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Developments in Auditing and Assurance - Exam Technique
The new Developments in Auditing and Assurance paper was set for the first time in November. 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.
The new examination is building on the Principles of Governance and Audit paper from the Professional 1 level and the other related elements of the Foundation level and then aims to extend and deepen the student’s understanding of auditing and auditing techniques. The examination therefore explores auditing and assurance procedures to consider more challenging reporting areas and issues. It examines and critiques current practices and explores emerging and future developments in auditing and assurance. In addition to providing a thorough professional grounding in audit, other assurance areas are also discussed, applying audit techniques to emerging areas.
The specific aims are to develop and examine the candidate’s ability:
To present, discuss and critique advanced auditing approaches and techniques
To demonstrate how these can be applied in different situations mainly (but not only) in relation to financial statement audits
To discuss and critique developments in auditing and accountability.
(N.B Wider aspects of accountability are also covered within this paper.)
What does this mean in practice?
The paper is examining your ability to analyse issues and then develop appropriate audit or other responses, as well as demonstrating you ability to critically appraise current practice and future developments. To enable the examiner to test these skills, the DAA 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.
The remainder of this article is aiming to help students to prepare for this first unseen practice scenario- based question.
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 or professional codes or quality guidance and illustrate that you appreciate the key risks and problems within the issue.
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 and 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 and to appreciation the impact that the context in which the entity operates has upon these risks. This is assessing you 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.
The key weakness in answers is a lack of detailed development of the issues and this may reflect some lack of detailed 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 (and I deal with some tips below) 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. To this end the examiner advises 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 a very low mark.
The examiners main observation on the performance of most papers in prior sittings of both DAA and Paper 15 concerned the lack of depth that students brought to their answers. Where students did have a grasp of the issues under consideration, they often failed to develop the discussion to show their application to the case in the question. 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!
Using the Scenario
The exam has a duration of 3 hours plus 15 minutes reading time. As all the questions are compulsory, this time is for you to slowly read the information in the scenario and to read the three questions to understand the issues that you are required to consider in your responses.
Obtaining and 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
A useful checklist to ensure that you have identified key issues would be that extracted from:
Obtaining an Understanding of the Entity and Its Environment, the Applicable Financial Reporting Framework and the Entity’s System of Internal Control
The following side headings will help you to identify the key issues:
“(a) The following aspects of the entity and its environment:
(i) The entity’s organizational structure, ownership and governance, and its business model, including the extent to which the business model integrates the use of IT; (Ref: Para. A56‒A67)
(ii) Industry, regulatory and other external factors; (Ref: Para. A68‒A73) and
(iii) The measures used, internally and externally, to assess the entity’s financial performance; (Ref: Para. A74‒A81) ISA (UK) 315 (REVISED JULY 2020) 9
(b) The applicable financial reporting framework, and the entity’s accounting policies and the reasons for any changes thereto; (Ref: Para. A82‒A84) and
(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”
Extracted from ISA 315 Identifying the Risks of Material Uncertainty (revised)
The end of the standard also gives detailed other checklists on:
Considerations for the understanding of an entity and its business model; understanding inherent risk models, understanding the system of internal control, understanding an entity’s internal audit function, understanding IT and finally understanding general IT controls. If you have a good working knowledge of the details of this standard, you will have good working templates for analysing any assurance/audit engagement – and hence any DAA 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 ( engagement partner / audit manager / ethic partner etc.)
What sort of firm are you working for? Is it an international LLP? Does it have a lot of offices nationally or internationally?
Are there any issues with staff changes?
Any indicators of problems with quality or competence of the staff?
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? And 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?
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 ISA 500 Audit Evidence and ISA 540 Audit of Accounting Estimates (revised)
Be aware that the paper is focusing more at complex issues and your ability to synthesise information which means that you will be potentially 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 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 DAA 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. Whilst the exam can not cover all aspects of an assignment, and the context and the specific issues being examined will change between each sitting, the paper is testing your ability to act professionally and so all papers will require your ability to demonstrate the fundamental skills and knowledge of an auditor.