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Why rote learning will lead to failure
Paula McGrath outlines the importance of you detailing the appropriate audit procedures in your F8 and P7 answers
A common requirement in both the F8 and P7 exams is to suggest appropriate audit procedures to be performed. In both papers the scenario will describe one or more specific issues and audit procedures should focus on these issues.
The examiners of both papers often comment that students tend to give a list of rote-learned procedures that do not focus on the issues in the scenario and therefore do not score marks.
A comment from the F8 Examiner’s Report (September 2016) said: “...candidates must strive to understand substantive procedures. Learning a generic list of tests will not translate to exam success – procedures must be tailored to the specific requirements of the question.” This comment was repeated again in the December 2016 Examiner’s Report.
To score well students must be able to suggest audit procedures that are relevant to the issue or balance being tested. In addition, the procedure must properly describe how the audit evidence is to be obtained and for what purpose.
The September 2016 F8 exam paper contained the following scenario:
The finance director of Spider Spirals Co has informed you that at the year-end the purchase ledger was kept open for one week longer than normal as a large bank transfer and cheque payment run was made on 3 November 20X6. Some purchase invoices were received in this week and were recorded in the 20X6 purchase ledger as well as the payment run made on 3 November. The client’s financial year ended on 31 October 20X6.
The requirement asked students to describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the matter.
In this scenario the issue relates to cut-off of trade payables. Audit procedures should therefore focus on testing the assertion of cut-off.
Relevant answers include:
• Select a sample of purchase invoices received between the period of 1 and 7 November, ascertain through reviewing goods received notes (GRNs) if the goods were received pre or post year end, if post year end, then confirm that they have been excluded from the ledger or follow through to the correcting journal entry.
• Review after date payments; if they relate to the current year then follow through to the purchase ledger or accrual listing to ensure they are recorded in the correct period.
• Obtain supplier statements and reconcile these to the purchase ledger balances, and investigate any reconciling items.
Procedures in relation to payables in general, or which test other assertions, are not relevant as they do not focus on the specific issue.
Similarly, procedures that focus on testing purchases are not relevant. The scenario is clearly headed ‘Trade payables’ so the examiner requires payables procedures not procedures that test the purchase transaction. Purchases are transactions which occur throughout the year. Payables are balances outstanding at the year-end. Therefore to test the year-end payables balance students must focus on the transactions that have occurred near the year-end for which payment has not yet been made.
A similar question was included on the March/June 2016 F8 paper. The first part of the scenario described an extensive refurbishment that a client had carried out to its restaurants. The refurbishment was financed via a share issue at a premium of $1.6 million. The requirement asked for substantive procedures in respect of:
(i) Property, plant and equipment
In (i), relevant procedures would focus on testing the additions of new assets and disposal of the old assets. Any procedures that test existing assets are not relevant as these do not form part of the refurbishment.
In (ii), relevant procedures would focus on the share issue such as confirming the receipt of cash to the bank statements and recalculating the split between ordinary share capital and share premium to be included in the financial statements. Any procedures which once gain focus on the refurbishment itself are not relevant as these were required in part (i).
Audit procedures are a significant part of the audit process as they are used to obtain sufficient appropriate audit evidence required to form a conclusion on the financial statements. They will feature in every audit exam. Audit exams at both levels require application of knowledge to a scenario. It is essential that students are able to suggest procedures which are relevant to the specific circumstances of the scenario rather than giving rote-learned procedures from the text book.
• Paula McGrath, F8 and P7 Content Specialist, Kaplan Publishing
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