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ACCA P7: A logical approach

James Griffiths offers a step-by-step guide to how to get through P7, a paper that causes PQs so much stress

April 2017

Both the pass rates and the comments made in the examiner’s report suggest that P7 is a difficult paper to pass. There is no real reason why this should be the case, so this article is an attempt to explain the key problems encountered and to suggest how students can prepare in order to be successful.

Timing:
I believe there are too many illustrations of poor time management. The questions that I end up marking in the classroom show that not enough time is spent by students analysing the relationship between marks and volume.
This should be an easy thing to solve – a 10-mark part of a question requires twice as much writing as a five-mark part!
It is remarkable how often students will write more if it is a topic with which they are familiar, rather than letting the marks dictate the volume.
Order
A lot of students tell me that they run out of time on question 1. Upon further discussion, I find that they have left this question until last with, say, 30 minutes remaining, so do not have time to complete it.
This is obviously a suggestion of poor time allocation but also a far more deep-rooted problem. If any student looks at the 35-mark question and feels it necessary to leave it until last it means that they don’t think they can answer it. This is unforgiveable.
Question 1 always contains key topic areas, such as risk analysis and audit procedures. If students feel unable to deal with these then they are simply not ready for P7. These topics are fundamental building blocks for the paper as a whole and must be second nature.

Accounting knowledge:
Let’s be clear about this, P7 requires P2 accounting knowledge – therefore do not attempt P7 before P2.
P7 often requires risks of misstatement to be explained. This cannot possibly be done in enough detail unless the accounting knowledge has been obtained first. How can any student expect to explain how, for example, a share based payment scheme could be misstated unless they know how it should be recorded correctly in accordance with IFRS 2?
Share based payments, financial instruments, deferred tax, pensions and foreign currency translation are all examined in detail at P2 and are all essential knowledge pools for P7.
Therefore, despite the fact that the ACCA rules allow students to attempt the P level papers in any order do P2 first – no exceptions!

Answers too general:
This is a very common failing, especially in answers to audit procedures questions. It is easy to fall into a formulaic response and we hear about board minutes, internal auditors, working papers, expert opinions and management representations. Let’s try to be a little more creative. Try to think of procedures that relate directly to the balance or transaction in the question instead of just trotting out a generic list.
Your accounting knowledge can help here, too. Let me try to illustrate by using the following short scenario;
Hawkins plc has introduced an incentive scheme for its directors and employees that will give them 500 share options each if they remain with the company for three years. An expense has been included in the statement of profit and loss in respect of this scheme.
a) Explain the risks of material misstatement for five marks.
b) Describe the audit procedures to confirm the treatment for five marks.

Answer 1 (poor!):
a) The share based payment scheme may not be recorded in line with IFRS 2.
b) I would inspect the relevant documentation to confirm it is accurate.
This answer would not achieve more than half a mark for each section – at the very most. I know this is an extreme example, but I believe that far too many answers bear a striking resemblance to this one!
Before we take a look at a decent answer, let us pause for breath!
A sound knowledge of IFRS 2 can get you five marks for BOTH sections.
Let’s just write down, as an answer plan, five things that IFRS 2 says.
• There are two types of scheme, equity settled and cash settled.
• Both schemes have vesting periods.
• Employees need to stay for the vesting period in order to exercise the options.
• An expense calculation is done by multiplying the options by the employees by the fair value of the option at the grant date, then dividing by the vesting period.
• A journal is recorded as an expense and either to equity or liability depending upon the type of scheme.
This is all the knowledge you need in order to achieve 10 out of 10. Now let’s look at a good answer.
a) The scheme may be misclassified as a cash settled scheme. It is clearly an equity settled scheme because share options have been granted, but it may not have been treated as such.
The vesting period may have been miscalculated – too long or too short – meaning an expense misstatement.
The estimation of potential leavers before the end of the vesting period may not have been done appropriately.
The wrong fair value may have been used in the expense calculation.
The entry that should have been a credit to equity – due to the type of scheme – may have been posted as a liability, meaning both categories are misstated.
b) The scheme agreement should be inspected to ensure that it has been classified correctly as an equity settled scheme.
The expense calculation should be
repeated to confirm its accuracy.
The basis of the fair value calculation should be agreed to source, perhaps the tradeable value on the stock market.
The financial statements can be inspected to ensure that the credit entry is in the right place – it has been correctly classified as equity.
The vesting period stated in the agreement should be agreed to the one used in the expense calculation.
Notice how the five facts have been used to generate both the sets of five points explained in a) and b). The facts are not actually written down as part of the answer, they are just used as reference points and the knowledge is applied.
This approach will produce structured answers and illustrate how P2 knowledge is essential to this process.
Practising doing this with as many accounting areas as possible will mean that question 1 will not be avoided, as well as improving timing relevance and volume.
• James Griffiths is a Kaplan Financial tutor

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