Having the chats with the audit examiner

Jul 03, 2018
We recently caught up with the FAE audit examiner who shared his views on an area where FAE students struggle.

The identification of audit risks and auditors’ responses to those risks is a common area examined on both the interim and final examination for the audit elective. This capability is front and centre of every audit, fundamental to the planning of each audit engagement and is core for any auditor.

Over the last few audit elective papers, students appear to struggle with this indicator. The overall standard of answers to this topic was quite poor and disappointing, considering there has been an emphasis on this subject in all recent interim and final examinations. Below is a summary of some of the key pitfalls and errors noted in recent exams.
  • The approach and layout of the solution is key for this type of indicator. The solution should be clearly laid out in a tabular format. The audit risk and the responses to this risk should be clearly identified and linked.
  • For each audit risk identified, candidates should be very clear as to the exact nature of the risk, using assertions where practical. For example, rather than just identifying inventory as the risk (this is not a risk but an element of the financial statements), candidates should identify valuation or existence of inventory as the risk. A mere list of areas of a balance sheet or profit or loss will not result in marks being awarded.
  • Candidates should be very clear as to why something is an audit risk by explaining why the information in the case study led them to believe there was a risk. For example, valuation of inventory was identified as an audit risk because we were told in the case study that inventory was sold post-year end for less than its cost. It is important to be very clear as to your rationale.
  • Candidates need to ensure that responses to risks are specific to the relevant audit risk assertion. For example, if we have identified valuation of inventory as a risk, the appropriate primary test would not be to attend the stock- take as this test is typically more relevant when testing the existence of an inventory.
  • Candidates need to have good financial reporting knowledge as often, the audit risk centres around incorrect financial reporting or inadequate disclosures. 
  • Generic audit risks of revenue recognition and management override, while deemed presumed risks of material misstatement by the ISA, should not be included on a list of audit risks unless there is a specific reason based on information included in the case study.
  • Candidates should concentrate on identifying audit risks based on the information provided, rather than suggesting audit risks that might exist had we more information on a particular area. For example, if the case study provides information on payroll for the company but not trade receivables, then you can be assured that the audit risks to be identified will relate to payroll and not trade receivables.
  • Do not miss the obvious! Candidates are reminded that audit risks identified should be drawn from the material within the case study.