concerned a fraud recently discovered at a client after an unmodified audit report had been issued. The question asked for an explanation of the matters to be considered in determining whether the audit firm may be liable to the client in respect of the firm’s failure to identify the fraud.

Part b) asked why the audit of financial instruments is particularly challenging (probably because no-one understands them! I quote a Government Minister here) AND an explanation of the matters to be considered when planning the audit of a client’s forward exchange contracts

You should by now be becoming aware that P7 is as much a knowledge of IAS /IFRS as P2!

Question 5, again split into 3 parts ( 7, 7 and 6 marks respectively) asking for an assessment of the implications for the completion of the Poodle group audit AND an explanation of any adjustments that may be necessary to the consolidated financial statements AND a recommendation of any further procedures necessary

Finally, the question asked for a description of the impact on the Poodle Group audit report were these suggested adjustments not to be made.

There really was not much in this exam which lay beyond predictability. Answering a partner’s email concerning planning and risk assessment, quality control and forensic accounting, comment and explanation of expected audit  evidence, potential liability for an inappropriate opinion, difficulties of  auditing financial instruments and a commentary on the application of IAS / IFRS with the potential effect of the financial statements and consequent audit report

All in all, a fair (if predictable) P7 exam

But, as always, time pressured, so the application of sound exam technique was an absolute necessity!