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Students
Developments in Auditing and Assurance
These notes are intended to give some additional guidance to students attempting the Developments in Auditing and Assurance paper in November 2022.
We have now had two sittings of the new Developments in Auditing and Assurance. The paper has changed somewhat from the old Paper 15 Professional Accountant in construct and emphasis, although the content is broadly similar and the key factors leading to success in the paper apply. Advice from past papers in your study pack will help you and there is material on the student online support from previous diets that will also prove helpful.
Although the world of auditing is changing and developing, many of the issues that were important in previous papers remain so now. I have amended this material for this sitting and I urge you to engage with it online!
How do I prepare for the paper? The paper is examining your ability to analyse issues and then develop appropriate audit or other responses, as well as demonstrating your ability to critically appraise current practice and future developments. To enable the examiner to test these skills, the Developments in Auditing and Accounting paper is based around a complex real-world scenario from which audit and assurance issues arise.
The paper is split into three questions, all of which are compulsory, and which may or may not always relate to the same scenario. The first question, worth 50% of the marks, will always be based on this scenario.
Key skills The key skill that you are being assessed on within this question is the ability to apply your professional knowledge and skills to the specific issues arising in the audit/assurance engagement described. To maximise your marks, you must address the specific issues in the scenario against relevant professional auditing standards, professional codes or quality guidance and illustrate that you appreciate the key risks and problems within the issue. In both prior sittings of this paper, the examiner has noted that students have not related the answer to the scenario and have tended to describe, rather than analysing and applying. This is a key weakness as it means that many of the marks for the answers are missed and the higher skills required in the paper are not demonstrated.
Nature of the scenario The scenario will give details of an entity subject to an audit or assurance assignment. Students will be asked to place themselves within a professional service team – usually as the audit manager or engagement partner – and to respond to the issues raised from this practical perspective.
Always these topics represent the audit of an accounting estimate. Therefore you should be applying the ideas of ISA 540 Audit of Accounting Estimates (revised), reflecting the move by IFAC to embed increased professional scepticism and evidence of management challenge in the work done. They also always require an ability to assess risk and management bias within the context that the entity is operating, and for the specific accounting balance or issue being explored. You must appreciate the impact that the context in which the entity operates has upon these risks. This is assessing your ability to identify risks and develop appropriate responses in the professional assignment.
The examiner tries to ensure that the issues examined are as relevant as possible and will therefore contextualise the entity in challenges that are contemporary and should be familiar to the student. The examiner also will ensure that the entity described is in a business that most students should be able to relate to. All the detailed information that students require to analyse risks and understand the unique problems facing the entity will be detailed in the scenario – and so some diligent reading initially to extract the key issues is advised! Credit will be given in the answers if students include additional understanding from their own studies but there will be sufficient information given in the scenario to explore the issues in depth.
Examination approach The key weakness in answers is a lack of development of issues. This may reflect some lack of reading of the scenario or a lack of detailed knowledge of the relevant standards being examined. Whilst lack of knowledge can only be resolved by detailed preparation (see my online article), lack of application can be resolved by exam technique. As the paper is 70% application and 20% evaluation and synthesis rather than knowledge recall, your answers must reflect this. I advise students to ensure that they understand the key issues in accounting standards, auditing standards, professional codes, quality standards, etc. and then apply these to the question diligently. Reiterating the question does not score marks and merely stating the theory without application also results in low marks.
The examiners’ main observation on the performance of most papers concerned the lack of depth in the answers. You need to make explicit links between the professional requirements applicable to the issue and the issue as described. Side headings are useful. You can either structure the answer around the individual issues within the question that are applicable or against the sections of the standard/code you are using to determine your professional response – but only include those sections that are relevant!
Obtain an understanding of the scenario Your preliminary analysis of the scenario should always apply the indicators of problems in ISA 315 Identifying the Risks of Material Uncertainty (revised) and ISA 570 Going Concern. Both of these standards have been revised in recent years and you must be familiar with the emphasis that the new standards place on the audit approach. You are particularly directed to the move away from the exploration of Business Risk in ISA 315 to a framework of assessing inherent risk by considering complexity, subjectivity, change and susceptibility of a balance to misstatement – either by manipulation or by error.
I summarise a useful set of headings to help you to focus your answers extracted from these standards: a. The following aspects of the entity and its environment:
i. the entity’s organisational structure, ownership and governance, and its business model, including the extent to which the business model integrates the use of IT; ii. industry, regulatory and other external factors; and iii. the measures used, internally and externally, to assess the entity’s financial performance. b. The applicable financial reporting framework, and the entity’s accounting policies and the reasons for any changes thereto. c. How inherent risk factors affect susceptibility of assertions to misstatement and the degree to which they do so, in the preparation of the financial statements in accordance with the applicable financial reporting.
If you have a good knowledge of the details of these standards, you will have good template for analysing any assurance/audit engagement – and hence any Developments in Auditing and Assurance scenario.
Understanding the questions You must also ensure that you understand what the overall context is for the question. To that end ensure you identify the following: ● What role have you been assigned (audit manager, engagement partner, ethics partner)? ● What sort of firm are you working for? Is it an international LLP? Does it have a lot of offices nationally or internationally? Does it have offices near the client and its operational bases? ● Are there any issues with staff changes? Are there any indicators of problems with quality or competence of the staff? ● Are there any development issues in the light of new standards or practices? ● What aspect of the engagement does each sub part of the question require you to address? ● How do the issues you have identified in your planning relate to and affect these? Are any specific accounting standards or issues being explored in the question? What are the issues in applying those standards in practice and what issues in the question may make these difficult? ● Is there management bias? How will it potentially affect the way in which the accounting estimates are treated?
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If the question asks for specific guidance on the conduct of the audit work, be as specific as possible around the evidence that you will obtain – and link this into the ideas from the standards.
The paper focuses on complex issues and your ability to synthesise information. This means that you will be pulling information from a lot of sources in the question and from a lot of different auditing and accounting and other professional standards. This reflects the real world of a working auditor – it is rare to get a real-life problem which nicely sits in only one aspect of accounting or auditing!
Writing your answer Having identified the issues from the scenario and decided upon the correct response for the question, write the answer clearly showing the link between the two. As stated above side headings are useful to structure the answer and clearly demonstrate the links between professional standards and how this applies to the issue you are addressing. ● Ensure that you address the specific requirements of the question. ● Use side headings, including an introduction and conclusion or recommendations (depending upon the requirements) to sign post the marker around the answer. ● Use full sentences, not bullet points.
Concluding thoughts on examination technique The Developments in Auditing and Assurance paper is not designed to trip you up or to trick you. The examiner has written a scenario that allows you to show your professional knowledge and skills and that you have the necessary competence to be in charge of an audit or assurance assignment in the real world. ●
