June 2013 examination seriesIIA Advanced Diploma and

IIA IT Auditing Certificate chief examiner report

IIA ADVANCED DIPLOMA

IIA IT AUDITING CERTIFICATE

JUNE 2013 EXAMS

REPORT FROM THE SENIOR CHIEF EXAMINER

Theresults for all IIA Advanced Diploma papers produced an average pass rate of79.9%, compared with the 70.5% in November 2012and 70.4% inJune 2012.

Results

The percentage pass rates for each paper, to the nearest decimal point, for UK and Ireland IIA Advanced Diploma students in the June 2013 examinations are summarised below:

June 2013

Module / All candidates
M1 Strategic Management / 81.8
M2 Financial Management / 71.7
M3 Risk assurance and Audit Management / 85.0
M4 Advanced Internal Auditing Case Study / 81.1
Last three series
Module / June 2013 / Nov 2012 / June 2012
M1 Strategic Management / 81.8 / 58.7 / 59.7
M2 Financial Management / 71.7 / 65.7 / 60.3
M3 Risk assurance and Audit Management / 85.0 / 79.0 / 76.3
M4 Advanced Internal Auditing Case Study / 81.1 / 80.9 / 82.6
Paper comments

M1 Strategic Management

The pass rate of 81.8% achieved by the 77candidates who sat the paper was considerablyhigher than that achieved in November 2012, and is the highest we have seen to date. We have examined a wide selection of the marking and are content that the higher than ‘normal’ pass rate is justified.One candidate achieved a distinction and 28 candidates achieved merits. Only one candidate scored fewer than 39 marks.

Question 1 was the compulsory scenario question and few candidates scored very highly. Although students’ points to define and differentiate between corporate and business strategies were not very perceptive, there were sufficient to secure adequate marks. Whilst candidates covered the basics, many did not develop their points and there was a tendency for repetition rather than providingrounded, effective answers. For example when part of the question asked for descriptions of the typical processes to aggregate and monitor therisks, phrases which appear in the M1 syllabus, manycandidates instead discussedat lengthvarious ways to mitigate risks that they had identified, thereby not meeting the requirement of the question.

Generally,most candidatesperformed sufficiently well, wereableto demonstrate sufficient understanding, and could meet theoverall requirements of the questions.

A significant proportion of the candidates attempting the optional Question 2about performance measurement scored well, producing a healthy pass rate. This proved to be the second most popular optional question. However a number of candidates mixed up all question parts into combined paragraphs covering tools, benefits and key performance indicators. This occasionally made it difficult to unpick individual points made and to score them.

The weakest answers tended to produce few or no points with no real description of the reasons why they were made.

Question 3, about ethics proved to be the most popular of the optional questions. Overall we were pleased that this also proved to be well answered, with several candidates obtaining full marks. The majority of candidates demonstrated a good understanding of the objectives and importance of ethics and how sound ethical practices and behaviours are key to strategy. They made useful reference to brand leadership through ethics, benefits such as a more positive media portrayal, and assisting the company through ensuring high levels of employee and corporate compliance. The contents of an ethical training programme was well constructed and a large range of options proposed. Embedding ethical training was less well answered however. Higher marks were achieved by candidates who were able to outline short and longer term objectiveseffectively.

Question 4,required candidates to demonstrate their understanding of three strategic options that were presented within the question context. This proved to be the least popular optional question and resulted in the lowest mean mark. In terms of providing a recommendation there was no right answer and candidates were expected to provide their reason, based on the advantages and disadvantages - and marks would have been gained accordingly. Having made a recommendation candidates then had to consider its impact. This part of the question was not answered well by many candidates. Candidates who gained marks considered their recommendation, the next steps for implementation, and its consequent impact.

Question 5was about strategy and strategic change, and was deliberately drafted in a more academic style than the other optional questions on the paper. It was attempted by 68% of the candidates and while the majority provided an adequate answer to the question whilst there were very few good or excellent answers there were also only a few poor answers. This clearly shows that candidates had prepared well on this syllabus area.

M2 Financial Management

Out of the 53 candidates who sat this paper, 38 were successful. This represents a pass rate for the series of 71.7%,a very good result overall and in line with the historic trends on this paper. There were some excellent scripts, enabling three candidates to achieve a distinction and a further eleven to gain a merit.

The spread of marks on each question was acceptable, including for question 4 which was the least popular question by far but returned a reasonable average mark.

Question 1, the compulsory 40 mark question on the paper, proved to be challenging for candidates. It covered capital investment appraisal and risk; and many students provided well thought out and knowledgeable answers.

In part a,candidates showed a good appreciation of capital investment appraisal butsome found it more challenging to equate how capital expenditure appraisal added value. Many candidates, though, were more reticent in directly addressing the idea of value added.

In part b there were some good answers, correct and well presented. However, even where answers were incorrectly calculatedthose candidates who provided clear and full workings received appropriate credit, because this was not a test of arithmetic.

The assessment requested in the final part of the question was generally answered well. Few answers considered more general economic risks in depth. Although this was beyond the terms of the question, a few answers related the argument to the scenario and were rewarded.

Question 2was well answered and scripts showed a good understanding of the budget setting process and the factors that impact on budgets.

In part (a), by analysing the budget for quarter 1, most candidates identified general performance issues on andcorrectly identified shortfalls in income and overspending on certain budget heads. However, the analysis often lacked precision and some answers did not provide detail of the numerical value of variances. Better answers highlighted favourable and adverse variances as a percentage of figures in the budget. Candidates should use appropriate accounting terminology e.g. variances when answering examination questions.

Answers relating to risks and challenges in the budget setting process were often good. Candidates’ offerings could have been enhanced by considering a wider range of risks and challenges and by linking the discussion to risks revealed by the budget analysis as a means of illustration.

In part b the potential impact of external factors on the budget was well assessed by many candidates. A good knowledge of appropriate external factors was shown. The link between the training department’s budget and the new unit’s business plan was not as well explained however.

Question 3about wasrelatively straightforward and most candidates performed well in response.After good arguments for and againstthe use of quantitative performance measurement as a means of management control in part a, in part b some answerslacked the necessary depth, breadth and quality e.g. focusing very narrowly on typical financial accounting performance measures, and largely ignoring other critical areas of performance, provided by the stronger candidates who covered the necessary range and breadth needed. On balance, most candidates showed the expected level of knowledge and understanding.

Question 4tested the syllabus area of value. It sought knowledge of accounting and corporate finance and the relationship between the two areas. Approximately half the candidates attempted this question. Those who performed well understood key corporate finance concepts and were able to apply these to the company scenario.

Whilst candidates were generally able to explain the concept of business value many struggled to apply their knowledge to the particular circumstances presented in the question.

Partbasked candidates to explain how conventional accounting methods could be inconsistent with value measurement. The relatively poor standard of answers suggests that this was not a part of the syllabus particularly well understood, similarly in part c, the concept of value drivers was not well explained, again indicating a general lack of knowledge of the syllabus in this area.

Question 5about benchmarkingwas popular and mostly well answered with a high proportion of the candidates who opted for this question achieving at least half marks. Most candidates were able to identify ways in which benchmarking could benefit the organisation and applied this to the scenario given. The majority of candidates were able to identify a number of different types of benchmarking. Answers that scored more highly included analysis and linkage with strategic objectives and strategic benchmarking and the significance and availability of reliable data when comparing with other companies in their sector. Candidates were also able to identify a number of factors that need to be considered when undertaking the benchmarking process.

M3 Risk Assurance and Audit Management

Following moderation, 77 candidates sat the paperand achieved an 85.7% pass rate – this was an increase from the 79% in November 2012 and9candidates achieved Distinctions.

The 85.7% pass rate was due to strong answers to questions 1, 2 and 5.

Question 1 proved challenging for students with a 59% pass rate among 77 candidate attempts. Generally all three parts were well answered. The higher scoring candidates demonstrated more depth in their answers, which is necessary at this level of examination.Additional credit was awarded to those candidates who fully explained the reasons for the statements they expressed.

A significant number of candidates missed the opportunity of scoring marks by omitting to state that the role of internal audit was to provide independent assurance to the trust board. A number of scripts made reference to the role of the health care regulator in their answers but only provided bland or general statements such as providing assurance on compliance by the trust of national standards. The better scripts expanded on this point by stating that the role of a regulator is to act in the public interest.

Overall Question 2 was well answered by the 59 who attempted it with candidates demonstrating a sound understanding of factors influencing successful and failing businesses. Many answers used relevant examples of organisations to illustrate points made in the discussion. High quality answers used a range of topical organisations as illustration.

Part b was less well answered. Although some good general points were made about how internal audit can assist organisations, answers were insufficiently focused on financial services organisations. Answers could have been enhanced by further references such as the recent CIIA guidance on the role of internal audit to help prevent a repeat of the banking crisis. There was also little evaluation of internal audit’s role, for example the need for strengthening of best practice and how internal auditing standards are interpreted and applied in banks.

Question 3asked candidates to describe the full value of what an Internal Audit service can provide. This was well answered by the 76 candidates who identified the key areas where a co-source partner can assist, andcandidates provided many good examples. Answers invariably included an understanding that Internal Audit must have a structured methodology applied consistently. Marks were achieved for demonstrating that a methodology in place that provides guidance to the auditors allows them to develop their professional knowledge and expertise. Candidates scored well when observing that this also lends itself to high quality work, respected by management and upon which reliance can be placed by external audit.

Question 4 was not a popular question possibly because it was a relatively untested area of the syllabus and on a specific topic: the broader dimensions of risk management and its overall framework. Nevertheless, overall the standard of answers was very high.

Question 5attracted 57 candidates who achieved a 78% pass rate. Less than 10% of the scripts were really poor. The question was about the role of internal audit and the potential conflict of interest when an auditor is asked to investigate an allegation concerning a management unit where the auditor had previously worked and exercised some management responsibility designing controls.

M4 Advanced Internal Auditing Case Study

The June 2013 Case Study focused on local government, more specifically a London-based borough council. The pass rate for the paper was 81.1% compared with 80.9% in November 2013 and generally on a similar level to previous sittings of the paper. The rate confirms that the performance of candidates on this paper continues to be strong. Ten out of 53 candidates failed the exam, and no candidate scored below 37 marks.

Question 1a focused on the in-house internal audit function of the Borough Council, requiring candidates to assess the independence and objectivity of its internal audit organisation and the audit personnel. This was generally poorly answered and many candidates failed to define or discuss independence and objectivity issues to an adequate level. Part bthen asked for a training package for new entrants to internal audit, referencing training needs that were evident from the case study. This provided many stronger answers even though it was allocated only 7 of the 25 marks available.

Question 2 explored the topical theme of expenditure cuts. Part a asked candidates to evaluate the risks of cutting adult social care projects from a list provided, and to suggest an approach to prioritising those to be cut. The key to a successful answer was to identify the projects and provide a methodology to evaluate risk. Part b sought an understanding from the candidates of the importance of internal audit as an assurance provider in times of austerity and uncertainty. This was generally well answered.

Question 3 related to the internal audit department’s annual plan; candidates answered it well and the mean mark was significantly higher than that achieved in the other three questions. Part asought an analysis why progress was so far behind plan. The key to scoring well was to focus on internal work practices and staffing, and the management of relationships with stakeholders. Part b was closely linked, and required a discussion on the ways the recurrence could be avoided. Again,it was well answered although some candidates failed adequately to explain the points they had raised andothers provided excessively long answers that failed to correspond with the marks available.

Question 4a looked for candidates to point out the risks if the annual ‘health-check’ audit of the council’s financial accounting systems were not carried out. On the whole answers were poor with some candidates failing to show their understanding of risk,instead listing control weaknesses, and others set out a proposed scope for the audit not what was asked for. Part b was to enable candidates to detail expected controls for data security and data protection at the council, or to assess controls referenced in the Case Study. Candidates received credit for either approach.

Common issues with all papers

The issues I raise here are common to all papers and have been common to all sittings of the Advanced Diploma examinations. The major issues such as:

  • Time apportionment between questions in relation to marks achieved;
  • Answering the question that was asked rather than that which the candidate would like to have been asked;
  • Excessive introductions and other descriptive passages that add nothing to the marks;
  • Repetition of the question; and
  • Absence of answer plans

alwaysoccur and always will occur, because each cohort of candidates has a substantial number of individuals who are new to the professional examination experience. The tuition providers are, I am sure, aware of this, but in the examination room it is up to each individual candidate to be aware and to deliver, just as it is up to competent auditors to be aware not only of the risks in the system, but also of the pitfalls to be avoided by the auditor during each engagement.

One issue that also comes up often at Advanced Diploma is insufficient attention paid to the context of the question asked – resulting in generic answers and generalities. The Advanced Diploma is a prerequisite for the achievement of Chartered Membership of the Institute. The tests that we set for the Advanced Diploma are designed to give candidates the opportunity to show that they can audit anything, and are meant to be challenging – as should be the professional approach of the auditor. The examination question presents a situation and asks the candidate what they would do about it.