Audit and assurance services

Anyone who has already looked at the Paper 3.1 Study Guide will find it detailed and comprehensive. So what influenced my writing of it? The most significant factors, not necessarily in order, were:

• the performance criteria identified in the membership competences review in 1998 for the key role of statutory audit;
• the ACCA Rulebook and IFAC Code of Ethics for Professional Accountants;
• the need to have a clear differentiation between auditing at Parts 2 and 3 – thus Paper 3.1:
  – has increased content (e.g. quality control, practice management, prospective financial information); and
  – demands higher skills (see below);
• questions set by predecessor examiners of professional level financial reporting and auditing papers (Steve Scott – Paper 10, now Paper 2.5 and Graham Holt – Paper 13, now Paper 3.6 and also the former 3.4 “Auditing and Investigations” paper)
• the influences of other examiners whom I encountered whilst I was a full-time tutor (principally of auditing and management papers);
• the fact that students who wish to obtain a UK Practising Certificate (Audit) will be required to sit this option paper;
• my practical experiences as an audit senior, supervisor and manager.

As I worked abroad in Africa for two years in the mid-1980s and for the last four in the Eastern and Central European market, I also started from an International perspective. There are therefore relatively few UK specific outcomes identified in the Study Guide. The International Stream Study Guide, Pilot Paper and December 2001 and June 2002 exams were all originated before their UK counterparts.

Format of the exam
The starting point was to have a compulsory Section A incorporating “case study” questions and a choice Section B. I was not alone in considering 70:30 to be the most suitable split for this Paper and two from three 15 mark questions makes an obvious Section B. Section A, which is compulsory, is also split between two “case study” questions and a question with an undisguised accounting content.

Although in the Pilot Paper Section A is split 25:25:20 this is only illustrative of the make up of 70 marks, which could, in a later exam be 30:20:20 (say).

Case Study Questions (1 & 2)
These are going to be the longest questions on the paper – perhaps running to more than a page of A4 of scenario (but not much more). One of them is likely to have an “angle” which is not auditing (e.g. Pilot Paper Q1 includes a planned acquisition). One of them, not necessarily the same one, may be a new (or proposed) engagement. These questions will principally be about “strategy”, planning issues (e.g. business and audit risks and materiality) and managing the auditor-client relationship (e.g. see “practice management”. Sessions 5 & 6 in the Study Guide). The scenario may be relatively unstructured with underlying issues which the best candidates may discern. However, that is not to say that candidates must look for “hidden meanings” – relevant answer points that “add value” to the information given in the question (rather than merely repeat it) will attract marks.

As explained further in other articles, these questions:

• can be approached as “auditing” assignments with or without “other services” – see “Rest Assured” article (Student Accountant June 2001);
• will require a higher level of skills and students who may get “bogged down” in them may prefer, as part of their personal exam technique, not to tackle them first – see “Exam Technique II” article (scheduled for Student Accountant October 2001).

Question 3
For the time-being, this question will have a structured scenario incorporating accounting issues in some guise, as illustrated in the Pilot Paper. Since financial reporting requires a sound knowledge of accounting standards, any would-be auditor of financial statements cannot disregard accounting treatments. I expect candidates to be able to make judgements about and comment on specific matters affecting the financial statements. Some of those “matters” may be thought of as “auditing” (e.g. “risk”, “materiality”) and others as “accounting” (e.g. recognising appropriate or inappropriate applications of IASs/FRSs). As explained in a tutorial note in the answer to the pilot paper question, I use the term “accounting treatment” in a broad sense to encompass disclosure as well as recognition and measurement.

Candidates who have passed Paper 2.5 (or 10) should welcome this question. However, it will not be necessary to know what are the correct accounting treatments to pass this question well – since a majority of marks can still be earned for other matters (see the Marking Scheme).

Note that the first of three articles on examination technique will feature next month in Student Accountant and puts Pilot Paper Question 3 “under the microscope”.

Section B
It is my intention to present Section B questions in such a way that candidates who read the requirements of Qs 4 & 5 and the “quote” of Q6 will be able to choose, relatively quickly, which they wish to tackle and in what order.

Questions 4 & 5
As I stated at the ACCA Teachers’ Conference in Wakefield (and reported by Pass magazine), I have a “passion” for auditor’s reports. Over the years I have been appalled at the lack of understanding of the meaning of standard opinions and their appropriateness to specific situations. In the pilot paper Q4(a) introduces the subject, about which there is controversy in part (b).

Q5 has a similar style to Q4 – i.e. requirement (a), which is presented as the first line of the question, informs the candidate that it is about confidentiality (which “pigeon-holes” this question into “ethics”).

Either or both of these questions will require candidates to take a professional stance and demonstrate in their answers their adherence to Fundamental Principles (integrity, objectivity, competence, confidentiality, due skill, professional scepticism, professional behaviour, etc). You may wish to note at this point that International pronouncements use a combination of English (US) and English (UK) spellings.

Discussion Question 6
The pilot paper demonstrates the minimum possible requirement for this question (“Discuss”). However, later questions are likely to have a longer requirement (e.g. to discuss a proposition in a given context or to discuss and reach a conclusion).

Caution
This article should be read bearing in mind that it provides an introduction to an examination which is new to a new syllabus. The parameters for the form and content of the exam are set by the syllabus. Whilst there will be a justifiable expectation that the first exams should reflect broadly the style and standard of the pilot and even though this article highlights certain topics as being important, it would be reckless of candidates to rely on “question topic spotting”. Tuition and material providers should appreciate that the style and standard of the pilot offers a framework in which I can (and will) examine the whole syllabus.

Conclusion
Last, but by no means least, I should mention the influence which you, the candidates, have on my way of thinking. At the end of the day, I want the candidate who has chosen this option and adequately prepared for the exam to pass it. I do not doubt that the candidate who has already passed Paper 2.5 and 2.6 or their old syllabus equivalents, 6 and 10, has the potential to pass it. To this end candidates must:

• appreciate the aims and objectives of the exam as reflected in the Syllabus, Study Guide and Pilot Paper;
• have read a suitable manual and gained a knowledge of a broad range of auditing and related accounting topics;
• possess a degree of common-sense and professionalism and the ability to think widely and make judgements;
• read relevant articles in Student Accountant;
• practice exam style and standard questions – the pilot paper provides the benchmark;
• have the necessary written communication skills to demonstrate that they deserve to pass.

Kim Smith is Examiner for Paper 3.1 and Group Technical Director, ATC International