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1 Examiner s analysis interview: F8 Audit and Assurance Interviewer: Welcome to the examiner s interview for F8, Audit and Assurance. The examiner has provided the answers and the words are spoken by an actor. Examiner: The interview will focus on the following areas: Review of past exam performance - this will cover the June and December 2011 and 2012 sittings. Areas where candidates performed well and any common themes that arise. Areas where candidates did not perform well and what this means to future candidates and tuition providers. Following on from this how future candidates can look to improve their performance by focusing on their question approach and exam technique Lastly I will look at how tuition providers can help candidates improve their performance. 1

2 Let s begin by looking at how candidates performed. The F8 global pass rate has historically been in the 34-43% range. June 2011 at 40% was towards the top end of this historic range and on the whole candidates performed well. In particular there was a question on internal audit and ethics and many candidates scored particularly well on this. December 2011 at 36% was a slight fall on June, here candidates performed particularly well on the corporate governance question but the subsequent events and audit report question were answered unsatisfactorily. June 2012 at 56% was a satisfactory pass rate indeed. Candidates performed well across Questions 1 to 3 on ethics, internal controls, sampling and planning with the notable exception of the substantive procedures (Question 4) and audit reports. This was the only session without an audit risk question and this I believe contributed to the increased pass rate. 2

3 December 2012 unfortunately saw unsatisfactory performance with the pass rate falling to 34%. Candidates did not perform well, particularly on the questions on substantive procedures and audit reports. On the whole, candidates are attempting all or most parts of questions and I have not seen any real evidence of time pressure impacting candidates in these sittings. Interviewer: So, within the F8 examination so far, which areas have been done well? Examiner: There are a number of areas where candidates are performing well. These include: All sittings contained questions on ethics. June 2011 and June 2012 had ethical scenarios whereas December 2011 and 2012 had knowledge questions on ethics. Ethics questions are always answered well and candidates are able to consider both the theory of ethics as well as apply it to a scenario. Frequently candidates score full marks on these types of questions. Where performance could be improved is in the explanations of the ethical risk, some candidates just identify the ethical threat from the scenario but fail to explain how this is a threat or they give an incorrect threat. For example in June 2012 candidates would state the audit team 3

4 attending a weekend away at a luxury hotel gives risk to a familiarity threat this is incorrect as it s a self-interest threat. Question 4b December 2011 tested a corporate governance scenario for 12 marks and candidates were able to easily identify corporate governance weaknesses from the scenario, although again candidates did not always adequately explain why these were deficiencies, but they were then able to provide valid recommendations. Candidates performed well on internal audit questions such as advantages and disadvantages of outsourcing in June 2011, reliance on internal audit in December 2011 and differences between internal and external audit in June Question 1a from December 2011, June 2012 and December 2012 required candidates to identify and explain deficiencies from the scenario and provide a control recommendation. Most were able to easily identify deficiencies and to make recommendations. However the explanations of the deficiencies need to be improved. In December 2011 candidates were given the deficiencies and had to explain what the implications were and many did not perform well. For December 2012, the requirement was to identify and explain SIX deficiencies and provide recommendations for 12 4

5 marks. The marks for this were allocated as follows; ½ a mark for identification of the deficiency, maximum of three marks, ½ a mark for explanation of the deficiency, maximum of three marks, and one mark per well explained control, maximum of six marks. Theoretical questions on evidence such as June 2011 on procedures for obtaining evidence, June 2012 financial statement assertions and December 2012 Question 1c on computer assisted audit techniques were generally well answered. However, even in these questions when this knowledge needs to be applied to a scenario, as in December 2012, or an account balance such as inventory in June 2012, then candidates seem to struggle. Question 5b from June 2012 required an explanation of going concern indicators. Candidates confidently identified relevant indicators but did struggle with an explanation of why these could impact on going concern with answers such as the company has been slow in paying its suppliers, this could indicate the company is not a going concern. Instead, the candidate should have explained that the company has been slow in paying its suppliers; this could result in suppliers refusing to supply Strawberry Kitchen designs with goods. 5

6 Interviewer: It s good to see that there are a number of areas where candidates are scoring well. Were there any areas where candidates did not perform well? Examiner: Unfortunately, there are a number of areas where candidates performance needs to improve. Audit risk is a core element of the audit and assurance syllabus. Since June 2010 every session, other than June 2012, has contained at least 10 marks on audit risk. Candidates are still making the same mistakes every sitting. This is unsatisfactory especially as I wrote an article in November 2011 on how to tackle audit risk questions. Candidates are able to identify the issue from the scenario which gives rise to the risk, this generally scores ½ a mark, but then fail to explain how this is a risk. For example in December 2011 the following risk was identified by a candidate standard costs are set when a product is first manufactured and are not usually updated. This is not an adequate answer to score the one mark available for the risk as it does not explain clearly the financial statement assertion impacted and the account balance affected. In addition the requirement to provide an AUDITOR response was inadequately addressed by many candidates as they give responses from management s perspective. For example in December 2011, in response 6

7 to the issue of the new IT manager not starting until after the year end a candidate responded with discuss with management why the IT manager will not start until January. This is not a valid auditor response as they would be concerned with the risk of increased errors in the system due to the lack of IT support. An example of a candidate answer for Question 3b December 2012 illustrates these points. This candidate was able to identify the issue from the scenario adequately; this would score ½ a mark. The response however was not adequate to score one mark as it does not address the approach that the auditor would take to gain sufficient evidence as to whether inventory is incorrectly valued. A better answer to this same issue is above. It clearly identified that the risk related to valuation of inventory was due to the valuation method adopted. The response also states how the auditor will audit the valuation risk; hence this answer obtained the two marks available. Interviewer: Are there any other areas where candidates didn t perform well? Examiner: Audit reports were tested in all four sessions and candidates performed unsatisfactorily on these questions in every sitting. 7

8 Candidates are unable to identify the correct audit report modification, frequently suggesting an emphasis of matter paragraph as if this is the solution for all audit report issues, and it is not. Candidates still take a scatter gun approach giving every audit report option available. Also the requirement to describe the impact on the opinion is often ignored when it has at least one mark per issue. Many candidates often confuse their answers stating the issue is not material, hence qualify the opinion. Audit reports are a core part of the syllabus and candidates should devote more time understanding and practicing this area. Here are some example responses from candidates. This first response from Question 5c December 2012 does not score any marks as the question asked for impact on the audit report if the issue remains unresolved. This answer focuses on what the impact would be if the issue was resolved and hence does not answer the question set. Also if the going concern problems no longer exist then an emphasis of matter paragraph would not be necessary anyway. In the second response the type of modification is wrong as it should be adverse rather than disclaimer, however the opinion would be that the 8

9 accounts are not true and fair and so the candidates answer, although confused, gains ½ a mark. The third response gains ½ a mark as it correctly identifies that the audit opinion would be modified. If it had gone on to say that the opinion should be adverse as the going concern basis is incorrect and the issue is material and pervasive then this answer would have gained two marks rather than just ½ a mark. Moving on, each session has tested substantive procedures and this is an area where candidates are still not giving the required level of detail. The requirement is normally to describe substantive procedures and therefore it should be assumed that it s one mark per well explained test. However, many are still providing inadequate answers such as ensure cut off is correct from December 2012 Question 4a(i). Candidates must be able to produce detailed tests for the key components of the statement of financial position and the profit or loss. In addition Question 4b in June 2012 and December 2012 required procedures for specific issues in the scenario; many candidates seemed to ignore the scenario entirely and gave a standard list of substantive tests. 9

10 For example in June 2012 candidates needed to focus on the depreciation method adopted and provide tailored tests. However, many just gave a list of standard Property Plant and Equipment tests. Example candidates answers from December 2012 illustrate the points made. This first procedure does not score any marks as the test relates to the assertion of rights and obligations. However the question scenario focused on the risk of completeness of payables and so this test is not relevant. The second procedure gains ½ a mark as it is focused correctly on cut-off; however the test itself is too vague to gain one mark. There is no detail as to what will be looked at, how the payables will be selected by Goods Received Note or invoice and what they will be agreed into such as the purchase ledger or accruals listing. Interviewer: Thanks for those examples. Where else would you say candidates did not perform as well? Examiner: Another core area of the syllabus is understanding the distinction between tests of controls and substantive procedures. It is unsatisfactory that many 10

11 candidates do not understand the difference between these two methods for obtaining evidence. This was evident in Question 1a June 2011 where candidates needed to give tests of control to test the sales cycle but frequently substantive procedures such as analytical review of sales and tests of detail were given. December 2011 Question 5 focused on subsequent events and it was answered inadequately by candidates. The first five marks related to responsibilities of the auditor with regards to subsequent events but many gave procedures rather than responsibilities. There was evidence that candidates had learnt standard phrases such as active duty or passive duty but could not explain what this meant. Candidates then needed to assess if three subsequent events required amendment and procedures to audit each event along with the audit report implications. Candidate answers were vague. Fraud and law and regulations responsibilities were tested in June 2012 Question 3a and December 2011 Question 1c. Candidates need to be clearer on what the AUDITORS and not just management s responsibilities are. 11

12 December 2011 Question 2a tested the knowledge area of internal control components and it was surprising how few candidates knew this textbook area. Interviewer: Thanks for that overview on the topic areas. What about candidates question approach and exam technique, are there areas for improvement here? Examiner: Yes, candidates can look to improve their results; here is a list of areas where they can focus their exam/question technique to maximise their chances of success. Read the question requirements carefully, this is so important as many candidates are failing to maximize their marks. I am sure that candidates have the knowledge but they must answer the question that is set and not the one they wish had come up. Many candidates look at the requirements, spot one of two key words and then provide an essay on this area. An example of this is June 2011 Question 3a where procedures for obtaining evidence relevant to the audit of purchases and expenses were required. A significant proportion of candidates did not read this properly 12

13 and so gave procedures for other balances such as inventory. These may well have been valid, well described procedures but they gained no marks as they were not what the question had required. Candidates must read the question requirements at least twice before they start to write. Many candidates spend time giving definitions even though they are not required. This wastes time. For example June 2011 Question 2a tested advantages and disadvantages of narrative notes and questionnaires but some candidates gave lengthy definitions of what these methods for documenting were. Candidates should only give definitions if they are specifically part of the question requirement. When a scenario is given it s so that candidates can apply their knowledge and gain the available application marks. However many candidates are not using the scenarios and so are missing out on marks. For example, December 2012 Question 4b(ii) had a scenario where the auditor had sent out receivables circularisations and some had not responded, others had differences. Candidates needed to use this information to generate substantive procedures to gain evidence for these two specific issues. However, many candidates ignored the information given and just provided general receivables tests. 13

14 Following on from this it was especially apparent in December 2012 that candidates had learnt generic tests and standard answers for topic areas, they made little effort to apply these answers to the scenario or question requirement. For example Question 1b inventory testing procedures DURING the count, candidates had learnt standard inventory tests and so listed these rather than tailoring their answer to just those procedures for the count itself. There is no harm in learning standard tests; however candidates must practice applying these to a scenario. Interviewer: Is there anything else you d like to add? Too few candidates are practicing questions prior to the exam. This is not solely a knowledge paper there are lots of application marks, and in order to gain these candidates MUST practice questions. Also past exams should be sat to time as answering five questions in three hours is challenging and so the more this is practiced the stronger the candidates performance will be. Candidates are reminded that they must clearly identify all requirement verbs. Different requirements need varying levels of detail, if the requirement is list, identify or state then the overall level of detail 14

15 required is significantly less than for describe, recommend or explain. The mark allocations will also be different, as a general rule the requirements like state, identify or list are normally only ½ a mark each whereas describe or explain is normally one mark. A requirement such as identify and explain or describe is normally one mark. Candidates should allocate their time based on 1.8 minutes per mark. Whilst the paper as a whole is not time pressured there is some evidence that candidates are spending too long on Questions 1 and 2 and this is to the detriment of later questions. Candidates should not spend more than 18 minutes on Question 2 as it s only worth 10 marks. In addition, candidates must write enough points for the mark allocation. For example December 2012 Question 4b was 15 marks for substantive procedures and so candidates should have aimed to produce as close to 15 procedures as possible. However, it was unsatisfactory that some candidates only wrote a handful of tests in total. In addition, questions can be attempted in any order. However, candidates are advised not to leave Question 1 until last. This question accounts for 30 marks, and if it is done last then it is often apparent that too little time was left for this. 15

16 If a specific number of points are required, such as in June 2011 Question 1a which asked for six tests, then candidates are advised not to waste time by providing more than the number requested. Many candidates were giving up to 8 10 tests which put them under time pressure elsewhere in the exam. Candidates should spend a few minutes thinking about the best way to present their answer. Whilst there are no general presentation marks available, a well presented answer does tend to score more marks. Using columns for linked requirements such as June 2012 Question 1a, means that no requirements are missed out. Also headings and subheadings can provide a clear structure. Candidates must make much more effort to present concise short paragraphs, there are those that tend to cover over half a page and little or no new points are actually made this wastes time. Whilst I appreciate that under exam pressure it s difficult to write neatly, candidates need to do more to write legibly. If it s not possible to read a candidate s handwriting then it s not possible to award marks. 16

17 Interviewer: After that detailed review of candidates performance over the last four exam sessions, are there key things that tuition providers can do to enhance candidates performance? Examiner: Yes, tuition providers have a key role to play in improving candidates performance in F8. After each exam a detailed examiners report is produced which explains the common mistakes made by candidates. However, sitting after sitting these same mistakes are made by significant numbers of candidates. If these are used more in class then candidates might be encouraged to actually read them prior to sitting the exam. Candidates must practice this skill if they wish to pass this exam. The more that this is done properly in class, the better prepared the candidates will be. Doing question plans in class can be beneficial, but it is the ability to write succinctly in relation to the question requirement that is key. Question plans can be used to help candidates correctly identify what the question requirement is and how the scenario can be used to provide an applied answer and to brainstorm how many points they need to make to pass a question. 17

18 Following on from the above point, reading candidates answers and giving them specific feedback on their understanding of the requirement and their layout will improve the quality of candidates answers. More time needs to be spent on testing candidates understanding of an area rather than just on rote learning. Particular areas to focus on would be audit risk, tailored substantive tests and audit reports. Tuition providers must ensure that they keep up to date with any changes to the study guide or examinable documents. The study guide has not been significantly changed for 2013, however there have been some minor changes which are detailed in a table at the end of the study guide. Also, whilst the examinable documents have not changed for 2013 some of the ISAs have been revised such as ISA 315 and so tuition providers must ensure that their technical knowledge and teaching materials are up to date. Interviewer: Thanks for that, now are there any plans to change the F8 exam going forward? Examiner: ACCA s exam year is changing to run from 1 September to 31 August. 18

19 There is a proposal to change the structure of the exam from December The proposal is to have three sections for the F8 exam. The first section would contain objective test questions to give wide syllabus coverage, then a section of short form questions and finally a section with long form questions. We are consulting on all proposed changes, after which we will produce a specimen paper. This will be available on our website when we finish the consultations. Keep watching the website for more information. Interviewer: Thank you very much. 19