Stepping up from Audit and Assurance to Advanced Audit and Assurance

This article identifies how best to prepare for the step up to Strategic Professional Advanced Audit and Assurance (AAA).

Audit is a 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?

Audit is therefore about understanding the specific circumstances of those clients, selecting procedures to reflect this and interpreting the specific results obtained. The three questions at AAA are all scenario based and will require candidates to use their technical knowledge and apply it to the information provided in the specific scenario.

Solid technical knowledge is essential

The key topics examined at Audit and Assurance (AA) (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 at AAA. These topics will continue to be examined at AAA, with the emphasis on the application of knowledge based on the specific scenario in the question. Candidates should ensure that they have a strong foundation of technical audit knowledge (a good pass mark at AA will assist in this) before starting their studies for AAA. This will enable candidates to focus on developing their further technical knowledge due to the expanded syllabus at AAA and their application of knowledge skills required at AAA.

Application of the technical knowledge to the scenario

Candidates must apply their technical knowledge to the specific scenario in the question. If technical knowledge is weak, then candidates may struggle, but equally, having that technical knowledge alone will not be sufficient to pass the exam. The question requirements are largely applied in nature, meaning that few, if any, marks are awarded for rote-learning.

Professional skills marks

20% of the marks are awarded for the demonstration of professional skills. It is recommended that candidates stepping up to Strategic Professional visit the information on the website about these skills. However, provided candidates have solid technical knowledge, utilise good exam technique and answer the requirements carefully, the professional skills marks will be achieved.

Syllabus differences between AA and AAA

The most obvious difference between AA and AAA 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 management (ISA (Revised) 220, ISQM 1 and ISQM 2), and tendering.
  • The audit of groups (ISA 600 (Revised))
  • Business risk (as part of the 50 mark “case study” style question)
  • 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 Strategic Business Reporting (SBR) (including related parties ISA 550).
  • The audit of performance information (pre-determined objectives) in the public sector.
  • In addition, the UK and Irish adapted exams include auditing aspects of insolvency in the syllabus.

Not just audit… a word about financial reporting

The AAA examiner also stresses that at this level a thorough understanding of the relevant audit, assurance and financial reporting regulations which fall within the syllabus is what is needed to achieve a clear pass at AAA.

As such candidates are encouraged to ensure that they sit and pass SBR prior to attempting AAA.

The topics encountered in AAA 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. Questions may require candidates to assess risks of material misstatement and audit risk using more complex accounting scenarios such as: group accounting, financial instruments, pensions accounting, leases, share options, and deferred tax.

Exam format, style and requirements

The fundamental difference between AA and AAA 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.

AA focuses purely on levels 1 and 2, while AAA is primarily focused on levels 2 and 3.

‘An ability to have an independent opinion backed by reasoned argument’

The emphasis on application is emphasised in the AAA examiner’s approach article and stresses that candidates need to be able to display: ‘an ability to have an independent opinion backed by reasoned argument’ and ‘an appreciation of commercial factors which influence practice management’ and ‘an appreciation of the fast‑moving developments in audit and assurance practices’.

There are very few knowledge marks available in the AAA sample questions and closer inspection will show that all the requirements are applied in nature. Candidates should be aware that knowledge alone will not be sufficient to gain full credit in the AAA exams and they cannot pass simply with pre-learnt knowledge.

Evaluation skills

The language of the requirements is different. AA favours ‘identify’, ‘explain’, and ‘describe’, with ‘recommend’ used sparingly. In contrast, AAA asks candidates to ‘evaluate’, ‘design audit procedures’ and also has a significant emphasis on ‘discuss’ and ‘recommend’ requirements and also a ‘critically appraise’ type question as well.

If candidates are asked to ‘evaluate’ a scenario, then a conclusion or a final decision should be provided. For example, there may be a requirement to evaluate whether to accept a client engagement or audit opinion. A final justified opinion will be required. The Examining Team are looking to see whether candidates can come to a conclusion and justify their decision.

In AAA, candidates may be requested to ‘prepare briefing notes for the audit engagement partner’s use, in which you evaluate the significant risks present within the scenario and communicate these in an appropriate format and at an appropriate level for the audit engagement partner to essentially assess the risks of material misstatement in relation to the engagement. The mark allocation should also be noted – audit risk could be in the region of as much as 20 – 26 marks at the Strategic Professional level, which is higher than would be the case at the Applied Skills level. This increase in the mark allocation should also give a clear indication of the increase in difficulty and the extra depth which is required at AAA level.

Candidates are reminded that depth of analysis and evaluation is key. Too often, candidates are attributing, say, 16 marks to writing about eight issues briefly.

Identify the issue, explain why it is an issue, evaluate the impact of these issues on the audit.

Audit procedures and the scenario

It is of vital importance that candidates understand the practical implications of these conceptual differences. Take, for example, a requirement which asks the candidate to propose suitable audit procedures for the audit of cash receipts in a cash flow forecast. Candidates should ensure that their procedures are specific to the assertion being tested and relevant to the specific scenario. Candidates should bear in mind that if the procedures are to be performed prior to the issuance of the auditor’s report, the procedures will be different to those proposed at the planning stage. You can’t simply perform the same procedures on every audit as each client is different and even recurring clients change continuously.

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 financial statements 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.

Candidates should design audit procedures which are relevant to the scenario, any specific assertion being tested and relevant to the stage of the audit.

How to approach the step up to AAA

In some ways AA is perhaps more challenging than AAA: it is unfamiliar to most; there is a lot of new material to learn; and it is one of the first application style exams that candidates come across. However, many candidates, having mastered AA wrongly think that they can apply the same principles to studying AAA. 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 which is not the most effective way to pass such a practical examination.

However, in AAA 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?’. You can’t force a pre-learnt response into a question where it simply does not fit,

There is only one way to learn how to apply these tools: practice! 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.

Candidates are highly recommended to practice as many AAA past exam questions as possible.

In summary

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. However, auditing and therefore AAA is about selecting the right tools and applying them to the, often narrowly defined and situation specific, question being asked. This process begins on day one of study and, for those who continue their auditing careers, it never ends.

Updated by a member of the AAA examining team