It comes as no great surprise that the audit papers are among the hardest ACCA exams to pass. Although there are many different reasons for this perhaps the most fundamental is that there is a lack of scope for repetition of pre-learnt knowledge in audit. Candidates like to learn tables, formulae, definitions, laws, standards and, put simply, audit doesn’t work like that. Of course, there are things that need to be learnt but audit is more concerned with how that knowledge is applied in practice.
Audit is, after all, a very practical aspect of the profession. It is concerned with gathering and presenting evidence, analysing that evidence and using it to inform a single – but very important – decision: are the financial statements free from material misstatement? You can’t simply perform the same procedures on every audit as each client is different and even recurring clients change continuously.
Audit is therefore about understanding the specific circumstances of those clients, selecting procedures to reflect this and interpreting the specific results obtained. It rarely involves standard formulae or repetition of laws or standards. So why would the exam?
Similarities between Paper F8 and Paper P7
Paper F8 underpins Paper P7. The key topics in Paper F8 (the audit framework, planning and risk assessment, control assessment, audit evidence, review and reporting) are all fundamental elements of performing an audit and are therefore assumed knowledge for Paper P7. In fact, the Paper P7 examiner identified planning, risk assessment, obtaining evidence, and reporting as topics that are likely to feature in every Paper P7 exam in the examiner’s approach article (see 'Related links').
There are further similarities: the longer questions are usually based on lengthy scenarios that commonly focus on elements of planning, risk assessment and audit procedures; both contain several questions based on shorter scenarios that focus on a range of topics that commonly include ethics, specific aspects of auditing and reporting. From December 2014 the format of Paper F8 will change and 20 marks will be attributed to multiple choice questions. However, the remaining 80 marks will still be achieved through scenario based narrative questions.
Candidates need to make sure they are comfortable with these similarities to ensure the transition from Paper F8 to Paper P7 is as smooth as possible. However, Paper P7 is different. Put simply it is harder: it has more advanced syllabus requirements; it has a larger syllabus and is based on more complex financial reporting standards, and the question requirements are largely applied in nature, meaning that few, if any, marks are awarded for rote-learning.
Syllabus differences between Paper F8 and Paper P7
The most obvious difference between Paper F8 and Paper P7 is the additional topics in the latter’s syllabus. These include:
- Professional issues, such as money laundering, professional liability and practice management including advertising, publicity, obtaining professional work and fees, quality control (ISA 220 and ISQC 1), and tendering.
- Auditing groups (ISA 600).
- Business risk.
- Non-audit assignments, including due diligence, prospective financial information reviews, and forensic audit (ISAE 3400 and 3042, ISR 4400, ISRE 2400 and 2410).
- Current issues and developments.
- The accounting concepts developed in Paper P2 (including related parties ISA 550).
- In addition, the UK and Irish adapted papers include auditing aspects of insolvency in the syllabus.
Some knowledge accumulation will, therefore, be required. For candidates who have reached Paper P7; many of the principles will have been covered in some way in previous studies. It should also be remembered that the ‘professional’ component requires commercial judgment and common sense.
Exam format, style and requirements
The fundamental difference between Paper F8 and Paper P7 is the way in which they are examined. Candidates should be aware that there are three intellectual levels relevant to the exams: level 1, knowledge and comprehension; level 2, application and analysis; and level 3, synthesis and evaluation.
Paper F8 focuses purely on levels 1 and 2, while Paper P7 is primarily focused on levels 2 and 3.
This is emphasised in the examiner’s approach articles for each paper. In the Paper F8 version (March 2010), the examiner states that the aim of Paper F8 is that it ‘can be passed by a candidate who understands the underlying theory of auditing and can apply that theory to relatively basic audit situations’.
The emphasis on application is also apparent in the Paper P7 examiner’s approach article (March 2013) but the examiner also stresses that candidates need to be able to display: ‘an independent opinion backed by reasoned argument’,‘an appreciation of commercial factors which influence practice management’ and ‘an appreciation of the fast‑moving developments in audit and assurance practices’.
It is of vital importance that candidates understand the practical implications of these conceptual differences. Few people would take the same approach to a multiple-choice style exam as they would to a discursive one; they require different techniques and thought processes. For the reasons explained above the same should be true of Papers F8 and P7.
The easiest way to appreciate these differences is to compare the exam papers. The June 2014 papers can be downloaded from the ACCA website and even a quick scan will reveal some obvious differences. Please note that the analysis below is based on the international versions, however the principles discussed are equally valid for all papers.
First, in the Paper F8 exam there are 25 marks available for basic knowledge that requires no application. The same can be said for only 11 marks in the Paper P7 exam. In both cases it should be clear that candidates cannot pass either exam simply with pre-learnt knowledge.
Second, the language of the requirements is different. Paper F8 favours ‘explain’, ‘describe’, ‘state’, and ‘list’, with ‘recommend’ used sparingly. Paper P7 also uses ‘explain’ a lot but there is a significant emphasis on ‘recommend’ requirements with a number of ‘discuss’ and ‘critically evaluate’ type questions as well.
Finally, the wording of the scenarios and the complexity of the questions are more advanced in the Paper P7. This is perhaps best illustrated with some examples. The first uses the topic of audit risk, which is common to both Paper F8 and Paper P7.
In Question 3, Recorder Communications Co, of the June 2014 Paper F8 exam, candidates are presented with a scenario based on a large mobile phone company. The scenario states that during the year the directors were paid a significant bonus, which was included in wages and salaries, and separate disclosure of the bonus is required by local legislation. The scenario goes on to state that the company also has a policy of revaluing its land and buildings and that an updated valuation has been included in the financial statements during the year. There are clear risks associated with the disclosure of the bonus within the financial statements and a possible overstatement of Property, Plant and Equipment (PPE) if the valuation has not been conducted and applied in line with IAS 16 Property, Plant and Equipment.
In Question 1, Adams Group, of the June 2014 Paper P7 exam, candidates are asked to evaluate the audit risks to be considered in planning the group audit and are provided with detailed information surrounding the group’s activities during the financial year, including details of a new bonus scheme for senior management based on revenue and details of investment properties held by one of the group companies. Candidates were also provided with a set of draft consolidated financial statements.
Most people would agree that accounting for PPE and wages and salaries are relatively straightforward topics that require little more than knowledge gained during Paper F3. However, the topics encountered in Paper P7 include much more complex financial accounting matters and require candidates not only to identify the potential risks from the scenario but to be able to utilise the financial information provided to further support their assessment of the risk through appropriate use of analytical procedures and calculation of materiality. Consistently the Paper P7 question on audit risks address more complex accounting scenarios such as: group accounting, financial instruments, pensions accounting, leases, share options, and deferred tax.
The differences continue beyond the topics. In the Paper F8 question ‘Recorder’ candidates are asked to ‘describe five audit risks... in planning the audit of Recorder Communications Co’. In the Paper P7 equivalent candidates are requested to ‘prepare briefing notes for my (the audit partner’s) use, in which you evaluate the audit risks present within the scenario and communicate these in an appropriate format and at an appropriate level for the audit partner to essentially assess the risks of material misstatement in relation to the engagement.
The Paper P7 version is much more open-ended. The ‘matters’ in this question include anything that affects the planning and conduct of the audit and the way in which the financial statements are prepared. Candidates are also required to present their responses in a professional manner and marks are awarded accordingly for this.
Another good example is the way in which substantive audit procedures are tested. In Paper F8 the items to be audited are identified in the syllabus and they are all basic elements of the financial statements studied in Paper F3.
In Question 1, Trombone Co, of the June 2014 Paper F8 exam, candidates are asked to ‘describe substantive procedures the auditor should perform at the final audit to confirm the completeness and accuracy of Trombone Co’s payroll expense’. Although some application is required, a well‑prepared candidate would be able to suggest sufficient pre-learned audit procedures to pass this question.
This is not possible in Paper P7; candidates could be asked what substantive procedures they would perform on any element of the financial statements. In addition, they may not just be asked how they would audit an asset or liability, they may be asked how they audit a specific element of the calculation or a specific assertion. Examples include the audit procedures to be performed on:
- The classification of non-controlling investments (June 2010).
- The costs involved in a reorganisation and the closure of a factory (June 2012)
- The amount of an insurance claim due to a burglary (June 2013)
- The disposal of a subsidiary (Dec 2013)
It is not possible to pre-learn audit procedures for these; they are too narrowly defined and it is impossible to second guess which elements of the accounts are going to be scrutinised. The only way to approach questions of this nature is to thoroughly understand the basic principles of planning and performing audit procedures and then to learn how to apply them to never seen before requirements. Candidates need to learn the process of answering these questions and not focus on trying to learn the answers.
How to approach the step up to Paper P7
In some ways Paper F8 is perhaps more challenging than Paper P7: it is unfamiliar to most; there is a lot of new material to learn; and it is one of the first application style papers that candidates come across. However, many candidates, having mastered Paper F8 wrongly think that they can apply the same principles to studying Paper P7. Usually this means learning diagrams of how control systems operate, lists of controls tests, lists of tests for sales, receivables, purchases, payroll, etc, lists of advantages and disadvantages of internal auditing and computer-assisted auditing. Practice of applying this knowledge to past exam questions is often left until the latter stages of study (this is not an approach I would advocate).
Paper P7 is about process; you are placed in unique, never seen before, real world situations with a set of tools at your disposal and you are asked ‘what do you need to do now?’. Would someone take exactly the same approach to building a factory in two different countries? The answer must surely be ‘no’. The basic principles of construction will be the same but you need to consider what resources (land, labour, materials) you have available, what the differences in pricing will be in the two locations, local building laws, interest rates and exchange rates.
This is Paper P7: the tools and the processes are the same but the environments and circumstances are always different. You can’t bludgeon a pre-learnt response into a question where it simply does not fit, in exactly the same way as you cannot force one country’s building principles on the rest of the world.
There is only one way to learn how to apply these tools: practice! The sharp intakes of breath are unmistakeable but it is the painful truth of Paper P7; it cannot be learned from reading alone. Junior auditors spend years learning how to audit by doing it; they start with the audit of non-current tangible assets and cash because they are the simplest things to audit. Only with years of practise can they move on to the audit of subsidiary accounts, pensions and complex financial instruments.
If you seriously wish to pass Paper P7 do as many past paper exam questions as possible. In fact, do them all.
The problem with professional studies is that all too often people – and not just candidates – are too concerned with learning the right or wrong answer. In all honesty I doubt that anyone ever writes a response to a Paper P7 question that matches the examiner’s answer, not like it would for a tax or financial reporting question anyway. Paper P7 is about selecting the right tools and applying them to the, often narrowly defined and situation specific, question being asked.
If candidates can learn how to do this then they should be able to do well in Paper P7. Unfortunately this is not a skill that is easily or quickly gained. This process begins on day one of study and, for those who continue their auditing careers, it never ends.
Simon Finley is a content manager for Kaplan Publishing and an audit tutor