Advanced Audit &

Assurance (AAA)
March/June 2022
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .......................................................... 2
Format of exam ................................................................ 2
General Approach to the AAA examination ..................... 2
Question 1 – Infinite Co (50 marks) ................................. 2
Requirement (a) – 24 marks ........................................ 5
Requirement (b) – 6 marks ........................................ 10
Requirement (c) – 8 marks......................................... 10
Requirement (d) – 8 marks ........................................ 11
Professional marks .................................................... 11
Question 2 – Wheeler (25 marks).................................. 12
Requirement (a) - 15 marks ....................................... 12
Requirement (b) – 5 marks ........................................ 14
Requirement (c) – 5 marks......................................... 14
Question 3 – Morrissey (25 marks) ............................... 16
Requirement (a) – 15 marks ...................................... 16
Requirement (aii) – 8 marks....................................... 17
Requirement (b) – 9 marks ........................................ 18
Conclusion ..................................................................... 19
General comments

This examiner’s report should be used in conjunction with the published March/June
2022 sample exam which can be found on the ACCA Practice Platform.
In this report, the examining team provide constructive guidance on how to answer the
questions while sharing their observations from the marking process, highlighting the
strengths and weaknesses of candidates who attempted these questions. Future
candidates can use this examiner’s report as part of their exam preparation, attempting
question practice on the ACCA Practice Platform, reviewing the published answers
alongside this report.

Format of exam

The Advanced Audit and Assurance (AAA) examination comprises two sections. Section A
contains a 50-mark question set predominantly at the planning stage of an audit while
section B has two 25-mark questions, one of which will be predominantly set in the
completion and reporting stage of the audit process. The remaining question can be taken
from any syllabus area.

General Approach to the AAA examination

The examination requires a sound understanding of the syllabus and builds on assumed
knowledge gained from both Audit and Assurance (AA) and Strategic Business
Reporting (SBR). Candidates should note that the accounting standards listed within the
SBR syllabus are also examinable in AAA.
Marks are awarded at AAA level for application of knowledge to a given scenario, where
candidates demonstrate an understanding of the issues presented.
Candidates should ensure that they are fully conversant with the financial reporting
standards covered by SBR to maximise their ability to effectively identify how audit risks
may arise from these issues and propose effective procedures to address those risks.
When a candidate attempts examinations at strategic professional, it is vital that they can
apply the knowledge they have gained through studying to the situations and scenarios in
each examination question. A common feature of weaker answers in this subject is the use
of rote learned knowledge without application to a specific scenario. The syllabus and study
guide for AAA sets out the high level of understanding required for this examination by using
verbs such as analyse, critically assess, apply knowledge and evaluate. Candidatesshould
be able to synthesise and evaluate material. Simply listing knowledge without explaining its
relevance or purpose will not be sufficient to pass the exam. This isparticularly important
with responses relating to procedures, where the purpose of the procedure must be given,
and ethics, where knowing the name of an ethical threat will notbe awarded credit in its own
right, rather identifying the specific way in which the threat arises in a given scenario and the
implication in that specific case is required to attain credit.
Appropriate exam technique should be developed using question practice for the skills
of time management, reading relevant technical articles and exam technique articles
published on ACCA’s website and reading past Examiner’s reports for each sitting.

Section A

Question 1 – Infinite Co (50 marks)

This question was a typical Section A question set at the planning stage, with requirements
focusing on matters specific to the planning stage of an initial audit engagement, an
evaluation of the significant risks of material misstatement, recommending specific audit
procedures in relation to an impairment of assets, responsibilities regarding money
laundering along with evaluation of indicators specific to the scenario and a review of an
acceptance assessment. The Section A question is where candidates perform best and
there have been more focused answers in recent sessions. It is pleasing to see that
candidates appear to have taken note of the guidance provided by the examining team in
this area.

Candidates are presented with the following information as they begin the question

It is 1 July 20X5. You are a manager in Pascal & Co, a firm of Chartered Certified
Accountants, and you are responsible for the audit of The Infinite Co, a new audit
client with a financial year ending 30 September 20X5.

The Infinite Co is an owner managed family business.

The company owns and operates a theme park, The Infinite Park, which includes
theme park rides, arcade style games and food and drink outlets.

Examiner’s report – AAA March/June 2022 2

The entity in this scenario was a new client to the audit firm, with the core business being
the ownership and operation of a theme park including arcade style games and food/drink
outlets. Candidates should note that they are not expected to have detailed industry
specific knowledge whenanswering questions in this examination and the scenario will
always have enough information to enable sufficient specific risks to be identified and
evaluated to achieve full marks.

Several exhibits were provided to candidates to enable them to develop an understanding

of the specific issues relevant to the audit. These were as follows:

The following exhibits, available on the left-hand side of the screen, provide information relevant to
the question:

Partner’s email - an email which you have received from Brian Fox, the audit engagement
partner in relation to The Infinite Co and Meadow Co.

Background information - information from The Infinite Co website giving background

information about the company and its operations.

Meeting notes - notes from a meeting between Brian Fox and the finance director of
The Infinite Co.

Preliminary analytical procedures - summary of key issues arising from preliminary

analytical procedures, performed by the audit team, on The Infinite Co projected
financial statements.

Meadow Co - a copy of the client acceptance assessment performed on Meadow Co

prior to audit acceptance.

This information should be used to answer the question requirement within your chosen response
option(s).

Unless specified otherwise, all exhibits should be considered when carrying out risk
evaluations and candidates should ensure that they carefully read the partner’s email for
any specific guidance in relation to how the information should be used.
It is recommended that candidates review all the exhibits while planning their answers to
the question but as mentioned should ensure they take note of any guidance given by the
examining team in terms of which exhibits are relevant to each requirement. Thus, allowing
for more detailed analysis and focus on specific information where relevant.
It is often the case that there will be interactions between the exhibits which will impact on
the analysis performed by candidates. Candidates are encouraged to spend adequate time
planning and aim to obtain a holistic view and understanding of the issues present in the
question.

Examiner’s report – AAA March/June 2022 3

 Introduction to the question

• The current date is the 1 July 20X5 and the client has a year end of 30 September
20X5. The scenario is set three months prior to the year end with the audit taking
place sometime after the client year end. This indicates the planning stage of an
assignment with the audit taking place in October or later. Note – this is normal and
does not indicate there is a lack of time to plan the audit.
• Infinite Co is family owned and managed – this means the company is not listed and
is not required to follow corporate governance best practice

• Infinite Co operates a theme park and has suffered an impairment of some rides due
to lack of maintenance. The company also hold land on a revaluation model. A number
of candidates demonstrated a lack of general understanding of IAS16 Property, Plant
and Equipment, either stating it was incorrect not to depreciate land or that it must be
considered for impairment under IAS 38 Intangible Assets every year. This was a
straightforward risk that land value had not been considered for several years and
under IAS 16 the valuation must be kept up to date.

• Infinite Co had included a general provision for unexpected costs which had increased
during the year. A significant number of candidates failed to identify that the general
provision did not meet the criteria of IAS 37 Provisions, Contingent Liabilities and
Contingent Assets and, therefore, demonstrated a lack of understanding of basic
financial reporting knowledge, with a number stating the provision was likely
understated.

• It is important to note that whilst Infinite Co is an initial audit engagement, the

requirement for part (a) is to evaluate risk of material misstatement and not audit risk,
therefore comments relating to an increase in detection risk due to lack of
understanding of the client would not be relevant. Marks were available for discussion
of the risk of errors in the opening balances or adopting consistent accounting policies
in consecutive years.

Examiner’s report – AAA March/June 2022 4

Exhibit 1 – Partner’s email

In a Section A question, the partner’s email will always set out the detailed requirements
which are to be answered and the mark allocation. It is recommended that candidates refer
to the partner’s email first to ensure that they understand what they are being asked to do
and the best way to allocate their time to each requirement.

It is important to note that there are specific instructions where attention is drawn in the audit
partner’s email. The information details that Exhibits 2,3 and 4 are required in order to
address the risk of material misstatement in part (a) and for the evaluation of the indicators
of impairment in part (c). The partners email clearly defines that Exhibit 5 is required to
formulate an answer for part (d) relating to a different audit client, Meadow Co.

With this context in mind, candidates should then consider the requirements whilst working
through the remaining exhibits to enable a tailored response to be made which utilises the
specific information given in the question. Candidates should note that any relevant client
specific information will be provided, and speculative answers will not obtain credit.

Requirement (a) – 24 marks

(a) Evaluate the significant risks of material misstatement to be considered in planning the
audit for the Infinite Co for the financial year ending 30 September 20X5
(24 marks)

This requirement is typical in volume and nature to many planning questions and examines
a major area of the syllabus - risk. It is important to notice that the requirement asked for an
evaluation, not simply a list of risks, nor a strategy or procedures to address those risks.The
examining team are testing whether candidates can understand how and why a risk arises
and the implications that this has on the financial statements or the audit itself. They are
looking for an assessment of materiality, a demonstration of knowledge of the underlying
accounting rules and the application of that to the scenario to identify the potential impact
on the financial statements. A well evaluated risk has in depth analysis. Candidates writing
only a sentence or two are unlikely to attain many of the marks available for each risk.
Candidates are reminded that there are useful technical and exam guidance articles on the
ACCA website which will provide additional support in approaching and answering questions
on risk.

An issue that arises repeatedly is that candidates are attempting to find 12 risks for a 24-
mark question and conducting little or no in-depth analysis of any of them. This will not be
ableto attain a pass mark. This means some of the risks stated in these candidate answers
will be speculative or not significant and, therefore, will not obtain credit.

Candidates should be aware of the published marking guides for risk questions and
understand how marks are credited. Each risk generally has a minimum of three marks
attached to it. More complex risks carry additional credit. Materiality and calculation marks
are over and above the marks available for the discussion of a risk. The marking guide
published for this question has fourteen areas of risks, some of which are deemed more
basic financial accounting issues and therefore carry lower marks and therefore should be
more easily obtained by candidates.
Examiner’s report – AAA March/June 2022 5
 The requirement asks only for significant risks of material misstatements, which mean risks
that are specific to the scenario, non-routine or require management to make estimates or
are subject to judgemental assumptions have the potential to give rise to a material
misstatement. Speculative risks, arising from routine transactions generally will not obtain
credit. Candidates demonstrating strong professional skills will be able to differentiate
between speculative and specific risks, and not spend time discussing topics which will not
obtain credit.

As a demonstration of this skill, consider the various properties that the client has in this
scenario.

Exhibit 2 – Background Information

Candidates are told general information that the company was opened more than 40 years
ago and is a family-owned business operating a theme park with various attractions and
revenue obtained in cash, credit cards and electronic payments.

Candidates must remember when discussing risks, that it is important to relate them to the
scenario rather than discuss abstract or generic risks. This is particularly an issue when
discussing management bias risk.
This is a key concept to understand for auditors as it can impact on judgements made by
management in deriving their figures for the financial statements. Candidates must be able
to demonstrate that they understand the concept of management bias and can identify it in
practice.
The examining team are often faced with two standard candidate responses to management
bias risk in Section A questions: “the client is listed so management will be biased to keep
shareholders happy” or “the client is not listed so the owners will be biased to keep profits
low and save tax”. The first statement doesn’t include scenario specific reasons for this
conclusion and is therefore too vague andgeneric. The second implies that all non-listed
clients are concerned with aiming for lower payments in respect of tax. Again, this is a
generic statement, and unless there is information in the scenario that specifically alludes to
this, then candidates will not receive credit for making this point. In both cases, neither will
be credited as an evaluation of management bias for a specific scenario.

• Candidates are told the company is a family-owned business and them family
members are actively involved in the day to day running of the business. The specific
management bias point in this scenario is the ability of management to override
controls.
To score more than a ½ mark for the identification of the specific bias risk, this will
have to be evaluated by candidates. Suggested explanations may include:

• Lack of segregation of duties

• Disregard of laws and regulations – scenario states the rides have not been maintained
on a regular basis, are aged and lack safety features
• Evidence of bypass of controls as the scenario states there is evidence of access to
company funds
Examiner’s report – AAA March/June 2022 6
The beginning of the evaluation will score the initial mark. It should then be linked to the
scenario to illustrate areas where this could potentially happen or appears to be happening.
In this question, this is reinforced by the specific examples in the scenario. There are
examples of the risks stated above to enable an evaluation to be made with specific
reference to this question and scenario. Candidates might find it sensible to address
management bias after they have analysed the other risks in the question.

Exhibit 3 – Meeting notes/ Exhibit 4 Preliminary analytical review

Candidates were generally able to identify the key risks and, were able to apply correct
accounting rules to support their analysis. There were areas of more general accounting
principles, that were not well attempted and disappointing to note. Commentary on how
each of those areas was tackled is below.

• Impairment of assets arose around the theme park rides that showed a lack of
upgrades for modern safety features. Materiality of the rides should be calculated
against the current year figures and not prior year figures. This is a simple calculation
to determine if the issue is a material risk of misstatement. Candidates need to
identify the indicator of impairment from the scenario, which in this instance is the
aging of the rides and lack of safety features. Many of the candidates correctly
identified the relevant accounting rule, yet a number fail to fully state the rule and
therefore fail to gain the full marks available.

• Following from the impairment risk of the theme park rides, the scenario then details
the risk regarding the revocation of the license to operate the theme park rides. This
should, therefore, be deemed a potential indicator of going concern. There was a
mixed response here, with many identifying the uncertainty regarding going concern,
yet evaluating that there was a risk of the financial statements being prepared on the
incorrect basis (which is unlikely), rather than identifying the potential lack of
disclosure in the notes to the financial statements for the uncertainty. This failed to
earn additional marks for the evaluation of the risk. Whilst the licence is important for
the company to operate the theme park rides it is not the sole activity of the client
that would render the operations to cease.

• Land was held by the company under a revaluation model and is not depreciated.
The company is correct not to depreciate land. It is disappointing to note a significant
number of candidates state that it was incorrect not to depreciate land and therefore
stating that the risk was that the carrying amount of land was overstated.
The candidates who correctly identified that the risk of the land held under
revaluation model was that the valuation had not been considered for several years
and this could result in the carrying amount of land being misstated. A number of
candidates stated that the land needs to be revalued every year and tested for
impairment, whereas under IAS 16 Property, Plant & Equipment, land under a
revaluation model requires the valuation to be kept up to date. This demonstrates a
lack of straightforward accounting principles for property, plant and equipment, and
a misunderstanding of accounting for property, plant and equipment. A number of
candidates also stated any gain/loss from revaluation should be shown in the
statement of profit or loss, whereas it should be shown in the statement of other
Examiner’s report – AAA March/June 2022 7
 comprehensive income.

• Revenue recognition was split into two main areas. The scenario detailed that it was
a cash based business and there was a risk of the overstatement of revenue due to
money laundering. There was a risk that proceeds from illegal activities could be
added to the cash balance potentially overstating both cash and revenue. The
majority of candidates correctly identified this risk and scored well. The second
consideration of revenue recognition related to revenue being understated due to
the risk from theft of cash sales, which was particularly linked to the high volume of
casual seasonal staff. It was surprising that the marks available for this angle of
revenue recognition were missed, with several candidates incorrectly discussing
risks for errors arising due to the company moving to electronic payments and staff
being untrained on how to operate the system. A minority of candidates incorrectly
identified and described how revenue can only be recognised when a customer has
physically ridden the theme park rides.

• The sale and leaseback transaction was a new issue which arose during the year, with
the company entering into the arrangement in respect of the park buildings.
Candidates struggled with the calculations here and the trend marks available were
generally not obtained. Generally, this risk was poorly answered with candidates
failing to score anywhere near the maximum marks available for the risk of
misstatement.
Management recognising the transaction as a sale is incorrect, instead, a right of use
asset, at the proportion of the retained carrying amount, should be recognised along
with a corresponding liability at the present value of the future cash payments. The
accounting treatment is deemed as more complex and therefore the risk is worth more
than the general three marks per risk. The majority of candidates correctly identified
the treatment was incorrect, yet they scored poorly regarding the accounting rules and
failed to score relevant trend marks that were available, such as the calculation of the
amount to recognise as a right to use asset and the correct calculation of the gain on
disposal.

• A significant number of candidates demonstrated a lack of financial reporting

knowledge by stating the risk of material misstatement linked to IFRS 8 Segmental
Reporting as the company have a number of streams of income. The company is a
privately owned company and therefore segmental reporting under IFRS 8 is not
applicable. IFRS 8 is applicable to companies whose debt or equity securities are
publicly traded. Candidates were not awarded credit where risks surrounding a lack of
segmental disclosure was discussed.

Examiner’s report – AAA March/June 2022 8

 • The legal case (contingent liability) and general provision were identified in the
scenario and several candidates failed to deal with them correctly.,
Many candidates failed to link the detail in the scenario and merely stated that
liabilities may be understated, even though the detail stated that the level of claims
was unknown and therefore unlikely to meet the criteria of IAS 37. No marks were
awarded as the issue here would have been a lack of disclosure regarding the
legal case in the financial statements.
The general provision was poorly answered with a number of candidates failing
to identify that a general provision for unexpected costs cannot be recognised
under IAS 37 as it does not meet the criteria of the accounting standard. Many
candidates linked the general provision to the legal case and stated the provision
was understated, rather than overstated as should not have been recognised at
all.
If the lack of provision was linked to the detail of the lawyer being an acquaintance
of the director, and that they may not be objective in their advice, credit was given
for the development and evaluation of a risk regarding potential understatement
of the liability.

• Exhibit 4 gave the candidates details of analytical procedures. Candidates should

remember that calculations are only credited when the resulting figures are
discussed in their answer in the context of a risk. Simply calculating a ratio will not
obtain credit. The skill examined is the ability to calculate a relevant ratio or trend
to identify a risk or support an evaluation of a risk. It is at that point that the
calculation mark is awarded.

Overall, this requirement was answered reasonably well by many candidates yet more than
expected numbers of candidates failed to identify the easier risks in the scenario and
demonstrated a weaker than expected level of more basic accounting treatment. This
resulted in many candidates failing to obtain what should have been easier marks.

Examiner’s report – AAA March/June 2022 9

 Requirement (b) – 6 marks

(b) design principal audit procedures to be performed on the impairment of the theme park rides

This requirement was well answered by a majority of candidates with practical, well
described procedures given. The model answer provides a list of procedures which are
indicative of the areas the examining team credited. Where a candidate suggests a
procedure not on the list in the model answer, they will still obtain credit providing it is
relevant and practicable.

Requirement (c) – 8 marks

(c) Discuss the responsibility of auditors with respect to money laundering and evaluate whether
there are any indicators of money laundering activities by either The Infinite Co or its staff.

The requirement was focused on the responsibility that auditors have regarding money
laundering and to evaluate the indicators detailed in the scenario with respect to money
laundering. Additional credit was awarded if a candidate successfully linked the scenario specific
indicator to the stage of money laundering.

Generally, the requirement was well answered in response to candidates evaluating the
indicators within the question suggesting there was a risk of money laundering. Examples
included:
• Infinite Co is a cash-based business and it is therefore easy to mix the cash obtained
from potentially illegal activities with the cash obtained from the sale of tickets for the
theme park, linked to placement.
• Due to the owners’ sons operating both the rides and gift shop, where margins have
increased significantly, implying that this may be another indicator of money
laundering.
• International transfers to foreign banks accounts may be an indicator of money
laundering, more specifically, the layering stage.

The most alarming issue highlighted in a significant number of candidate responses is where
candidates stated that a suspicion of money laundering should be disclosed to those charged
with governance, the audit committee (even though in the present scenario the company didn’t
have one) and a minority of candidates stated it should be disclosed in the notes to the financial
statements or the audit report in the public interest.

This action would amount to the auditor committing a criminal offence of tipping off the client, and
it is disappointing to see the number of candidates who fail to understand the difference money
laundering and fraud.

Examiner’s report – AAA March/June 2022 10

Requirement (d) – 8 marks

(d) using exhibit 5, conduct a review of the information contained in the Meadow Co client
acceptance assessment to evaluate weaknesses in Pascal & Co’s acceptance procedures and
recommend improvements which should be implemented.

The final requirement was focused on reviewing the acceptance assessment procedures
performed by the auditors on a different company, Meadow Co. The candidate was required to
discuss the weaknesses in the procedures performed and recommend improvements the firm
should implement.
There was a mixed response here, which candidates either answered well and were able to
evaluate the weaknesses or stated general acceptance procedures to be performed and failed
to respond specifically to the requirement.

It was noted that a number of candidates discussed the need to communicate with the previous
auditor, which is correct for a requirement for general consideration at acceptance. In the context
of this scenario, however, the extract of the acceptance assessment stated that verbal clearance
had been obtained, hence the previous auditor had been contacted. A number of candidates
failed to recognise that the issue in this weakness was that only a verbal confirmation had been
received and that this should have been obtained in writing. Where candidates discussed the
weaknesses specific to the scenario, marks were awarded, however, generic comments
regarding communication with the previous auditors did not meet the requirement and
demonstrated candidates failed to successfully understand the requirement.
A further point of weak development was in reference to the money laundering section. Many
candidates correctly identified that money laundering assessment was inadequate, and provided
weak evaluations as to why it was too brief. There were several responses that stated the details
obtained from the owner and his wife were insufficient, yet they failed to identify that the auditors
should have performed client identification procedures to involve additional individuals and this
should have been extended to any shareholders holding more than 25% shareholding along with
other directors of the company. A number of candidates failed to identify this issue.

Professional marks

Professional marks are available in this examination for the use of the right format, a brief
introduction (a half page introduction is not required, and wastes time), the structure of the
answer and clarity of the explanations provided. Most candidates are able to score at least three
marks in this area.

Examiner’s report – AAA March/June 2022 11

Section B

Section B comprises two 25-mark questions, one predominantly from section E of the syllabus
(completion and reporting) and the other covering any area of the syllabus.

Question 2 – Wheeler (25 marks)

This 25-mark question was set at the completion and reporting stage of an audit. As is typical of
reporting questions, this is where the examining team see some of the strongest and some of
the weakest demonstrations of auditing competence from candidates.
Stronger candidates often display strong practical skills, incorporating a good understanding of
materiality and risk, a strong knowledge of the financial reporting which is needed to perform an
audit, an ability to distinguish between auditor and client information and an understanding of the
difference between the financial statements, an auditor’s report and an audit opinion.

Weaker candidates tend to lack the underlying knowledge of double entry accounting and are
unable to distinguish between the client and the audit firm, between the financial statements and
the auditor’s report or demonstrate a good understanding of the concept of materiality.

Requirement (a) - 15 marks

(a) Using the information in Exhibit 1, comment on the matters to be considered, and explain
the audit evidence you expect to find during your review of the audit working papers

This question covered the treatment of a new product capitalised as an intangible asset and a
warranty provision. Candidates were required to consider the matters that would be discussed
with management regarding to the treatment of the issue highlighted in the scenario and to
discuss the evidence the auditor would expect to see on the audit file.

Examiner’s report – AAA March/June 2022 12

Successful candidates identified the new product capitalised as development costs was unlikely
to meet the criteria in IAS 38 Intangible Assets, as the selling price is noted to be less than the
cost incurred and therefore would be loss making.
To answer the requirement successfully the candidate should take an approach of:
• Calculate materiality of the issue
• Identify the incorrect accounting treatment by the client – linked to the scenario
• State the relevant accounting rule – how it should be dealt with
• The impact on the financial statements

The new product is recognised as development costs under IAS 38 and it was disappointing to
note candidates who made reference to ‘PIRATE’ criteria. Whilst this is used as an acronym for
candidates to assist them in retaining the knowledge of the criteria of IAS 38, marks will not be
awarded unless a candidate demonstrates they have the knowledge of the criteria by listing them
out specifically.

A number of candidates incorrectly stated that 4% of profit before tax was material, whereas it is
below the benchmark of 5% and, therefore, not material. Calculating materiality incorrectly in a
Section B question will ultimately affect how candidates answer the impact on the audit opinion.
This latter requirement is normally examined separately, resulting in marks lost due to suggesting
an incorrect impact on the audit opinion.

The warranty provision had declined in comparison with prior year by over 50%.
Materiality was generally successfully calculated correctly for this matter, and most candidates
were awarded the additional trend marks available. The main issue here was that there was a
reduction in the warranty provision, yet revenue had increased, this appears inconsistent as there
is an expectation the warranty provision would increase in line with increasing revenue.
Candidates were required to identify this as being a potential management manipulation of the
figures and that the auditors should adopt an increased level of professional scepticism.

Successful candidates scored well regarding the evidence expected to be on file in response to
both matters in the scenario. The evidence is required to be specific to the issue and examples
of evidence for the new product that related to more general capitalization criteria, rather than
assessing that the development cost has been potentially incorrectly capitalised. Therefore,
where candidates document general evidence for the creation of a provision or general
captialisation of intangible assets, they would fail to score marks.

Overall, the majority of candidates performed well in this requirement.

Examiner’s report – AAA March/June 2022 13

Requirement (b) – 5 marks

(b) discuss the implications for the auditor’s report on the basis that no adjustments have been made
to the financial statements in relation to the warranty provision

Candidates were asked to assess the implication on the audit report if the adjustment to the
warranty provision is not corrected.

Stronger candidates correctly calculated the materiality of the understated liability and fully
evaluated the misstatement was not material. For candidates to score maximum marks, the
term ‘not pervasive’ must be explained, for example, it is isolated to one issue and the
financial statements as a whole are not impacted. Where candidates merely say the impact
is pervasive with no explanation, credit will be restricted.
Candidates should then indicate the correct opinion to be given, in this instance a qualified
opinion due to a material misstatement.
Candidates should evaluate the impact on the report, in that the basis of opinion paragraph,
which is situated below the opinion paragraph is used to explain the reason for the
modification.

It is disappointing to note the number of candidates who continue to discuss the use of an
Emphasis of Matter paragraph in response to this issue, which is wholly irrelevant, along
with a number of candidates referring to the need for a Key Audit Matter paragraph, yet the
scenario clearly stated the client is not listed.

It is concerning that there are still candidates who use outdated terminology when
discussing the implications of misstatements on the auditor’s opinion. Candidates are
continuing to show a lack of knowledge regarding the content of auditor’s reports and audit
opinions issued.

Candidates looking for further specific detail on how to create depth in their answers should
refer to the technical articles on the ACCA website.

Requirement (c) – 5 marks

(c) Explain the implications of the proposed sale of Byres Co on the completion of the audit

The final requirement required candidates to consider the implications regarding the sale of
the company to a venture capitalist. The auditor had not been made aware of the issue
during the fieldwork of the audit with the information only having been identified at the
clearance meeting. .

This requirement was poorly answered with a significant number of candidates failing to
attempt the question or incorrectly stating it was either an adjusting event or non adjusting
event. Some candidates stated the financial statements needed to be prepared on a break
up basis, concluding that because the company was being sold, it was no longer a going
concern. Some candidates also stated the company should be accounted as held for sale
under IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations..

This demonstrates a lack of understanding of the requirement and also the audit process.
Examiner’s report – AAA March/June 2022 14
The question stated the although the company was in advanced negotiations, it had not
been sold nor was there an agreement with a specific date of sale.

The few candidates who did evaluate the impact on the audit mainly identified that there
may be a risk of manipulation of the financial statements in order to show a healthier position
of the company in order to obtain the best-selling price.

The main issue from the scenario is the auditors were not aware during the fieldwork and
the integrity of management should be questioned. Therefore, the audit risk increases due
to a potential change in ownership and from a management bias point of view.

The impact on completion is to consider the materiality level, and that a reduction may be
required to address the increase in audit risk.

Management representations obtained should be considered in line with the increased risk
surrounding management integrity and additional procedures to be performed around areas of
judgement/estimates, in particular, the capitalisation of the new product and decrease in
warranty provision detailed in part (a).

Overall, this was a poorly answered requirement, either not attempted by the candidate or
failing to score marks.

Examiner’s report – AAA March/June 2022 15

Question 3 – Morrissey (25 marks)

This was a 25-mark question relating to a due diligence assignment for a non-audit client,
whereby the audit firm were required to focus on two separate intangible assets, a licence and a
patent. Candidates needed to consider the operational significance and valuation of the
intangible assets. The assignment also required candidates to discuss additional information
required by the auditor and to evaluate why they would need information regarding the company’s
financing arrangements.

Due diligence falls under audit related services and other assurance services syllabus area F,
being a specific type of review engagement with work primarily limited to enquiries and analytical
procedures.

Requirement (a) – 15 marks

Requirement (ai)

(ai) Using the information in Exhibits 1 and 2:

Explain the specific enquiries you should make of Brodie Co’s management
relevant to the company’s intangible assets.

The requirement asked candidates to discuss specific enquiries that should be made with the
management team regarding the intangible assets which consisted of the licence and the patent.
The assignment is a due diligence assignment, not an audit, and therefore detailed substantive
procedures would not be performed.

Weaker candidates listed detailed substantive procedures to test intangible assets, yet this did
not meet the requirement. As due diligence work is limited to enquiries, and this being specifically
stated in the requirement, candidates who merely discussed audit procedures to test intangible
assets and did not focus on the attention to the enquiries would not be credited. Candidates
needed to make enquiries concerning the valuation and the significance of the assets to the
Examiner’s report – AAA March/June 2022 16
 company from an operational point of.

Strong candidates made a reasonable attempt at evaluating discussions to be made to the client
concerning the assets, such as:

- when the licence was acquired and the term of the licence to determine when the renewal of the
licence is required

- the terms and conditions of the licence to assist the auditor in determining any restrictions on the
licence

- any likely issues associated with re acquiring the licence in the future

- the terms of the patent and whether the patent can be renewed at the expiration date

A well attempted answer tailored the response to consider why we would make specific enquiries
as part of the due diligence assignment for the acquirer to have detailed information regarding
the target company to assist in their decision-making process.

Generally, the depth of answers fell short of that expected from a professional level candidate.
Candidates are advised to read the specific question requirement to develop a clear
understanding of what is expected within their response. Due diligence is an area that should be
answered well as there is no double entry accounting knowledge being evaluated.

Candidates should also be reminded that a due diligence is not the performance of an audit, it is
an audit related service and can sit in a number of engagement categories, and whilst the
assignment uses the techniques of a review engagement, it is likely it will be deemed an agreed
upon procedures engagement which is a fact-finding exercise and no assurance is given.

Requirement (aii) – 8 marks

(aii) Using the information in Exhibits 1 and 2:

Recommend, with reasons, the principal additional information which should be
made available by Brodie Co’s management in relation to the company’s financing
arrangements.

The second requirement in part (a) required candidates to recommend the additional
information which would be required and made available to them regarding the target
companies’ financial arrangements.
The target company’s sources of finance relate to equity shares, a bank loan and finance from
a venture capitalist.

Generally, the requirement was poorly answered with the main issue noted being the lack of
understanding by the candidates on the difference between performing audit procedures and
Examiner’s report – AAA March/June 2022 17
discussing additional information required relating to specific items.
Additional information is required by the auditor to enable them to gain a better understanding
surrounding a certain issue/area and does not necessarily need to be in the form of documentary
evidence. The information can also be obtained from making enquiries with management
alongside reviewing documentation.

The additional information required for this requirement related purely to the equity share capital,
the bank loan and the venture capitalist loan, for example:

- the number of shares in issue and the value of the shares including if voting rights are
attached
- the interest rate on the loan and the venture capitalist loan
- whether any covenants exist on the loan or security over the target company assets
- do the target company have any other sources of finance
- what are the target company plans to secure alternative funding should existing finance
not be renewed.

These are all gaps in the knowledge of the auditor which would require further investigation in
order to perform the due diligence assignment and report the facts back to the acquiring company
to enable them to make a decision regarding future acquisition.

Strong candidates evaluated the additional information required and also evaluated why we
would need it, yet weaker candidates merely stated substantive procedures to address risk
around the sources of finance which did not meet the question requirement.

Requirement (b) – 9 marks

(b) Using Exhibit 3: Comment on the ethical and professional issues to be

considered by Marr & Co in relation to the request from the finance director

Requirement (b) is a standard ethics and professional issues requirement. AAA candidates should expect
ethics to be examinable, and this requirement should achieve high marks based on brought forward
knowledge from previous ACCA examinations including detailed knowledge from AA.

Exhibit 3 related to an email received from the finance director requesting the audit firm to be appointed
as auditors following the successful acquisition of the target company. The audit firm was involved in the
due diligence assignment for the acquisition of this target company.

There were a number of ethical threats candidates could have evaluated and recommended safeguard
for along with professional issues. Such threats included assessing the competence of the management
team, the threat to audit quality, whether the audit firm have sufficient competence and resources as it is
noted in the requirement this is a small audit firm and they may, potentially lack available resources with
the level of experience required. .
Examiner’s report – AAA March/June 2022 18
Strong candidates successfully identified the threats and linked the threat to the specific detail in the
scenario along with an explanation of how the threat will impact the auditor and the fundamental principles
that we are required to adhere to. Safeguards and actions were also considered in order to bring the
threat down to an acceptable level.

Weaker candidates merely identified the threat with little or no explanation, for example, the offer of the
trip to attend the conference paid for by the client. Where candidates merely say there is a self-interest
threat, yet do not link it to the detail in the scenario, no credit will be awarded due to a lack of demonstrating
knowledge of ethical threats which can be applied to the specific scenario.

A number of candidates did not read the scenario sufficiently and discussed the self review threat linked
to the corporate finance advice and stated an action that the corporate finance advice should be decline.
The question clearly stated the audit firm were appointed to provide corporate finance advice prior to the
acquisition of the target company. At that point in the process the audit firm were not the auditors, they
were appointed auditors following the acquisition of the target company. Comments relating to the decline
of the corporate finance advice were therefore not relevant as this had already taken place.

Candidates are advised to read the exhibits clearly and make note of the exhibits to be used for each
requirement.

Overall, a mixed response, generally the level of detail in candidate responses show insufficient depth on
how the threat arose and the impact it would have on the auditor and the fundamental principles it
threatens, showing lack of explanation and application of knowledge to the scenario. Candidates
demonstrate they understand which threat is being examined yet often do not explain this sufficiently and
fail to spot the other professional issues in the question

Conclusion

The performance of candidates in these questions is broadly in line with past sessions.
There continues to be a gap between candidates capable of demonstrating audit
competence through strong application of knowledge and concepts to practical scenarios,
and those who approach the examination as a factual exercise and fail to tailor their answers
to the scenarios or do not show professional scepticism or commercialawareness.

Practice of past questions will aid candidates in determining their knowledge gaps and give
practice at applying their knowledge to the given scenarios. It is essential that candidates
analyse their answers produced in comparison to the scenario specific explanations given in
the model answers. This question practice needs to be built upon a good knowledge of the
syllabus and must build upon both the Applied Skills level audit and financial reporting
examinations and the Strategic Business Reporting (SBR) syllabus.

Candidates are encouraged to develop a wider appreciation of the significance of risks by

reviewing published auditor’s reports of listed companies where the auditor produces a key
audit matters section. This will allow candidates to see real world explanations by auditors of
why something was a specific risk to a specific client.

Guidance on how to structure answers is available in the technical articles available on the
ACCA website.

Examiner’s report – AAA March/June 2022 19