Underpinning knowledge for the audit papers

This article explores the similarities and differences between Audit and Assurance (AA) and Advanced Audit and Assurance (AAA) and identifies how best to prepare for the step up to Strategic Professional

It comes as no great surprise that the audit exams 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 AA and AAA

It should come as no surprise that Audit and Assurance is the main exam which underpins and sets out much of the assumed knowledge for Advanced Audit and Assurance. The key topics in 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 for AAA. In fact, the AAA examiner identified audit planning, risk assessment, obtaining evidence, and reporting as topics that are likely to feature in every AAA exam in the examiner’s approach article (see 'Related links').

There are further similarities: the longer questions are usually based on lengthy scenarios which commonly focus on elements of planning, risk assessment and audit procedures; both contain several questions based on shorter scenarios which focus on a range of topics that commonly include ethics, specific aspects of auditing and reporting. The AA exam features three OT case questions, which each comprise five OT questions for a total of 30 marks. These OT case questions cover a broad range of syllabus topics and are often very practical in nature. The remaining 70 marks in the exam are achieved through scenario based narrative questions. The AA includes one 30-mark questions and two 20-mark questions which, similar to AAA, test candidates’ ability to assimilate relevant information and produce a tailored response to the requirement presented.

Candidates need to make sure they are comfortable with these similarities to ensure the transition from AA to AAA is as smooth as possible. However, AAA 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 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 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 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.

Some knowledge accumulation will, therefore, be required. For candidates who have reached AAA; 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 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.

This is emphasised in the examiner’s approach articles for each exam. The AA examiner states that the aim of the exam is to ‘test a candidate’s understanding of the underlying theory of auditing and their ability to apply that theory to practical audit situations’.

The emphasis on application is also apparent in the AAA examiner’s approach article but the examiner also 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’.

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.

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 AA and AAA.

The easiest way to appreciate these differences is to compare the exams. The Sample March/June 2019 exams 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 versions of the AAA exam.

Firstly, looking at the AA exam there are 16 marks available for basic knowledge which requires no application. 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. In both cases though it should be clear that candidates cannot pass either exam simply with pre-learnt knowledge.

Second, 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.

Finally, the wording of the scenarios and the complexity of the questions are more advanced in AAA. This is perhaps best illustrated with some examples. The first uses the topic of audit risk, which is common to both AA and AAA.

In Question 17, Peony Co, of the AA March/June 2019 sample exam, candidates are presented with a scenario based on a food retailer. The scenario states that during the year the company’s internal audit department discovered that a number of non-current assets which were not fully depreciated were in fact obsolete. The scenario goes on to state that in preparation for an expansion the company is planning to make approximately 60 employees redundant after the year end and that no decision has been made as to when this will be announced but it is likely to be just before the year end. There are clear risks associated with a possible overstatement of non-current assets if assets have not been appropriately depreciated. There is also a very clear indication that a provision will be required at the year end in relation to the announcement to make employees redundant.

Compare this to Question One, Margot Co, of the March/June 2019 Sample AAA exam, where candidates are asked to evaluate the risks of material misstatement to be considered in planning the audit of a company which produces fruit-based products using agricultural produce grown in the company’s farms. Candidates were provided with detailed information surrounding the company’s activities during the financial year, including details of a severely damaged factory building, new research and development which had been carried out in the year and the use of an auditor’s expert in relation to the company’s biological assets. Candidates were also provided with extracts from the latest management accounts, results of preliminary analytical procedures performed by the audit team and details of an impairment review carried out by the finance director in relation to the damaged factory building. 

Most people would agree that accounting for non-current assets in the form of property, plant and equipment and redundancy provisions are relatively straightforward topics that require little more than knowledge gained from Financial Accounting (FFA). However, 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. Consistently AAA question’s on risks of material misstatement and audit risk 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 AA question candidates are asked to ‘describe eight audit risks... in planning the audit of Peony Co’. In AAA equivalent candidates are 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 was worth 16 marks in AA, but this increased to 20 marks in the AAA exam and in other past exams has been 24 – 26 marks at the Strategic Professional 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.

The AAA 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 AA the items to be audited are identified in the syllabus and they are all basic elements of the financial statements studied in FFA.

In Question 18, Hyacinth Co, of the March/June 19 sample exam, candidates are asked to ‘describe substantive procedures the auditor should perform to obtain sufficient and appropriate evidence in relation to the valuation of Hyacinth Co’s inventory or in relation the company’s year-end sales tax liability. The method of inventory valuation and the way in which the sales- tax liability has been derived is very clearly detailed in the scenario. Therefore although some application is required, a well‑prepared candidate would be able to tailor a number of pre-learned audit procedures in order to pass this question.

This is not possible in AAA; candidates could be asked to design 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 impairment of the factory (March/June 2019).
  • The development cost capitalised in respect of new plastic-free packaging (March/June 2019)
  • A grant received from the government (December 2018)
  • The audit of goodwill arising on the acquisition of a subsidiary (September 2018)

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 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.

If you seriously wish to pass AAA do as many past paper exam questions as possible. In fact, do them all.

Conclusions

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.

If candidates can learn how to do this then they should be able to do well in AAA. 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.

Written by a member of the AAA examining team