Breaking down Audit risk drafting
Revenue risk, example from Summer 2023, CFAP 6
In every attempt, almost a two-third of students fail to surpass at least 50 marks in the CA-Final Auditing paper, CFAP 6.
Reason being?
Predominantly, the skill of drafting.
I have been teaching since 2012 and during these years, merely 15 percent who failed were due to lack of knowledge of standards. The rest were primarily due to drafting skills.
Let’s take an example of Audit Risk question, Asim Ghani & Company, Chartered Accountants (Q1) from Summer 2023 paper of CFAP 6.
The requirement says ‘discuss the Audit Risks’. And its a full-blown 20 marks question with different bullets. But when it says ‘discuss the audit risks’, you never content yourself with just the discussion on audit risk, you always go beyond and make logical connections in your answer structure.
The drafting structure that I use with my students to write a single Audit risk comprise three elements:
Risk factors.
Risks.
‘May’ language.
Here are a few extracts from the same questions. Lets break down drafting audit risk.
Seemingly, there are two risks. Revenue and forex.
Taking up the revenue risk, a typical answer of student to this question is:
‘There is a risk that revenue is not correctly/ appropriately recorded since the entity has provided multiple services bundled into one contract price’, or
‘The entity is providing multiple services in a project and this implies that revenue is not correctly allocated.’
Before you go head, I will give you a moment to identify whats wrong in the above drafted risks. Please apply your mind first before you read further.
In my view, the answers collectively had four issues; what I call:
the issue of assumption (jumping to conclusions)
the issue of specificity,
may language,
deficient connection.
In answer 1, the student presumes project price bundled into one, if you notice, its not stated therein. In both answers, the student does not specifically mention the services involved. In addition, one cannot find a connection between incorrect revenue recognition and bundled services. As in, how is a bundled service leading to inappropriate revenue risk? Also, the issue of ‘may language’ in answer 2, specifically.
Lets use our drafting structure to fix this.
Risk factor: The entity earns revenue from projects with multiple services. There is subjectivity/ multiple judgments involved e.g. determining separate performance obligations and allocating price of the sale of software, updates, and other related services.
Risk: There is a risk that the revenue may not be correctly allocated and recorded.
Clearly, you can see the issues addressed.
Assumptions averted. Be always careful with your words used, as in, what they might imply.
Connection established. The mention of subjectivity or judgment.
Specificity addressed. It answers to what judgment, and which services.
May-language adopted.
Usually, I ask my students to use the above format to practice separating Risks and Risk factors for a single point so that both are given the due respect.
Now you may also choose to write it together.
The entity earns revenue from projects containing multiple services. There is subjectivity/ multiple judgments involved e.g. determining separate performance obligations and allocating price of the sale of software, updates, and other related services. Hence, there is a risk that the revenue may not be correctly allocated and recorded.
Now, one last point before we conclude.
What is the different between ‘the risk that revenue may not be recorded and ‘the risk that revenue is not recorded’.
Both are correct and use the language of possibility and not actuality. But they both depict a different level of suspicion in the writer’s mind. I asked GPT-4, and this is what I received.
Fabulous 😍