The first article in this series of two on Paper P7 case study questions discussed question style, what to look for in the requirements, how higher-level skills are tested, and the meaning of professional marks within a question requirement. This second article goes through part of a typical Section A case study question, applying the recommended approach described in the previous article. This approach comprises four stages.
STAGE 1 – UNDERSTANDING THE REQUIREMENT
The first thing to do is to read and fully understand the question requirement. Here is the requirement we will be looking at in this article:
‘Prepare a report, to be used by a partner in your firm, in which you identify and evaluate the professional, ethical, and other issues raised in deciding whether to accept the appointment as provider of an assurance opinion as requested by Petsupply Co.’ (12 marks)
Note: this requirement includes two professional marks.
Having read the requirement, break it down. You are asked to do two things:
- identify, ie state from the information provided
- evaluate, ie discuss from a critical point of view.
The requirement asks you to consider ‘professional, ethical, and other issues’. This could cover a wide range of considerations, such as:
- ethics: independence, competence, conflicts of interest, confidentiality, assessing integrity
- professional issues: the risk profile of the work requested, the fee – and whether it is sufficient to compensate for high risk, availability of staff, managing client expectations, logistical matters such as timing, legal and regulatory matters – such as money laundering, and (in some cases) obtaining professional clearance
- other issues: whether the work ‘fits’ with the commercial strategy of the audit firm, the potential knock-on effect of taking on the work – such as the impact on other clients, or on other work performed for this client.
You are asked to produce a report, so remember that the professional marks available will be awarded for using the correct format, the use of professional business language, and for presenting your comments as a logical flow culminating in a conclusion.
From reading the requirement, you know that the question scenario will be based on a potential assurance assignment and will be broadly based around acceptance issues.
STAGE 2 – READING THE SCENARIO
When reading through the detail of the scenario, you should now be alert to information relevant to this requirement. Highlight important points that you think are relevant to the scenario and remember to focus on issues that could affect your acceptance of a potential assurance assignment.
Now read the following extract from the scenario and highlight the salient points – remember to look out for any factors relevant to the ethical, professional, and other issues described above.
Extract: You are a senior manager in Dyke & Co, a small firm of Chartered Certified Accountants, which specialises in providing audits and financial statement reviews for small to medium-sized companies. You are responsible for evaluating potential assurance engagements, and for producing a brief report on each prospective piece of work to be used by the partners in your firm when deciding whether to accept or decline the engagement. Dyke & Co is keen to expand the assurance services offered, as a replacement for revenue lost from the many small‑company clients choosing not to have a statutory audit in recent years. It is currently May 2007.
Petsupply Co has been an audit client of Dyke & Co for the past three years. The company owns and operates a chain of retail outlets selling pet supplies. The finance director of Petsupply Co recently communicated with your firm to enquire about the provision of an assurance report on data provided in the Environmental Report published on the company’s website. The following is an extract from the e-mail sent to your firm from the finance director of Petsupply Co:
‘At the last board meeting, my fellow directors discussed the content of the Environmental Report. They are keen to ensure that the data contained in the report is credible, and they have asked whether your firm would be willing to provide some kind of opinion verifying the disclosures made. Petsupply Co is strongly committed to disclosing environmental data, and information gathered from our website indicates that our customers are very interested in environmental matters. It is therefore important to us that Petsupply Co reports positive information which should help to retain existing customers, and to attract new customers. I am keen to hear your views on this matter at your earliest convenience. We would like verification of the data as soon as possible.’
You have looked at Petsupply Co’s Environmental Report on the company website, and found a great deal of numerical data provided, some of which is shown below in Table 1.
Table 1: Petsupply Co's environmental report – numerical data
|Petsupply Co: environmental key performance indicator (KPI)/target||Actual KPI year to 30 April 2007||Actual KPI year to 30 April 2006||Reason for variance/trend|
|To spend $1m per annum on developing environmentally-friendly packaging and bags||$1.1m spent on relevant development||$0.75m spent on relevant development||Petsupply Co has more liquid funds available in the year to 2007 to spend on development projects
|To increase the amount of waste recycled by 10% per annum||50 tonnes of waste recycled||25 tonnes of waste recycled||Petsupply Co has doubled the amount of waste recycled due to installation of recycling bins at all
|To ensure that at least 90% of our customers are ‘very happy’ with Petsupply Co’s environmental policies||95% ‘very happy’||70% ‘very happy’||Customers complete surveys in store to rate our policies; data shows that customers are extremely happy with our progress on environmental matters
STAGE 3 – TAKE TIME TO THINK ABOUT THE REQUIREMENT AND THE SCENARIO
As discussed in the previous article, you must take time and not rush to answer. When evaluating this particular scenario try to think widely about the information provided. Your answer should cover a broad range of issues rather than concentrating on one or two. Your comments must be tailored to the scenario. It is pointless, for example, to write about a general acceptance issue which is not specifically related to Petsupply Co.
It is important to appreciate that few marks will be available for stating the issue. The higher-level skill marks in this question will be awarded for a discussion of why the issue is relevant to the decision about whether or not to provide the assurance service to Petsupply Co. The requirement is to evaluate the scenario and therefore it is crucial to demonstrate an appreciation that there may be two conflicting sides to the discussion.
Table 2 shows an example of a thought process which identifies the issues and explains why each issue is relevant to the requirement; the issues are shown in the order in which they appear in the question.
Table 2: Example of a thought process which identifies issues and shows relevance to the requirement
|Issue from the scenario||Why relevant to the requirement|
|Your firm is keen to provide more assurance services due to loss of income from audit services||The engagement will provide an extra source of revenue, and accepting the assignment fits the commercial strategy of Dyke & Co. But, the firm should not put the fact that it wants more revenue from providing assurance services above the more important consideration of ethical and professional issues, and the overall assessment of the risk attached to the assignment. It will also be important to consider whether the assignment is a one-off engagement or is likely to be an ongoing service.
|Petsupply Co has been a client for three years||Your firm will already possess good business understanding, which will reduce the risk associated with the engagement, and should also cut down on planning time. However, Dyke & Co must consider various ethical matters, as Petsupply Co is already an audit client, including the appropriateness of providing a non-audit service, and the impact on the level of fees received from an existing client. It is irrelevant to discuss whether there are general threats, such as financial interests in Petsupply Co, as Dyke & Co already provides the audit service, and should therefore already have conducted general ethical clearance.|
|The assurance service requested is to provide an opinion on environmental key performance indicators||This appears to be a very specialist assignment and it is questionable whether a small firm of accountants would possess relevant skills and experience. However, the firm could either spend time and money training staff to perform the assignment, or bring in specialists to perform the work. This would enable Dyke & Co to build up experience in this area, enabling it to provide further services of this type, which fits in with the firm’s commercial strategy. However, whether the skills are developed in house, or bought in, there will be considerable expense involved; Dyke & Co would need to carefully consider the fee charged as the firm will want to recover as much cost as possible.
|Petsupply Co is keen to disclose positive data in order to maintain customer satisfaction||There is a high inherent risk attached to the environmental data. Petsupply Co has a clear reason to manipulate the data in order to disclose that targets are being met. In deciding whether to accept the assignment, Dyke & Co must consider whether this risk can be reduced to an acceptable level. It may be difficult for Dyke & Co to challenge the directors with confidence about the data, given its lack of experience in this area.
|Petsupply Co requires a ‘verification’ of the environmental data||The client appears to have an unrealistic expectation of what an assurance service can provide. Before any decision is made about acceptance, Dyke & Co must explain to the client that its report will not verify or certify the data, and is likely to provide at best ‘limited assurance’ over the data – the expectation of the client clearly needs to be managed.
|Petsupply Co wants the work performed as quickly as possible||As discussed above, Dyke & Co will need to either develop or buy-in expertise in this area, and due to the high inherent risk identified above, the firm will want to spend plenty of time gathering evidence. The client again may have unrealistic expectations about the timeframe in which the opinion could be provided.
|Some of the data shown in the environmental report is not well defined||It would be relatively easy to gather evidence on the amount spent on development, as this is similar to a substantive audit procedure but it may be hard for Dyke & Co to substantiate if the money has really been spent on environmentally-friendly packaging.
Quantifying how much waste has been recycled will depend on the strength of the system put in place by Petsupply Co to capture the data. Equally, it would be difficult to gather detailed evidence to reach an opinion on customer satisfaction as it is a very subjective measure, not suitable for quantification. All of the above points suggest that the engagement will involve testing some subjective issues, and possibly relying on the controls put in place by the client, both of which have an impact on the overall risk assessment of the work requested.
Table 2 is not an answer, it is a thought process. This is what you should be thinking about after reading through the scenario. The previous article stressed the importance of thinking through the scenario. It may help to jot these ideas down in an answer plan before making a start on your written answer, as this will help you to prioritise the points and give the report a logical flow.
STAGE 4 – WRITING THE REPORT
The requirement states that two professional marks are available. As discussed in the previous article, these marks are not for the technical content of the answer, but for the way the relevant points are communicated. The report will be evaluated on the following:
- Use of a report format – a brief introduction, clear separate sections each discussing a different point, and a final conclusion.
- Style of writing – the report is addressed to the partner and so language should be appropriate. You do not need to explain things that would be obvious to a partner, and you must be tactful.
- Clarity of explanation – make sure that each point is explained simply and precisely, and avoid ambiguity.
- Evaluation skills – demonstrate that each point may have a positive and a negative side.
Remember, when answering any question requirement it is quality not quantity that counts. You should make each point succinctly and remain focused on the specific requirement. Questions can be time pressured, but it is important to remember that you should be able to read the requirement, think about it, and write an answer in the time available. This means that there is only a limited amount of time available for actually writing the answer, so keep it short and to the point. Irrelevant waffle earns no marks and will detract from the professional skills evaluation. What follows is an outline report format for this requirement:
- Report is internal, addressed to a partner, covering proposed assurance service for existing audit client
Section 1 – ethical matters
- Provision of non-audit service
- Impact on total fee from client
- Competence to perform work – specialised engagement
Section 2 – risk-related matters
- High inherent risk – figures prone to manipulation
- Data highly subjective
- Need to rely on systems put in place by client
Section 3 – commercial matters
- Fee will have to be high enough to compensate for high risk
- Fee may need to compensate for specialists if used
- Strategic fit – assignment in line with commercial goals of Dyke & Co
- Build up experience in non-audit service
- Ascertain whether assignment will be recurring
Section 4 – other matters
- Managing client expectation regarding type of opinion sought
- Managing client expectation regarding timeframe
- Summary of key issues and decision on acceptance
Note: not all of the above points are necessary to secure a pass mark; the marking scheme is also flexible enough to cater for comments that may not appear in the ‘model answer’.
This article shows how to approach one requirement from a typical Section A question in Paper P7. It is important to practise technique by attempting as many questions as possible, starting with the Pilot Paper for Paper P7.
Written by a member of the Paper P7 examining team