Qualification Programme Examination Panelists’ Report
Module C – Business Assurance
(June 2018 Session)
(The main purpose of the following report is to summarise candidates’ common weaknesses
and make recommendations to help future candidates improve their performance in the
examination.)
(I) Section A – Case Questions
General Comments
The case background was related to a company founded in Hong Kong focused on
the manufacturing and trading of health supplements. Through this hypothetical case
background, the section aimed to test the candidates’ ability to apply their auditing
knowledge.
Certain specific audit areas were tested which included identification of control
activities, risk assessments, audit procedures on sales commission, subsequent
event review and engagement acceptability. Candidates achieved fair results in this
section as some candidates did not perform well regarding risk assessments and
some failed to propose relevant audit procedures by analyzing carefully the case
facts.
Specific Comments
Question 1(a) – 4 marks
The question required the candidates to identify the control activities in place
relating to revenue recognition. Many candidates performed well in this question
and were able to achieve full marks as all answers could be easily identified from
the case facts.
Question 1(b) – 6 marks
The question required the candidates to analyse and explain the risks of material
misstatements in relation to distributor sales and consignment sales based on the
facts and circumstances as stated in the case.
The performance of the candidates was fair. Most of the candidates were able to
identify and explain the cut-off issue of the distributor sales and consignment sales.
Some candidates were able to identify and explain the potential human error risk of
distributor sales and consignment sales. However, many candidates were not able
to pick up the unusual increasing trend of the consignment sales which may have
implied a potential risk of occurrence. Some candidates failed to analyse the risks
using the case facts.
Module C (June 2018 Session) Page 1 of 6
Question 2(a) – 4 marks
The question required the candidates to evaluate the risks of material
misstatements of sales commission in terms of accuracy assertion.
The performance of the candidates was fair. Some candidates did not read the
question requirements carefully and their risk analysis focused on completeness
and cut-off instead of accuracy. Many candidates failed to identify that the sales
commission to retail sales ratio increased a lot during the period. Some candidates
gave the wrong conclusion with regard to the evaluation of the risks of material
misstatements.
Question 2(b) – 6 marks
The question required the candidates to propose relevant audit procedures in
response to the risk of material misstatements in relation to sales commission.
The performance of the candidates was not satisfactory. Quite a lot of the
candidates failed to propose control tests of the POS system. Some candidates
were able to point to the control tests of the POS system but failed to propose
specific tests in terms of both IT general controls and application controls.
Question 3(a) – 6 marks
The question required the candidates to analyse and explain the risks of material
misstatements in the financial statements regarding the product recall.
The performance of the candidates was not satisfactory in general. Most of the
candidates were only able to explain one or two risks in terms of overstatements of
inventories and revenue, potential litigation and claims from the customers, or
disclosure sufficiency in the financial statements. Some candidates provided
irrelevant answers.
Question 3(b) – 6 marks
The question required the candidates to propose relevant audit procedures in
response to the risk of material misstatements identified in Question 3(a).
Most of the candidates did not perform well in this question. As some candidates
had failed to identify the risks of material misstatements in Question 3(a)
appropriately, they were not able to propose relevant audit procedures in tackling
this question. Some candidates only proposed general audit procedures relating to
a subsequent event review but failed to suggest relevant audit procedures by
applying the case facts.
Module C (June 2018 Session) Page 2 of 6
Question 3(c)(i) – 3 marks
The question required the candidates to determine and explain the obligation of an
auditor to follow up on a subsequent event which occurred on the date the
auditor’s report but before the issuance of the financial statements and assess the
relevant impact on the financial statements.
The performance of the candidates was fair. Some candidates failed to explain the
auditor’s obligation and propose relevant audit procedures. Instead, these
candidates jumped quickly to the conclusion of issuing a modified audit opinion.
Question 3(c)(ii) – 3 marks
The question required the candidates to determine and explain the obligation of an
auditor to follow up on a subsequent event that occurred after the issuance of the
auditor’s report and the financial statements and assess the relevant impact on the
financial statements.
The performance of the candidates was fair. Most of the candidates were able to
explain that the auditor had no obligation to perform additional audit procedures on
a subsequent event that happened after the issuance of the auditor’s report and the
financial statements. However, they failed to explain further regarding the possible
impact on the financial statements and so some marks were lost.
Question 4(a) – 9 marks
The question required the candidates to advise and explain whether ABC & Co
could provide the described (i) recruitment service and (ii) process and control
review service and provide relevant safeguards if required.
The performance of the candidates was not satisfactory. Many candidates spent
time explaining the restricted internal audit activities of an auditor but failed to
propose the relevant safeguards for providing the services. Some candidates failed
to comment on the engagement acceptability of the recruitment service.
Question 4(b) – 3 marks
The question required the candidates to advise and explain whether ABC & Co
could provide the described accounting service and provide relevant safeguards if
required.
Many candidates performed well in this question. They were able to suggest
relevant safeguards for providing the service.
Module C (June 2018 Session) Page 3 of 6
(II) Section B – Essay/Short Questions
General Comments
More applications of auditing standards were tested in this paper in relation to setting
materiality for the purpose of an audit, situations where related parties are involved,
and group audits. Technical knowledge of the new auditor’s reporting was also
tested in this section.
Specific Comments
Question 5(a) – 3 marks
The question required the candidates to identify the primary financial statements
users and the elements in the financial statements that they would focus upon.
This question was straightforward and the candidates performed satisfactorily.
Question 5(b) – 3 marks
The question required the candidates to list factors that may be considered when
determining the materiality level for the purpose of an audit.
Candidates performed well as this question was simple and straightforward and the
answers could be easily referenced from the Learning Pack.
Question 5(c) – 3 marks
The question required the candidates to consider if they could take the average of
the three years of financial information to determine materiality.
Candidates did not perform well because they could not provide the correct answer
with valid justifications. It appeared candidates did not understand the underlying
principle to be able to make an appropriate judgement.
Question 5(d) – 3 marks
The question required the candidates to consider whether they should take the profit
for the year from the continuing operation or discontinued operation to determine
materiality.
Candidates did not perform well because they could not provide correct answers
with valid justifications. Some candidates spent time to discuss what needs to be
considered when determining materiality instead of answering the question directly.
Module C (June 2018 Session) Page 4 of 6
Question 6(a) – 3 marks
The question required the candidates to identify related party transactions and
balances from the case.
Candidates performed well in this question as the related party transactions and
balances could be easily identified from the case facts. However, some candidates
were not able to assess the audit risks.
Question 6(b) – 5 marks
The question required the candidates to recommend management controls over
related party relationships and transactions.
Candidates did not perform well because their answers were too generic which did
not provide specific controls to address the risks. Many candidates did not consider
carefully and they wrongly suggested Mr Fong should approve the related party
transactions instead of being approved by unrelated personnel in the company
(e.g. executives from the financial department).
Question 6(c) – 6 marks
The question required the candidates to propose procedures to audit a loan to a
related party.
Candidates performed fairly. Most of the candidates were able to demonstrate their
fundamental knowledge when proposing the audit procedures on short term loans
advanced to a related party. However, higher marks were awarded to candidates
who could provide sufficient procedures.
Question 7(a) – 9 marks
The question required the candidates to propose group engagement team’s
procedures in a situation where the component auditor reported an exception.
The performance was not satisfactory in this question. Candidates did not
specifically propose procedures to address the situation. Some candidates misread
the question requirement and provided incorrect answers which discussed the
involvement of a group auditor in the planning stage. In general, candidates’
knowledge of performing a group audit was weak.
Module C (June 2018 Session) Page 5 of 6
Question 7(b) – 5 marks
The question required the candidates to advise as to the responsibilities of the group
auditors regarding the communication to those charged with governance.
In general the candidates answered this question well as most of the answers could
be located in the Learning Pack. However, some candidates did not score a
satisfactory mark perhaps because they were not familiar with this topic and they
pulled answers from their textbooks or the Learning Pack which were not relevant to
the question requirement.
Question 8(a) – 5 marks
The question required the candidates to advise the audit committee’s follow up
action to address the key audit matter reported by the auditor.
Candidates did not perform well as this was related to one of their weak areas with
respect to corporate governance. Some candidates did not read the question
requirement carefully and wrongly focused on discussing the auditor’s work on the
goodwill impairment assessment. Some candidates did not attempt this question
which also indicated that candidates in general have insufficient knowledge of this
area.
Question 8(b) – 5 marks
The question required the candidates to describe how to determine a matter as a
key audit matter and describe the contents required in an auditor’s report.
The question was straightforward. Candidates performed fairly if they were aware
of the new auditor’s reporting. However, some candidates were not familiar with this
new topic and scored low marks.
(III) Conclusion and Recommendation
The overall result of the candidates was considered to be fair.
Many candidates still showed that they were fairly weak on the identification of the
risks of material misstatements using the case facts and circumstances and the
application of the auditing principles on certain specific areas. This indicated the
candidates’ lack of practical experience and insufficient knowledge in dealing with
certain new or specific audit areas. It is recommended that candidates enhance their
application of the auditing standards by practising on more cases.
Module C (June 2018 Session) Page 6 of 6
