AA Walkthrough: Planning Materiality and Significant Audit Risks

ExpertMinds Editorial·3 June 2026·10 min read

A structured worked example of an ACCA AA audit planning question — calculating planning materiality, identifying significant risks from financial data, and proposing audit responses.

Audit planning questions are a staple of AA Section C and routinely offer 15–20 marks. The examiner reports three consistent weaknesses: candidates use vague risk descriptions that are not specific to the scenario, propose procedures that are too general ("check invoices"), and omit the linkage between the risk identified and the assertion it threatens. This walkthrough demonstrates the required structure.

Key fact:AA marking scheme for risk questions: typically 1 mark for identifying/explaining the risk + 1 mark for the specific audit response. Generic responses score 0. Always name the assertion threatened and the specific procedure.

You are auditing Marlow Co for the year ended 31 March 20X4. Revenue: $42.4m (20X3: $35.1m). Gross profit margin: 38% (20X3: 44%). Inventory: $6.8m (20X3: $4.1m). Trade receivables: $8.9m (20X3: $5.2m). The directors have recorded $1.2m of development costs as an intangible asset. The company secured a major new contract in January 20X4 worth $12m over 3 years; revenue of $2.4m has been recognised in the current year. (a) Calculate planning materiality and justify your benchmark. (b) Identify and explain three significant audit risks arising from the financial information above. For each risk, state the assertion threatened and one specific audit procedure.

[18 marks]

Part (a) — Planning Materiality

Choose a benchmark and apply a percentage

Common benchmarks: Revenue (0.5–1%), Gross profit (1–2%), Total assets (1–2%), Profit before tax (5–10%). Marlow Co is a trading company with significant revenue growth — revenue is a stable benchmark. Planning materiality = 1% × $42.4m = $424,000. Alternative: if PBT is provided, use 5% × PBT. Always justify: "Revenue is appropriate because it is a stable metric for a trading entity. PBT is volatile due to the margin decline and may not represent normal performance."

Tip:Examiner tip on materiality: you will not lose marks for choosing a different benchmark IF you justify it. Never apply a benchmark without explaining why it is appropriate. The justification earns as many marks as the number.

Part (b) — Three Significant Audit Risks

Risk 1: Revenue recognition on long-term contract (IFRS 15)

Risk: Marlow Co has recognised $2.4m on a $12m three-year contract commencing January 20X4. IFRS 15 requires identification of performance obligations and recognition as obligations are satisfied. There is a risk that revenue has been recognised too early (over-statement) or that the stage of completion is based on management estimates that cannot be independently verified. Assertion: Occurrence / Accuracy. Procedure: Obtain and review the contract; inspect management's calculation of the stage of completion; compare progress invoiced to work certified by the customer.

Risk 2: Gross profit margin decline (from 44% to 38%)

Risk: The gross profit margin has fallen by 6 percentage points despite a 21% increase in revenue. This may indicate unrecorded liabilities (cost cut-off error), overstatement of inventory, incorrect cost classification, or genuine pricing pressure. The risk of material misstatement in cost of sales or closing inventory is elevated. Assertion: Accuracy / Valuation (inventory), Completeness (cost of sales). Procedure: Perform analytical procedures — recalculate expected cost of sales at the prior year margin and investigate the variance; attend the year-end inventory count and test the costing of a sample of inventory lines.

Risk 3: Development costs capitalisation (IAS 38)

Risk: $1.2m of development costs have been capitalised as an intangible asset. IAS 38 requires all six development criteria to be met (technical feasibility, intention to complete, ability to use/sell, probable future economic benefits, adequate resources, ability to measure expenditure reliably). Failure to meet any criterion requires expensing. Management has an incentive to capitalise to boost reported profit. Assertion: Existence / Valuation. Procedure: Obtain management's assessment of the six IAS 38 criteria; review supporting evidence (feasibility studies, market assessments, cash flow projections for the product); confirm that costs capitalised meet the definition and do not include research-phase costs.

Watch out:Common AA mistake: writing "there is a risk revenue may be misstated" without connecting it to a scenario-specific fact. Every risk sentence should start with "Because [specific fact from the scenario], there is a risk that [assertion] is [over/understated]." Generic risk descriptions earn 0 marks.

Practise AA audit risk questions

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