THE INSTITUTE OF CHARTERED ACCOUNTANTS
OF NIGERIA
NOVEMBER 2014 PROFESSIONAL EXAMINATION
Question Papers
Suggested Solutions
Plus
Examiners’ Reports
PROFESSIONAL EXAMINATION – NOVEMBER 2014
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION - NOVEMBER 2014
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3 hours
SECTION A:
COMPULSORY QUESTION
(30 Marks)
QUESTION 1
Wasp Ltd
You are an audit manager in Ruby & Co, a firm of Chartered Accountants. One of your
audit clients Wasp Ltd. provides satellite broadcasting services in a rapidly growing
market.
In February 2014 Wasp Ltd purchased Xstatic Ltd, a competitor group of companies.
Significant revenue, cost and capital expenditure synergies are expected as the
operations of Wasp Ltd and Xstatic Ltd. are being combined into one group of
companies.
The following financial and operating information consolidates the results of the
enlarged Wasp Ltd. group:
Year-end 31 December
2014
2013
(Budget)
(Actual)
₦’m
₦’m
Revenue
6,827
4,404
Cost of sales
(3,109)
(1,991)
Distribution costs and administrative expenses
(2,866)
(1,700)
Research and development costs
(25)
(22)
Depreciation and amortization
(927)
(661)
(266)
(202)
Loss before tax
(366)
(172)
Number of subscribers
14.9m
7.6m
Average revenue per subscribers (ARPS)
₦437
₦556
Interest expense
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In November 2014 Wasp Ltd. purchased MTbox Ltd. a large cable
communications provider in Gambia, where your firm has no representation. The
financial statements of MTbox Ltd. for the year ending 31 December 2014 will
continue to be audited by a local firm of Chartered Accountants. MTbox Ltd’s
activities have not been reflected in the above estimated results of the group.
Wasp Ltd. is committed to introducing its corporate image into Gambia.
In order to sustain growth, significant costs are expected to be incurred as
operations are expanded, networks upgraded and new products and services
introduced.
Required:
a.
Identify and describe the principal business risks for the Wasp group.
(9 Marks)
b.
Explain what effect the acquisitions will have on the planning of Ruby &
Co’s audit of the budgeted consolidated financial statements of Wasp Ltd.
group for the year ending 31 December 2014.
(10 Marks)
c.
Explain the role of a Letter of Comfort as an evidence in the audit of
financial statements.
(6 Marks)
d.
Discuss how non-consolidated entities under common control affect the
scope of an audit and the audit work undertaken.
(5 Marks)
(Total 30 Marks)
SECTION B:
ATTEMPT ANY TWO OUT OF THREE QUESTIONS
(40 Marks)
QUESTION 2
SMP Accountants
You have just joined the partnership of a small firm of Chartered Accountants SMP
Accountants & Partners and have been asked to prepare a communication brief for
distribution to all staff which will then be followed by a presentation with a question
and answer session. The communication brief required is regarding quality control
procedures and audit working papers.
ISA 220 requires quality control procedures to be implemented at the engagement
level and ISQC 1 requires them to be implemented at the level of the audit firm. The
partners are concerned that the firm’s quality control procedures may not be
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satisfactory as they have never been reviewed since they were first implemented five
years ago. In addition, staff are able to read the policies and procedures in the staff
manual. There are currently no other ways in which the information is communicated
to them.
Required:
a.
b.
Prepare a communication brief for distribution to all staff which sets out:
i.
why quality control policies and procedures are necessary
ii.
the areas that should be covered by quality control policies
iii.
procedures that would be required to ensure that the policies are met.
(12 Marks)
Answer the following queries which were asked at the question and answer
session.
i.
What is the difference between a hot review and a cold review and why are
both necessary?
ii.
Why is it so important that all audit reasons and justifications are
documented in the working papers when it should be obvious from test
results what the key issues are?
iii.
Why do audit working papers have to be standardised since this inhibits
auditors exercising their skills and experience in the most effective way?
(8 Marks)
(Total 20 Marks)
QUESTION 3
Woes Limited
You are responsible for the audit of Woes Limited for the year-ended 31 December
2013. The principal activity of Woes Ltd is the provision of high quality packaging
services for manufacturing companies. The company was established 3 years ago and
has significantly exceeded its growth targets in each of those years.
Historically, the packaging process was labour intensive but in September 2013, in an
effort to reduce labour costs and increase efficiency, the company invested in an
enhanced automated packing system. The investment was funded by a loan
repayable in monthly instalments over four years. The loan covenant agreement
includes a term specifying that the company’s debt: equity ratio should not exceed 1:1.
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A comparison of the draft accounts for the year ended 31 December 2013 with the
previous year indicates a significant increase in revenue with a small increase in
profit. The company is currently trading in excess of its overdraft limit and is
negotiating an increase in its facility with the bank. Management has prepared, in
support of its negotiations, profit and cash flow forecasts based on the assumptions
that the anticipated increase in efficiency including reduction in labour costs will be
achieved.
The company struggles to meet the weekly wage bill and has fallen behind in its
payments to the tax authorities. It has also failed to comply with the terms of the lease
in respect of the factory premises and has not paid the last 3 months’ instalments.
Required:
a.
Identify and explain, from the information provided above, factors which indicate
that Woes Ltd may not be a going concern.
(10 Marks)
b.
Outline the matters to which you would direct your attention in the period after
the reporting date in order to determine whether Woes Ltd can continue as a
going concern for the foreseeable future.
(10 Marks)
(Total 20 Marks)
QUESTION 4
The Cinnamon Group
The Cinnamon Group is an international business, made up of ten subsidiaries and a
head office. You are the manager in charge at the firm undertaking the group audit,
but there are separate local auditors for the Cayenne subsidiary in the United States,
the Habenaro subsidiary in Mexico and the Hybrid subsidiary in Columbia. You are
aware of the following information:
(i)
Hybrid is a loss-making subsidiary, with losses at the current year end totalling
₦27 million. There are significant control problems, high level of bad debts and
25% staff turnover. The local auditors have already stated their intention to give
a qualified opinion for the year just ended because of the material issues found.
(ii)
Cayenne is operating to a different financial year to that of the group as a
whole, being October 2013 rather than December 2013.
(iii)
Shortly after the year end, in January 2014, the Cinnamon Group announced the
sale of Habenaro for ₦250 million and this disposal is currently on-going.
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(iv)
The Cinnamon Group is guaranteeing loans of approximately ₦100 million for
its subsidiaries.
Required:
a.
Set out how you would plan and control the group audit of the Cinnamon
Group.
(5 Marks)
b.
Consider the impact of each of the above issues on the group audit.
(10 Marks)
c.
Explain the nature of the relationship between your firm and the auditors
of the subsidiaries, making particular reference to the extent to which
your firm may rely on the component auditors’ work and to the
considerations involved where joint audits are conducted.
(5 Marks)
(Total 20 Marks)
SECTION C:
ATTEMPT ANY TWO OUT OF THREE QUESTIONS
(30 Marks)
QUESTION 5
Green issues
Oil and Gas Limited is a company involved in the upstream petroleum activities in the
Delta Region. The restiveness of the youth in this area of operation was a result of
environmental degradation of the region. Your firm has just been appointed as the
auditors to the company. During preliminary planning stage of the audit, you realised
that the environmental issues could have impact on the financial statements.
Required:
a.
Enumerate EIGHT steps you would include in the audit process in order to
highlight environmental issues that may be apparent in the client’s business.
(8 Marks)
b.
Identify SEVEN major social issues that an auditor will be concerned with in a
company’s social policy report.
(7 Marks)
(Total 15 Marks)
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QUESTION 6
Lagos Leisure Ltd.
You are the senior audit manager for a medium sized firm of accountants. Your firm
has just lost two clients which have gone into receivership and has now been invited
to tender for the audit of Lagos Leisure Ltd. The audit fees have been initially
estimated at ₦200,000.
Lagos Leisure Ltd is a medium sized manufacturing organisation which has existed for
35 years and has generally made consistent profits. However, in the last two years,
profits have fallen by approximately 10% in each year, although the market sector in
which Lagos Leisure Ltd operates is expanding. The company has also stated that they
would like some consultancy support regarding business strategy in order to try and
reverse the current profit downturn, and have set aside ₦1m for this.
You have ascertained the following from a brief discussion with the Managing
Director:
(i)
There has been no investment in non-current assets in the last 10 years. The
company was intending to start a program of investment two years ago but this
was cancelled due to the reduced profits, and maintenance and repair costs have
increased significantly over the last year.
(ii) Staff remuneration has been frozen, and there has been some discussion with
unions as staff morale is very low and several staff have already left. So far,
industrial action has been avoided.
(iii) The Financial Director was dismissed three months ago, and hasn’t been
replaced; he is currently suing Lagos Leisure Ltd for unfair dismissal.
(iv) The Managing Director is due to retire next year; a replacement has not yet been
considered.
(v)
There is an outstanding litigation as an employee is suing Lagos Leisure Ltd due
to an accident whilst in the workplace, and the authorities have written a
detailed report about the case.
Your firm’s total fee income last year was ₦7m, including ₦500,000 from the lost
clients.
Required:
Prepare a document for discussion with the partners covering the following:
a.
The advantages and disadvantages of tendering for the audit of Lagos Leisure
Ltd, highlighting any key risks to your firm.
(7 Marks)
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b.
Although the initial estimate of the audit fee was ₦200,000, further work needs
to be done before a figure could be included in the tender document. List the
factors which should be taken into account when calculating this fee.
(4 Marks)
c.
An outline of the matters which should be included in the tender document if
the firm decides to tender.
(4 Marks)
(Total 15 Marks)
QUESTION 7
CAATs
The availability of Computer Assisted Audit Techniques (CAATs) should be considered
by auditors when planning the nature, extent and timing of tests in an audit. Auditors
must determine their testing strategies which will depend on their choice of either
using a manual testing method or computer assisted method.
Required:
a.
Explain FIVE factors that will determine auditors’ choice of method of testing in
the planning of audit in a computer environment.
(10 Marks)
b.
Identify FIVE solutions to loss of audit trail.
(5 Marks)
(Total 15 Marks)
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SECTION A:
SOLUTION 1
1.
Wasp Ltd
(a)
Principal business risks
Tutorial note: The requirement to ‘identify and describe’ suggests that
although marks will be awarded for the mere identification of risks from the
scenario, those risks must be described (as illustrated below).
i.
ii.
Development in the industry

Possibility of leakages whereby unauthorised users will have
access to services.

Rapid and new technological developments in the industry,
provides faster data transmission.
Increasing interactive
capabilities will render certain existing products and services
obsolete.

Wasp Ltd cannot predict how emerging and future technologies
(e.g. ‘Bluetooth’) will affect demand for its services.

Billing and collection methods may be cumbersome.
Competition


iii.
Although Wasp Ltd. may have reduced competition in the shortterm by having acquired a competitor, the communications
market is still expanding. Increasing competition from other
existing and new competitors offering new technologies could:

affect Wasp Ltd. ability to attract and retain customers

reduce Wasp Ltd. share of new and existing customers

force Wasp Ltd. to reduce prices.
The cost and revenue-generating capabilities of new
technologies tend to fall significantly and relatively quickly
(e.g. mobile phone technology is available in disposable form).
Integration

Combining two groups which have previously operated
independently and competitively against each other, is likely to
result in disruption of operations and services.

Potential difficulties may be encountered in seeking to retain
customers and key personnel.

The anticipated ‘significant synergies’ in revenue, cost and
capital expenditure may have been optimistic. If they do not
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materialise to the extent predicted, Wasp Ltd. operational
activities, financial condition and future prospects are likely to
be adversely affected.

iv.
Operating losses

v.
vi.
Wasp Ltd may have difficulty in adapting its corporate image to
the culture of the Gambia’s network.
Loss before tax has more than doubled (increased by 113%). If
Xstatic Ltd. was making significant losses before it was acquired
by Wasp Ltd. those losses may have been expected to continue
in the short-term. Although the group’s operations are being
combined and synergies are expected, recurring losses will
clearly threaten the new group’s operational existence as a
going concern.
Falling Average Revenue Per Subscriber (ARPS)

ARPS, a key performance indicator, has fallen by more than 20%
(437-556)/556 = -21.4%). This is likely to reflect falling tariffs in
a competitive market.

Although the number of subscribers has nearly doubled
revenue has increased by only 55%. It seems unlikely that such
a growth in subscriber base can be maintained, therefore the
reduction in tariffs and call rate could result in falling revenues.

Part of the growth is due to the acquisition of Xstatic Ltd. The
fall in ARPS may indicate that Xstatic Ltd. ARPS is substantially
less than that of Wasp Ltd. If Xstatic Ltd. tariffs were lower than
Wasp Ltd. because it was offering a lower quality of service, it
may be difficult for Wasp Ltd. to increase its tariff.
Sustaining growth

Growth may not be sustainable as further expansion will incur
significant costs and investment which must be financed.

The significant costs expected to be incurred in upgrading
networks may not be recouped if additional revenues are
insufficient. Failure to maintain existing networks is likely to
result in a loss of market share.

If Wasp Ltd. financial resources are insufficient to meet the
operating losses, it may need to issue equity and/or increase its
debt. Possible adverse consequences of increasing indebtedness
include:

high debt-service costs;
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
operating and financial restrictions being imposed by
lenders;

difficulty in obtaining further finance in the future;

being unable to take advantage of business opportunities;

reduction in credit rating.
Tutorial note: Although there are relatively explicit pointers to the
above business risks in the scenario, marks will also be awarded for
other risks which are perhaps more implicit as illustrated below.
vii. Countries of operation

Operations have been expanded to Gambia. Wasp Ltd.
inexperience of economic and legal developments in Gambia
may affect the investment in MTbox Ltd.
viii. Foreign exchange rates

ix.
Wasp Ltd. transacts business in a foreign country and foreign
exchange rate fluctuations could have a material effect on
operating results.
Highly regulated market

Network operations could be adversely affected by changes in
the laws, regulations or government policies which regulate the
industry.

Difficulties in obtaining approvals for the erection and
operation of transmitters could have an adverse effect on the
extent, quality and capacity of Wasp Ltd. network coverage.

Allegations of health risks associated with radio waves from
transmitter masts and mobile handsets could reduce subscriber
demand and increase exposure to potential litigation.
Tutorial note: Candidates are not expected to have knowledge of
industry-related complexities (e.g. of licensing, subsidies and network
credit recharging - however, appropriate marks would be awarded for
comments on such business risks arising.
(b)
Impact of acquisition on planning
Tutorial note: Note that the context here is that of the group auditor’s
planning of a group audit.
i.
Group structure
The new group structure must be ascertained to identify the entities
that should be consolidated into the group budgeted financial
statements of Wasp Ltd for the year ending 31 December 2014.
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ii.
Materiality assessment
Preliminary materiality will be much higher, in monetary terms, than
in the prior year. For example, if a percentage of revenue is a
determinant of preliminary materiality, it will increase by 55% based
on estimate.
Tutorial note: ‘Profit’ is not a suitable criterion as group is loss-making.
The materiality of each subsidiary should be assessed, in terms of the
enlarged group as at the planning stage. For example, any subsidiary
contributing more than 10% of the group’s assets and revenue, is
material while less than 5% is not. This will identify, for example:

Those entities which will require Ruby & Co. to understand the
work of component auditors and possibly have some involvement
in their work

Those for which analytical procedures may suffice.
If MTbox Ltd is a significant component to the group, Ruby & Co. must,
as a minimum:
iii.

Discuss MTbox Ltd. significant business activities with its
management/auditors

Confer with MTbox Ltd. auditors the risk of material misstatement
of MTbox Ltd financial information;

Review MTbox Ltd. auditors’ documentation of identified
significant risks of material misstatement of the group financial
statements; and

Evaluate the report of the work performed by MTbox’s auditors.
Goodwill arising
The audit plan should draw attention to the need to audit the amount
of goodwill arising on the acquisitions and management’s impairment
test at the end of the reporting period.
The assets and liabilities of Xstatic Ltd and MTbox Ltd, at fair value to
the group, will be combined on a line-by-line basis and any goodwill
arising recognised.
The calculation of the amount attributed to goodwill must be agreed to be
the excess of the cost of the acquisition over the fair value of the identifiable
assets and liabilities existing at the date of acquisition (Xstatic Ltd February 2014, MTbox Ltd - November 2014).
Significant non-current assets such as properties are likely to have been
independently valued prior to the acquisition. It may be appropriate at the
planning stage to identify the need to place reliance on the work of quantity
surveyors and other valuers.
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iv.
Group transactions and balances
A list of all the companies in the group should be included in group audit
instructions to ensure that intra-group transactions and balances and any
unrealised profits and losses on transactions with associated companies are
identified for elimination on consolidation.
It should be confirmed at the planning stage that inter-company
transactions are identified as such in the accounting systems of all Wasp Ltd
group companies and that inter-company balances are regularly reconciled.
Problems are likely to arise if new intercompany balances are not
identified/reconciled. In particular, exchange differences are to be expected.
v.
Analytical procedures
Having brought in the operations of a group of companies with similar
activities may extend the scope of analytical procedures available. This
could have the effect of increasing audit efficiency.
vi.
MTbox Ltd income statement/statement of comprehensive income
The effective date of the acquisition of MTbox Ltd may be so late in the
financial year that it is possible that its post-acquisition results are not
material to the consolidated income statement/statement of comprehensive
income.
vii. Component auditors
Component auditors will include:

Any affiliates of Ruby & Co. in any of the countries in which Wasp Ltd
operates; and

unrelated auditors
Ruby & Co. will plan to use the work of MTbox Ltd auditors who are
appropriately recognised. Their competence and independence should be
assessed through information obtained from a questionnaire and evidence
of their work.
A letter of introduction should be sent to the unrelated auditors, with Wasp
Ltd. permission, as soon as possible if not already done requesting their cooperation in providing specified information within a given timescale.
Group instructions will need to be sent to affiliated and unrelated auditors
containing:

proforma statements;

a list of group and associated companies;

a statement of group accounting policies

the timetable for the preparation of the group accounts
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
a request for copies of management letters;

an audit work summary questionnaire or checklist;

contact details of senior members of Ruby & Co. audit team.
viii. Accounting policies (Xstatic Ltd & MTbox Ltd.)
It is likely that Xstatic Ltd has the same accounting policies as Wasp Ltd.
because, as a competitor, it operates in the same jurisdictions MTbox Ltd.
may have material accounting policies which do not comply with the rest of
the group. Ruby & Co. may request that MTbox Ltd. auditors calculate the
effect of any non-compliance with a group accounting policy for adjustment
on consolidation.
ix.
Timetable
The timetable for the preparation of Wasp Ltd group budgeted consolidated
financial statements should be agreed with management as soon as
possible. Key dates should be planned for:

Submission of management financial statements to Ruby & Co.;

Agreement of inter-company balances and transactions;

Completion of the consolidation package;

Tax review of group accounts;

Completion of audit fieldwork by other auditors ;

Subsequent
2

Final clearance on accounts of subsidiaries;

Ruby & Co. final clearance of budgeted consolidated financial
statements.
events
review;
Tutorial note: The order of dates is illustrative rather than prescriptive.
(c)
Letter of Comfort
Consolidated financial statements are prepared on a going concern basis
when a group, as a single entity, is considered to be a going concern.
However, the going concern basis may only be appropriate for certain
separate legal entities (e.g. subsidiaries) because the parent undertaking
(or a fellow subsidiary) is able and willing to provide support. Many banks
routinely require a letter of reassurance from a parent company stating that
the parent would financially or otherwise support a subsidiary with cash
flow or other operational problems.
The roles as audit evidence will include:
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(d)

A formal confirmation of the support will be sought in the form of a
letter of support or ‘comfort letter’ confirming the parent company’s
intention to keep the subsidiary in operational existence or otherwise
meet its obligations as they fall due.

The Letter of Comfort should normally be approved by a board minute
of the parent company or by an individual with authority granted by a
board minute.

The ability of the parent to support the company should also be
confirmed, for example, by examining the group’s cash flow forecast.

The period of support may be limited to one year from the date of the
letter or until the date of disposal of the subsidiary. Sufficient other
evidence concerning the appropriateness of the going concern
assumption must therefore be obtained where a later repayment of
material debts is foreseen.

The fact of support and the period to which it is restricted should be
noted in the financial statements of the subsidiary.
Non-Consolidated Entities
In general, the scope of a statutory audit should be as necessary to form an
audit opinion and the nature, timing and extent of audit procedures should
be as necessary to implement the overall audit plan.
Non Consolidated of entities under common control were a significant
feature of the Enron and Parmalat business empires. Such business empires
increase audit risk as fraud is often disguised through labyrinthine group
structures. Hence the auditors need to understand and confirm the
economic purpose of entities within business empires as well as special
purpose entities (SPEs) and non-trading entities.
Non-Consolidated entities fall outside the requirement for the preparation of
group accounts so it is not only finance that is off-statement of financial
position when controlled entities are excluded from consolidated financial
statements.
In the absence of consolidated financial statements, users of accounts of
Non-Consolidated entities have to rely on the disclosure of related party
transactions and control relationships for information about transactions
and arrangements with other group entities. Difficulties faced by auditors
include:

Failing to detect related party transactions and control relationships;

Not understanding the substance of transactions with entities under
common control;

Excessive creative tax planning;
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
The implications of transfer pricing e.g. failure to identify profits
unrealised at the business empire level;

A lack of access to relevant confidential information held by others;

Relying on representations made in good faith by those whom the
auditors believe manage the company when control rests elsewhere.
Audit work is inevitably increased if an auditor is put on enquiry to
investigate dubious transactions and arrangements. However, the
complexity of business empires across multiple jurisdictions with different
auditors may deter auditors from liaising with other auditors especially
where legal or professional confidentiality considerations prevent this.
EXAMINER’S REPORT
The question tests candidates’ understanding in identifying business risks in a given
scenario and how to plan an audit of consolidated financial statements.
Being a compulsory question, all candidates attempted the question; but performance
was very poor.
The commonest pitfall of the candidates was the lack of understanding of the question
which led them to proffer irrelevant solutions.
Candidates are enjoined to prepare adequately for future examinations.
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SECTION B:
SOLUTION 2
SMP ACCOUNTANTS & PARTNERS
INTERNAL MEMO
To:
All employees
From:
New partner
Date:
19 November 2014
Subject:
Communication brief on quality control
Please find details below regarding the subject of quality control policies and
procedures. I will shortly be arranging a time for a presentation to be followed by a
staff question and answer session.
(i)
Why quality control policies and procedures are necessary
ISA 220 (Quality control for an audit of financial statements) requires that all
firms implement quality control policies and procedures at the engagement
level. ISQC 1 (Quality control for firms that perform audits and reviews of
financial statements and other assurance and related services engagements)
requires all firms to implement quality control policies at the firm’s level. It is
therefore clear that the audit profession as a whole perceives such policies and
procedures to be necessary. The key reasons for this are set out below.
Whenever an audit assignment is performed by a firm, there are several risks
which it is exposed to such as performing work negligently such that the client
or indeed a third party suffers a loss as a result. This could have an adverse
effect on the audit firm, its reputation could suffer consequently both the
income from that client and potential clients may be lost due to the loss of the
client.
Another risk that could arise if there were insufficient/inadequate quality
control procedures is that an audit report may be qualified when in fact it
should not be.
Such risks should be avoided by any firm and therefore proper management of
quality control within our firm is vital.
(ii)
Areas that should be covered by quality control policies

Professional requirements for all personnel - It should be ensured that all
staff adhere to ICAN’s principles of independence, integrity,
confidentiality and professional behaviour.
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
Skills and competence of all staff - All staff should be either fully
qualified or trained for the work that they are performing, and a
system should be in place to ensure that knowledge is kept up to
date.

Acceptance and retention of clients - The firm should ensure that it is
able to perform the audit i.e. that it has the necessary capacity and
skills, would be able to remain independent, and that the client’s
directors and management are trustworthy and have integrity.

Assignment of personnel to the audit - Appropriate staff must be
assigned to each audit i.e. they must have the relevant skills and
experience to perform the work.

Delegation of work to staff undertaking the audit - All work that is
delegated must be performed to satisfactory standards and meet
quality control criteria. Adequate direction, supervision and review
should exist throughout all stages of the audit.

Consultation - There should be consultation within the firm with
other audit managers or partners on subjective audit issues; in
addition,
where
necessary,
consultation
with
external
bodies/individuals on specialist issues should also be conducted.

Monitoring quality control policies - An important part of any quality
control system is to ensure that such policies stay relevant and are
sufficient. An effective and appropriate system should be in place.
For audits of listed companies an engagement quality control review
must also be carried out by a reviewer independent of that
engagement.
(iii)
Procedures required to ensure that quality control policies are met
An outline of the procedures that would be required within SMP
Accountants & Partners to ensure that quality control policies are met
is detailed below. These will be expanded and refined following
discussions within the firm:

Division of staff - Current job titles will be reviewed for all staff to
ensure that these are still meaningful and accurate, and properly
represent the duties undertaken by each individual. The
organisation chart will be updated and copies issued to all staff
and included within the staff manual. This will ensure that there
are no misunderstandings regarding any individual’s reporting
lines.

Training of staff - A training course will be devised to ensure that
all staff understand and are familiar with the firm’s quality
control procedures. These procedures will be documented and
will form part of the induction process for all new members of
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staff. Ongoing training methods will also be devised to ensure
that all staff are kept up to date with current issues.
(b)

Ethical requirements - Independence requirements should be
communicated to all staff and they should be required to notify
the firm of any circumstances or relationships that might cause a
breach.

Acceptance and retention of clients - There should be a system in
place which ensures that prior to accepting any new client, and
when reviewing all existing clients’ circumstances, all such
relevant factors are considered.

Working papers - These will be standardised to ensure that all the
work that is required for each part of the audit is complete and
documented. It should also ensure that work is properly reviewed
at the appropriate level at the required stages in the audit.

Consultation - Any issues that arise during the course of the audit
which are subjective and/or contentious should be discussed with
a senior member of staff, or, where necessary, discussed with an
approved specialist outside of the firm.

Proper/effective recruitment and retention policies and
procedures - To ensure that the right personnel are selected for
the right job, and that such staff are retained within the firm.

Monitoring of quality control policies - A monitoring process
should be established to check that the quality control system is
operating effectively. This should include inspecting, on a cyclical
basis, at least one completed engagement for each engagement
partner.
Queries from the question and answer session
(i)
Difference between a hot review and a cold review
A hot review is a review of working papers that is performed by a more
senior member of staff during the course of the audit, and is usually
performed soon after the work is completed. The reviewer will
indicate that he has performed the review by dating and initialling the
piece of work. The review should ensure that the work has been
performed in line with the audit programme and that the conclusions
are consistent with the results obtained.
A cold review, on the other hand, is one that is performed at the end of
the audit - usually by the audit manager or partner. This will be done
before the audit report is signed off and will comprise a review of the
whole file together with the financial statements. The purpose of this
review is to ensure that the audit work has been fully completed and
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that the results and conclusions for the entire audit are consistent.
(ii)
Why all audit reasons and justifications need to be documented in the
audit working papers
All audit reasons and justifications need to be documented in the audit
working papers because those working papers need to be sufficiently
detailed and complete to enable an auditor with no previous
experience of the audit to establish what work has been completed
and how the conclusions were reached. This would become especially
important if the auditors had to give evidence in a court of law
regarding the audit. It should also be clear from the documentation in
the file that the auditors’ conclusions are reasonable.
(iii) Reasons for standardised audit working papers
The standardisation of audit working papers ensures that work is
performed consistently across audits, and that the evidence that is
necessary for each piece of work is always obtained. However, the
working papers should not be so rigid that they inhibit the auditors’
skills and flair, as these are the factors that make the difference
between a good and a bad auditor. Auditors should always be looking
for anything unusual when performing their work and if any such
issues are identified then they should be put on notice and ‘dig
deeper’. Any such instances should never be ignored just because such
work is not part of the standard programme. Auditors must be flexible
in their approach, and use their initiative.
EXAMINER’S REPORT
The question tests candidates’ understanding of the need for quality control in an
audit firm and the difference between HOT and COLD review. It also tests their
knowledge of the need to standardize audit working papers.
About 80% of the candidates attempted the question and performance was poor.
The commonest pitfall was the candidates’ mis-interpretation of working papers for
audit program.
Candidates should read and interprete questions properly before attempting to answer
them.
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SOLUTION 3
3.
Woes Limited
(a)
Factors that indicate that Woes Limited may not be a going concern include:



Exceeding growth targets

Overtrading may cause cash constraints

Working capital may be limited
Loan agreement terms

May not be able to meet instalments

May not comply with terms of covenant
Trading in excess of overdraft


Overdue tax liabilities


(b)
May seek settlement through the courts
Overdue rent


Tax authorities may call for payments
Cash shortage may cause suppliers to press for payment


Increase in facility may not be granted
Risk of eviction by the landlord.
Unpaid Salaries

May lead to labour unrest

Reduced productivity

Increase in labour turnover
Matters to direct attention in order to determine whether Woes Ltd can
continue as a going concern include:

Review profit forecasts

Examine cash flow forecasts

Inflows for probability of realisation

Outflows for reasonableness

Consider the quality of the accounting systems for the forecasts

Assess the assumptions made in the forecasts

Review payback dates for all cash outflows

Perform sensitivity analysis on all components
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
Review actual cash flows after the end of the reporting period in order
to assess the accuracy of the forecasts

Are loan instalments up to date?

Review the post year-end trading and its impact on the cash flow

Obtain and review management rescue plans and ensure that they are
consistent with facts already known to the auditor.

Compare clients’ position with similar companies in the same business.

Where financial assistance is to be given by banks and other sister
companies, review the degrees of their commitment.

Check correspondence with creditors so as to ensure that pressure is
not being mounted by creditors.

Ask the directors for their opinion and consider whether their plans are
realistic.

Obtain a management representation for the going concern basis.

Consider factoring of trade receivables.

Assess the Net Realisable Value of inventory.

Inspect correspondence with tax authorities.

Examine the minutes of meeting of the directors and management.
EXAMINER’S REPORT
The question tests candidates’ knowledge on issues relating to going concern of a
business entity.
About 80% of the candidates attempted the question and performance was below
average.
The commonest pitfalls of candidates were writing solutions relating to part (a) for
part (b), and repeating same points over and over again in different words.
Candidates are advised to prepare adequately for future examinations.
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SOLUTION 4
4.
The Cinnamon Group
(a)
Approach to planning and controlling the group audit
Planning the group audit will involve:

Obtaining the instructions issued by head office for the preparation of
the group’s financial statements.

Obtaining the timetable for the production of the individual financial
statements and the group financial statements.

Ensuring that there is a standard format and layout of subsidiary
financial statements to facilitate consolidation.

Determining audit staffing and skills required.

Liaising with component auditors of subsidiaries.

Considering potential problems that may arise, for example with
Hybrid.

Evaluating the risks arising from the group relative to the subsidiaries.

Considering any additional procedures that may be required for
subsidiaries being audited by component auditors.

Assessing whether materiality levels are acceptable.

Using questionnaires for the subsidiaries to establish accounting
policies, accounting details needed for consolidation but not available
from the accounts and information relevant for group accounts but not
for subsidiaries’ own accounts.
Controlling
The group audit will be subject to the same control and quality checks as
any other audit, including maintenance of documented files with auditors’
decisions, file review, supervision and discussion with management.
Effective planning, allocation of staff and review procedures for group
audits are all important elements of control.
(b)
Impact of each issue on the group audit
(i)
Hybrid
If Hybrid continues to make losses, the directors of Cinnamon may
consider it to be an impairment in the value of the holding company’s
investments. If that is the case, the auditors will need to confirm that
any write-down is adequate by examining:

The extent of support to Hybrid by Cinnamon - what element of
the ₦100 million guarantees relates to Hybrid
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
Hybrid’s cash flow projections

The extent of disclosure of guarantees in Cinnamon’s financial
statements.
There are clearly material problems for the subsidiary itself but
consideration needs to be made as to whether these issues are also
material to the group as a whole and whether the subsidiary control
problems are symptomatic of a wider problem.
If the issues are material to the group, then the impact on the audit
report will need to be considered.
(ii)
Cayenne
Cayenne’s year-end precedes that of the group by two months and
therefore figures used for this subsidiary will either be estimated or
out-of date in the group financial statements.
IAS 27 Consolidated and separate financial statements requires the
consolidated financial statements to be prepared as at the same
reporting date. Therefore, Cayenne should be made to prepare
additional financial statements as at the group year-end – unless it is
impracticable to do so.
If it is impracticable, provided the difference is no more than three
months (as is the case here), the October 2014 financial statements
may be used provided adjustments are made for any significant
transactions or events occurring in November and December. The
auditor will need to consider whether any such adjustments need to be
and have been made.
(iii) Habenaro
As the announcement was not made until after the year end, this is a
non-adjusting subsequent event that will have a significant impact on
the group statement of financial position. The auditor will need to
ensure adequate disclosure in the financial statements.
(iv) Guarantees
These loans are an important liability for Cinnamon Group and the
auditors will need to ensure that there is appropriate disclosure in the
financial statements.
(c)
Relationship with component auditors
The group auditors have overall responsibility for expressing an opinion on
the group financial statements and therefore need to confirm that they are
satisfied with the work undertaken by the subsidiary auditors, referred to by
ISA 600 as ‘component auditors’ where they are not also the group auditors.
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In reviewing the work of the component auditors, the group auditors need
to confirm the following:

That all significant risks of material misstatement of the group
financial statements have been addressed in the audit of the
components.

Whether there are any reasons why they cannot rely on the work of the
component auditors for example, a lack of competence, independence,
or local regulation of auditors.

The materiality of the issues raised in the component financial
statements in relation to the group materiality level in particular
Hybrid, which seems to be of most significant concern.
If a joint audit is to be undertaken, then it is important that the scope and
responsibilities are agreed and documented. This will involve a preliminary
meeting to agree approach, timing, staffing, responsibilities and working
papers.
EXAMINER’S REPORT
The question tests candidates’ knowledge in respect of planning and control of group
accounts audits.
Less than 50% of candidates attempted the question and performance was poor.
The commonest pitfall of candidates was lack of understanding of the question.
Planning and control of Audits are important elements of Auditing. Candidates at this
level are expected to be well versed with this area of the syllabus.
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SECTION C:
SOLUTION 5
Green issues
(a)
Steps in the audit process which will highlight environmental issues are as
follows:
(i)
Review of environmental impact analysis report.
(ii)
Evaluation of possible risk of misstatements in the financial
statements.
(iii) Controls which are in place to identify risk should be looked into.
(iv) Have an understanding of environment operations and issues.
(v)
Obtain written representation
environmental matters.
from
management
on
any
(vi) Obtain evidence from environmental experts where necessary.
(vii) Seek corroborative evidence of any statements by management.
(viii) Consider minutes of directors, board committees or environmental
officers’ meetings.
(ix) Confirm compliance with laws, regulations and standards.
(x)
Review contingencies and ensure adequate disclosure.
(xi) Include environmental issues in the review of the appropriateness of
going concern.
(xii) Use professional judgment to consider whether the evidence in
relation to environmental matters is sufficiently persuasive.
(xiii) Prepare a checklist of guidelines and standards to be complied with.
(b)
The auditor will need to know what the company has been doing or intends
to do in respect of its social policy. The auditor should consider the
following:
(i)
Confirm that human rights are not violated.
(ii)
Consider restiveness of stakeholders.
(iii) Review the health, safety and environmental policy and procedures.
(iv) Evaluate and report on environmental performance of the company.
(v)
Look into the corporate social responsibility performance of the
company.
(vi) Look into the economic empowerment of members of host community
by the company.
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(vii) Assess the development of host community.
(viii) Assess charitable donations made by the company.
(ix) Verify that child labour is not practised by the company.
EXAMINER’S REPORT
The question tests candidates’ knowledge on environmental issues in the audit of an
entity.
About 60% of candidates attempted the question and performance was poor.
The commonest pitfall exhibited by candidates was their inability to address steps in
audit process to highlight environmental issues.
Candidates are enjoined to cover this area of the syllabus adequately since this has
become very important in the audit of entities.
SOLUTION 6
6.
Lagos Leisure Ltd
(a)
Advantages and disadvantages of tendering for the audit
A number of issues require careful consideration before deciding whether or
not to tender for the audit.
Advantages

Increased fees - this would be especially advantageous as the audit
firm has recently lost two clients.

There is the possibility of additional work (i.e. management
consultancy) as well as the audit which would significantly increase
the firm’s overall fee income.
Disadvantages and attendant risks)

Lagos Leisure Ltd is currently experiencing difficulties in respect of
sales.

The company has had staff morale problems which could make the
audit more difficult as staff may be unwilling to co-operate with the
auditors or may present an unbalanced view of circumstances due to
their low morale.

It has not invested in non-current assets recently. This has only
compounded its current financial problems and will not help in
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improving the outlook for the future and the company’s long term
viability, especially taking into account the other mitigating factors
such as the retirement of the managing director, staff issues and
pending litigation.
(b)

There is a litigation currently outstanding from an employee regarding
an accident in the workplace - the audit firm would have to ensure
that this is correctly treated. Furthermore, the finance director is suing
the company for unfair dismissal. Both of these litigations should put
the audit firm on notice that the situation within the company is one
which is far from ideal for taking over an audit.

The audit firm should ascertain what has happened to the previous
auditors i.e. did they resign, or were they removed from office reasons for either of these situations should be ascertained. The
previous auditors should be contacted for relevant information.

The audit fee represents increased total fee income for the firm, this,
together with the potential amount for the consultancy support, would
mean that the total income from the company represented 18.5% of the
firm’s total fee income. The audit fees on their own represent 3% so
clearly this is well within the recommended limit of 15%. However,
because of the potential additional income, the audit firm would have
to be aware of any independence issues, and take appropriate action
including incorporating relevant safeguards to independence.

A company search should be undertaken to confirm who is involved in
the running of the company and a copy of the filed financial
statements should be obtained.

Discussions should be held with management and their lawyers
regarding the litigation, as the outcome of the cases could have a
significant impact on the profit for the year.

If the tender is unsuccessful then all the work involved will have been
wasted and this clearly has a cost implication to the audit firm.

Background information regarding the industry as a whole and for the
company specifically should also be obtained to ascertain whether or
not expert assistance would be required and whether the audit firm
has the relevant skills and experience to perform the audit.
Factors to be taken into account when calculating the audit fee for inclusion
in the tender document

What work will be required to be performed for the audit? This
depends on how complex the financial affairs are and whether or not
the audit firm will be able to rely on the controls in existence.
Although the latter will not be known until the audit work is started,
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the firm may be able to get a feel for this from the initial information
obtained. The tender should state this and make allowance for it.
(c)

What is the fee for similar companies audited in respect of size,
complexity and degree of risk?

What the set up costs would be for the audit and then subsequent
annual costs? The first audit will obviously take more time due to the
systems documentation required.

The number and calibre of staff that would be required for the audit.

The fee charged must be able to be clearly analysed and explained.

Whether or not the fee can be easily renegotiated at a later date?

Ensure that the client is clear as to what is included in the audit fee
and what would have to be paid for in addition if required.
An outline of what should be included in the tender document if the audit
firm decides to tender

Details of the firm and its personnel who are likely to be used on the
audit and for the management consultancy work.

The audit methodology/approach to be used for the audit, together
with how the management consultancy work would be approached.

The nature, purpose and legal requirements of an audit.

An assessment of the company’s requirements for the audit and the
management consultancy support.

Details of how the audit firm will satisfy the requirements in respect of
the audit and management consultancy support.

Any assumptions made by the audit firm in preparing the tender e.g.
work to be done by the company’s staff.

The fee and how it has been calculated.

The other services that the audit firm can offer in addition to
management consultancy.
EXAMINER’S REPORT
The question tests candidates understanding of tendering for an audit engagement.
About 70% of the candidates attempted the question and performance was poor.
The commonest pitfall shown by the candidates was lack of understanding of
tendering requirements as they relate to audit engagement.
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Candidates are advised to prepare adequately and cover the syllabus in details before
registering for examinations.
SOLUTION 7
Computer Assisted Audit Techniques (CAAT)
(a)
Auditors’ choice of method of testing during the planning of audit in a
computer environment will be determined by the following factors:
(i)
Practicability of performing audit tests manually:
Many computer based accounting systems perform functions for which
no visible evidence is available. In this regard, it will not be advisable
for the auditor to use manual testing method.
(ii)
Time availability:
Generally, since the auditor has to report within a short time scale, he
may choose to use CAAT as they are quicker to apply, even though
manual methods may be more practical and cheaper.
(iii) Computer facilities availability:
When using CAAT auditors will need to ensure that the required data,
computer files and programs are available;
(iv) Expertise and experience:
Auditors will require at least a basic understanding of the
fundamentals of computer processes because they are using the
computer to assist them in performing the audit tests before
contemplating using CAAT.
(v)
Reliance on internal audit functions:
Where CAAT is used by a suitably trained internal auditor, it may be of
significant assistance. The extent to which the external auditors are
able to reduce the level of tests by taking account of computer audit
techniques performed by the internal auditor will depend on their
assessment of the independence and effectiveness of the internal audit
function.
(vi) Volume of clients’ business:
It is not worthwhile to use CAAT where the volume of transactions is
small.
(b)
Solutions to loss of audit trail include the following:
(i)
Use of Computer Assisted Audit Techniques to assess reliability.
(ii)
Testing on a total basis and ignoring individual items to access report.
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(iii) Closer co-ordination between internal and external auditors to bridge
gaps in compliance tests.
(iv) Arranging for special print-outs of individual information for the
auditors to attempt to re-create transaction trail.
(v)
Clerical re-creation of individual items of data for comparison with
computer generated totals.
(vi) Programmed interrogation facilities whereby records held on magnetic
files are printed on a selective basis by means of direct request to
those files.
EXAMINER’S REPORT
The question tests candidates’ understanding of audit in a computer environment.
About 60% of candidates attempted the question and performance was poor.
The commonest pitfall by candidates was lack of knowledge in computer audit
environment.
Candidates are enjoined to cover the syllabus adequately and read relevant study
materials especially because modern day business environment is being
computerized.
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS
OF NIGERIA
MAY 2015 PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Plus
Examiners’ Reports
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This question tests candidates’ knowledge of foreign exchange hedging techniques and
Forward Rate Agreement (FRA) calculations.
Many candidates, that is, over 70% attempted the question but performance was generally
poor. Most of the candidates did not have a good understanding of the question hence they
gave wrong answers while the few candidates that appear to understand it seem to lack the
technical ability to handle it.
Candidates’ commonest pitfalls were their inability to explain concept of hedging,
differentiate between internal and external hedging and their lack of indepth knowledge of
this area of the syllabus.
Candidates’ are advised to always give adequate considerations to all sections of the
syllabus in their preparations for the Institute’s examinations. They should also improve
their knowledge on foreign exchange transactions.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – MAY 2015
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3 hours
ATTEMPT FIVE QUESTIONS IN ALL
SECTION A:
COMPULSORY QUESTION
Marks)
(30
QUESTION 1
You are the manager responsible for four audit clients of Nnamdi & Co., a firm of Chartered
Accountants. The year end in each case is 31 December, 2014.
You are currently reviewing the audit working paper files and the audit seniors’
recommendations for the auditors’ reports. Details are as follows:
(a)
Ray Company Limited is a subsidiary of Sun Group Plc. Serious going concern problems
have been noted during this year’s audit. Ray Company Limited will be unable to trade
for the foreseeable future unless it continues to receive financial support from the parent
company. Ray Company Limited has received a letter of comfort from Sun Group Plc.
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The audit senior has suggested that, due to the seriousness of the situation, the audit
opinion must at least be qualified ‘except for’.
(b)
Intangibles Limited has changed its accounting policy for goodwill during the year from
amortisation over its estimated useful life to annual impairment testing. No disclosure of
this change has been made in the financial statements. The carrying amount of goodwill
in the statement of financial position as at 31 December, 2014 is the same as at 31
December, 2013 as management’s impairment test show that it is not impaired. The audit
senior has concluded that a modification to the opinion is not required but suggests that
attention can be drawn to the change by way of an ‘emphasis of matter’ paragraph.
(c)
The directors’ report of Shelter Limited states that investment property rental forms a
major part of revenue. However, a note to the financial statements shows that property
rental represents only 1·6% of total revenue for the year. The audit senior is satisfied that
the revenue figures are correct. The audit senior has noted that an unmodified opinion
should be given as the audit opinion does not extend to the directors’ report.
(d)
Audit work on the after-date bank transactions of Star Limited has identified a transfer of
cash from Twinkle Limited. The audit senior assigned to the audit of Star Limited has
documented that Star’s finance director explained that Twinkle Limited commenced
trading on 7 January 2015, after being set up as a wholly-owned foreign subsidiary of
Star Limited. The audit senior has noted that although no other evidence has been
obtained, an unmodified opinion is appropriate because the matter does not impact on the
current year’s financial statements.
Required:
For each situation above, comment on the suitability or otherwise of the audit senior’s proposals
for the auditors’ reports. Where you disagree, indicate what audit modification (if any) should be
given instead.
(Total 30 Marks)
SECTION B: ATTEMPT ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION
(40 Marks)
QUESTION 2
One of the techniques used by auditors in arriving at final audit opinion is analytical review.
Preliminary analytical procedures are often performed using accounting ratios.
Required:
Explain the possible reasons for the following changes found at the planning stage of the audit:
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a.
b.
c.
d.
e.
an increase in capital gearing
an increase in dividend cover
an increase in the current ratio
a decrease in the gross profit margin
an increase in the inventory holding period
(4 marks)
(4 marks)
(4 marks )
(4 marks)
(4 marks)
(Total 20 marks)
QUESTION 3
a.
Discuss the following FIVE elements of good quality control in a firm of Chartered
Accountants:
i.
ii.
iii.
iv.
v.
b.
Independence
Personnel management
Acceptance of and continuance with client
Engagement performance
Monitoring
(2 Marks)
(2 Marks)
(2 Marks)
(2 Marks)
(2 Marks)
As the Audit Manager in charge of Silver Limited’s audit for the year ended 31
December, 2014, state and explain FOUR quality control procedures you will apply for
the effective management of the audit.
(10 Marks)
(Total 20 Marks)
QUESTION 4
ICAN has an ethical guide, its Professional Code of Conduct and Guide for Members. These
rules are applicable to all members. If these rules are not complied with, disciplinary action may
result which could lead to a reprimand, fine or delisting.
Required:
a.
Explain why you think ICAN’s fundamental principles are so important to auditing.
(6 Marks)
b.
Explain how a member can demonstrate that he is truly independent in carrying out the
work he performs and why it is important that he should do so.
(6 Marks)
c.
Set out the circumstances under which it is permissible to disclose confidential clients
information.
(8 Marks)
(Total 20 Marks)
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SECTION C:
ATTEMPT ANY TWO OUT OF THREE QUESTIONS IN THIS
SECTION (30 Marks)
QUESTION 5
Auditing standards require auditors to carry out procedures designed to obtain sufficient and
appropriate audit evidence. In order to do this, the auditor may require the services of a
specialist. In respect of specialists whose work may be relied upon by the auditor, you are
required to:
a.
Describe a specialist and give FOUR examples of specialists.
(6 Marks)
b.
State the circumstances under which an auditor may need the work of specialists.
(6 Marks)
c.
How will an auditor determine the competence and objectivity of a specialist?
(3 Marks)
(Total 15 Marks)
QUESTION 6
Forensic audit covers a broad spectrum of activities whose terminology is not strictly defined in
regulatory guidance.
Required:
a.
What is Forensic Audit?
b.
(2 Marks)
State TEN situations which might require the services of a forensic auditor.
(5 Marks)
c.
State FIVE qualities of a forensic auditor.
d.
State THREE differences between forensic audit and financial audit.
(5 Marks)
(3 Marks)
(Total 15 Marks)
QUESTION 7
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You have been appointed Auditor of a company whose accounting transactions are processed
using the computer. You have decided to use Computer-Assisted Audit Techniques (CAAT) to
generate evidence for the audit assignment.
Required:
a.
State FOUR advantages and THREE disadvantages of using test data in compliance
testing of application controls.
(7 Marks)
b.
List FOUR activities for which audit software may be used to perform substantive tests
by the auditor.
(4 Marks)
c.
List TWO advantages and TWO disadvantages of the use of audit software.
(4 Marks)
(Total 15 Marks)
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SOLUTION 1
(a)
Ray Company Limited
If a letter of comfort had not been received, then a modified opinion on the grounds of a
material misstatement, disagreement about the appropriateness of the going concern
assumption would be required. As the matter is likely to be pervasive, an adverse opinion
would be appropriate (ISA 570 Going Concern).
However, the company has received a letter of comfort from its parent company to the
effect that it will enable the company to continue trading. If this evidence, together with
other evidence such as management’s representations are considered to be sufficient to
support the appropriateness of the going concern presumption, a modified opinion will not
be necessary provided that the support is adequately disclosed as a note in the financial
statements. If the evidence is sufficient but the disclosure is inadequate, a qualified
(‘except for’) opinion or adverse opinion would be required.
If the letter of comfort does not provide sufficient evidence (e.g. if there are doubts about
Sun’s ability to provide the required finance), the significant uncertainty arising should be
drawn to the users’ attention in an ‘emphasis of matter’ paragraph in the auditors’ report.
This would not result in a modified opinion, unless the disclosure relating to the
uncertainty were considered inadequate.
Conclusio n
The audit senior’s proposal is unsuitable. The auditors’ opinion should be unmodified if
the disclosures are adequate.
(b)
Intangibles Limited
In order to show fair presentation in all material respects, the financial statements of an
entity should contain not only accurate figures, but also sufficient disclosure in relation to
those figures in order to allow the users to understand them. As required by IAS 1
Presentation of Financial Statements, items should be treated on a consistent basis from
year to year. If this is not the case, then any change, together with the financial impact of
this change, will need to be disclosed as a note in the financial statements.
Failure to disclose the reasons for change in policy (i.e. to comply with IFRS 3 Business
Combinations) and its effects (e.g. the lack of annual amortisation) means that the financial
statements do not comply with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. A modified opinion is therefore required on the grounds of a
material misstatement (disagreement on disclosure (IAS 1 and IAS 8)). Assuming the
matter to be material (but clearly not pervasive), a qualified ‘except for’ opinion should be
expressed.
The main purpose of an ‘emphasis of matter’ paragraph is to describe a matter which the
auditor considers fundamental to an understanding of the financial statements, for example
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to draw attention to a major catastrophe which has had a significant effect on the entity’s
financial position. Such a paragraph highlights a note in the financial statements that more
extensively discusses such a matter, which has been taken into account in forming the audit
opinion – it does not modify that opinion. An ‘emphasis of matter’ paragraph cannot
therefore be used to make good a lack of disclosure.
IFRS 3 also requires disclosure of a reconciliation of the carrying amount of goodwill at
the beginning and end of the year. This should show no movement for the year ended 30
June 20X4.
Conclusio n
The audit senior’s proposal is unsuitable. Unless all aspects of the change including
reasons and effects, are adequately disclosed, an ‘except for’ qualification will be required
on the grounds of a material misstatement.
(c)
Shelter Limited
The audit opinion states whether the financial statements:
q
for a “fair presentation” framework are presented fairly, in all material respects or
give a true and fair view in accordance with the applicable financial reporting
framework; and
q
for a “compliance” framework comply with the applicable financial reporting
framework.
The directors’ report is not a part of financial statements prepared under International
Financial Reporting Standards (IFRS). However, auditors have a professional
responsibility to read other information in documents containing audited financial
statements e.g. the directors’ report in an annual report to identify material inconsistencies
with the audited financial statements or material misstatements of fact.
A material inconsistency exists when other information contradicts information contained
in the audited financial statements. Clearly, the word ‘major’ is inconsistent with 1.6%.
If the inconsistency is resolved e.g. because the directors’ report is corrected to state ‘...
major part of other income...’ an unmodified audit opinion will be given.
If the inconsistency is not resolved, the audit opinion on the financial statements cannot be
modified because the inconsistency is in the directors’ report. In this case, an ‘other
matter’ paragraph may be used to report on this matter that does not affect the financial
statements (ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditors’ Report).
Conclusio n
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An unmodified opinion on the financial statements is appropriate. If, however, the
inconsistency is not resolved, it should be reported in a separate ‘other matter’ paragraph,
immediately after the opinion paragraph.
(d)
Star Limited / Twinkle Limited
The cash transfer is a non-adjusting event after the reporting period. It indicates that
Twinkle Limited was trading after the end of the reporting period. However, that does not
preclude Twinkle having commenced trading before the year-end.
The finance director’s oral representation is wholly insufficient evidence with regard to the
existence (or otherwise) of Twinkle Limited at 31 December 2014. If it existed at the end
of the reporting period its financial statements should have been consolidated, unless
considered immaterial.
The lack of evidence that might reasonably be expected to be available (e.g. legal papers,
registration payments, etc.) suggests a limitation on the scope of the audit. If such evidence
has been sought but not obtained then the limitation is imposed by the entity rather than by
circumstances.
Whilst the transaction itself may be immaterial, the information concerning the existence
of Twinkle Limited may be material to users and should therefore be disclosed as a nonadjusting event. The absence of such disclosure, if the auditor considered necessary, would
result in ‘except for’, opinion.
Tutorial note: Any matter that is considered sufficiently material to be worthy of disclosure
as a non-adjusting event must result in such a modified opinion if the disclosure is not
made.
If Twinkle Limited existed at the end of the reporting period and had material assets and
liabilities, then its non-consolidation would have a pervasive effect. This would warrant an
adverse opinion.
Also, the nature of the limitation (being imposed by the entity) could have a pervasive
effect if the auditor is suspicious that other audit evidence has been withheld. In this case,
the auditor should express a disclaimer in the audit report.
Conclusio n
Additional evidence is required to support an unmodified opinion. If these were not
forthcoming a disclaimer may be appropriate.
EXAMINER’S REPORT
The question tests candidates understanding of scenarios that will give rise to different
audit opinions in the auditors’ report.
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SOLUTION 2
Accounting Ratios
Possible reasons for changes:
(a)
Increase in capital gearing: High gearing generally indicates that the company has
increased its loan profile. The loan must be serviced. This includes payment of
interest on fixed interest borrowings.
This means that there are fewer funds
available for distribution to shareholders. It may also mean that the company is
expanding. This also means greater returns for shareholders in the future. A high
gearing ratio may also mean that the company is at risk of going concern.
(b)
Increase in dividend cover: This shows how many times a company could pay the
dividend it has decided to pay to shareholders. If a company’s dividend cover is
increasing, it may simply mean that it is making greater profits in relation to the
dividend it pays out.
It may also mean that the company could pay out more dividends in future or that the
company is paying out a reduced dividend and is investing more in the business.
(c)
Increase in current ratio: An increase in current ratio may indicate increased
inventory, cash or receivables.
The implication of this may be that the company is expanding or alternatively that it
is experiencing trading difficulties and is unable to sell its inventory or to collect its
receivables.
An increase may also be due to a decrease in trade payables or other current
liabilities.
(d)
Decrease in gross profit margin: A decrease in gross profit margin may indicate that
the cost of raw materials or bought-in goods has increased or that discount allowed
have increased or selling prices have decreased.
(e)
Increase in inventory holding period: The inventory holding period indicates the
number of days the company could continue to trade if supplies were to cease.
The longer the period, the higher the level of inventory held. Inventory holding
involves expenditure. Generally, the lower the figure the better, provided that the
company does not run out of inventory.
q
An increase may indicate that the Company is unable to sell its inventory
q
An increase may also indicate that the company is expecting additional sales
or simply that the business is expanding.
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q
Many businesses are cyclical (seasonal) and increases and decreases are to
be expected.
q
Increase in the value of non-moving and/or obsolete stock.
EXAMINER’S REPORT
The question tests candidates’ ability to interpret changes in financial ratios arising from
analytical review of financial statements.
About 80% of the candidates attempted the question and performance was good.
The commonest pitfall of the few candidates that performed poorly was that rather than
explaining reasons for changes, they were defining the formulae.
Candidates are advised to read more, prepare adequately for examinations and ensure that
they read questions properly so as to understand the requirements of the question before
attempting them.
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SOLUTION 3
Good Quality Control
(a)
(i)
Independence
The auditor must be free from any bias in giving an opinion. The auditor should not
allow himself to be put in a situation where any third party could put pressure on him
to change his opinion or to compromise his objectivity.
(ii)
Personnel Management
Management of personnel is the most important function and key to the successful
conduct of a business. Therefore, the staff manager should be able to plan, organize,
lead a team, control, establish credibility and build commitment. A firm should have
in place a partner, called the staff partner, who will be in charge of staff matters. He
should ensure that all staff receive due attention on matters affecting them. Staff
training and capacity building should be provided to build skill and competence.
(iii) Acceptance of and continuance with clients
The firm should be satisfied that potential or new clients comply with the terms and
conditions of the practice before acceptance. Where they become aware of some
information that may prevent the practice from acting for such a client or even
continuation of relationship with an existing clients, they should readily disclose such
information so that a decision may be taken in time by the practice. If there is any
development affecting the relationship, the firm should consider its position in
relation thereto and take appropriate measures.
(iv) Engagement performance
The practice should constantly review the responsibilities of the audit engagement
partners which include direction, supervision, review, consultations and quality
control policies.
Assignments should be planned in such a way that all resources required for the
successful performance of the audit are made available e.g. Audit Planning
Memorandum, audit programmes, etc.
(v)
Monitoring
This is to ensure that the controls put in place by the firm are working. This involves
day-to-day or periodic review by managers and partners. The practice should ensure
that its quality control and procedures are regularly reviewed and updated to ensure
compliance with set standards, both within the practice
and general standards
set by the profession as a whole.
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(b)
System of Quality Control
Quality controls are all the measures, controls, procedures, pronouncements, etc., put in
place by the firm to ensure that the tasks of audit are effectively, efficiently and
economically carried out; and by extension ensure an objective audit opinion that reflects
the true and fair view of the financial statements being audited.
Quality control measures include:
q
Audit planning
q
Audit Programme drafting and usage
Checklist (completion checklist)
Staff allocation
Documentation
Staff briefing
Matters for next audit
Work acknowledgement
Audit review
Peer review
Supervision
q
q
q
q
q
q
q
q
q
EXAMINER’S REPORT
The question tests candidates understanding of quality control in a firm of Chartered
Accountants.
About 80% of the candidates attempted the question and performance was average.
The commonest pitfall of the candidates was the misinterpretation of the (b) part of the
question which made them to write out of context; not being able to identify quality control
measures.
Candidates are advised to read and understand questions before attempting them.
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SOLUTION 4
ICAN Professional Code of Conduct and Guide for Members
(a)
Importance of the fundamental principles of professional conduct
These principles are considered to be so fundamental because they underpin the way in
which ICAN members should act during the course of their professional work and they
specify behaviour expected from members during the course of their work. ICAN is a
professional body and has a high reputation which can only be maintained if its members
also adhere to the high standards that are set by it.
Furthermore, any individual or organisation that employs the services of an ICAN
member should be able to expect a certain level of service from that member. By stating
the fundamental principles of professional conduct within their rules of professional
conduct, ICAN is requiring its members to adhere to those standards. If those standards
are subsequently breached then disciplinary action, followed by a reprimand, fine or
expulsion can follow.
These principles are therefore clearly fundamental to auditing as a profession, as ICAN
members who are acting as auditors have certain responsibilities and obligation to their
clients and third parties when conducting their work. These principles further demand
high standards of conduct from such a person acting as auditor.
(b)
Importance of independence and how it can be demonstrated
Independence of auditors is a key area within the ICAN rules of professional conduct. It
is vital that not only is a member independent but he must be seen to be independent if he
is to act as an auditor – his objectivity must be beyond question.
There are many situations which may give the appearance that a member is not
independent. Such situations should be safeguarded against and avoided by the auditor if
he is to be seen as truly independent. Examples include:
q
Firms should not be overly dependent on the fee income from one client or group
of connected clients. The code requires extra safeguards if income from a client
exceeds 15% of gross practice income for two consecutive years. An audit firm
should have procedures in place to ensure that existing clients do not go over this
threshold.
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q
An audit firm should avoid auditing clients where a ‘close connection’ exists with
that client or with an officer or employee of the client. In addition, if an officer or
employee is closely connected with a partner or member of staff of the audit firm
then audits of that client should be avoided. Also, a person in an audit firm should
not be involved in the audit of a client if he has been an officer or employee of
that client up to two years previous to the audit.
q
An audit firm should not audit a company in which it has a financial interest.
Similarly, if a member of staff at the firm has a financial interest then he should
not be involved in the audit.
q
An audit firm or anyone closely connected with it should not, either directly or
indirectly, give a loan to or guarantee borrowings by an audit client or accept a
loan from such a client or have borrowings or other obligations guaranteed by
such a client except the client is a loan-giving institution such as a bank, finance
house, etc.
q
Accepting goods, services or hospitality from a client can threaten or appear to
threaten independence and these should be avoided unless clearly insignificant.
q
An audit firm may provide other services, such as taxation, consultancy as well as
audit services to a client. Although ICAN does not object to this in principle, it is
stressed that the auditor should not participate in executive decisions, or perform
management functions. Care should always be taken by any firm which is
providing additional services to clients to ensure that it maintains its
independence. Many of the larger auditing firms do this by having different
departments with different staff who work on the different types of assignment.
q
Independence could be put at risk where there is actual or potential litigation
between the auditor and his client. It could be difficult for the auditor to report
fairly and impartially on the client’s financial statements and the client’s
management may be unwilling to disclose all relevant information.
q
If an audit firm has an associated firm supplying other services e.g. insurance
services, management consultancy, then it could be considered to influence the
audit firm’s actions when auditing a particular firm with a view to obtaining
additional work for the associated firm. The audit firm should be aware of this
threat to its independence and ensure that the situation is regularly reviewed to
maintain objectivity. Factors that need to be considered include the closeness of
the association and the degree to which the associate firm wants the audit firm to
retain the client.
q
If an auditor has to perform an asset valuation assignment for a client then they
should ensure that they maintain their independence.
q
If a member’s view is requested on the appropriateness of an accounting standard,
he should ensure that he has all the information that is necessary, as the opinion
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may influence the auditors’ judgement. Furthermore, if a member is asked for a
second opinion on the accounting treatment of items then he should ensure that he
contacts the present auditor to obtain all necessary information and facts.
It is important to demonstrate Independence in order to:
q
ensure credibility
q
avoid liability
q
avoid damage to firms’ reputation
(c) Circumstances in which confidential clients’ information may be disclosed
The general rule is that clients’ information is confidential and may not be
disclosed unless the client gives his permission. However, there are exceptions to
this rule.
The auditor may be obliged to disclose client’s information in the following
circumstances:
q
Where he is ordered to do so by a court order.
q
Where he suspects his client to be undertaking activities such as drug
trafficking, terrorism or money laundering.
q
If, according to the Banking, Insurance, Insolvency and Financial Services
legislation, the auditor considers that the client has been acting recklessly or
is not a fit and proper person to be managing a business.
q
If the auditor becomes aware of a suspected or actual non-compliance with
laws and regulations. This will give rise to a statutory right or duty to
report. He should report this to the proper authority immediately.
Even if the auditor is wrong in his suspicions, he will be protected against
defamation claims by the client under the legal principle of ‘general privilege’. In
such cases, he will have to prove that his suspicions are justified and should be
able to provide relevant evidence to support his claim.
The auditor may voluntarily disclose relevant information in order to protect
himself in legal proceedings, if authorised by statute, to sue for fees or when he
considers it appropriate to report in the public interest in which case the following
circumstances should apply:
q
He must report to an appropriate authority.
q
Members of the public are likely to be affected.
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q
The matter is serious and likely to be repeated.
In such circumstances, the auditor should also consider:
q
The relative size of the amounts involved
q
The extent of the likely financial damage
q
The client’s reasons for being unwilling to disclose the matters to the
appropriate authority.
If a member is approached by any authority where prosecution is the main
intention, he should act very carefully. He should seek legal advice before
disclosing client’s information and ascertain whether the enquirer has sufficient
authority to request such information.
If the auditor discloses client information recklessly, then he will be in breach of
his contractual duty of confidentiality and could be sued by the client.
EXAMINER’S REPORT
The question tests candidates’ understanding in respect of ethical issues as contained in
ICAN’s Professional Code of Conduct and Guide for Members.
About 80% of the candidates attempted the question and performance was good.
The commonest pitfall of some of the candidates was that they were writing on threats to
independence rather than ways of ensuring independence.
Candidates need to prepare adequately before sitting for examinations and also read and
interprete questions properly before attempting them.
SOLUTION 5
Specialists
(a)
A specialist is an expert who is a knowledgeable person or firm that has acquired
specialist knowledge and skills and obtained experience and competence in a discipline
and is respected as one held in public reckoning, whose opinion on issues in their
respective disciplines, is held to be authoritative and reliable as a basis for decisions on
consequential matters. Examples of specialists include:
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Legal practitioners, Forensic Accountants, Estate Surveyors, Medical Practitioners,
Architects, Pharmacists, Quantity Surveyors, Mechanical, Electrical, Civil, Electronic
Engineers, Actuarists, etc.
(b)
The circumstances under which an auditor needs a specialist are:
(i)
When he needs to express an opinion on areas that he has no skill or competence
to resolve.
(ii)
Where it is not convenient or appropriate for him to provide the required service.
The services of specialists could be required in the following circumstances:
·
determining the outcome of a litigation
(c)
·
valuation of assets – e.g. buildings
·
determining actuarial value of gratuities
·
determining value of work of art and antiquity
·
geological determination of mineral resources
·
assessment of work done on long-term contracts
The expert is expected to be a member of a recognized professional body or a Trade
Group. He must be certified to render the service by an authoritative body and must have
some years of experience. The auditor would need to consider the following:
q
Qualification of the specialist
q
Independence and
q
Technical competence
To be objective, the specialist should not be employed by the client and must not be
related to the client.
EXAMINER’S REPORT
The question tests candidates’ understanding of the work of a specialist and how it relates
to the work of the auditor.
About 90% of the candidates attempted the question and performance was good.
The commonest pitfall among the candidates who did not do well was their inability to state
precisely when an auditor may require the services of a specialist.
Candidates need to read and understand questions before attempting to answer them.
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SOLUTION 6
Forensic Audit
(a)
Forensic audit refers to the procedures carried out in order to obtain reliable and
acceptable evidence for anticipated disputes or litigation. It involves the use of auditing
and investigative techniques to identify and gather evidence. The forensic auditor is
often required to act as an expert witness when matters are brought up in court.
(b)
Situations requiring the services of a forensic auditor include:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
(xv)
(xvi)
(xvii)
(xviii)
(xix)
(c)
Theft and frauds
Bribery allegations
Tax evasion
Insider dealings
Wrongful dismissals
Business interruptions
Property losses
Insurance claims
Personal liability claims
Construction claims
Bankruptcies
Breach of contract
Stock market manipulations
Arson
Matrimonial divorce claims
Investment scam
Management/employee wrong doing
Royalty audits
Expert witness testimony
Qualities of a forensic Auditor
(i)
Ability to identify fraud with minimal information
(ii)
Identification of financial issues significant to the matter
(iii)
Knowledge of investigative techniques
(iv)
Knowledge of the rules of evidence in court
(v)
Ability to interpret financial information
(vi)
Ability to communicate findings in a language that is understandable by a
layman
(vii)
Possession of investigative skills
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(d)
(viii)
Possession of investigative mentality
(ix)
Computer literacy
Differences between Forensic Audit and Financial Audit
(i)
Financial audit aims at giving an audit opinion on the financial statements while
forensic audit aims at detecting material frauds and misstatements
(ii)
Financial audit depends on examination of audit trail while forensic audit
depends on examination of events and activities behind the documents
(iii)
Financial audit is conducted strictly according to standards, guidelines and
applicable legislations whereas no such restriction is placed on the scope of
forensic audit
(iv)
Financial audit is usually statutory whereas forensic audit is on ad hoc basis
(v)
The financial auditor reports to members of the auditee while forensic auditor
reports to the persons who appointed him
EXAMINER’S REPORT
The question tests candidates understanding of forensic audit.
About 80% of the candidates attempted the question and performance was average.
The commonest pitfall of the candidates was that some misconstrued forensic audit to
mean forex (bureau - de - change). Others who had some idea of the topic could not give
detailed explanation.
Candidates are advised to cover the syllabus thoroughly before entering for examinations.
They should also read the questions carefully and interprete it correctly before attempting
it .
SOLUTION 7
CAATs
(a)
(i)
Advantages of test data include:
q
They provide a positive assurance on the correct functioning of the
program controls actually tested;
q
They can be used on a continuing basis until the programs are changed;
q
Once set up, running costs from year to year are low;
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(ii)
(b)
(c)
q
They require less detailed knowledge of data processing; and
q
They are cheap to install and easy to implement as their contents can be
moderated at will.
Disadvantages
q
The possibility of data files corruption where ‘live’ test data is used
q
It is time-consuming
q
Where ‘dead’ test data is used, the auditor requires a reasonable
assurance that the programs being used are those in normal processing
q
Gives an indication of correct or improper functioning of controls only at
the time of the test which may change thereafter.
Activities for which audit software may be used during substantive tests by the
auditor include:
(i)
Re-perform calculations;
(ii)
Select individual transactions for subsequent manual substantive tests;
(iii)
Extract list of exceptional items;
(iv)
Obtain information relevant to analytical review; and
(v)
Used to scrutinize large volumes of data.
Advantages of the use of Audit Software
(i)
It can be used to analyse voluminous data.
(ii)
The search is more accurate and faster than when software is not applied.
(iii)
The running costs are usually low.
(iv)
It can be used for other transactions
Disadvantages
(i)
Has a high set-up cost.
(ii)
Usually not available for small companies.
(iii)
Requires considerable level of knowledge in data processing.
(iv)
Consumes a lot of computer time which may not be acceptable to clients.
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EXAMINER’S REPORT
The question tests candidates understanding of the use of audit software for audit
assignments.
About 20% of the candidates attempted the question and performance was poor.
The commonest pitfall of the candidates was their lack of understanding of the use of audit
software.
Candidates are enjoined to cover all aspects of the syllabus before writing future
examinations.
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
NOVEMBER 2015 PROFESSIONAL EXAMINATION
Question Papers
Suggested Solutions
Plus
Marking Guide
Examiners‟ Reports
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PROFESSIONAL LEVEL EXAMINATION - NOVEMBER 2015
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3 hours
ANSWER FIVE QUESTIONS IN ALL
SECTION A:
COMPULSORY QUESTION
(30 Marks)
QUESTION 1
a.
Gnasher Investigations is an entity specialising in conducting investigations
for corporate clients. It employs ex-police officers, security consultants, IT
and fraud specialists. Gnasher Investigations recently dropped its firm of
auditors and has approached your firm to undertake the audit. You have
been provided with the following information:
 Gnasher Investigations is a major service provider to your firm,
particularly in the provision of IT and fraud consultancy.
 Gnasher Investigations has acrimoniously
dropped their previous
auditors and are withholding fees, pending the resolution of a number of
issues in particular relating to their accusations on the competence of the
auditors.
 Gnasher Investigations is facing a hostile take-over at present from
Technical Investigations Group, a company you also audit.
Required
i.
Explain the impact of each of the three pieces of information provided
above and how these would influence your decision to accept the
nomination as auditors for Gnasher Investigations.
(5 Marks)
ii. Describe other factors that you would consider in taking a decision as to
the acceptance of Gnasher Investigations as a client.
(5 Marks)
iii. Describe the steps you would take if you decided to accept the
nomination as auditors for Gnasher Investigations.
(5 Marks)
b.
You are required to discuss the following FIVE elements of good quality
control in a firm of Chartered Accountants:
(i)
Independence
(ii) Personnel management
(iii) Acceptance and continuance of client
(iv) Engagement performance
(v)
Monitoring
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015
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c.
Why does the Institute of Chartered Accountants of Nigeria place much
emphasis on the requirement that all member firms put in place a system of
quality control?
(5 Marks)
(Total 30 Marks)
SECTION B:
ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION
(40 Marks)
QUESTION 2
a.
Analyse and evaluate any FOUR fundamental principles of ethical standards
as provided in the Institute of Chartered Accountants of Nigeria‟s Code of
Professional Conduct for Accountants.
(8 Marks)
b.
Outline the penalties for a member‟s unethical behaviour.
c.
Outline the powers available to the Institute to enforce the ethical standards.
(8 Marks)
(Total 20 Marks)
(4 Marks)
QUESTION 3
EBOLA SANITIZER LIMITED
You have been appointed as the auditor of Ebola Sanitizer Limited for the year
ended 31 December 2014.
The principal activity of the company is the
development, manufacture and sale of Ebola-testing equipment for health care
sector.
During the planning meeting with the Company‟s Chief Finance Officer, the
following matters were brought to your attention:
(i)
Inventories include N1.5million in respect of the cost of instruments made to
a customer‟s specification. The customer is based in a country which
recently imposed trading sanctions against your country.
(ii)
Work-in-progress includes N2.5million in respect of an equipment being
manufactured for Hazard Care Plc. Labour has been charged at daily rates,
which include direct costs and appropriate overheads.
(iii)
In October 2014, the company commenced construction of an assembly line
for its new range of testing machines. The line is due to be completed in
February 2015. The costs recorded in the non-current assets register include
materials, labour, overheads and loan interest.
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Required:
a.
Prepare an audit planning memorandum (extract) setting out specific audit
work to be carried out in respect of the matters stated in (i – iii) above.
(10 Marks)
b.
Advise on audit adjusting entries to be raised to correct any material
misstatements in the financial statements.
(10 Marks)
(Total 20 Marks)
QUESTION 4
There are occasions when company directors might want to conceal documents or
records. For example, if the company is facing litigation for a considerable sum of
money, they may not wish to disclose this fact in their financial statements since
the appropriate treatment could well be the recording of a liability. Documents
showing that a company‟s assets are not worth as much as they are stated in the
statement of financial position may also be suppressed by the directors.
It is likely that company directors will attempt to conceal a matter where it will
have an adverse effect on the company‟s financial statements. There may also be
occasions when directors do not disclose matters that might improve a company‟s
profit figure. For example, directors might be intent on “income smoothing” or
shareholding directors in small companies may wish to minimise their profits for
tax purposes.
Required:
a.
Analyse THREE circumstances under which company directors may portray the
company‟s performance as better than it actually is.
(6 Marks)
b.
Assess and advise on any TWO audit procedures required to deal with
identified misstatements in various account balances and other financial
statements disclosures.
(4 Marks)
c.
Develop audit procedures the auditor should adopt where he has identified the
risk of material misstatements in the financial statements arising from fraud.
(10 Marks)
(Total 20 Marks)
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SECTION C:
ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION
(30 Marks)
QUESTION 5
An installed software programme that can process accounts receivables was
presented to the auditor of Yes Limited. The aging, which indicates how long the
customers‟ balances were outstanding, is useful when evaluating the collectability
of those accounts.
In order to test whether the age analysis was done correctly, the auditor decided to
test the clients‟ schedules. He used the audit firm‟s software to recalculate the
aging. He reasoned that if the aging of accounts receivables produced by his audit
software was in reasonable agreement with the clients figures, he would have
evidence that the client‟s aging was reliable.
However, the auditor was shocked when he found material differences between the
balances he arrived at using his Audit software and the client‟s balances. The
client‟s information technology manager investigated the discrepancies and
discovered that programme errors occurred while designing the software. This
outcome caused the auditor to substantially increase the level of his review of the
year-end balances which eventually resulted in significant audit adjustments to the
financial statements.
Required:
a.
Assess and advise on any THREE ways information technology improves
internal control.
(6 Marks)
b.
Evaluate SIX risks specific to accounting systems in IT environment.
(9 Marks)
(Total 15 Marks)
QUESTION 6
B Plc, a leader in the manufacture of beverages has been in crisis since its
shareholders‟ loss of confidence in its management. The predecessor of B Plc which
was a partnership between two friends metamorphosed into a private company
after 15 years of operation. Two years later, it became a public company. The
erstwhile partners had substantial interest and control in the company. The way
the affairs of the company were being conducted was not much different from the
partnership business which was the progenitor of the public company. This
overbearing influence of the former partners caused disaffection among the other
shareholders.
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Your audit firm has just been appointed as the auditors of the company and you
found out that many internal and accounting control systems are being short
circuited by management.
Required:
a.
As the leader of the team in charge of the audit of the company, assess the
attitude of management vis-a-vis spirit of good governance.
(9 Marks)
b.
Evaluate SIX matters of importance requiring the auditors of a public
company to communicate with those charged with governance of the
company.
(6 Marks)
(Total 15 Marks)
QUESTION 7
Mystical Perfumes has been in existence importing perfume for a number of years.
The managing director had built up the business using contacts he already had in
the industry. The company imports only one brand of perfume which is
manufactured exclusively by one company. The perfume is distributed via „shops
within shops‟ at 20 branches of a well-known store. Under this agreement, Mystical
Perfumes pays a percentage of its takings to the store, with a minimum annual
payment of ₦100,000 per store.
The audit is nearing completion but you have just heard that the Tanzanian
manufacturer is facing serious financial difficulties and that supplies have ceased.
Required
a.
Set out additional information that the auditor would require before
reaching his audit opinion.
(7 Marks)
b.
Set out the possible forms of report that the auditor may issue.
(8 Marks)
(Total 15 Marks)
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SOLUTION 1
(a)
i.
Based on first Scenario
Since Gnasher Investigation is a major service provider to our firm,
the issue of independence is of great concern which may not allow us
take up the audit.
Based on second Scenario
If the reason of parting ways with the old audit firm is incompetence
and there is no independence issue, we can take up the audit and
press for the payment of the withheld fees on behalf of the previous
auditors.
Based on third Scenario
As auditors to Technical Investigation Group which is considering
taking over Gnasher Investigations, it will not be advisable for our
firm to take over the audit of Gnasher, since the company is facing a
hostile take-over by the Technical Investigation Group and this could
cause conflict of interest.
ii.
Other factors to be considered before accepting the nomination as
auditors for Gnasher Investigations include:
-
Assessment of whether there are any professional problems
attached to accepting the engagement, e.g. problems of
lack of independence, lack of technical expertise or conflict
of interest.
-
Ensuring that resources are available to complete the audit
assignment, especially the right number and quality of
staff.
-
The need to carry out risk assessment of the assignment.
-
Taking up references on the proposed client company and
its directors, if they are not already known to the firm. This
is known as client screening.
-
Communicating with the existing auditors to discuss the
appointment, the client and the audit work, to establish if
there are any matters that we should be aware of when
deciding whether or not to accept the appointment.
-
Whether a partner or anyone closely connected with a
partner has a beneficial interest in Gnasher. This may be
particularly relevant in view of the existing relationship
with Gnasher.
-
Fees in relation to overall income of the firm.
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iii.
(b)
i.
Once we have decided to accept the nomination as auditors for
Gnasher Investigations, we will ascertain that suitable procedures are
carried out to ensure that:
The firm will be independent and there will be no conflict of
interest.
-
The firm has the technical competence to do the work.
-
Professional clearance has been sought for and obtained
from the previous auditors.
-
Appropriate anti-money laundering
performed i.e. client identification.
-
Letter of engagement is sent to the client and duly signed
by the appropriate authority.
-
The audit will not impact on the consultancy service
relationship already being provided.
procedures
are
Independence
For an audit opinion to be of value, the auditor must be independent
and seen to be independent. This means that the auditor must have
independence of mind and in appearance. He is not affected by
influences or prejudices that compromise his professional judgment.
This allows the auditor to act with integrity and exercise objectivity
and professional skepticism.
ii.
Personnel Management
This centres on the direction and supervision of staff, and review of
their work.
Direction:
The audit team should be informed of the work they are
expected to carry out and the objectives that the work is
intended to achieve.
There should be a well prepared audit work programme
Staff should be familiar with the overall audit plan.
Staff should understand:
Their responsibilities:
Nature of the business of the client
Risk related issues
Detailed approach to the performance of the audit
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Review of work
This may take the following forms:
Peer review
Engagement quality control review
Hot review
Monitoring review or cold review
The purpose of audit review is to check whether:
The audit work was carried out to proper professional
standard
The objectives of the audit have been achieved
The work carried out during the audit and the audit
evidence are suitably documented and that the audit
evidence supports the conclusions that have been reached.
iii.
Acceptance and continuance of client
ISQC 1 requires that the firm should establish policies and procedures
to provide it with reasonable assurance that the firm will only take on
or continue work where the firm
-
iv.
Is competent to perform the engagement
Has the capabilities, including the necessary resources to do
so
Can comply with the relevant ethical requirements,
Has considered the integrity of the client and does not have
information which would lead it to conclude that the client
lacks integrity
Is sure that there will be independence and there are no
conflicts of interest
Professional clearance is received from previous auditors in
the case of new client
Engagement performance
Policies and procedures are required to include:
Those that will ensure consistent quality engagement
performance
Supervision responsibilities
Review responsibilities
Appropriate consultation takes place on difficult or contentious
matters
Sufficient resources are available for such consultation
The nature, scope and conclusions of the consultation are
documented
Conclusion arising from the consultation are implemented
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v.
(c)
Guidance on engagement quality control reviews should be put
in place
Monitoring
The firm is required to establish a monitoring process designed to
provide it with reasonable assurance that its quality control system is
relevant, adequate and operating effectively. This process should
include inspecting, on a cyclical basis, at least one completed
engagement for each engagement partner.
Responsibility for the monitoring process should be given to a partner
or other appropriate persons with sufficient experience and authority.
When monitoring review which is also known as cold review is carried
out, it should not be performed by those involved with the
engagement or the engagement quality control review.
The practice should ensure that its quality control and procedures are
regularly reviewed and updated to ensure compliance with set
standards both within the firm and generally by the profession as a
whole.
The Institute of Chartered Accountants of Nigeria places much emphasis on
the requirement that all member firms put in place a system of quality
control because IFAC to which ICAN belongs, requires that members should
perform their professional work with due skill and care and with proper
degree of technical competence.
To satisfy the professional requirements for due skill, care and technical
competence, audit firms need to have a strong system of quality control.
Good procedures for quality control reduces the risk for the audit firm to:
-
issue an incorrect audit opinion
be sued for negligence, and payment of damages
avoid adverse publicity and damage to the reputation of the
firm
avoid loss of client
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Marking Guide
a)(i)
Stating of impact
Decision arrived at based on impact
2nd Scenario – as above
3rd Scenario
Stating of impact
Stating of hostility of takeover
(ii) Stating any five factors mentioned
(iii) Stating any steps
(b)(i)
Marks
Marks
1
½
1
½
1
1
5
1 mark each
1 mark each
5
5
Independence:
Stating of independence of mind and appearance
Not affected by influences or prejudices
Acting with integrity
(ii) Personnel Management:
Direction and supervision of staff
Audit programme and working papers
Review of work
(iii) Acceptance and continuance of client:
Establishment of policies and procedures to
ensure that the firm is competent and capable
Assurance of independence
(iv)
Engagement performance:
- Policy in place for supervision, review of quality control
- Availability of resources
- Internal and external consultations
- Conclusions arising from the consultation & implementation
(v)
Monitoring:
Establishment of monitoring policies
2 marks each for any
Responsibility for monitoring – engagement partner
(i) – (v)
Regular update of quality control procedures
10
(c)
Stating of due care and skill
Stating of any two risks that will be reduced
by good quality control
Total
1
2 Marks each
4
30
EXAMINER‟S REPORT
The question is in three parts. Part (a) tests audit engagement issues, part (b) tests
element of good quality control in an audit firm, while part (c) tests the importance of
quality control as enunciated by ICAN.
Being a compulsory question, it was attempted by all the candidates, but performance was
poor.
The commonest pitfall of the candidates was their inability to relate part (b) of the
question to quality control.
Candidates are advised to read the Study Pack thoroughly before embarking on the
examination.
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SOLUTION 2
(a)
Fundamental Principles of ethical standards as provided in the Institute of
Chartered Accountants of Nigeria‟s Code of Professional Conduct for
Accountants are:
i)
Integrity
A Chartered Accountant should be straightforward and honest in all
professional and business relationships. Integrity implies not merely
honest, but fair dealing and truthfulness.
ii)
Objectivity
Objectivity is the state of mind, which has regard to all considerations
relevant to the task at hand, but no other consideration. A Chartered
Accountant should not allow bias, conflict of interest or undue
influence to override his professional or business judgment.
iii)
Professional Competence and Due Care
A Chartered Accountant has a continuing duty to maintain
professional knowledge and skills at the level required to ensure that
a client or employer receives competent professional service based on
current developments in practice, legislation and techniques. A
member should not accept or perform work, which he is not
competent to undertake unless he obtains such advice and assistance
as will enable him to do so. A Chartered Accountant should act
diligently and in accordance with applicable technical and
professional standards when providing professional services. A
member should carry out his professional work with due skill, care,
diligence and expedition and with proper regard for the technical and
professional standards expected of him as a member.
iv)
Confidentiality
A Chartered Accountant should respect the confidentiality of
information acquired as a result of professional and business
relationships and should not disclose any of such information to third
parties without proper and specific authority unless there is a legal or
professional right or duty to disclose. Confidential information
acquired as a result of professional and business relationships should
not be used for the personal advantage of the Chartered Accountant or
third party.
v)
Professional Behaviour
A Chartered Accountant should comply with relevant laws and
regulations and should avoid any action that discredits the profession.
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A member should conduct himself with courtesy and consideration
towards all with whom he comes in contact with in the course of
performing his work.
(b)
Penalties for a member‟s unethical behavior include:
Fines
Suspension from membership of the Institute for a period of
time
Expulsion from membership of the Institute
Withdrawal of Certificate and Licence to Practice
Reprimand
Payment of costs associated with the investigations and
meetings
o
o
o
o
o
o
(c)
Enforcement of ethical standards
(i)
The power of the Institute to enforce ethical standards is
derived from the Institute of Chartered Accountants of Nigeria
Act No 15 of 1965. This power is conferred on the Accountants
Disciplinary Tribunal. The Tribunal in this respect is
independent of Council.
(ii)
The Investigating Panel considers complaints against the
conduct of members, and is empowered to initiate disciplinary
action by referring appropriate cases to the Disciplinary
Tribunal for adjudication.
(iii)
Where a complaint is against the conduct of a firm having more
than a partner, the complaint shall be deemed to have been
made against each and every member who was partner in the
said firm at the material time for the purposes of this scenario.
(iv)
Any failure to follow the guidance in fundamental principles or
in the statements shall also be taken into account by the
Committee of the Institute responsible for regulating the work
of members and member firms.
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Marking Guide
(a)
Marks
Stating any of the fundamentals of ethical standard 1 Mark each
Integrity, objectivity, professional competence
and due care, confidentiality, professional
behaviour
4
Development of each fundamental
1 point each
4
(b)
Any four penalties
1 Mark each
4
(c)
Analysing the powers of the Institute in
enforcing the ethical standards
Marks
4
2 Marks for 4
Total
8
8
20
EXAMINER‟S REPORT
The question tests ethical standard fundamentals, penalties for unethical behavior
by members and the powers available to the Institute on the enforcement of ethical
standards.
About 90% of the candidates attempted the question and performance was good.
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SOLUTION 3
(a)
Extracts of Audit Planning Memorandum:
(i)
(ii)
(iii)
(b)
-
Confirm trading sanctions against your country/client noting
when this could be lifted.
-
Verify/compute inventory valuation report in respect of the
specific inventory of N1.5m made to customer‟s specification.
-
Obtain/verify customer‟s request for the production.
-
Trace funds already received on the contract to the financial
records and determine amount outstanding.
-
Verify and recompute work-in-progress sheets/reports in
respect of manufacture of equipment for Hazard Care Plc.
-
Agree labour charge out rate
-
Compute and compare apportionment of overheads
Verify cost records for non-current assets, noting
Valuation of materials
-
Valuation for labour/charge-out-rate
-
Apportionment of overheads
-
Whether loan interest is directly related to the loan obtained for
the manufacture/construction of the assembly line only
-
Verify/review loan document
-
Check interest computation and compare with what is charged
to non-current assets register.
Areas of Audit Adjustments
Audit journal will be raised in respect of the inventory of N1.5m
which belonged to a customer whose country has imposed
trading sanctions against our client‟s country.
-
Where no amount has been received on the contract, write off
the full amount already incurred against income.
-
Where part payment has been made, write off the inventory
value of N1.5m, but make provision for the amount paid.
-
If interest calculations by the firm are materially different from
client‟s calculation, appropriate correcting journal should be
raised.
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Marking Guide
Marks
Marks
(a)
1 mark for any 10 points raised
10
10
(b)
21/2 marks for any four areas of audit adjustments listed
10
10
20
EXAMINER‟S REPORT
The question tests candidates understanding in respect to preparation of audit
planning memorandum and adjustments needed to be made by auditors to correct
material misstatement in financial statements.
About 40% of the candidates attempted the question and performance was poor.
The commonest pitfall of candidates was their lack of understanding of the
question.
Candidates are advised to read the Study Pack very well before writing the
examinations.
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SOLUTION 4
(a)
Company directors may wish to portray the company‟s performance as better
than it actually is under the following circumstances:
i.
ii.
iii.
iv.
v.
vi.
Where directors are entitled to bonus based on higher profit before tax
or higher turnover.
When there is a plan to sell the company or a merger is envisaged.
Where they intend to influence creditors or lenders particularly where
the company is seeking for facilities.
Where retaining one or more directors is based on performance.
Where there has been some sort of embezzlement on the part of the
directors and there is need to cover up.
Where the company wants to offer its shares to the public.
(b) Steps to be taken when misstatements are identified in various account
balances and other financial statements are:
-
discuss the matter with management regarding its effect on the
accounts
if the auditor considers that there is an apparent material
misstatement of fact, he should request management to take legal
advice and thereafter consider the legal advice received by the entity
notify those charged with governance and explain what the auditor‟s
action will be concerning the misstatement
take any further appropriate action (such as taking legal advice about
the matter)
where management refuses to adjust the financial statements, the
auditor should modify its report based on appropriate circumstances.
(c) The audit procedures to be adopted include the following:
-
Deploy experienced personnel in key areas of the clients audit e.g.
Revenue, bank balances, receivables, payables and assets.
Obtain external confirmation in respect of certain balances – banks,
receivables and payables.
Obtain expert advice/confirmation with experts in respect of plant and
equipment.
Carry out an analytical review
Discuss with those charged with governance.
Evaluate the internal control system of the company
Carry out detailed substantive tests
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Marking Guide
(a)
Marks
Any three circumstances where the
Directors may wish to portray better performance than
actual
6
(b)
Assess and advice on any two procedures
4
(c)
Any four audit procedures to be adopted when fraud
is identified
10
20
EXAMINER‟S REPORT
The question tests candidates knowledge on the manipulation or window dressing
of financial statements to show better performance than actual and procedures to
be adopted by auditors when faced with such circumstances.
About 90% of the candidates attempted the question and performance was below
average.
The commonest pitfall of the candidates was their confusing issues to be discussed
in Part B for Part C and vice-versa.
Candidates are enjoined to cover the Study Pack adequately before examinations.
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SOLUTION 5
(a)
Information technology improves internal control in the following ways:
i.
If correct data is presented to the machine and faultless computer
programs are used, the output will be error free.
ii.
Passwords ensure that only those authorized can handle particular
transactions.
iii.
Access is usually restricted to computer environment.
iv.
Completeness of recording is assured by the design of programs and
procedures that allow only complete documentation to be entered into
the system.
(b) Risks specific to accounting system in an IT environment include:
i.
Human error.
ii.
Over-riding of controls by management for fraudulent acts.
iii.
Possibility of collusion and fraud by members of staff particularly
computer staff.
iv.
Failure to apply control properly
v.
Poor program set-up
vi.
Unauthorised access to master-file
vii.
Unexpected systems break down through virus or other means
viii.
Loss of audit trail
Marking Guide
Marks
(a)
Any three points how IT improves internal
control e.g. password, access restriction, etc
(b)
Any six points on specific risks to
Accounting system in an IT environment
Marks
6
9
15
EXAMINER‟S REPORT
The question tests candidates understating of how IT improves internal control of an
accounting system. It also tests the risks associated with accounting system in IT
environment.
About 70% of the candidates attempted the question and performance was poor.
The pitfall of the candidates was stating the benefits of IT instead of stating how
Information Technology improves internal control.
Candidates are enjoined to familarise themselves with their Study Pack more
comprehensively.
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015
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SOLUTION 6
(a)
The attitude of management of B Plc is at variance with the spirit of good
governance for the following reasons:
Corporate governance is the way in which companies are managed and
controlled. In particular, it focuses on the role of directors and their
responsibilities to shareholders and other stakeholders.
As a form of business entity, an important feature of companies is the
divorce of ownership from management. Good governance requires that
every company should:
(b)
-
Be headed by an effective board which is collectively responsible for
the success of the company.
-
Have a clear division of responsibilities at the head of the company
between the running of the board and the executive responsibility for
the running of the company‟s business. No one should have
unfettered powers of decision.
-
Have a board that includes a balance of executive and non-executive
directors and in particular, independent non-executive directors such
that no individual or small group of individuals can dominate the
board‟s decision makings.
-
Put in place a formal and transparent procedure for the appointment
of new directors to the board.
-
Ensure that the board is supplied in a timely manner with information
in a form and of a quality appropriate to enable it to discharge its
duties. All directors should receive induction on joining the board
and should regularly update and refresh their skills and knowledge.
-
Ensure that the board undertake a formal and vigorous annual
evaluation of its own performance and that of its committees and
individual directors.
Matters of importance that are required to be communicated to those
charged with governance of a public company by its auditors include:
i.
The responsibility of the auditors in relation to the financial
statements.
ii.
Planning, scope and timing of the audit
iii.
Significant findings from the auditors
iv.
Material weaknesses, if any in the design, implementation or
operating effectiveness of internal control
v.
Written representations required by auditors
vi.
Auditors‟ independence
o
A statement that relevant ethical requirements regarding
independence have been complied with.
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o
All relationships (including total fees for audit and non-audit
services) which may reasonably be brought to bear on
independence.
o
The related safeguards that have been applied
eliminate/reduce identified threats to independence.
Marking Scheme
(a)
Any six points on good governance
11/2 mark for each point.
(b)
Any six points on matters of importance
1 mark per point
Marks
to
Marks
9
6
15
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of Corporate Governance.
About 80% of the candidates attempted the question and performance was poor.
The commonest pitfall of the candidates was their lack of understanding of the
requirements of the question which bothers on Corporate Governance.
Candidates are advised to familarise themselves with the Study Pack.
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SOLUTION 7
(a)
(b)
Further information that the auditor would require before reaching his audit
opinion include:
-
Obtaining sufficient evidence about the appropriateness of
management‟s use of the going concern assumption in the
preparation and presentation of the financial statements.
-
Checking whether a material uncertainty exists that may cast
significant doubts on the entity‟s ability to continue as a going
concern.
-
Performing risk assessment procedure to determine whether there are
events or conditions that may cast significant doubt on the entity‟s
ability to continue as a going concern.
-
Enquire for written representation from management and where
appropriate, those charged with governance, regarding their plan for
future action and the feasibility of these plans.
-
Enquire from the entity‟s legal counsel regarding litigation and
claims.
-
Enquire from management the possibility of getting suppliers from
other sources.
-
Whether management has been able to determine how long the
financial difficulties of their supplier will last
-
Enquire about the current level of inventory and determine whether it
will be sufficient for the company until supplies resume, or alternative
found.
-
Confirm whether there is in place Loss of Income Insurance Policy.
Possible forms of opinion
Where the going concern assumption is appropriate but a material
uncertainty exists the auditor must consider whether the financial
statements:
o
Adequately disclose the principal events or conditions that may cast
significant doubt on the entity‟s ability to continue as a going concern
and management‟s plans to deal with those events or conditions and
o
Disclose clearly that there is a material uncertainty related to events
or conditions that may cast significant doubt on the entity‟s ability to
continue as a going concern.
If there is adequate disclosure then the auditor should express an unquilified
opinion but should use an “emphasis of matter” paragraph to highlight the
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uncertainty and to draw attention to the relevant note in the financial
statements.
If there is no adequate disclosure then the auditor should express a
“qualified or adverse” opinion.
Where the going concern assumption is inappropriate the auditors should
express:
o
an adverse opinion if the financial statements have been prepared on
a going concern basis.
o
an unqualified opinion if the financial statements have been prepared
on an alternative acceptable basis (e.g. break-up basis) and there is
adequate disclosure of this basis. An “emphasis of matter” paragraph
may be required.
Marking Guide
(a)
(b)
Marks
Marks
Any seven additional information
one mark for each point
7
Reference to Going Concern
Reference to “Uncertainty –subject to”
1
2
Stating adequate disclosure, unmodified opinion
and emphasis of matter paragraph
2
Stating that there is no adequate disclosure, then there is
adverse opinion if financial statements are prepared in line
with going concern.
2
Unmodified opinion where the financial statements are
prepared on break-up basis.
1
15
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on the various forms of audit report.
About 80% of the candidates attempted the question and performance was fair.
The commonest pitfall of the candidates was their inability to identify the problem
in the question to be able to come up with relevant audit report.
Candidates are advised to cover the syllabus and study the Pack properly.
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PATHFINDER
MAY 2016 PROFESSIONAL EXAMINATION
Question Papers
Suggested Solutions
Plus
Marking Guide
Examiners‟ Reports
NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com
THE INSTITUTE OF CHARTERED ACCOU NTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMI NATION - MAY 2016
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3 hours
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN THE PAPER
SECTION A:
COMPULSORY
(30 Marks)
QUESTION 1
Your firm was recently appointed the statutory auditors of Foodys, a limited liability
company in Nigeria, for the year ended December 31, 2015. The previous auditors,
from whom your firm has received professional clearance, did not wish to be re­
appointed as auditors.
The principal activities· of the company are the distribution and retail of fine
Spanish food products. All products are imported from suppliers based in Spain and
delivered to Foodys's central warehouse in the south west of Nigeria. The company has
its own retail outlets but also supplies national supermarket chains and small
independent retailers in Nigeria. Sales through Foodys's retail outlets are on cash
basis and sales to supermarkets and independent retailers are on credit basis.
The company maintains computerised records for inventories held at the
distribution centre and retail outlets. The inventory records are supported by
continuous counting procedures and as a result the company does not undertake a
physical count at the year end.
Foodys's retail outlets are equipped with computerised tills. As each sale is recorded,
the computer updates the quantity sold and the inventory balance. The manager at
each outlet is responsible for banking the takings on a daily basis.
During the year, the company engaged consultants to design and implement the
company's new website with online ordering facilities. Under the terms of the contract.
the website was scheduled to be operational by the end of September 2015 in order to
take advantage of the high seasonal demand at this time of the year. Due to technical
problems, the website was not launched until the end of November 2015. The
consultants have been paid in full for their work. However, the company has commenced
legal proceedings for breach of contract.
Despite failing to meet its sales targets in respect of online sales, the management
accounts for the 11months to November 30, 2015 indicate an increase in sales revenue
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of 12% compared with the same period in 2014. Inventory and receivables balances are
significantly higher than the previous year as a result of the increased level of activity.
Management is planning to expand the retail activities of the business by opening
additional retail outlets. It is hoping to fund the expansion with a bank loan and
has approached the company's bankers to provide the fundi ng. The bankers require
the audited financial statements before making a decision. Management is keen to
have the funding in place to progress with the expansion and would like to have
the audit completed by February 28, 2016.
Required:
a.
Identify the key business risks from the circumstances described above.
b.
List the factors which have led you to identify that risk;
c.
Outline the audit work you would perform to address the risk
(Total 30 Marks)
SECTION B: ANSWER TWO OUT OF THREE QUESTIONS IN THIS SECTION (40 MARKS)
QUESTION 2
a.
Comment on the need for ethical guidance for accountants on money laundering.
(5 Marks)
b.
You are senior manager in Nnamdi & Co, a firm of Chartered Accountants in
Nigeria. Recently, you have been assigned specific responsibility for undertaking
annual reviews of existing clients. The following situations have arisen in
connection with three clients:
i.
Nnamdi & Co was appointed auditor and tax advisor to Unicorn Co last year
and has recently issued an unmodified opinion on the financial statements for
the year ended March 31, 2016. To your surprise, the tax authority has just
launched an investigation into the affairs of Unicorn on suspicion of under­
declaring income.
( 7 Marks)
ii.
The chief executive of Hassan Co., an exporter of specialist equipment, has
asked for advice on the accounting treatment and disclosure of payments
being made for security consultancy services. The payments, which aim to
ensure that consignments are not impounded in the destination country of a
major customer, may be material to the financial statements for the year
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ending December 31, 2015. Hassan does not treat these payments as tax
deductible.
(4 Marks)
iii.
Your firm has provided financial advice to the Adetunji family for many years
and this has sometimes involved your firm in carrying out transactions on
their behalf. The eldest son, Verni, is to take up a position as a senior
government official to a foreign country next month.
(4 Marks)
Required:
Identify and comment on the ethical and other professional issues raised by each of
these matters and state what action, if any, Nnamdi & Co should now take.
(Total 20 Marks)
QUESTION 3
The Kuramo Art Gallery and Museum (KAGM) is in the centre of a city that is
popular with tourists. About 6 5% of its income comes from admission fees and
annual memberships, and about 30% of its income comes from sponsorshi p of
special exhibitions by companies. Most of the remaining income comes from a
small cafe and gift shop in the art gallery and museum.
Admission fees come from sales of tickets to daily visitors and from annual
membership subscriptions from 'Friends of KAGM' who are entitled to free entry to the
art gallery and museum at any time.
Day tickets can be purchased by credit card in advance, by a telephone 'hotline· or
at KAGM's website on the Internet. Alternatively, day tickets can be bought with
cash or credit card at the 'door· on the day of the visit. Reduced prices are available
for children, students and individuals aged over 65, and there are also special
reduced-price 'family tickets' for two adults and two children.
Sponsorship arrangements are agreed up to 18 months in advance. Some corporate
sponsors, particularly transport companies (bus companies and railway companies)
sell advertising to KAGM.
The management of KAGM have identified the following applicable risks that
need careful attention. They believe that these risks should be managed actively.
(i)
There is a failure to attract more visitors because of the poor condition of
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many of the paintings in the art gallery and of the items in the museum.
Paintings must be restored regularly because their condition deteriorates.
KAGM has just one specialist restorer, who is unable to keep up with the
required volume of work. The management of KAGM recognise that
investment in new items and the restoration of existing items is inadequate,
but blame the lack of income for the problem.
(ii) Some corporate sponsorship agreements may not be invoiced due to poor
communication between the sponsors, KAGM's sponsorshi p managers and the
accounts department of KAGM.
(iii)
Some sponsorship agreements are not invoiced at their correct amount. This
happens often when a sponsor is also a company that provides advertising for
KAGM. Normal practice is for these sponsors to deduct their advertising charges
from the amount they pay to KAGM in sponsorshi p. However, the accounts
department in KAGM is not given the details of these set-off arrangements.
(iv) Some of the cash received from day visitors at the door may be stolen (or lost, or
used by management for business expenses) and does not reach KAGM's cashier.
(v)
The on-line booking system for buying tickets in advance on the KAGM website is
not always available because the website is 'down'.
Required
a.
Describe appropriate internal controls to manage each of the applicable risks
described above.
(15 Marks)
b.
Explain the financial statements risks that arise from each of these applicable
risks.
( 5 Marks)
(Total 20 Marks)
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QUESTION 4
You are the manager responsible for four audit clients of Globe & Co, a firm of Chartered
Accountants. The year end in each case is June 30, 2015.
You are currently reviewing the audit working paper files and the audit seniors'
recommendati ons for the auditors' reports. Details are as follows:·
a.
Red Co. limited is a subsidiary of Yellow Holdings Plc. Serious going concern
problems have been noted during this year's audit. Red will be unable to trade for
the foreseeable future unless it continues to receive financial support from the
parent company. Red has received a letter of support ( 'comfort letter') from Yellow
Holdings Plc.
The audit senior has suggested that due to the seriousness of the situation, the
audit opinion must at least be qualified ‘except for'.
( 5 Marks)
b.
Edo Co Plc has changed its accounti ng policy for goodwill during the year from
amortisation over its estimated useful life to annual impairment testing. No
disclosure of this change has been given in the financial sta tements. The carrying
amount of goodwill in the statement of financial position as at June 30, 2015 is the
same as at June 30, 2014 as management's impairment test shows that it is not
impaired.
The audit senior has concluded that a modification to the opinion is not required
but suggests that attention can be drawn to the change by way of an emphasis of
matter paragraph.
(6 Marks)
c.
The directors' report of Prompt Co Limited states that investment property rental
forms a major part of revenue. However, a note to the financial statements shows
that property rental represents only 1.6% of total revenue for the year. The audit
senior is satisfied that the revenue figures are correct.
The audit senior has noted that an unmodified opinion should be given as the audit
opinion does not extend to the directors’ report.
(4 Marks)
d.
Audit work on the after-date bank transactions of Twinkle Co Limited has identified
a transfer of cash from Star Co. Limited. The audit senior assigned to the audit of
Twinkle has documented that Twinkle's finance director explained that Star
commenced trading on July 20, 2015 after being set up as a wholly-owned foreign
subsidiary of Twinkle.
The audit senior has noted that although no other evidence has been obtained, an
unmodified opinion is appropriate because the matter does not impact on the
current year's financial statements.
( 5 Marks)
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Required:
For each situation, comment on the suitability or otherwise of the audit
senior's proposals for the auditors' reports. Where you disagree, indicate
what audit report modification (if any) should be given instead.
(Total 20 Marks)
SECTION C: ANSWER TWO OUT OF THREE QUESTIONS IN THIS SECTION (30 MARKS)
QUESTION 5
Badagry Yachti ng and Marina (BYM) have a marina on the West Coast of Nigeria
and a large sales operation dealing in yachts and speedboats. You are responsible for
the audit of BYM and have found some potential causes of concern that could
indicate fraudulent activity or financial misconduct within the company. In
particular:
{i)
(ii)
(iii)
30% of the yachts on sale by BYM are supplied through one of the major
international boating companies with a special finance arrangement deal.
However, BYM have also obtained separate finance on these yachts, which are
therefore in effect being 'double financed'.
Ten yachts shown as assets by BYM cannot be located, with no explanation
other than that they have not been sold. These yachts are worth
approximately N50million.
Long delays have occurred in performing reconciliations with the last four
months of reconciliations still not completed. At the time of the last
reconciliation, material differences had been identified upon which no action
appears to have been undertaken.
(iv) Sales have been overstated by N100million in the current financial
statements.
The finance director has been off sick with stress for the last five months and
therefore has not been available to discuss any of the issues identified.
Required
a.
Explain the difference between fraud and error and how the issues shown here
could be categorised as fraud or error.
(6 Marks)
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b.
Discuss the role of management and the role of the auditor in the prevention
and detection of fraud and error.
(3 Marks)
c.
Describe what steps you would take to further investigate and then report on
the matters referred to above.
(6 Marks)
{Total 15 Marks)
QUESTION 6
Bob Removals Limited is a removals company. In the year ended December 31, 2015 the
company made a trading profit of N800,000. You are the manager in charge of the
audit.
The following issues have arisen:
·
(i)
A customer is suing the company for N1m for damage caused to antique
furniture. The company is defending the claim and believes that the furniture
was a reproduction as opposed to antique and therefore worth only N100, 000.
(ii)
A balance due from Safe Storage in respect of sub-contract work, of N300, 000,
has been outstanding for over six months. Your firm has been asked by Bob
Removals' accountant not to write to Safe Storage for direct confirmation of this
amount as the latter company objects to such letters. You have been assured
by the accountant that the relationship between the two companies is good and
that the outstanding balance will be paid.
(iii)
Bob Removals has recently invested in four new removal vans and is currently
carrying out extensive refurbishment of its premises. As a result of this
expenditure the company has reached its overdraft limit of N500,000.
Required
F or each of the above issues:
a.
State, with reasons, the audit work that you would expect to find when
undertaking your review of the audit working papers for the year ended
December 31, 2015
b.
Draft the relevant sections dealing with these issues of the written
representation letter you would wish the directors to sign.
(Total 15 Marks)
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QUESTION 7
You are one of three audit managers working for a medium-sized firm of
accountants which has just taken on the audit of Mastay Designs limited. Mastay
Designs retails designer clothes through its two shops located in busy towns 30
kilometres apart.
The clothes sold are very exclusive. They are designed by the company's owner, Mrs.
Smith, who is also the managing director. 50% of the company's clothes are made to
order with the remainder being produced as inventory for the two shops. Each
hand made piece can take up to three months from commencement of design to
finishing and can sell for up to N100,000.
Mrs Smith splits her time equally between the two shops. She employs two
shop managers, two assistants, and other staff who make up her designs in
workrooms above each shop. There are two other directors: Mr. Smith, her
husband, the finance director, and Ms Craft, her sister, who is the marketing
director.
The following is an extract from the financial statements:
Year ended September
30, 2015 (draft)
Non-current assets
Intangible (goodwill)
Property, plant and equipment
N
Current assets
Inventories
Finished goods
Work in progress
Year ended
- 30,
September
2014 (actual)
N
675,000
400,000
750,000
450,000
1,500,000
450,000
2,100,000
750,000
Note to the draft accounts
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There is a legal claim pending. However, the directors consider that it is so
unlikely to succeed that no provision has been made for it in the financial
statements.
The goodwill figure arose when Mastay Designs Limited, originally a
partnership was incorporated to become a limited company in July 2011.
Required:
a.
State the evidence you would require from Mastay Designs limited in
order to verify the year end inventory figures and justify your answer. (4
Marks)
b.
Briefly describe what audit work you would perform to verify the figure
for goodwill in the financial statements.
( 3
Marks)
c.
Explain what is meant by an ·accounting estimate' and describe what
work you would perform to verify whether or not the figure for the
legal claim pending should be included in the financial statements.
(4 Marks)
d.
Mastay Designs limited has approached its bank to discuss raising
finance for a new exciting 12 month partnership venture with a major
clothes designer. The bank has asked for a five year forecast to be
examined and reported on by an accountant. Briefly describe what work
you would carry out in connection with the forecast, including the
contents of your firm's report.
(4 Marks)
(Total 15 marks)
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SOLUTION TO QUESTION 1
1a. Business risks according to ISA 315 relate to identifying and assessing the risk of
material misstatements through understanding the entity and its environment
and can be defined as risks resulting from significant conditions, events,
circumstances, actions or inactions that could adversely affect an entity’s ability
to achieve its objectives and execute its strategies, or from the setting of
inappropriate objectives and strategies.
Based on the scenario in the question, the following are the business risks that
are embedded in the operations of Foody’s Ltd:
i)
The imported food is perishable and might spoil before getting to Nigeria.
ii)
Foreign exchange fluctuations may lead to large losses and may not be
treated in line with IAS 21.
iii)
The risk that the food might have expired before being sold to customers
causing reputational risk. Some of the expired goods might be carried in
inventory without value adjustment in line with IAS 2.
iv)
Credit risk arising from payment default by national supermarket chains and
independent retailers and inadequacy of provisions, thus overstating the
receivables.
v)
High maintenance cost of website and likely technical problems with the
website ordering facilities, leading to increased operational cost and errors
in recorded inventory/revenue
vi)
Cash sales in company’s outlets increase the risk of pilferage
vii) Mismatch of computerised inventory records and the physical existence of
inventory leading to errors in inventory value.
viii) Current year’s Financial Statement is required for the primary purpose of
obtaining bank funds for the expansion project. This increases the inherent
risk of management bias in the preparation of the Financial Statements.
ix)
Bank loan may require compliance with strict covenants, pledging of the
company’s assets, high interest costs, which may not be properly treated in
line with IFRS. It will also increase the company’s financial leverage.
x)
Coordination, supervision, and monitoring issues relating to having multiple
distribution outlets. A business model involving multiple locations is difficult
to control, increasing the likelihood of inefficiencies, system deficiencies,
and theft of inventory or cash.
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xi)
Political risk with Spain may stall or frustrate the only source of supply of
goods, e.g., imposition of increased import duties on or outright ban of
imported food products and political strife between the two countries.
xii) Legal proceedings against the consultant for breach of contract may
increase reputational risk. The strained relationship may prevent
access to the consultant in future when the need for their services
arises.
(b)
(c)
The factors that aid risk identification, and
audit work to address each risk:- These are discussed in a tabular form as
follows:
i)
The imported food might spoil before getting to Nigeria.
b) Factors aiding risk identification
c) Audit work to address the risk

The nature of the business.

The nature of the inventories.

The mode of operation of the
business.


Inspect the terms of contract
governing
the
importation
of
inventory from Spain
Examine
whether
adequate
mitigation is in place covering the
physical security and insurance of
the inventory while in transit to
Nigeria.
ii)
Foreign exchange fluctuations may lead to large losses and may not be
treated in line with IAS 21.
b) Factors aiding risk identification
c) Audit work to address the risk

Foreign currency fluctuation in
Nigeria is enormous and highly
unpredictable

Foreign exchange (FX) is highly
regulated.

Requirements of IFRS



Inquire from management how FX
risk exposure is being managed.
Review the company’s cash flow
forecast
and
examine
the
assumptions relating to FX rate
fluctuations.
Ensure
that
management
assumptions
are
reasonable.
Inspect the accounting records to
ascertain if FX transactions and
differences were treated in line with
IAS 21.
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iii)
The risk that the food might have expired before being sold to customers
causing reputational risk and some of the expired inventory might be
carried at year end without value adjustment in line with IAS 2.
b) Factors aiding risk identification

The nature of the business.

The nature of the inventories

Inventory valuation is subject to
IFRS regulation

The company’s reputation
iv)
c) Audit work to address the risk



Credit risk arising from default by national supermarket chains and
independent retailers and inadequacy of provisions, thus overstating the
receivables.
b) Factors aiding risk identification

The nature of the business.

Competitive practices

Degree
of
management

judgment
c) Audit work to address the risk

by

Degree of oversight by those
charged with governance on
accounting practices.


v)
Inquire of management the process in
place for identifying slow moving items
and how such items are valued.
Review internal audit plan, work, and
report on inventory.
Perform detailed cost and NRV testing
of inventory to ensure valuation at
lower of cost and NRV in line with IAS
2.
Inquire from management the credit
control measures in place, such as
credit references, credit limits, credit
monitoring.
Test such controls as stated above to
ensure that they are effective.
Perform age analysis of receivables and
ensure adequate provision has been
made by management.
Circularize the receivables
High maintenance cost of website and likely technical problems with the
website ordering facilities, leading to increased operational cost and errors
in recorded inventory/revenue.
b) Factors aiding risk identification
c) Audit work to address the risk

Significance of volume of online
sales.

Susceptibility of websites to
technical hitches and attack


Inquire
from
management
to
understand the nature of the problem
with the website.
Test application controls over the
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through virus and malicious acts
of hackers

website sales with the aid of CAATs.
Obtain evidence that antivirus is
regularly updated, firewall is in place
and working effectively, and patches
are being run regularly.
vi)
Cash sales in company’s outlets increase the risk of pilferage
b) Factors aiding risk identification
c) Audit work to address the risk

Cash is susceptible to outright
theft and teeming and lading

Nature
of
the
business segment

Customers convenience

Practice by competitors
vii)

company’s


For a sample of daily sales, ensure they
are recorded, and they are banked
completely on a daily basis.
Review the controls around the cash
operations such as segregation of
duties and ascertain if they are
effective.
Observe operations and perform
surprise till counts with reconciliation
to the records.
Mismatch of computerised inventory records and the physical existence of
inventory leading to errors in inventory value.
b) Factors aiding risk identification
c) Audit work to address the risk

The perpetual inventory system
adopted by the company which
does not require year-end
inventory count

Susceptibility of inventory to
theft being imported food
products

The mode of operation of the
business.





For a sample of items in the inventory
records, verify the physical existence of
the items to identify overstatement of
records.
For a sample of physical items of
inventory, check that the records are
accurate to identify possible omission
or understatement of records.
Do a detailed cost/NRV testing for a
sample of items
Select a sample of items sold after
year-end and compare their sales value
with the valuation made for them in
the year-end inventory.
Carry out cut-off procedure to ensure
the correctness of the inventory value
in the financial statements.
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viii)
Current year’s Financial Statements is required for the primary purpose of
obtaining bank funds for the expansion project. This increases the inherent
risk of management bias in the preparation of the Financial Statements.
b) Factors aiding risk identification
c) Audit work to address the risk

The company’s present state of
finance.

Management pressure to obtain
the funds.


ix)

Tendency for management to
change accounting policies and
estimates
IAS 8 requirements for change of
accounting
policies
and
accounting estimates.

Bank loan may require compliance with strict covenants, pledging of the
company’s assets, high interest costs, which may not be properly treated
in line with IFRS. It will also increase the company’s financial leverage.
c) Audit work to address the risk

Level of the company’s financial
risk.

The general banking rule in
Nigeria
x)


b) Factors aiding risk identification


Emphasize professional skepticism to
the engagement team.
Audit approach should emphasize
substantive procedures
Analytical review is required to identify
significant changes in trends for more
detailed testing.
Inquire from management of changes
in accounting policies and evaluate
their appropriateness in line with IAS 8
Accounting estimates and all other
areas of subject judgment should be
extensively
reviewed
for
reasonableness.

The requirements of IFRS on the
treatment of bank loan as
financially liability.


Review the proforma loan contract
terms to understand the nature of the
loan, the interest costs, and the
implications of the covenants.
Discuss with the management how they
intend to meet the loan requirements.
Evaluate
the
company’s
current
financial gearing to assess if it is
overtrading and needs to inject more
permanent capital into the business
Coordination, supervision, and monitoring issues relating to having
multiple distribution outlets. A business model based on multiple locations
is difficult to control, increasing the likelihood of inefficiencies, system
deficiencies, and theft of inventory or cash.
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b) Factors aiding risk identification

The nature of the business.

The mode of operation of the
business.
c) Audit work to address the risk



The complexity of the structure
of the business.

Present
control
structure
including internal audit
xi)
Political risk with Spain or EU countries may stall or frustrate the only
source of supply of inventory, e.g., imposition of increased import duties or
outright ban of imported food products.
b) Factors aiding risk identification

c) Audit work to address the risk
Political factors relating to
government policies of Nigeria
and Spain.

Potential changes in government
policies

State of the economy of the
country in which the company
trades.
xii)

Review internal audit reports on
operations in remote locations and test
if issues are resolved.
Inquire of management of the process
in place for monitoring the activities in
remote locations.
Review the schedule of inventory and
ensure that it includes the inventory in
the remote locations


Discuss with management if there are
plans to diversify the supply sources.
Review political reports on the
relationship and the level of trade
between the two countries
Legal proceedings against the consultant for breach of contract
b) Factors aiding risk identification
c) Audit work to address the risk

Relationship
between
the
company and the consultant

The nature and terms of contract

The potential future need for the
services of the consultant


Likelihood of success of the


Discuss
with
management
the
implications of the legal action against
the consultant on the company’s
reputation.
Ascertain whether an alternative
specialist can be engaged to maintain
the website now and in future.
Discuss with the company’s lawyers on
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litigation

the likelihood of the success of the
litigation
The company’s reputation
Marking Guide - Question 1
a.
Identifying business risks in the scenario
1 mark each for any ten risks
b.
10 marks
Identifying factors leading to or aiding risk
½ mark each for any twenty factors
c.
10 marks
Stating audit work to be performed to address each risk identified
½ mark each for any twenty steps
10 marks
30 marks
Examiner’s Report
The question tests candidates’ knowledge in respect of business risks and work to be
carried out in respect of the risks identified.
Being a compulsory question, almost all the candidates attempted the question.
Performance in part (a) of the question was fair, but poor in parts (b) and (c).
The commonest pitfall of the candidates was their inability to link parts (b) and (c) to
part (a).
Candidates are enjoined to cover the syllabus more appropriately before registering for
examination.
SOLUTION TO QUESTION 2
(a)
Need for ethical guidance
o
Accountants working in a country that criminalises money laundering are required
to comply with anti-money laundering legislation and failure to do so can lead to
severe penalties. Guidance is needed because:
•
legal requirements are onerous;
•
money laundering is widely defined;
•
accountants may otherwise be used, unwittingly, to launder criminal funds;
•
Money laundering can damage personal reputation.
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o
o
Accountants need ethical guidance on matters where there is conflict between
legal responsibilities and professional responsibilities. In particular, professional
accountants are bound by a duty of confidentiality to their clients. Guidance is
needed to explain:
•
how statutory provisions give protection against criminal action for
members in respect of their confidentiality requirements;
•
when client confidentiality overriding provisions are available.
Further guidance is needed to explain the interaction between accountants
responsibilities to report money laundering offences and other reporting
responsibilities, for example:
•
•
•
•
o
(b)
reporting to regulators;
auditor’s reports on financial statements (ISA 700);
reports to those charged with governance (ISA 260);
reporting misconduct by members of the same body.
Ethical guidance is needed to make accountants working in countries that do not
criminalise money laundering aware of how anti-money laundering legislation
may nevertheless affect them. Such accountants may commit an offence if, for
example, they conduct limited assignments or have meetings in a country having
anti-money laundering legislation (e.g. Nigeria, UK, Ireland, Singapore, Australia
and the United States).
Annual reviews of existing clients
(i)
Tax investigation – Unicorn Co.
o
Unicorn is a relatively new client. Before accepting the assignment, the
auditors should have carried out customer due diligence (CDD). They should
therefore have sufficient knowledge and understanding of Unicorn to be
aware of any suspicions that the tax authority might have.
o
As the investigation has come as a surprise it is possible that, for example:
•
the tax authorities suspicions are unfounded;
•
the auditors failed to recognise suspicious circumstances.
o
The auditor should review any communication from the predecessor auditor
obtained in response to its ‘professional inquiry’ (for any professional reasons
why the appointment should not be accepted).
o
A quality control for new audits is that the audit opinion should be subject to
a second partner review before it is issued. It should be considered now
whether or not such a review took place. If it did, then it should be
sufficiently well documented to evidence that the review was thorough and
not a mere formality.
o
Criminal property includes the proceeds of tax evasion. If Unicorn is found to
be guilty of under-declaring income that is a money laundering offence.
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(ii)
o
The auditors’ reputational risk will be increased if implicated because it knew
(or ought to have known) about Unicorn’s activities. They may also be liable
if found to have been negligent in failing to detect any material misstatement
arising in the financial statements.
o
Unicorn’s audit working paper files and tax returns should be reviewed for
any suspicion of fraud being committed by Unicorn or error overlooked by the
auditors. Tax advisory work should have been undertaken and/or reviewed by
a manager/partner not involved in the audit work and/or appropriate
safeguards for self-review threat applied.
o
As tax advisor, the auditors could soon be making disclosures of
misstatements to the tax authorities on behalf of Unicorn. They should
encourage Unicorn to make necessary disclosure voluntarily.
o
If the auditors find reasonable grounds to know or suspect that potential
disclosures to the tax authorities relate to criminal conduct, then a suspicious
transaction report (STR) should be made to the relevant authorities.
Advice on payments
There is no obvious tax issue, therefore:
o
Hassan is not overstating expenditure for tax purposes.
o
The auditor should consider his knowledge of import duties, etc in the
destination country before recommending a course of action to Hassan.
o
The payments being made for security consultancy services may amount to
bribery and corruption.
If this is a bribe:
o
Hassan clearly benefits from the payments as it receives income from the
contract with the major customer. This is criminal property and possession of
it is a money laundering offence
o
The auditors should consider the seriousness of the disclosure made by the
chief executive in the context of domestic law.
o
The auditors may be guilty of a money laundering offence if the matter is not
reported. If a report to the relevant authorities is considered necessary the
auditors should encourage Hassan to make voluntary disclosure. If Hassan
does not, the auditors will not be in breach of client confidentiality for
reporting knowledge of a suspicious transaction.
(iii) Financial advisor - Adetunji Family
o
Customer due diligence (CDD) and record-keeping measures apply to
designated non-financial businesses and professions who prepare for or carry
out certain transactions on behalf of their clients.
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o
Yemi is a ‘politically exposed person’ (‘PEP’ i.e. an individual who is to be
entrusted with prominent public functions in a foreign country).
o
The auditors’ business relationships with the family therefore involve
reputational risks similar to those with Yemi. In addition to performing
normal due diligence measures the auditors should:
•
have risk management systems to have determined that Yemi is a PEP;
•
obtain senior partner approval for maintaining business relationships
with such customers;
•
take reasonable measures to establish the source of wealth and source
of funds;
•
conduct enhanced ongoing monitoring of the business relationship.
o
The auditor can choose to decline to act for the family and/or Yemi (if asked).
o
If the business relationship is to be continued, senior partners approval
should be obtained for any transactions carried out on the family’s behalf in
future.
Marking Guide - Question 2
a.
bi.
bii.
biii.
Stating of money laundering as a crime; need for guidance;
the use of accountants unwittingly; how statutory provisions give
protection; reporting to regulators; reporting to those charged with
governance, etc
(1 mark each for any 5 points)
Stating of quality control for new audit; tax evasion as criminal
property; failure to recognise suspicious circumstances; reputation
risk to auditors; review of audit working papers, etc.
(1 mark each for any seven points)
Stating of knowledge of client’s business; not overstating
expenditure for tax; could be guilty; voluntary disclosure by auditor;
etc
(1 mark each for any four points)
Highlighting the –
Need for customer due diligence; politically exposed person; the
need for risk management; senior partner approval for new business
etc
(I mark each for any four points)
5 marks
7 marks
4 marks
4 marks
20 marks
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Examiners’ Report - Question 2
The question tests candidates understanding of ethical issues.
Most candidates attempted the question, but performance was poor.
The commonest pitfalls of the candidates were their lack of knowledge in this area,
and inability to apply their theoretical knowledge to practical issues.
Candidates are enjoined to cover the syllabus more approximately before registering
for examinations. They should also learn to apply their theoretical knowledge to
practical issues since this will be among their duties as Chartered Accountants.
SOLUTION TO QUESTION 3
(3a)
The applicable risks and audit work to be carried out include:
i)
Poor conditions of paintings leading to failure to attract visitors.





ii)
Determine the standard of performance for a specialist restorer, which
should help to determine the number of restorers that are needed.
Based on this, budget should be prepared to assess the level of funding
needed.
Restorers’ performance should be measured and monitored regularly.
Restorers’ remuneration should be tied to performance.
Incentive scheme should also be set for them to encourage good
performance above expectation.
Corporate sponsorship agreements not invoiced because of poor communication
among the parties.







Sponsorship agreement once executed with the sponsor should be sent to
the Accounts Department.
Accounts Department should issue invoice on each agreement the same day
and send to the sponsor.
Accounting entries should be passed in the sales journal and ledgers the
same day invoice is issued.
Invoice and sponsorship agreements should be serially numbered and
sequentially used.
Invoices and agreements should be matched for posting purposes,
The serial numbers of the two documents should be regularly accounted for,
Regularly, agreements should be reconciled with invoices and the entries in
the books to identify agreements that were not invoiced.
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iii)
Invoicing wrong amounts due to unrecorded set-off.





iv)
Improper accounting for cash from day visitors








v)
Sponsors’ invoicing for advertising should be sent directly to the KAGM’s
Account Manager.
Sponsorship agreements should include a column reflecting if advertising
will also be rendered by the sponsor. The sponsor should indicate on the
agreement if set-off is to be applied.
Agreements should indicate the payment period.
Accounts department should issue statement of accounts to the sponsors
periodically.
Accounts department should follow-up on the sponsors for settlement.
Day visitors should be issued a token, and they should present the token to
the cashier who collects cash from them and activate the token.
Different tokens should be for different pricing categories - individual,
family, etc to ensure that correct amount is charged and collected.
Cashier should bank all cash takings daily.
An imprest system should be maintained for that purpose. The imprest
should be regularly replenished and expenses retired.
Internal audit staff should do surprise cash count regularly.
Cash book should be reconciled with bank statements regularly and the
reconciliation statements should be reviewed independently by someone of
sufficient authority.
Reconciling items should be investigated, monitored, and cleared timely.
CCTV should be installed, with camera fixed at the sensitive points including
over the entrance door and the cashier’s stand.
Defective website






Income from admission and membership fees, part of which are paid online
through website, constitute 65%. This is a major part of KAGM’s income, and
therefore a high risk.
Website should be regularly maintained and monitored
The program controls should also be tested regularly.
Security measures should be reinforced.
Antivirus should be deployed and updated regularly
Website transactions should be monitored
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
Service maintenance agreement should be in place with a contractor, with
service level agreement on the maximum time of restoration with penalty
clauses.
(3b) Financial statements risks are those risks that arise from business activity which
have impact on the items in the financial statements. The following are the
financial statements risks for each identified business risk.
Risk
Financial Statements Risk
The poor condition of paintings Reduction in the number of visitors to the place will
in the gallery.
definitely reduce the overall revenue of the company
which will also lead to a fall in profit, and possible
manipulation of turnover figure.
Incomplete
invoicing
corporate sponsors
to This will lead to inaccurate record of income and
even loss of revenue to the company which also leads
to reduction in revenue.
Invoicing wrong amounts due This will affect the figure to be included in the
to unrecorded set-off.
financial statements.
Improper accounting for cash This will reduce the profit of the company thereby
from day visitors
affecting the financial statements.
Defective website
This may lead to loss of revenue and also the website
equipment may be subjected to depreciation in the
financial statements.
Marking Guide – Question 3
a) Identification of risks, which include
i.
Poor conditions of painting leading to failure to attract visitors.
ii. Corporate sponsorship agreement not invoiced because of poor
communication among the parties.
iii. Invoicing wrong amounts due to unrecorded set-off
iv. Improper accounting for cash from day visitors
v. Defective website
(1 mark for each risk mentioned)
5 marks
(2 marks for any two Internal Control Points raised under each risk 10 marks
stated above)
b) Listing risks and stating how they affect financial statements
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(½ mark each for five risks and effects on financial statements 5 marks
respectively)
Examiners’ Report – Question 3
The question tests candidates understanding of internal control on risks and how risks
affect financial statements
About 60% of the candidates attempted the question and performance was poor.
The commonest pitfall of the candidates was that they were writing on general
internal control issues rather than those directed towards specific risks.
Candidates need to read and digest the study text before embarking on examinations,
and also interpret questions properly before attempting them.
SOLUTION TO QUESTION 4
(a)
Red Co. Limited
Since Yellow Holdings Plc has confirmed its continuing support for Red Co.
Limited and this is evidenced in the letter of support, provided that this and any
other audit evidence (such as written representations from management) are
considered sufficient and appropriate, and this has been disclosed appropriately
in the financial statements, a modified opinion would not be required.
A modified opinion would be suitable if a letter of support from the parent
company had not been received. If the letter of support were considered
insufficient then the matter would be highlighted in the auditor's report in an
“emphasis of matter” paragraph.
(b)
Edo Co Plc
The company has changed its accounting policy for goodwill during the year and
failed to disclose this in the financial statements. In accordance with IAS 8:
Accounting policies, changes in accounting estimates and errors, the change in
policy should be disclosed in the financial statements.
An unmodified opinion on the financial statements with the inclusion of an
emphasis of matter paragraph is therefore not suitable as the opinion should be
modified on the grounds of a misstatement regarding disclosure - depending on
the materiality of the issue, the modification would either be qualified ('except
for') (if material) or adverse (if pervasive).
(c)
Prompt Co Limited
Although the auditors are not required to provide an opinion on other
information in documents containing financial statements, they are required to
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read the other information and consider its consistency with the accounts in
accordance with ISA 720: The auditor's responsibility in relation to other
information in documents containing audited financial statements.
As there is a material inconsistency between what has been reported in the
financial statements and what is stated in the directors' report, if the directors
refuse to make any amendments to the directors' report so that it is consistent
with the accounts, then although an unmodified opinion on the financial
statements can be issued, an emphasis of matter paragraph should also be
included to highlight this inconsistency.
(d)
Twinkle Co Limited
A wholly-owned subsidiary of Twinkle Co Limited has commenced trading on 20
July 2015, subsequent to Twinkle Co Limited year end. It is not clear whether the
company was incorporated prior to 30 June 2015.
The auditors should obtain more information about Star Co. Limited. It should be
possible to obtain details about its registration from the Company or Companies'
Registry. If this information is unavailable, this would represent an inability to
obtain sufficient appropriate audit evidence in respect of which the auditors
would have to qualify their auditor’s opinion in respect of it.
If the company was incorporated after 30 June 2015, it requires disclosure in the
financial statements as a non-adjusting event after the end of the reporting
period. If these disclosures are not made, the auditors would have to qualify the
auditor's opinion for 2015 due to a misstatement regarding the disclosure.
However, assuming the subsidiary was accounted for correctly in the 2016
financial statements, the 2016 auditor's report would be unaffected.
If the company was incorporated before 30 June 2015 then the subsidiary needs
to be consolidated in Twinkle Co Limited financial statements and the relevant
disclosures have to be made. If this is not the case, then the auditor's opinion for
2015 would have to be qualified over a misstatement in respect of the accounting
treatment of the subsidiary Star Co. Limited.. This would also result in the 2016
auditor's opinion having to be qualified over the same issue if it was not
corrected, as the problem would affect the comparative financial information in
the following year, however a disclaimer opinion would be more appropriate
position to take.
Marking Guide - Question 4
a) Detailed discussion of topic
Stating of modified opinion
b) Detailed discussion of topic
Stating of unmodified opinion
c) Detailed discussion of issue
3 marks
2 marks
4 marks
2 marks
2 marks
5 marks
6 marks
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“Emphasis of matter” paragraph
d) Detailed discussion of issue
Disclaimer opinion
2 marks
3 marks
2 marks
4 marks
5 marks
20 marks
Examiners’ Report – Question 4
The question tests candidates understanding of the different types of audit opinion
and when appropriate to apply them.
About 40% of the candidates attempted the question and performance was poor.
The commonest pitfall of the candidates is the mix-up of opinions in each scenario.
The need for candidates’ adequate preparation for examinations cannot be overemphasised.
SOLUTION TO QUESTION 5
(a)
Fraud can be defined as intentional misrepresentation of financial information in
order to gain personal advantage. Fraud involves deception on the financial
information in order to have an unjust and illegal advantage. Examples of fraud
include falsification of records or documents and misappropriation of assets.
Error on the other hand can be defined as unintentional misrepresentation of
financial information not necessarily to gain personal advantage. Examples of
error include unintentional mistake, misapplication of accounting policies,
genuine oversight and clerical mistakes.
The key distinction between fraud and error is therefore whether the effect on the
financial statements is deliberate (fraud) or unintentional (error). Other
difference between fraud and error may arise in relation to any legal or
regulatory reporting requirement. There may be requirement to report a
suspicion of fraud but not error.
(i)
The issue of double financing on a particular transaction calls for
concern as this may be related to fraudulent act.
(ii) Financial statements must have been materially misstated where
existence of assets that are worth N50m cannot be physically located
and there is no convincing explanation to back up their non existence.
This obviously is a fraudulent act.
(iii) Not performing reconciliation as at when due is an act that can put
the auditor on an enquiry coupled with detection of material
differences upon which no action had been taken. All these
indications tend towards fraudulent act and needs to be investigated.
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(iv) The overstated sales could either be error or fraud. However, the
overstated amount of N100m could cause material misstatement of
the financial statements and this should be thoroughly investigated.
(b) MANAGEMENT RESPONSIBILITY
The primary responsibility for the prevention and detection of fraud and error rest
with management. The responsibility may be partly discharged by putting in
place adequate and effective accounting and internal control system. However,
such control can only minimize fraud and error but it cannot completely
eliminate them.
AUDITORS RESPONSIBILITY
It is not the primary responsibility of the auditor to prevent or detect fraud or
error, although the audit may act as a deterrent to fraud. However, the auditor
should plan his work very well in order to detect material misstatements that
could distort the financial statements.
According to ISA 240, an auditor conducting an audit in accordance with ISAs is
responsible for obtaining reasonable assurance that the financial statements as a
whole are free from material misstatements, whether caused by fraud or error.
(c)
The audit procedures where fraud or error is suspected
The auditor should take the following steps when fraud or error is suspected:

Identify the extent and possible impact on the financial statements of
the fraud or error. Document the facts fully in the audit files.
Additional testing may be required to establish the likely extent of
any misstatements.

Consider the possible impact on other areas of the audit and on the
overall assessment of audit risk. This may result in a revision to the
original audit plan.

The findings should be discussed with management, regardless of the
extent of the problem, and management should be kept informed of
developments.

The auditor should determine the action that management should
take. This should include the possibility of seeking legal advice if
fraud is suspected.

The auditor should normally communicate on a formal basis to
management at an appropriate level. In the case of a company, the
auditor communicates formally with the board of directors or the
audit committee. However, if management themselves are involved in
a suspected fraud, the auditor should consider taking legal advice to
decide the best course of action. In extreme cases, the auditor may
feel it is appropriate to resign.

The auditor should consider the impact on his audit report to the
members, in terms of any impact on the true and fair view presented
by the financial statements.

Further enquiry on the long absence of the finance director.
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Marking Guide – Question 5
a)
b)
c)
Clear distinction between fraud and error
Correct indication of fraud or error, backed by justifications
(1 mark each for the four instances)
Description of management responsibility on fraud and error (1½ marks)
Description of auditors responsibility on fraud and error
(1½ marks)
Stating of any four procedures where fraud or error is suspected
(1½ marks each for any four)
2 marks
4 marks
6 marks
3 marks
6 marks
15 marks
Examiners’ Report – Question 5
The question tests candidates understanding in respect of fraud and error.
About 90% of the candidates attempted the question and performance was good.
SOLUTION TO QUESTION 6
BOB REMOVAL LIMITED
(a)i. Response from the enquiries made of the management of the company. The
reason for this enquiry is to get actual direct response on the allegation.
Response from the enquiry made from solicitor of the company. The reason
for this is to confirm the legal case and position of the company in paying
for the damage.
Checking whether the legal suit of N1m has been recognised in the account
of the company as contingent liabilities.
(ii)
-
-
-
Copy of the document used to request for the balance from Safe Storage.
This is to serve as evidence that a request was made to get detailed address
of the customer.
Evidence of the request made to top management of the company on the
need to write confirmation letter to their customers.
A written representation from top management staff of the company to
accept the assertion of the Accountant. This will serve as evidence to back
up the figure in the financial statements.
Copy of the company’s credit policy in the working papers file. This is to
confirm whether the receivables that is far over six months is within the
company policy and also to know whether to recommend the receivables of
N300,000 as bad and recognised as such in the accounts.
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(iii) -
check the payment voucher used to purchase the van or the minutes of
meeting where decision was taken for the purchase of the van. This is to
confirm the authority to purchase the van, and their values.
Check the minutes of the Board of Directors meeting to confirm the authority
for the renovation of the company’s premises.
Review the documentation of the discussion with the top management staff
of the company to confirm whether the company’s overdraft limit has been
extended.
Review correspondence with bank as further confirmation of overdraft.
b)
Bob Removals Limited
14, Criminal Avenue,
Panti, Yaba,
Lagos.
19th May, 2016
The Managing Partner
Ilabe & Co.,
Chartered Accountants,
Ikeja,
Lagos.
Dear Sir,
LETTER OF REPRESENTATION
As part of our responsibilities to prepare the financial statements and also to provide
you with all the necessary information and explanations needed for the purpose of
your audit, we are giving you additional confirmation in respect of the balances in the
account as listed below.
RECEIVABLES
The amount of N300,000 which is overdue for receipt from our customer is hopeful of
recovery. The length of overdue period is within our credit policy period and as a result
there is no need for any receivables confirmation.
CONTINGENT LIABILITY
The legal claim by our customer on the antique furniture has been settled out of court
by a payment of N250,000; no further amount is expected to be paid and no claims
have been received.
We hope that this information meets your requirements. Should you require further
confirmation, please do not hesitate to contact us.
Yours faithfully,
BOB REMOVAL LIMITED
Managing Director
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Marking Guide - Question 6
a)
b)
Listing of audit work expected to be found in
working paper file, with reasons for each
(1 mark each for any nine points)
Proper drafting with relevant headings e.g
9 marks
* Client letter headed paper/address
* Audit firm’s name/address
* Heading
* Body content
-
Receivable/overdue debt
-
Contingent liability
* Closing remarks
(1 mark each, maximum of 6 points)
6 marks
15 marks
Examiners’ Report – Question 6
The question tests candidates understanding of relevant sections of audit working
paper file.
Majority of the candidates attempted the question and performance was good.
SOLUTION TO QUESTION 7
(a)
The evidence you would require involve:
i.
Carrying out physical inspection of where the inventories are located; this is
to confirm the existence of those inventories.
ii. Obtaining the final inventory sheets that were prepared by the Master
Design Staff and work back any additions or deductions from the inventories
to confirm the final figure in the year end account.
iii. Checking a sample of cost price to purchase invoice; this is to ensure
correctness of the inventory price.
iv. Reviewing the requirements of IAS 2 to ensure that the inventory figure has
been approximately treated in the accounts.
v.
Assessing the condition of the inventory at their location; this is to identify
obsolete and out of fashion inventory.
vi. Ensuring that inventories are valued at the lower of cost and net realisable
value.
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vii. Vouching raw materials and labour costs to invoices and time sheets/labour
rates.
(b)
Audit procedures to verify goodwill in the financial statements include the
following:
Ascertain the total components of the purchase consideration.
Confirm the total value of the purchase consideration
Ascertain the net assets of the partnership business before incorporation
into limited company.
Check the arithmetical accuracy of the calculated goodwill
Confirm the treatment of the goodwill in the accounts to ascertain whether it
is in line with IFRS 3: Business combinations.
(c)
Accounting estimates is an approximation of the amount of an item in the
absence of a precise measurement. Estimates are made for the financial
statements by the management of the entity, using their judgement.
The audit work that would be performed in order to verify whether or not the
figure for the legal claim pending should be included in the financial statements
include
-
(d)
Confirm the existence of the legal claim from the management of Mastay
Design Ltd.
Review the minutes of the board of directors meetings for information
relating to legal suit
Review the financial statements for any contingent liability relating to the
legal suit.
Confirm in writing from the company’s solicitor the condition of the suit and
the likely provision to be made in the accounts.
Confirm whether the legal claim has been properly treated in the accounts in
line with relevant IFRS.
Procedures relating to a profit forecast that Mastay Designs Limited will use in
support of a bank loan application might be as follows:

Understand the basis of the forecast (by asking the person who prepared it).
Then test the calculation of the forecast according to its method (for
example, if it has been extrapolated from previous results, re-perform the
arithmetic of the extrapolation).

Consider whether the assumptions in the forecast are consistent with each
other (for example, will sales grow at that rate without additional marketing
costs?)

Consider whether the forecast is reasonable in the light of known facts such
as:
Current economic circumstances
Past trading history

Discuss the key variables and sensitivities with management. Often, key
assumptions will be estimates of sales demand and sales price, and the
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








gross profit ratio. The auditor should establish the basis on which these
estimates have been made.
Review internal consistency of forecast (for example, has the same interest
rate been used throughout the forecast, has the same growth rate been
applied to sales and purchases?)
Compare assumptions and bases for forecasting with information used
internally (for example, by the marketing department)
Compare figures with other forecasts to ensure consistency (for-example,
depreciation should appear in both profit forecast and capital expenditure
forecast)
Compare figures with any available evidence - for example, costs may be
compared to quotations for work to be done. Assess costs for
reasonableness. For example if the profit forecast includes estimates of
advertising and marketing costs, do these seem reasonable in comparison
with the value of sales turnover and other operating costs?
Consider whether all items of cost have been included. For example if the
profit forecast involves the launch of a new product, have all the initial
running costs been included, such as initial marketing costs and set-up costs
for operations.
Consider whether the forecast of the amount of finance required allows for
working capital.
Check that the forecast of profit and cash flows includes the cost of
borrowed finance.
Check that forecasts of costs and revenues allow for estimated inflation.
It would also be appropriate to carry out some sensitivity analysis of the
forecasts of revenues, costs and profits, to establish the extent to which
estimates in the forecast would need to differ before the forecast profit turns
into a forecast of loss.
Reporting on Profit forecast
A report from the audit/accountancy firm on Profit forecast should contain the
following elements:

Title

Addressee

Identification of the Profit forecast (for example by page references to pages in
same document as the report, where the Profit forecast can be found).

A statement that management is responsible for the Profit forecast, including the
assumptions on which it is based.

A reference to the purpose of the Profit forecast and/or the restricted distribution
of the report (and the Profit forecast) to a limited number of users.

A statement of negative assurance as to whether the assumptions that
management have made provide a reasonable basis for the Profit forecast

An opinion as to whether the Profit forecast is properly prepared on the basis of
these assumptions, and whether the Profit forecast is presented in accordance
with the relevant financial reporting framework.
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

The report should also contain warnings (caveats) that the Profit forecast is a
forecast or projection, and the results indicated by the Profit forecast might not
be achieved
Date, address and signature of the accountant/auditor.
Marking Guide – Question 7
a
b
c
d
Describing the evidence required to verify and justify inventory
figures
(1 mark each for any four points)
Describing audit work to be performed to justify figure of goodwill in
financial statements
(1 mark each for any three points)
Defining accounting estimate
Describing audit work to be performed to verify whether the figure for
pending legal claim or contingent liability is acceptable
Describing of audit work in respect of profit forecast
(½ mark each for any four points)
Listing items in profit forecast report
(½ mark each for any four points)
4 marks
3 marks
1 mark
3 marks
2 marks
2 marks
15 marks
Examiners’ Report – Question 7
The question tests candidates understanding in respect of accounting estimates,
goodwill valuation, stock valuation and profit forecast.
Almost all the candidates attempted the question but performance was poor.
The commonest pitfall of the candidates was lack of understanding of the
requirements of the question.
Candidates are advised to study in-depth all the areas of the syllabus.
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
NOVEMBER 2016 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
Plus
Examiner’s Reports
PROFESSIONAL LEVEL EXAMINATIONS – NOVEMBER 2016 DIET
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2016
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3 hours
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY
(30 MARKS)
QUESTION 1
Havana Bank Plc was listed on the Nigerian Stock Exchange in February 2015. There
was an initial public offer in the same period with proceeds of N5billion. Part of the
proceeds was expected to be utilised to strengthen the bank’s internet banking facility.
In November of the same year the Managing Director/Chief Executive Officer (MD/CEO)
proceeded on a three-week vacation to the United Kingdom but did not return at the
time of concluding the audit of the 2015 financial statements early in 2016. It was
observed that the MD/CEO had absconded with documents relating to the public offer.
It was also noted that he kept drawing cash whilst in the United Kingdom amounting
to N922 million.
The Bank closed its Gambian operations in June 2015 because it had made losses for
two consecutive years. Prior to the 2 years before the closure, the operations in Gambia
had grown into a network of five branches, contributing 15 percent of the gross
income and 9.5 percent of the net profits of the group. The closure was not disclosed in
the financial statements but reference was made to the closure in the directors’ report.
As the Audit Manager in the firm of Chartered Accountants that audits Havana Bank
Plc, you are required to:
a.
Identify and explain the significant audit matters you will consider in forming an
opinion in relation to the missing documents and the cash drawings by the
absconded MD/CEO.
(10 Marks)
b.
Analyse and evaluate your views on the non-inclusion of the discontinued
Gambian operations in the financial statements.
(10 Marks)
c.
Explain FIVE duties, as an auditor in relation to the bank’s internet banking.
(10 Marks)
(Total 30 Marks)
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SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS IN
THIS SECTION
(40 MARKS)
QUESTION 2
As an Audit Manager in a big audit firm in Nigeria, you were opportuned to attend a
conference on Professional Ethics and Anti-Money Laundering in New York. On your
return, one of the audit seniors went through the presentations and asked questions
on some of the statements she noted in the presentations.
You are required to explain the following statements to her:
a.
A good Auditor is an independent auditor.
(5 Marks)
b.
The Accountant’s normal professional duty of confidentiality to clients is not an
adequate defence where money laundering is involved.
(5 Marks)
c.
Specific obligations for detecting and reporting suspicions of money laundering
are placed on professional firms.
(5 Marks)
d.
A firm might act for two clients that are in direct competition with each other
where there are acceptable safeguards.
(5 Marks)
(Total 20 Marks)
QUESTION 3
You are the Audit Manager in charge of the audit of Mix Biz, a company which runs a
chain of snack bars operating in a number of strategic locations in Lagos. Your firm
has been the auditor for a number of years and has always had to substantively test
cash sales because of lack of control over the recording of takings. The audit reports to
date have been unmodified.
You have recently been informed that the company has employed a newly qualified
Chartered Accountant as Chief Internal Auditor and a partly qualified Assistant
Internal Auditor. Since their appointment half way through the year ended December
31, 2015, they have spent most of their time carrying out substantive tests on cash
sales.
The Directors are hopeful that your audit fee this year will decrease because you will
be able to rely on the work carried out by the Internal Auditors.
Required
a.
Explain the issues that will be relevant to your firm in deciding:
i.
whether you can rely on the work performed by the Internal Auditors
(8 Marks)
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ii.
b.
how much reliance to place on that work
(7 Marks)
In connection with Accountancy and Audit, an Expert or Specialist is a firm or
person that possesses special skills in a profession other than Accountancy.
Required
i.
What is the significance of evidence from Experts to an auditor? (2 Marks)
ii.
Identify THREE factors to be considered before placing reliance on the
report of a Specialist.
(3 Marks)
(Total 20 Marks)
QUESTION 4
a.
You have been appointed as the Auditor of a company whose accounting
transactions are processed using computer. You have decided to use ComputerAssisted Audit Techniques (CAAT) to generate evidence for the audit assignment.
Required
i.
State FOUR advantages and THREE disadvantages of using test data in
compliance testing of application controls.
(7 Marks)
b.
ii.
List FOUR activities for which audit software may be used to perform
substantive tests by the auditor.
(4 Marks)
iii.
List TWO advantages and TWO disadvantages of the use of audit software.
(4 Marks)
The availability of Computer-Assisted Audit Techniques should be considered by
the Auditor when planning the nature, extent and timing of tests in an audit.
The Auditor must determine his testing strategies which will depend on his
choice of either using a Manual Testing Method or Computer-Assisted Method.
Required
Identify FIVE solutions to loss of audit trail.
PROFESSIONAL LEVEL EXAMINATIONS – NOVEMBER 2016 DIET
(5 Marks)
(Total 20 Marks)
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SECTION C:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS IN
THIS SECTION
(30 MARKS)
QUESTION 5
In compliance with ISA 250 “Consideration of Laws and Regulations in an Audit of
Financial Statements”, the auditor shall conduct the audit in a manner that gives him
confidence that the client has met all legal requirements of the country in which it
operates.
As the Audit Partner in charge of APB Manufacturing Plc, you are required to:
a.
Identify and clarify SIX steps that ISA 250 requires of you in ascertaining that the
company complies with all applicable laws and regulations.
(9 Marks)
b.
State and explain FOUR procedural actions you will take in the event that the
company failed to comply, in material areas, with applicable laws and
regulations.
(6 Marks)
(Total 15 Marks)
QUESTION 6
Allhope Publications Limited is an old established publishing company owned by two
brothers. Over the years, the company had made consistent progress both in sales and
profitability.
Due to the quality of their work, the patronage of the company has grown to the extent
that its working capital cannot accommodate the work on hand.
The Directors have approached their bankers, Owopo Bank Plc for a facility of N500m
to procure essentially modern machineries and printing materials and also for running
expenses, particularly salaries.
In support of its application for the bank facility, the company has prepared a profit
forecast which is being presented to your firm for review.
Required:
As contained in ISAE 3400: “The Examination of Prospective Financial Information
(PFI)”.
a.
What will you take into consideration before accepting this assurance
engagement?
(5 Marks)
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b.
Enumerate the procedures to be adopted after you have agreed to take up the
engagement:
i.
As regards PFI assurance engagements generally
ii.
On the Profit forecast.
(10 Marks)
(Total 15 Marks)
QUESTION 7
Iyanuoluwa Pharmaceutical Industries Limited has been in existence for some years
and it has been audited by a firm of Chartered Accountants up to December 31, 2014.
Your firm, Blueberry & Co. (Chartered Accountants) has just been appointed to act as
auditors for the financial year January 1, 2015 to December 31, 2015 which has been
accepted.
Required:
In line with ISA 510: “Initial Audit Engagements”.
a.
What are the objectives of the Auditor when considering such an initial audit
engagement in respect of opening balances?
(6 Marks)
b.
Provide audit procedures that are required to be followed in respect of opening
balances.
(9 Marks)
(Total 15 Marks)
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SOLUTION 1
(a)
(b)
The significant audit matters relevant to the formation of opinion in relation to
the missing documents and the cash drawings by the absconded MD/CEO
include:
i.
The accounting records for the sale of shares are missing.
ii.
The accounting records are missing because the MD/CEO absconded with
them. There must be reasons why he took the accounting records: fraud
is a possible reason especially as he kept withdrawing cash while in
United Kingdom and also for failing to return at the end of his vacation.
iii.
There is an indication in the manner the MD/CEO has taken the
accounting records and withdrawn cash that there may have been a
fraud. It is therefore probable that the auditors will have to modify the
opinion even if they are able to reconstruct the financial records, while it
will not be possible to gain sufficient appropriate evidence about the
possible fraud.
iv.
The Bank may have been concealing ailing financial position by
manipulation for some years, and probably to make up for this, it went
public to raise cash.
v.
There is constraint in obtaining sufficient appropriate audit evidence
(limitation on scope) for the year ended 31 December, 2015. The audit
opinion should be modified.
vi.
The effectiveness of the internal control relating to the custody of
documents and cash withdrawal needs to be evaluated.
vii.
Consider the utilization of the funds and cash realised from the public
offer.
viii.
The possible impact of the cash withdrawal in other areas of the audit
and the overall assessment of audit risk.
Views on the non-inclusion of the discontinued Gambian operations in the
financial statements.
The Gambian operations appear to have been a subsidiary of the bank’s
business, incorporated in The Gambia, which contributed materially to total
revenue. The closure represents a discontinued operation, and failure to
disclose the details is a failure to comply with IFRS 5 “Non-current Assets Held
for Sale and Discontinued Operations”. It is also in breach of the requirements
of IAS 7 “Statements of Cash Flows” and IFRS 8 “Operating Segments” which
also require disclosures relating to discontinued operations. The matter is
material, but is not pervasive. If management does not amend the financial
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statements to provide the required disclosures, a qualified audit opinion (for a
misstatement) would be appropriate.
(c)
Duties of the auditor in relation to the Bank’s internet banking.
The auditor’s duties in an internet banking environment should include the
following elements:
i.
ii.
iii.
iv.
v.
vi.
vii.
The audit firm should decide whether the engagement should be
accepted (as in any professional engagement).
The firm should then plan the engagement: an important aspect of
planning may be to make available audit staff with appropriate expertise
in internet banking operations.
The firm should obtain a detailed knowledge of the bank’s business.
It should consider liaison with the internal auditors of the bank, if there
have been internal audit investigations into the bank’s internet banking
transactions or systems.
The firm should identify and evaluate the risks in the internet banking
operations.
It should ascertain and evaluate the control environment and the specific
internal controls that are in operation in tracking transactions and
alerting customers instantly, without errors.
It may also be appropriate to perform a going concern review,
particularly in the case of the bank relying heavily on internet banking
activities for efficiency.
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MARKING GUIDE
(a)
(b)
(c)
Identifying and explaining the following
- Significant audit matters
- Records for sale of shares
- MD/CEO absconding with accounting records
- Possibility of fraud
- Modification of audit opinion
- Concealment of ailing financial position
- Inability to obtain audit evidence
Effectiveness of internal control
- Impact of cash withdrawal on operations
2 Marks each for any five points
Marks
Marks
10
Views of non-inclusion of the closed Gambian branch on
financial statements:
- Gambian operation is a subsidiary
- Closure represents discontinued operations
- Failure to disclose is a failure to comply with IFRS 5
- Breach of requirements of IAS 7
- Requirements of IFRS 8
- Material but not pervasive
- Qualified audit opinion
2 Marks each for any five points
10
Auditor’s duties shall include:
- Decide whether engagement should be accepted
- Plan the engagement
- Obtain detailed knowledge of the business
- Liaison with internal auditor
- Identify and evaluate risks in the internet banking
- Evaluating the control environment
- Carry out going concern review
2 Marks each for any 5 points
10
30
EXAMINERS’ REPORT
The question tests candidates understanding of (a) significant audit matters to be considered
in forming an opinion, (b) the requirements of IFRS 5, 8 and IAS 7; and (c) auditors’ duties in
relation to internet banking.
Being a compulsory question, almost all the candidates attempted it, but performance was
poor.
The commonest pitfall of the candidates was their inability to interpret the question properly.
Candidates are enjoined to read the ICAN Study Text thoroughly.
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SOLUTION 2
(a)
The purpose of an audit is to enhance the degree of confidence of intended
users in the financial statements. This is achieved by the auditor expressing an
opinion on whether the financial statements of an entity are prepared in all
material respects in accordance with applicable financial reporting
framework....... ISA 200.
For an audit report to be of value, the auditor must not only be independent,
but must also be seen to be independent. The auditor must have independence
of mind and be seen to be independent in appearance.
‘Independence of mind’ is a psychological state that permits the auditor to
express a conclusion without being affected by influences or prejudices that
compromise his professional judgment.
Independence in appearance means the avoidance of facts and circumstances
that a reasonable and informed third party would conclude that a firm or a
member of the assurance team’s integrity, objectivity or professional scepticism
has been compromised.
Auditors’ independence can be compromised by any of the following factors
called threats: self-interest, self-review, familiarity, advocacy and intimidation,
although safeguards are available to mitigate some of these threats.
Therefore, a good auditor is the one whose objectivity is not in doubt i.e. an
auditor who is independent in mind and appearance and who reduces the risk
to his independence to an acceptable low level by applying appropriate
safeguards.
(b)
Money laundering is the process by which criminals attempt to conceal the true
origin and ownership of the proceeds from their criminal activities (e.g. drug
trafficking, terrorism, theft, tax evasion and other types of fraud), allowing them
to maintain control over the proceeds and, ultimately, providing a legitimate
cover for their sources of income. The term is widely defined to include
possessing, in any way dealing with, or concealing the proceeds of any crime.
Professionals, including accountants, have professional duty of confidentiality
to their clients, in which case they are not allowed to disclose their clients’
information to others unless where they have legal or professional duty or right
to disclose. However, the accountant’s professional duty of confidentiality is not
an adequate defence where money laundering is involved. The accountant has
a legal duty to report suspicions of money laundering to the appropriate
authorities as required by law, i.e. National Financial Intelligence Unit (NFIU)
or Economic and Financial Crimes Commission (EFCC). Under the Money
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Laundering (Prohibitions) Act 2011, professionals, including accountants, enjoy
statutory protection against breach of confidentiality if they report their
suspicion of money laundering activities of their client in good faith and to the
appropriate authority. Auditor’s duty of confidentiality will therefore not be
breached if they report, in good faith, any money laundering knowledge or
suspicions to the appropriate authority.
However, disclosure in bad faith or without reasonable grounds would possibly
lead to the accountant being sued for breach of confidentiality.
The following may be an acceptable defence to the accountant on money
laundering issues:

A report had been made to the appropriate party, or

There was an intention to make a report but there was a reasonable
excuse for not having done so.
(c)
Obligations placed on professional firms
Money laundering may be of particular relevance to accountants, and in
particular auditors, in cases where criminals establish companies and use
transactions among their companies to ‘launder’ their dirty money. Specific
obligations for detecting and reporting suspicions of money laundering are
placed on professional firms (for example, lawyers and accountants) and
financial institutions. These requirements include the following:
i.
Putting into place systems, controls and procedures to ensure that the
firm is not used for money laundering purposes.
ii.
Appointing a Money Laundering Reporting Officer (MLRO), whose
responsibility is to receive reports on suspected money laundering
activities from other employees and report them to the appropriate
authorities.
iii.
Establishing and enhancing the record-keeping systems (a) for all
transactions, which must be kept for at least five years, with controls to
ensure that they are not inadvertently destroyed and (b) for verifying the
identity of clients by obtaining official documents, such as – for an
individual – passport or driving license, supported by recent utilities bills,
and – for a company – certificate of incorporation.
iv.
Establishing procedures within the firm for reporting any suspicion of
money laundering by client companies.
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iv.
Training and educating staff in procedures for detecting and reporting
suspicions of money laundering activities.
These obligations are wide-ranging and auditors and other professionals need
to be fully aware of the extent of their responsibilities in taking care of them.
(d)
Safeguards in Acting for Two Competing Clients
A firm might act for two clients that are in direct competition with each other.
The firm has a professional duty of confidentiality, and so will not disclose
confidential information about one client company to its competitor. Again, the
test is whether a “reasonable and informed third party” would consider the
conflict of interest as likely to affect the judgement of the firm. The approach
that the accounting firm should take will be a matter of judgement and should
reflect the circumstances of the case. Where the acceptance or continuance of
an engagement would materially prejudice the interests of any client, the
appointment should not be accepted or continued.
In such cases, acceptable safeguards should be put in place. These include the
following:
i.
Giving careful consideration to whether or not it is appropriate to accept
an assurance engagement from a new client that is in direct competition
with an existing client. It may be appropriate to decline the offer from
the potential client.
ii.
Careful management of the clients: For example by ensuring that
different members of staff are used on the two engagements.
iii.
Full and frank disclosure to the clients of the potential conflict, together
with suitable steps by the firm to manage the potential conflict of
interest.
iv.
Procedures to prevent access to information (such as physical separation
of the teams and confidential and secure data filing). Such an approach
is known as creating “Chinese walls”.
v.
Establishing clear guidelines on security and confidentiality and the use
of confidentiality agreements.
vi.
Regular review of safeguards in place.
vii.
Advising one or both clients to seek additional independent advice.
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MARKING GUIDE
(a)
(b)
(c)
(d)
Independence of the Auditor
- Expression of opinion
- Enhancement of degree of confidence
- Agreeing with financial reporting framework – ISA 200
- Explaining of independence of mind and appearance
- Causes of compromise of independence
- Objectivity not in doubt
1 Mark each for any five points
Marks
Marks
5
Duty of confidentiality
- Identifying money laundering
- Professional duty of confidentiality to client
- Report suspicious acts to appropriate authority
- Protection against breach of confidentiality
- Not disclosing in bad faith
- Acceptable defence
1 Mark each for any five points
5
Obligations placed on professional accountants
- Putting controls in place to ensure that the firm is not used
for money laundering purpose
- Money Laundering Reporting Officer
- Enhance record keeping system
- Reporting procedure
- Staff training
1 Mark each
5
Safeguards where acting for two competing clients:
- Considering whether or not to accept engagement
- Client management
- Confidentiality and separation of audit teams
- Clear guidance on security
- Regular review of safeguards
1 Mark each
5
20
EXAMINERS’ REPORT
The question tests candidates understanding of Professional Ethics and Anti-Money Laundering
activities.
About 85% of the candidates attempted the question, but performance was poor.
The commonest pitfall of the candidates was poor application of theoretical knowledge and
misinterpretation of the question.
Candidates are advised to cover the syllabus properly and learn to apply their knowledge in
practical ways.
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SOLUTION 3
(a)
Placing Reliance on the Work of Internal Auditor
Where the activities of external auditors overlap with the work of internal
auditors, the external auditors may be able to reduce the amount of testing and
checking they perform in their work by relying on the work that has already
been carried out by the internal auditors. Reliance should lead to a more
efficient and cost-effective audit, which may translate to reduction in audit fee.
Since the external auditors are responsible for their opinion even if they have
relied on the work of the internal auditors, they must be satisfied that they can
rely on the work of the internal auditors to support their audit opinion.
In taking this decision, ISA 610 “Using the Work of Internal Auditors” requires
the external auditors to assess whether or not reliance can be placed on the
work performed by the internal auditors and how much reliance can be placed
on that work.
To assess whether or not the external auditors can rely on the work of internal
auditors of Mix Biz, the external auditors must consider the following issues.
a)
i.
Sufficiency of organizational status of the internal audit, its objectivity
and operational independence of management structure. In particular,
whether or not the chief internal auditor reports to an ‘independent’
senior person or body within the entity, such as the audit committee
rather than the finance director.
ii.
The scope of the internal audit work and any restrictions placed by the
senior management on the scope of their work and whether or not
management acts on the internal audit recommendations or undermines
them. External auditor will have less confidence on the internal audit
work if their recommendations are not acted upon by management.
iii.
The technical competence and due professional care of the internal
auditors. The external auditors will assess the qualifications, technical
training and experience of the internal auditors. For Mix Biz, the chief
internal auditor is newly qualified and the second staff is partly
qualified, which suggests inadequate experience. The external auditor
will also assess to what extent the internal auditors take professional
approach towards their work.
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aii.
iv.
The extent of application of systematic and disciplined approach
including quality control by the internal auditors.
v.
Appropriateness and adequacy of resources of internal audit function
given the company’s size and the nature of its operations.
vi.
Existence of established policies for hiring, training and assigning
internal auditors to internal audit engagements.
vii.
Required level of knowledge of the entity’s financial reporting and
applicable reporting framework.
viii.
Level of skills or industry-specific knowledge to perform work related to
entity’s financial statements.
xi.
Existence of quality control procedures in the internal audit function.
If the internal audit function is not reliable based on the above general
assessments, then external auditors need not assess the specific internal
audit work, as it will not be reliable enough for external audit purpose.
How much reliance to place on the work of internal auditors
If internal audit function is reliable, then the external auditor should evaluate
the specific work performed during the year to ascertain their adequacy for
external audit purposes. In doing this evaluation, the external auditor will
consider the nature and scope of the specific work performed by the internal
audit, the assessed risk of material misstatement at the account balance or
transaction level, and the degree of subjectivity involved in the evaluation of
the evidence gathered by the internal audit to see if these will be relevant to
the specific areas of the audit. The amount of reliance to be placed on the
specific work will depend on the consideration of the following issues whether
or not:
i.
The work was properly performed, supervised, reviewed and
documented;
ii.
The staff doing the work were adequately qualified/experienced/trained;
iii.
Sufficient and appropriate audit evidence was obtained;
iv.
The conclusions drawn were appropriate in the circumstances given the
result of the work performed;
v.
The reports prepared were consistent with the work performed;
vi.
Management acted on the specific recommendations made or ignored
them;
vii.
Any exceptions or unusual matters were properly resolved.
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So, if both internal audit function and the specific work performed are reliable,
then external auditor may rely on the internal audit work in order to reduce the
level of substantive testing to be performed.
b.
Evidence from Experts
i.
An Auditor is an expert only in accountancy and not in other fields. ISA
620 “Using the Work of an Auditor’s Expert” therefore allows auditors to
use the work of an expert to provide knowledge relevant to audit, which
the audit firm does not possess such as in the areas of legal opinions,
valuation of properties, other assets and pension liabilities. Relying on
the work of an auditor’s expert is inevitable in the following
circumstances:

As a safeguard necessary to eliminate the identified significant
threats or to reduce those threats to an acceptable level;

As an efficient and effective way of obtaining appropriate audit
evidence required to form an opinion;

Where auditor is unable to form an opinion without expert’s help.
ii.
Factors to consider before relying on the report of an expert ISA 620
“Using the Work of an Auditor’s Expert” requires auditors to decide
whether or not to use the work of an expert, and assess whether or not
that work is adequate. Before relying on the work of an expert, the
auditor needs to consider the following factors:
(a)
Independence and objectivity of the expert, e.g.

The expert’s relationship with management and those
charged with governance. The expert must be sufficiently
independent.

The degree of reliability of the expert’s reports. Professional
competence of the expert in terms of his qualifications and
experience.
(b)
Reputation, expertise, resources
professional/ethical standards.
(c)
Before any work is performed by the expert, the auditor should
agree in writing:

Nature, scope and objectives of the expert’s work;

Respective roles and responsibilities of both parties;

Nature, timing and extent of communication between both
parties;

Confidentiality or non-disclosure agreement.
available
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(d)
Upon completion, the auditor must assess the work completed to
ensure appropriateness for audit purposes. The auditor must
consider the:

Consistency of findings with the other evidence that the
auditor has obtained;

Significant assumptions made;

Use and accuracy of source data.
MARKING GUIDE
Marks
ai
ii.
Placing reliance on the work of the internal auditor
- Explanation of the relevance of ISA 610 – “Using the Work of
an Internal Auditor”
Other considerations
- Status of the internal audit unit in the organisation
- Scope of its work
- Technical competence
- Quality control by the internal auditor
- Adequacy of resources
- Line of reporting
- Documented procedural guide
1 Mark each for any 6 points
How much reliance can be placed on the internal auditor’s work
Evaluating the internal audit work performed to determine
reliability, risk assessment, transaction level
Other areas to consider include:
- Whether or not the work was properly performed
- Qualification of internal audit team
- Experience of team
- Whether or not sufficient and appropriate audit evidence was
obtained
- Whether or not reports prepared were consistent with the
work performed
- Whether or not management acted on recommendations and
findings of audit
- How exception matters were resolved
1 Mark each for any 5 points
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2
6
8
2
5
7
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bi
ii.
Significance of evidence from experts
- Definition of an expert
- Inevitability of relying on the work of an expert
- Where auditor is unable to form an opinion without an
expert’s help
- As an efficient and effective way of obtaining audit evidence
- As a safeguard to eliminate significant threats or reduce the
threats
½ Mark each for any two points
Factors to consider before placing reliance on the work of a
specialist:
- Independence of the expert
- Reputation, expertise and resources available
Auditor to agree in writing
- Nature , scope and objectives of the expert’s work
- Role and responsibility of both parties
- Nature, timing and extent of communication between both
parties
- Confidentiality of Non-disclosure agreement
(1 Mark each for any three points)
1
1
2
3
20
EXAMINERS’ REPORT
The question tests candidates’ knowledge of External Auditor’s reliance on the work of Internal
Auditors and other specialists or experts.
About 85% of the candidates attempted the question, but performance was poor.
The commonest pitfall of the candidates was that, they were focusing on the newly appointed
officers rather than the technicalities involved and also repetition of answers.
Candidates should endeavour to read and understand the question properly before attempting
it.
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SOLUTION 4
(a)
(i)
Advantages of test data include:

helps to confirm that exception reports are correctly produced

provides a positive assurance of the correct functioning of the
program controls actually tested;

can be used on a continuing basis until the programs are changed;

Once set up, running costs from year to year are low;

requires less detailed knowledge of data processing; and

are cheap to install and easy to implement as their contents are
variable at will.

Can be used to verify effectiveness
Disadvantages

The problem of data files corruption where ‘live’ test data is used

It is time consuming

Where ‘dead’ test data is used, the auditor requires a reasonable
assurance that the programs being used are those in normal
processing

It cannot provide assurance that the system and its controls
operate effectively at any other time.
(ii)
Activities for which audit software may be used during substantive tests
by the auditor include:
(i) Re-performing calculations;
(ii) Selecting individual transactions for subsequent manual substantive
tests;
(iii) Extracting list of exceptional items;
(iv) Obtaining information relevant to analytical review;
(v) Used to scrutinize large volume of data.
(vi) Matching the contents of two or more computer files and selecting
any unmatched items for further audit work.
(iii)
Advantages of the use of Audit Software
(i) It can be used to analyse voluminous data.
(ii) The search is much more accurate and faster than when software is
not applied.
(iii) The running costs are usually low.
(iv) It can be used for other transactions
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Disadvantages
(i) Has a high set up cost.
(ii) Usually not available for small companies.
(iii) Requires considerable level of knowledge in data processing.
(iv) Consumes a lot of computer time which may not be acceptable
to clients.
(b)
Solutions to loss of audit trail include the following:
i.
Use of computer assisted audit techniques to assess reliability.
ii.
Testing on a total basis and ignoring individual items to access data
output.
iii.
Closer co-ordination between internal and external auditors to bridge
gaps in compliance tests.
iv.
Arranging for special print-outs of individual information for the auditors
to attempt to re-create transaction trail.
v.
Clerical re-creation of individual items of data for comparison with
computer generated totals.
vi.
Programmed interrogation facilities whereby records held on magnetic
files are printed on a selective basis by means of direct request to those
files.
vii.
Involvement of the auditor during the system development stage when a
client is computerizing its accounting system. This will enable the
auditor advise management on the controls that should be incorporated
within the system and those reports, which he will require from the
system for audit processes.
viii.
Where reports that have audit relevance are routinely produced by the
client’s system, the auditor should inform management, at an early date
during the financial year, to retain such computer generated reports for
the purposes of the audit.
ix.
The auditor may place greater emphasis on alternative audit procedures
as a means of obtaining audit evidence. Such alternative audit
procedures may include third party confirmation and physical
verification of computer generated balances.
x.
Where it becomes impracticable to vouch individual transactions, the
auditor may be able to achieve his audit objective by performing
reasonableness tests on the total balances using analytical review
procedures.
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xi.
The auditor may increase the frequency of his audit visits in order to
ensure that audit tests are performed close to when transactions are
processed.
MARKING GUIDE
ai
ii.
iii.
Advantages of using test data in compliance testing of application
controls:
- Helps to confirm that exception reports are correctly produced
- They provide positive assurance of the correct functioning of
the program control
- Can be used on continuing basis
- Running cost low once it is set up
- Requires less detailed knowledge of data processing
- Can be used to verify effectiveness
- Cheap to install
1 Mark each for any four points
Marks
Marks
4
Disadvantages:
- Problem of data file corruption
- Time consuming
- It cannot provide assurance that the system and its controls
operate effectively at any other time
- Where dead test data is used, the auditor requires a reasonable
assurance that the programs being used are those in normal
process
1 Mark each for any three points
3
Activities for which audit software may be used to:
- Re-perform calculations
- Select individual transactions for subsequent
substantive tests
- Extract list of exceptional items
- Obtain information relevant to analytical review
- Scrutinize large volume of data
1 Mark each for any four points
4
manual
Advantages of the use of Audit Software:
- Analyses voluminous data
- Searches much more accurate and faster
- Reduces running cost
- Can be used for other transactions
1 Mark each for any two points
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(b)
Disadvantages
- High set up cost
- Not available for small companies
- Requires knowledge of data processing
- Consumes lot of computer time
1 Mark each for any two points
2
Solution to loss of audit trail:
- Use of CAAT to assess reliability
- Testing on a total basis and ignoring individual items
- Closer co-ordination between internal and external auditors
- Arranging for special printout of individual information
- Clerical re-creation of individual items of data
- Programmed interrogation facilities whereby records held on
magnetic files are printed on a selective basis
- Frequent audit visits to perform tests on transactions close to
when they are processed
1 Mark each for any 5 points
5
20
EXAMINERS’ REPORT
The question tests candidates’ knowledge of Computer-Assisted Audit Techniques.
About 25% of the candidates attempted the question and performance was poor.
Candidates’ commonest pitfalls were lack of knowledge in this area. Candidates should learn
to cover the syllabus adequately.
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SOLUTION 5
(a)
(b)
ISA 250- “Consideration of laws and regulations in an audit of Financial
Statements” requires the auditor to:
i.
Obtain a general understanding of the applicable legal and
regulatory framework and how the entity is complying with that
framework. This is part of obtaining an understanding of the entity
and its environment – here, the legal environment – as required by
ISA 315.
ii.
Obtain sufficient appropriate audit evidence in respect of compliance
with those laws and regulations which might be expected to have a
direct effect on material amounts and disclosures in the financial
statements.
iii.
Make enquiries of management as to whether or not the entity is
complying with the relevant laws and regulations.
iv.
Inspect any correspondence with the relevant authorities.
v.
During the audit, remain alert to the possibility that other audit
procedures might bring instances of non-compliance to the auditor’s
attention.
vi.
Obtain written representations from management that all known
instances of non-compliance or suspected non-compliance have been
disclosed to the auditor.
vii.
Document all identified or suspected instances of non-compliance
and the results of discussions with management and/or other parties.
Action by the auditor in the event of non-compliance or suspected noncompliance by a client company.
If the auditor identifies or suspects material areas of non-compliance by the
company, the following procedures are required:
i.
Obtain an understanding of the nature of the act and the
circumstances under which it has occurred.
ii.
Evaluate the possible effect of the non-compliance on the financial
statements.
For suspected non-compliance, discuss the matter with management.
If compliance is not demonstrated, take legal advice.
iii.
iv.
If there is insufficient evidence of a suspected non-compliance,
consider the impact on the audit report. This would constitute a
“limitation on scope”.
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v.
Consider whether or not the non-compliance impacts on other areas of
the audit, for example, on the overall risk assessments.
vi.
Consider how to report the non-compliance to those charged with
governance, shareholders and/or to the authorities.
MARKING GUIDE
(a)
(b)
ISA 250 requirements include:
- Obtaining general understanding of applicable legal and
regulatory framework and how entity is complying
- Getting appropriate audit evidence in respect of compliance
- Enquiring of management as regards compliance
- Inspecting correspondence
- Obtaining written representation
- Documenting all identified or suspected instances of noncompliance
- Being alert during audit for instances that may bring about
non-compliance
1
1 /2 Marks each for any six points
Actions to be taken in the event of non-compliance
- Obtain an understanding of the nature of the act
- Evaluate effect on financial statements
- Discuss with management
- Seek legal advice
- Consider impact of non-compliance to other areas
- Consider how to report non-compliance
1
1 /2 Marks for any four points
Marks
Marks
9
6
15
EXAMINERS’ REPORT
The question tests candidates’ knowledge of the requirements of ISA 250 “Consideration of
Laws and Regulations in an Audit of Financial Statements”.
About 70% of the candidates attempted the question and performance was poor. It was
apparent that candidates did not cover this area of the syllabus. Candidates are advised to
cover all aspects of the syllabus before embarking on registering for the examination.
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SOLUTION 6
Allhope Publications Limited
(a)
Areas to consider before accepting this type of assurance engagement include
The availability of resources and staff with the necessary expertise

Determining the timescale for the completion of the engagement

Agreeing a fee for the work with the client

Establishing with the client the form that the assurance report will take

An engagement letter should be agreed and signed by both parties
before the work is actually started.

It is particularly important that the client should understand that in a
review of forward – looking information, only negative assurance can be
provided

The client should also be informed that the audit firm will comply with
the requirements of ISAE 3400 “When Reviewing the Prospective
Financial Information”.
(b)
(i)












Procedures in a PFI assurance engagement includeUnderstanding the nature of the information to be examined
Establishing the intended use of the information and the intended
recipients of the final report.
Establishing whether the information will be for general distribution or
limited distribution to a small number of users.
The nature of the assumptions that have been made by management.
Whether or not they are best estimate assumptions for a forecast, or
hypothetical assumptions for the purpose of making projections.
The time period covered by the information
Obtain sufficient knowledge of the entity and its environment
Seek evidence to support estimates/assumptions
Assess whether or not hypothetical assumptions are realistic and sensible
Assess whether or not the prospective financial information contains all
the relevant material items and that nothing of significance has been
omitted.
If part of the future period in the forecast or projection has already
passed, the auditor should review the actual results for that part of the
period, and compare actual results with the forecast or projection. The
differences will help the auditor to assess the reliability of the forecast or
accuracy of the projection.
The auditor should check the arithmetical accuracy and consistency of
the projected financial information that has been prepared.
The auditor should obtain representations from management on
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(ii)
Management’s acceptance of responsibility for the information
The intended use of the information
The completeness of the assumptions that were made to
prepare the PFI.
Procedures to be adopted on a profit forecast should include the following:
 Understand the basis of the forecast by asking the person who prepared
it.
 Test the calculations of the forecast according to its method for example,
if it has been extrapolated from previous results, re-perform the
arithmetic of the extrapolation.
 Consider whether or not the assumptions in the forecast are consistent
with each other e.g., will sales grow at that rate without additional
marketing costs?
 Consider whether or not the forecast is reasonable in the light of known
facts such as current economic circumstances and past trading history.
 Discuss the key variables and sensitivities with management. Often, key
assumptions will be estimates of sales demand and sales prices, and the
gross profit ratio. The auditor should establish the basis on which these
estimates have been made.
 Review internal consistency of forecast, for example, has the same
interest rate been used throughout the forecast, has the same growth
rate been applied to sales and purchases?
 Compare assumptions and bases for forecasting with information used
internally e.g., by the marketing department
 Compare figures with other forecasts to ensure consistency.
 Compare figures with any available evidence.
 Consider whether or not all items of cost have been included.
 Consider whether or not the forecast of the amount of finance required
allows for working capital.
 Check that the forecast of profit and cash flows includes the cost of
borrowed finance.
 Check that forecast of costs and revenues allow for estimated inflation.
 Carry out some sensitivity analysis of the forecasts of revenues, costs and
profits to establish the extent to which estimates in the forecast would
need to differ before the forecast profit turns into a forecast loss.
 Where the audit firm has no previous knowledge of the entity, it should
obtain sufficient knowledge of the entity and its environment.
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MARKING GUIDE
(a)
(b)
i.
ii.
What to consider before accepting PFI assurance engagement
- Availability of resources and staff
- Time frame for completion
- Agree fee
- Form of reporting
- Engagement letter
- Review of forward-looking information will give negative
assurance
1 Mark each for any 5 points
Marks
Marks
5
Procedural steps to adopt on
PFI assurance engagement:
- Obtain letter of engagement
- Understand nature of information
- Establish intended use of the information
- Confirm if it is for general distribution or limited distribution
- Nature of assumptions made by management
- Time period covered
- Obtain knowledge of entity
- Assess whether or not hypothetical assumptions are realistic
- Check arithmetic accuracy
- Obtain management representation
- Review projections
1 Mark each for any five points
5
Profit forecast
- Understand basis of the forecast
- Test calculations
- Consider consistency of assumptions
- Reasonableness of forecast
- Compare figures with available evidences
- Check items of costs
- Carry out sensitivity analysis
- Discuss key variables
- Review internal consistency of forecast
- Check that forecast includes cost of borrowed finance
1
/2 Marks each for any ten points
5
15
EXAMINERS’ REPORT
The question tests candidates understanding of the requirements of ISAE 3400 “The
Examination of Prospective Financial Information”.
About 70% of the candidates attempted the question and performance was poor. It appears
that candidates did not cover this area of the syllabus.
Candidates are advised to cover all aspects of the syllabus before registering for examinations.
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SOLUTION 7
Iyanuoluwa Pharmaceutical Industries Limited
a.
b.
The objectives of the auditor when considering an initial audit engagement in
respect of opening balances is to obtain sufficient appropriate audit evidence
about whether or not:

The opening balances contain misstatements that materially affect the
current period’s financial statements, and

Appropriate accounting policies reflected in the opening balances have
been consistently applied in the current period, or a change of
accounting policy has been properly accounted for and disclosed.
The following audit procedures are required in respect of opening balances:

Read the most recent financial statements and audit report, if any, for
information relevant to opening balances.

Check that the prior period’s closing balances have been correctly
brought forward.

Check that opening balances reflect appropriate accounting policies

Where possible, if the prior period financial statements were audited,
review the predecessor auditor’s working papers to obtain evidence in
respect of opening balances

Consider whether or not audit procedures carried out in the current
period provide evidence on some of the opening balances. For example,
cash received from customers in the current period gives evidence of the
existence of a receivable at the opening date.

Carry out specific audit tests to obtain evidence for opening balances

If evidence is found that opening balances could contain material
misstatements affecting the current period’s financial statements,
perform appropriate additional tests to assess the effect.

If such misstatements do exist, communicate this to those charged with
governance in accordance with ISA 450.

Check that the accounting policies reflected in the opening balances have
been consistently applied in the current period or a change of accounting
policy has been properly accounted for and disclosed.
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MARKING GUIDE
(a)
(b)
In line with ISA 510
Auditor’s objectives when considering an initial audit engagement
in respect of opening balances
- Whether or not balances contain misstatements
- Appropriate accounting policies reflected have been
consistently applied
3 Marks for each of the two points
Audit Procedures:
- Read the most recent financial statements and audit report, if
any, for relevant information
- Check prior period balances
- Check reflection of appropriate accounting policies
- Review predecessor auditor’s working paper where possible
- Carry out specific audit test
- If misstatement exists, communicate to those charged with
governance in accordance with ISA 450
- Check consistency of accounting policies applied
11/2 Marks for any 6 points
Mark
Mark
6
9
15
EXAMINERS’ REPORT
The question tests candidates understanding of the requirements of ISA 510 “Initial Audit
Engagements”.
About 90% of the candidates attempted the question but performance was poor.
The commonest pitfall of the candidates was their misinterprestion of the question by taking it
to mean new audit engagement.
Candidates are advised to read and understand the requirements of a question before
attempting to answer it.
PROFESSIONAL LEVEL EXAMINATIONS – NOVEMBER 2016 DIET
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
MAY 2017 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
Plus
Examiner‟s Reports
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – MAY 2017
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3 hours
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF THE SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY
(30 MARKS)
QUESTION 1
You are Aremu Ana, an Audit Partner at Danda Audit firm who has kept pace with
the International Auditing and Assurance Standards Board‟s (IAASB) new and
revised reporting standards which lay the foundation for the future of global
auditor‟s reporting and improved auditor communication.
You have concluded arrangements with the Human Capital Department of the firm
to train the firm‟s audit team which includes trainees, supervisors and managers.
The training programme has been fixed to hold in two months‟ time. You are now
preparing notes which will assist to educate the audit team and make them
appreciate the new standards.
Required:
Prepare a training briefing note which:
a.
Clarifies the intended benefits of the IAASB‟s new auditor reporting project.
(5 Marks)
b.
Identifies and describes the different sections of the new auditor‟s report as
required by ISA 700 (Revised), Forming an Opinion and Reporting on
Financial Statements.
(20 Marks)
c.
Explains the term „Key Audit Matters‟ (KAM), stating any TWO matters an
auditor is required to take into account in the determination of KAM in
accordance with ISA 701, Communicating Key Audit Matters in the
Independent Auditor‟s Report.
(5 Marks)
(Total 30 Marks)
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SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OF THE THREE QUESTIONS
IN THIS SECTION
(40 MARKS)
QUESTION 2
Home Care is a charity that provides accommodation for unemployed young people.
The constitution of the charity explains how the charity‟s income could be spent
and also contains a requirement that administrative expenditure cannot exceed
10% of income in any year.
The charity‟s income is mainly derived from voluntary cash donations collected by
volunteers from members of the public. Recently, the charity‟s income has been
impacted by the current global economic and financial meltdown.
Required:
a.
Describe the term „audit risk‟ and explain the THREE elements of risk that
contribute to total audit risk.
(8 Marks)
b.
Using the information provided in the question, identify FOUR areas of
inherent risk to be taken into account in planning the audit of Home Care and
explain the effect of each of these risks on the audit approach.
(12 Marks)
(Total 20 Marks)
QUESTION 3
Your firm has been external auditors of Specific Processors Plc for some years.
Specific Processors Plc. has an Internal Audit Department which is engaged in both
compliance and operational auditing within the company. You have a good opinion
of the quality of work of the internal auditors and you have established a good
relationship with Mr. Lucky Suleiman, FCA, the head of the Internal Audit
Department and he has invited you to give a talk to staff of his department during
their annual training week. He would like your talk to focus on the roles of external
and internal auditors, the type of work they carry out and their specific
responsibilities.
Required:
a.
Develop a suitable presentation for your talk, paying particular attention to
the differences and similarities of the following features of the external and
internal auditors:
i.
ii.
iii.
General role
Independence
The work carried out in the following areas
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iv.
systems of internal control
operational auditing
Reporting responsibilities
(10 Marks)
b.
Explain what evidence you would seek as external auditor to satisfy yourself
that you can rely on the work of internal auditors.
(4 Marks)
c.
Give THREE examples of internal audit activity reports that might be used by
the external auditor.
(6 Marks)
(Total 20 Marks)
QUESTION 4
a.
In most cases, the role of the practising accountant is the provision of
statutory audit of the annual financial statements of a company. However,
the practising accountant may be contracted for assurance engagement
other than a statutory audit.
Required:
Explain „assurance engagement‟.
b.
(4 Marks)
Alhaji Chukwudi is the Chairman and majority shareholder of Talking Drums
Limited, a telecommunications company operating in Nigeria. The company
had experienced considerable growth in the past. However, over the last
three years, there has been noticeable increase in cost of operations which is
slowing down the growth of the company. Management had explained that
the increasing cost is as a result of expansion of coverage area which
management believes will lead to further expansion and growth of the
company in the nearest future. Alhaji Chukwudi wants to get a certain level
of assurance that there is value for the increased expansion costs the
company was incurring. As a result, the Board of Directors resolved to
engage a practitioner for a „value for money‟ evaluation of the coverage
expansion costs.
Required:
i.
Explain „value for money‟.
(2 Marks)
ii.
Explain the 3Es of achieving value for money.
(6 Marks)
c. Traditionally, the role of the auditor has focused on providing assurance on
„historical‟ events, for example on financial statements relating to a period of
time in the past. As business and economic environments have changed,
demand has grown for practising accountants to provide assurance on
prospective financial information (PFI).
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Required:
i.
Explain „Prospective Financial Information‟.
ii.
State and explain SIX procedures you will perform in a PFI assurance
engagement on Profit Forecast of a company.
(6 Marks)
(Total 20 Marks)
SECTION C:
(2 Marks)
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION
(30 MARKS)
QUESTION 5
You are an Audit Manager of Lobito James & Co., a firm of Chartered Accountants.
You are aware of some significant changes and new requirements in the Revised
ISAs as a result of IAASB Clarity Project issued in October 2008 that are expected to
impact on the following audit procedures:
(a)
Communicating with those charged with governance (ISA 260).
(b)
Materiality in planning and performing an audit (ISA 320).
(c)
Audit considerations relating to an entity using a service organisation (ISA
402).
(d)
Evaluation of misstatements identified during an audit (ISA 450).
(e)
External confirmation (ISA 505).
(f)
Auditing accounting estimates, including fair value, accounting estimates
and related disclosures (ISA 540).
(g)
Related parties (ISA 550).
You are required to:
i.
Explain the objective of the IAASB Clarity Project.
(1 Mark)
ii.
Explain TWO new requirements in each of the revised ISAs listed above.
(14 Marks)
(Total 15 Marks)
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QUESTION 6
You are an Audit Senior in ABC firm of Chartered Accountants, a Pan-African audit
firm. You just resumed from your examination leave and received the following
email from Mrs. Chidi, an Audit Manager in your firm.
Dear Audu,
Welcome back from leave and best of luck in your examination.
We have just been appointed as financial statements auditor to Gbogbonise Plc., a
conglomerate having its head office in Lagos. Our preliminary discussion with the
group Chief Financial Officer (CFO) indicates that the company has five subsidiaries
and two associates. One of the subsidiaries is incorporated and operates in Ghana
while one of the associates is incorporated and operates in The Gambia. The other
members of the group are incorporated and operate in Nigeria. The group
operations cover automobiles, agriculture and manufacturing.
We will be meeting with the audit committee in three weeks to present our audit
plan and strategy for the assignment.
Required:
Prepare a draft memorandum for Mrs. Chidi, describing:
a.
Challenges that may be encountered in this engagement.
(5 Marks)
b.
General procedures that may be performed on significant and non-significant
components.
(3 Marks)
c.
Salient items to be included in the group audit instructions.
d.
Procedures to be performed relating to consolidation of the group. (4 Marks)
(Total 15 Marks)
(3 Marks)
QUESTION 7
The need for auditor‟s rotation has been a topic of discussion following various
major corporate failures in recent years. The Central Bank of Nigeria (CBN) in 2006
introduced mandatory audit firm rotation as part of effective corporate governance
of banks in Nigeria. The board of Aluwo Bank Plc has complied with this policy and
are now reviewing its implementation. Some of the directors are not clear about
the form that auditor‟s rotation takes. While some have argued in favour of the
Central Bank of Nigeria (CBN) policy on audit firm rotation, others are against it,
claiming it has not achieved the desired objective.
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Required:
Draft a memo to the board of Aluwo Bank Plc. which sets out clearly.
a.
b.
Two different suggestions about how auditor rotation could be achieved.
(5 Marks)
Arguments in favour of audit firm rotation.
(4 Marks)
c.
Arguments against audit firm rotation.
(6 Marks)
(Total 15 Marks)
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SOLUTION TO QUESTION 1
a.
The intended benefits of IAASB‟s new auditor reporting project are:
i.
ii.
iii.
iv.
v.
vi.
b.
Enhanced communication between auditors and investors, as well as
those charged with corporate governance;
Increased user confidence in audit reports and financial statements‟;
Increased transparency, audit quality, and enhanced information
value;
Increased attention by management and financial statements
preparers to disclosures, referencing the auditor's report;
Renewed auditor focus on matters to be reported that could result in
an increase in professional scepticism; and
Enhanced financial reporting in the public interest.
Identification and description of the different sections of the new auditor‟s
report as required by IAS 700 (Revised), Forming an Opinion and Reporting
on Financial Statements.
Sections of the New Auditor‟s Report
(i)
The auditor‟s report shall be in writing.
(ii)
Title
The auditor‟s report shall have a title that clearly indicates that it is
the report of an independent auditor.
(iii)
Addressee
The auditor‟s report shall be addressed, as appropriate, based on the
circumstances of the engagement.
Auditor‟s Opinion
The first section of the auditor‟s report shall include the auditor‟s
opinion, and shall have the heading “Opinion.”
(iv)
The Opinion section of the auditor‟s report shall:
o
Identify the entity whose financial statements has been
audited;
o
State that the financial statements have been audited;
o
Identify the title of each statement comprising the financial
statements;
o
Refer to the notes, including the summary of significant
accounting policies; and
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o
(v)
Specify the date of, or period covered by, each financial
statement comprising the financial statements.
Basis for Opinion
The auditor‟s report shall include a section, directly following the
Opinion Section, with the heading “Basis for Opinion”, that:
o
o
o
o
States that the audit was conducted in accordance with
International Standards on Auditing;
Refers to the section of the auditor‟s report that describes the
auditor‟s responsibilities under the ISAs;
Includes a statement that the auditor is independent of the
entity in accordance with the relevant ethical requirements
relating to the audit, and has fulfilled the auditor‟s other
ethical responsibilities in accordance with these requirements.
The statement shall identify the jurisdiction of origin of the
relevant ethical requirements or refer to the International
Ethics Standards Board for Accountants‟ Code of Ethics for
Professional Accountants (IESBA Code); and
States whether the auditor believes that the audit evidence
obtained is sufficient and appropriate to provide a basis for the
auditor‟s opinion.
(vi)
Going Concern
Where applicable, the auditor shall report in accordance with ISA 570
(Revised) the going concern status of the entity.
(vii)
Key Audit Matters
For audits of complete sets of general purpose financial statements of
listed entities, the auditor shall communicate key audit matters in the
auditor‟s report in accordance with ISA 701.
When the auditor is otherwise required by law or regulation or
decides to communicate key audit matters in the auditor‟s report, the
auditor shall do so in accordance with ISA 701.
(viii) Responsibilities for the Financial Statements
The auditor‟s report shall include a section with a heading
“Responsibilities of Management for the Financial Statements.”
The auditor‟s report shall use the term that is appropriate in the
context of the legal framework in the particular jurisdiction and need
not refer specifically to “management”.
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In some jurisdictions, the appropriate reference may be to those
charged with governance.
(ix)
Auditor‟s Responsibilities for the Audit of the Financial Statements
The auditor‟s report shall include a section with the heading
“Auditor‟s Responsibilities for the Audit of the Financial Statements.”
This section of the auditor‟s report shall:
State that the objectives of the auditor are to:
o

Obtain reasonable assurance about whether the financial
statements as a whole are free from material
misstatements, whether due to fraud or error; and

Issue an auditor‟s report that includes the auditor‟s
opinion.
The Auditor‟s Responsibilities for the Audit of the Financial Statements
section of the auditor‟s report shall further:
o
o
State that, as part of an audit in accordance with ISAs, the auditor
exercises professional judgment and maintains professional
skepticism throughout the audit; and
Describe an audit by stating that the auditor‟s responsibilities are:
(i)
(ii)
(iii)
(iv)
To identify and assess the risks of material misstatements of
the financial statements.
To obtain an understanding of internal control relevant to
the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity‟s
internal control. In circumstances when the auditor also has
a responsibility to express an opinion on the effectiveness of
internal control.
To evaluate the appropriateness of accounting policies used
and the reasonableness of accounting estimates and related
disclosures made by management;
To conclude on the appropriateness of management‟s use of
the going concern basis of accounting and, based on the
audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast
significant doubt on the entity‟s ability to continue as a
going concern.
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(v)
When the financial statements are prepared in accordance
with a fair presentation framework, to evaluate the overall
presentation, structure and content of the financial
statements, including the disclosures, and whether the
financial statements represent the underlying transactions
and events in a manner that achieves fair presentation.
o When ISA 600 applies, there is a need to further describe the auditor‟s
responsibilities in a group audit engagement by stating that:
(i)
(ii)
(iii)
The auditor‟s responsibilities are to obtain sufficient
appropriate audit evidence regarding the financial information
of the entities or business activities within the group to express
an opinion on the group financial statements;
The auditor is responsible for the direction, supervision and
performance of the group audit; and
The auditor remains solely responsible for the auditor‟s opinion.
Location of the description of the auditor‟s responsibilities for the
audit of the financial statements:
The description of the auditor‟s responsibilities for the audit of the
financial statements required by the ISA shall be included:

Within the body of the auditor‟s report;

Within an appendix to the auditor‟s report, in which case the
auditor‟s report shall include a reference to the location of the
appendix; or

By a specific reference within the auditor‟s report to the
location of such a description on a website of an appropriate
authority, where law, regulation or national auditing standards
expressly permit the auditor to do so.
When the auditor refers to a description of the auditor‟s
responsibilities on a website of an appropriate authority, the auditor
shall determine that such description addresses, and is not
inconsistent with, the requirements of the ISA.
(x)
Other Reporting Responsibilities
If the auditor addresses other reporting responsibilities in the
auditor‟s report on the financial statements that are in addition to the
auditor‟s responsibilities under the ISAs, these other reporting
responsibilities shall be addressed in a separate section in the
auditor‟s report with a heading titled “Report on Other Legal and
Regulatory Requirements” or otherwise as appropriate to the content
of the section, unless these other reporting responsibilities address the
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same topics as those presented under the reporting responsibilities
required by the ISAs in which case the other reporting responsibilities
may be presented in the same section as the related report elements
required by the ISAs.
If other reporting responsibilities are presented in the same section as
the related report elements required by the ISAs, the auditor‟s report
shall clearly differentiate the other reporting responsibilities from the
reporting that is required by the ISAs.
If the auditor‟s report contains a separate section that addresses other
reporting responsibilities, the requirements of the ISA shall be
included under a section with a heading “Report on the Audit of the
Financial Statements.” The “Report on Other Legal and Regulatory
Requirements” shall follow the “Report on the Audit of the Financial
Statements.”
o
(xi)
Name of the Engagement Partner
The name of the engagement partner shall be included in the
auditor‟s report for audits of complete sets of general purpose
financial statements of listed entities, unless, in the rare
circumstances that such disclosure may reasonably be expected to
lead to a significant personal security threat.
(xii)
Signature of the Auditor
The auditor‟s report shall be signed.
(xii)
Auditor‟s Address
The auditor‟s report shall state the location in the jurisdiction where
the auditor practices.
(xiv)
Date of the Auditor‟s Report
The auditor‟s report shall be dated not earlier than the date on which
the auditor has obtained sufficient appropriate audit evidence on
which to base the auditor‟s opinion on the financial statements.
Key audit matters (KAM) are those matters that, in the auditor‟s professional
judgement were of most significance. In the audit of the financial statements
of the current period, key audit matters are selected from matters
communicated with those charged with governance.
The purpose of including these matters is to assist users in understanding
the entity, and to provide a basis for the users to engage with management
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and those charged with governance about matters relating to the entity and
the financial statements.
Each key audit matter should describe why the matter was considered to be
significant and how it was addressed in the audit. The auditor should make
sure each KAM refers to how the matter relates to the specific entity.
Key audit matters include:

Areas of higher assessed risk of material misstatement, or significant
risks identified in accordance with ISA 315;

Significant auditor judgments relating to areas in the financial
statements that involved significant management judgment,
including accounting estimates that have been identified as having
high estimation uncertainty; and

The effect on the audit of significant events or transactions that
occurred during the period.
Specific examples include:

Significant fraud risk;

Goodwill;

Valuation of financial instruments;

Fair values;

Effects of new accounting standards;

Revenue recognition;

Material provisions such as a restricting provision; and

Implementation of a new IT system, or significant changes to an
existing system.
EXAMINER‟S REPORT
The question tests candidates understanding of: (a) IAASB‟s new auditor reporting project;
(b) ISA 700 (Revised): forming an opinion; Reporting on Financial Statements; and (c) Key
Audit Matters. ISA 701.
Almost all the candidates attempted the question but performance was average.
The commonest pitfall of the candidates was their misinterpretation of the question. They
answered the question based on the old auditor‟s report and opinion. They also lacked
understanding of the International Standards on Auditing – ISA (700 and 701).
Candidates are enjoined to study the International Standards on Auditing (ISA) very well.
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MARKING GUIDE
a.
Intended benefits of IAASB‟s new auditor reporting project
- Enhances communication between auditors and investors
- Increases users confidence in the report
- Increases transparency, audit quality
- Increases attention by management
- Renews auditor focus on matters to be reported
- Enhances financial reporting in public
1 mark each for any five points
MARKS
5
b. Identifying and describing the different sections of the new
auditor‟s report which are
- To be in writing
- Must have a title
- Addressee
- Audit opinion
- Basis of opinion
- Going concern issues
- Key audit matters
- Responsibility for financial statements
- Auditors responsibility
- Other reporting responsibility
- Name of engagement partner
- Signature of auditor
- Auditor‟s address
- Date of audit report
1 mark each for mentioning of each heading and 1 mark for
development for any ten
c.
Definition of key audit matters
- Stating some key matters such as areas of higher assessed
risk of material misstatement
- Effect on the audit of significant event
1 mark each for any two points
MARKS
20
3
2
5
30
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SOLUTION TO QUESTION 2
(a)
Audit risk is the probability that the auditor would draw an invalid audit
conclusion and therefore, express an invalid audit opinion. It is the
probability of reporting that financial statements present a true and fair
view whereas they do not and vice versa.
Audit Risk includes the following:
(b)
(i)
Inherent Risk (IR)
Inherent risk is the probability that material misstatements of
financial information will occur assuming that internal control
measures are absent. It is the risk attached to any particular
population because of its type, size and nature. An example of
inherent risk is that the stock of a computer manufacturer has a high
risk of obsolescence because of rapid technological change;
(ii)
Control Risk (CR)
Control risk is the probability that material misstatement of financial
Information may occur, the internal controls fail to prevent or correct
them. Where internal controls are weak, there is a higher risk of fraud
and error, so the control risk will be high. Example of control risk is
lack of integrity by top management staff; and
(iii)
Detection Risk (DR)
Detection risk is the probability that the auditor‟s substantive
procedures will not detect material misstatements that exist within a
class of transactions or an account balance. The level of detection is
determined by the uncertainties that are due to sampling risk.
The table below shows the key areas of inherent risk the auditor of Home
Care should consider in planning the audit of the charity and the effect of
each risk on the audit approach.
S/N
1.
Inherent Risk
Constrained source of income
being voluntary donations from
members of the public. The
donors have no obligations to
make donations and this makes
the charity‟s income to be at risk.
If donors encounter difficulties
their agreed donations may not
be forthcoming. Example is the
impact of the recent financial
meltdown on donations received.
The limited source of income
therefore creates going concern
risk for the charity. Uncertainty
Effect of Risk on Audit Approach
Uncertainty of future income
suggests a need to rigorously
evaluate the going concern status
of the charity. It is necessary to
assess the extent to which the
material uncertainty created by the
impact of the financial meltdown
affects the basis of preparation of
the financial statements, i.e., the
appropriateness of preparing the
financial statements on the going
concern basis and the effect on the
reporting of the key audit matter
under the newly issued ISA 701.
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2.
3.
4.
of future income suggests a need
to rigorously evaluate the going
concern status of the charity.
The
income
streams
from
voluntary
donation
is
unpredictable and bears no
relationship with the Home
Care‟s expenditure.
Income in the form of cash
collected by volunteers through
donations by members of the
public. Cash should therefore be
significant in the charity, where
controls are also limited. The risk
of suppression, diversion and
conversion of such cash by the
volunteers is high.
The current declining income
from
donations
creates
sensitivity for key statistics like
the proportion of the charity‟s
income that is spent on
administrative
expenditure
which must be mandatorily
maintained. The 10% mandatory
threshold may be exceeded
because the admin expenditure
is usually fixed, despite the
income
reduction
being
experienced due to the impact of
the meltdown.
The
lack
of
identifiable
relationship
between
the
expenditure and income renders
analytical review procedure less
appropriate/useful.
The limited controls that exist in a
small charity like Home Care
suggests that the auditor will only
place limited reliance on controls
particularly over cash. This calls for
more substantive tests
over
completeness of income.
The current threat to income from
donations calls for detailed testing
of the compliance with the
restricted spending limit for
administrative expenditure.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of audit risk and identification of
inherent risk in a given scenario.
About 90% of the candidates attempted the question and performance was good in
part (a) but poor in part (b).
The commonest pitfall of the candidates was the misinterpretation of the (b) part.
They prepared audit programmes instead of identification of inherent risk.
Candidates are enjoined to read questions and interprete them properly before
attempting them.
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MARKING GUIDE
SOLUTION 2
a Defining Audit Risk
Defining Inherent Risk
Defining Control Risk
Defining detection risk
MARKS
2
2
2
2
b. Giving key areas of Inherent Risk and its effect on audit
approach e.g.
- Constrained source of income
- Unpredictability of income from voluntary donors
- Cash collection
- Low income due to economic meltdown
- Proportion of expenditure to income
(1½marks for each key area and 1½marks for each effect on
the four areas
MARKS
8
12
20
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SOLUTION TO QUESTION 3
Internal audit is defined as the independent appraisal function established within
an organisation to examine and evaluate its activities as a service to the
organisation. The objective of internal auditing is to assist members of the
organisation in the effective discharge of their responsibilities. To this end, internal
auditing furnishes them with analyses, appraisals, recommendations, counsel and
information concerning the activities reviewed (IIA, 1991).
Differences between external and internal auditor
S/N Factor
1 General Role
2
3
4
5
External Auditor
Expresses an opinion on the
truth and fairness of the
annual financial statements
Internal Auditor
Examines systems and
controls and assesses risks
in order to make
recommendations to
management for
improvement.
Independence
The external auditor is
The internal Auditor is
independent of directors or independent of staff and
management of the
departments of the
company.
company.
System
of Confirms whether the
Monitors compliance with
Internal Control
internal control is adequate. the internal control
Operational
Carry out sample review of
Carries out detailed review
Auditing
the entity‟s transactions to
that is 100% of transactions
obtain the necessary audit
within an entity.
evidence.
Reporting
Reports to the shareholders Reports to the board of
Responsibility
directors.
Similarities between external and internal auditor
S/N
1
Factor
General Role
External Auditor
Acts as a check on the
activities of others.
They are independent of
those whose work they
review, that is, they are
independent of the
directors.
2
Independence
3
System
of They are interested in the
Internal Control adequacy and compliance
with the internal control
system that is in existence
within the entity
Internal Auditor
Acts as a check on the
activities of others.
They are independent of
those whose work they
review, that is, they are
independent of the staff and
the management.
They are interested in the
adequacy and compliance
with the internal control
system that is in existence
within the entity
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S/N
4
Factor
Operational
Auditing
5
Reporting
Responsibility
(b)
An external auditor should seek the following evidence before relying on the
work of the internal auditor:
(c)
External Auditor
They use various audit
techniques and tests to
obtain audit evidence.
Such as compliance tests,
substantive tests,
calculations, enquiry etc.
They issue report on the
work performed, that is
audit report.
Internal Auditor
They use various audit
techniques and tests to
obtain audit evidence. Such
as compliance test,
substantive test,
calculations, enquiry, etc.
They issue report on the
work performed, that is
internal audit report
(i)
The extent to which the internal auditor has access to higher level
management within an entity. If the internal auditor can contact the
higher level authority directly, either to report his observations or
advise the management, then reliance can be placed on the internal
auditor;
(ii)
The professional competence and experience of the internal audit
staff, given the nature and complexity of the operations and control of
audit work in the department;
(iii)
The quality of training given to the audit staff to enable them meet
the changing requirements of the business;
(iv)
The quality of the internal audit reports as well as recognition
accorded to the report by top management of that entity;
(v)
The scope of responsibilities assigned to the department and the
extent of any limitation therein; and
(vi)
The adequacy of audit work documentation.
Internal audit reports that might be used by the external auditor include the
following:
(i)
Documentation of the accounting and internal control systems of an
entity;
(ii)
Report of the review of the entity‟s accounting and internal control
systems;
(iii)
External confirmation of receivables and payables;
(vi)
Report on an inventory count and work in progress carried out;
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(iv)
Preparation of schedules, breakdowns and analyses required by the
external auditors; and
(v)
Reports on the
recommendations.
implementation
of
the
external
auditor‟s
EXAMINER‟S REPORT
The question tests candidates understanding on Internal Audit.
About 90% of the candidates attempted the question, but performance was only average.
The commonest pitfall of the candidates was their poor presentation skills. They also
lacked understanding of part (c) of the question.
Candidates are advised to read the Study Text thoroughly before taking future
examinations.
MARKING GUIDE
SOLUTION 3
A Stating the differences between external and internal auditor
under the features listed
- The general role - Expression of opinion
- Independence
- Adequacy of internal control
- Operational methodology
- Reporting line
½ mark for the each of five points on the differences between
the External Auditor and Internal Auditor
5
Stating similarities between external and internal auditor
- Check on activities
- Independence
- Adequacy and compliance with control
- Use of audit techniques, compliance and substantive tests
- Issuance of report on work done
½ mark for each of the five points on External and Internal
Auditor issues
5
b. Evidence needed to be able to rely on the work of internal
auditor
- Access to higher level of management
- Professional competence
- Quality of training given to audit staff
- Scope of responsibility assigned to audit department
- Adequacy of audit work documentation
1 mark each of any four points
10
4
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c.
Report of internal audit that might be applied by external
audit
- External confirmation on receivables and payables
- Inventory count report
- Preparation of schedules and breakdowns
- Documentations of the accounting and internal control
system
2 marks for each of any 3 points
6
20
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SOLUTION TO QUESTION 4
(a)
Assurance engagement:
According to ISA 100, an assurance engagement is “one where a practising
accountant evaluates or measures a subject matter that is the responsibility
of another party against suitable criteria and expresses an opinion which
provides the intended user with a level of assurance about the subject
matter”.
(b)
Value for money
(i)
„Value for money‟ means using resources in the best way in order to
achieve intended objectives.
(ii)
The 3Es of achieving value for money include
Economy
Efficiency and
Effectiveness
(1)
Economy. This means spending money prudently, and not
paying more than necessary for resources such as materials
and labour.
(2)
Efficiency. Efficiency means using resources in such a way that
they produce the greatest possible amount of „output‟. It
means getting more from the use of available resources.
(3)
Effectiveness. Effectiveness means using resources in such a
way as to achieve the desired objectives. Efficiency is of little
value unless the output from the system is what the entity
wishes to achieve.
(c)
(i)
Prospective Financial Information
Prospective financial information (PFI) is financial information
based on assumptions about events that may occur in the
future, and possible actions by an entity.
(ii)
List of Procedures relating to a profit forecast

Understand the basis of the forecast and test the
calculation of the forecast according to its method. For
example, if it has been extrapolated from previous
results, re-perform the arithmetic of the extrapolation.
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
Consider whether the assumptions in the forecast are
consistent with one other. For example, will sales grow
at that rate without additional marketing costs?

Consider whether the forecast is reasonable in the light
of known facts such as current economic circumstances
and past trading history.

Discuss the key variables and sensitivities with
management and establish the basis on which these
estimates have been made.

Review internal consistency of forecast. For example, has
the same interest rate been used throughout the forecast,
has the same growth rate been applied to sales and
purchases?

Compare assumptions and bases for forecasting with
information used internally by other departments in the
organization. For example, by the marketing department.

Compare figures with other forecasts to ensure
consistency. For example, depreciation should appear in
both profit forecast and capital expenditure forecast.

Compare figures with available evidence and assess for
reasonableness. For example, if the profit forecast
includes estimates of advertising and marketing costs, do
these seem reasonable in comparison with the value of
sales turnover and other operating costs?

Consider whether all items of cost have been included.
For example, if the profit forecast involves the launch of
a new product, have all the initial running costs been
included, such as initial marketing costs and set-up costs
for operations.

Consider whether the forecast of the amount of finance
required allows for working capital.
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EXAMINER‟S REPORT
The question tests candidates understanding in respect of: (a) assurance engagement (b)
„value for money‟; evaluation and (c) Prospective Financial information (PFI).
About 50% of the candidates attempted the question and performance was average.
The commonest pitfall of the candidates was their interpretation of procedure in respect of
PFI to mean historical financial records.
Candidates are advised to cover the syllabus more effectively when preparing for future
examinations.
MARKING GUIDE
SOLUTION 4
A Defining assurance engagement
MARKS
MARKS
4
b. i. Defining value for money
ii. Mentioning the three Es of achieving value for money and
explaining them
- Economy, Efficiency and Effectiveness
2 marks for each point
2
C
2
i.
ii.
-
Defining Prospective financial information
Procedures relating to a profit forecast
Understand the basis of the forecast
Consider assumptions
Consider reasonableness of forecast
Discuss key variables
Compare figures with available evidence
Consider whether all items of cost have been included
Consider consistency of figures,
Compare assumptions and bases with available
information
1 mark for each of any 6 points
6
6
20
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SOLUTION TO QUESTION 5
(i)
The objective of the IAASB Clarity Project is to improve the clarity of ISAs and
ISQCs and also the consistency of their application.
(ii)
The changes and new requirements in each of the revised ISAs listed above
are as follows:
(a)
ISA 260: Communication with those charged with governance
The revisions to ISA 260 were intended to reflect significant
developments to regulatory and auditing standards in several
jurisdictions and shifts in the expectations of those charged with
governance and other stakeholders.
Additional requirements include:
 explaining why significant accounting practices, which are acceptable
under the applicable financial reporting framework, are not the most
appropriate in the circumstances.
(b)

documenting matters communicated orally.

communicating any significant difficulties encountered during the
audit.

communicating any significant matters arising from the audit that
were discussed, or subject to correspondence with management.
ISA 320: Materiality in planning and performing an audit
In revising ISA 320 the IAASB:
 updated the definition of materiality to make it clearer that materiality
depends on the size and nature of an item, judged in the surrounding
circumstances.

introduced guidance on the use of benchmarks for the initial setting of
materiality, but did not set formulaic rules.

indicated that during the audit, the auditor should be alert for possible
management bias – such that when evaluating whether the financial
statements as a whole are free of material misstatements, the auditor
is required to consider both uncorrected misstatements and qualitative
aspects of the entity‟s accounting practices.
The IAASB concluded that it would be better to address materiality and
the evaluation of misstatements in separate ISAs – which led to the
creation of ISA 450.
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New requirements include:
 determining a lower amount called “performance materiality” for
the purpose of assessing risk and deciding on appropriate audit
procedures
 revising materiality during the audit if the auditor becomes aware
of information that would have caused him to initially have set a
different threshold
 specific documentation requirements for thresholds determined and
any changes made during the audit.
(c)
ISA 402: Audit considerations relating to an entity using a service
organisation
ISA 402 was revised to reflect:
 the increased use of service organisations
 the need to bring the ISA in line with the risk assessment ISAs.
Requirements include:
 specifying matters to be included in the auditor‟s understanding of
how the entity uses the services of a service organization;
 where the auditor has concluded that controls at the service
organization operate effectively, specifying procedures to be
performed in testing the operating effectiveness of controls,
including:
obtaining a Type 2 report;
testing controls at the service organization; and
using another auditor to test controls at the service
organization

(d)
specifying procedures to be performed if the auditor plans to use a
report from another auditor as audit evidence, including:
- being satisfied with the other auditor‟s professional
competence and independence and the standards followed;
and
- procedures to determine whether a Type 2 report provides
sufficient evidence about the effectiveness of controls at the
service organisation.
ISA 450: Evaluation of misstatements identified during an audit
ISA 450 is a new ISA which emerged from the revision of ISA 320
on audit materiality. There are a number of new requirements
which include:
 accumulating all identified misstatements other than those that
are clearly trivial;
 prior to evaluating the effect of uncorrected misstatements,
reassessing materiality determining whether uncorrected
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misstatements are material, considering their nature as well as
their size;
 documenting:
the amount below which misstatements would be
regarded as trivial;
all misstatements accumulated during the audit and
whether they have been corrected; and
the auditor‟s conclusion as to whether uncorrected
misstatements are material, individually or in
aggregate, and the basis for that conclusion.
(e)
ISA 505: External confirmations
The revision of ISA 505 was in response to concerns that requirements
in this area needed to be more rigorous. Compared to the previous
version of ISA 505 there are more detailed requirements in relation to:
maintaining control over the confirmation requests;
obtaining further evidence to resolve doubts over the reliability of
responses; and
 conditions which must be present if negative confirmations are to
be used.


(f)
ISA 540: Auditing accounting estimates, including fair value
accounting estimates, and related disclosures
ISA 540 was revised in order to improve the rigor of the auditing of
accounting estimates, particularly in view of the potential for
management bias/earnings management by manipulation in this
area.
The revised ISA introduces requirements for greater rigor and
scepticism in the audit of accounting estimates. It encompasses a risk
based approach, focusing on those estimates that have high
estimation uncertainty.
New requirements include:
 obtaining an understanding as to how management identify the
need for accounting estimates and how they make those estimates;
 reviewing the outcome of accounting estimates made in prior
periods ;
 evaluating estimation uncertainty and whether high estimation
uncertainty leads to significant risks;
 for identified significant risks:
- evaluating how management has considered alternative
assumptions or outcomes; and
- obtaining sufficient appropriate evidence about whether
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management decisions are in accordance with the applicable
financial reporting framework evaluating the adequacy of
disclosure of the estimation uncertainty; and
 reviewing management‟s judgment and decisions in order to
identify possible management bias.
(g)
ISA 550: Related parties
ISA 550 was revised in response to major corporate scandals (e.g.
Enron and WorldCom in 2002) which often involved related parties; a
need to focus more on a risk-based approach, in line with other ISAs.
The revised ISA 550 which also seeks to assist auditors with the
difficult task of identifying related parties and undisclosed related
party transactions.
New requirements include:
 considering the susceptibility of the financial statements to
material misstatements due to fraud or error arising from the
entity‟s related party relationships and transactions;
 obtaining an understanding of the controls put in place to identify,
account for and disclose related party relationships and
transactions and to approve significant transactions outside the
normal course of business;
 treating significant related party transactions as giving rise to
“significant risks”;
 specifying procedures to be performed if the auditor identifies
related parties or significant related party transactions that
management has not previously disclosed to the auditor;
 specifying procedures to be followed for significant related party
transactions outside the normal course of business; and
 obtaining sufficient appropriate evidence about a management
assertion that a related party transaction was conducted on normal
commercial terms.
EXAMINER‟S REPORT
The question tests candidates understanding of the application of ISAs.
About 20% of the candidates attempted the question and performance was poor.
The commonest pitfall of the candidates was their lack of familiarity with ISAs.
Candidates need to read the Study Text thoroughly before embarking on future
examinations.
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MARKING GUIDE
SOLUTION 5
i. Explaining the objective of IAASB Clarity Project
Explaining two new requirements in each of the revised ISAs
Documenting matters communicated orally
Communicating any significant difficulties encountered
during the audit
Testing controls at the service organisation
Using another auditor to test controls at the service
organisation
Reviewing management‟s judgement and decisions in order
to identify possible management bias, etc
Determining a lower amount called “performance materiality”
Obtaining a Type 2 report
2 marks for each of any seven points
MARKS
MARKS
1
ii.
-
14
15
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SOLUTION TO QUESTION 6
Date:
20 May, 2017
To:
Mrs. Chidi (Audit Manager)
From:
Audu (Audit Senior)
Subject:
Audit planning for Gbogbonise Group
Introduction
Thank you for your email and your good wishes for my examination. I enumerate
below some of the relevant issues for the audit planning and strategy for the audit
of our new client, Gbogbonise Group which should aid our discussion at the
planned meeting with the Group‟s Audit Committee on our role as the auditor of the
parent company and the group.
(a)
The challenges that we are likely to encounter in this engagement
i.
The organisation and planning of a group audit is significantly more
complex than for a single company.
ii.
Gbogbonise Group includes a large number of companies – 5
subsidiaries including a foreign subsidiary based in Ghana and two
associates including one foreign associate based in The Gambia. These
foreign components are companies that report in their own currencies
and perhaps, also use their national accounting practices to prepare
their financial statements, rather than IFRS.
iii.
Some of the companies in the group may have different year-end
accounting dates from others in the group. This creates a challenge
for consolidating the financial statements of all the group members.
iv.
Group financial statements require numerous and potentially
complicated consolidated adjustments. It will therefore be necessary
to make audit adjustments to the financial statements of individual
group companies in the consolidated financial statements.
v.
Some of the companies in Gbogbonise group may be audited by other
audit firm(s).
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(b)
The general procedures that need to be performed on the significant and
non-significant components
The procedure to be performed on each component depends on whether the
component is significant or non significant.
Significant components are those that either (a) are of individual financial
significance to the group, or (b) have been identified as likely to include
significant risks of material misstatement of the group financial statements.
The general procedures to be followed are as follows:
i.
ii.
iii.
(c)
For a component that is of individual financial significance to the
group, the group auditor or a component auditor must perform
audit using the component materiality;
For a component that is significant because of the likely significant
risk of material misstatement to the group financial statement, the
group auditor or a component auditor must perform one or more of
the following procedures:
(a)
an audit using component materiality;
(b)
an audit of one or more account balances, classes of
transactions or disclosures (depending on where the risk of
material misstatement lies); and
(c)
specified audit procedures to address the risk of material
misstatement.
For non significant component, the group auditor should perform
analytical procedure at the group level.
The salient items to be included in the group audit instructions
The group auditor‟s letter of instruction to the component auditor should set
out the following:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
the work required to be done by the component auditor;
the use to be made of that work by the group auditor;
the form and content of the component auditor‟s communication with
the group engagement team. This may be in the form of a memo or
report of work performed;
a request for cooperation;
ethical requirements;
component materiality;
identified significant risks; and
a list of known related parties.
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(d)
The procedures to be followed relating to the consolidation of the group
The underlisted procedures should be followed on the different areas of the
group consolidation:
(i)
Clerical accuracy
Confirm the figures have been transferred accurately from the
components‟ financial statements to the consolidation
schedules;
Check the arithmetical accuracy of all consolidation
calculations, such as the consolidation total balances and total
transaction values.


(ii)
Status of investments


(iii)
Confirm that the parent company has correctly classified
investments as a subsidiary, associate, joint venture or simple
investment, in accordance with standard accounting practice;
Confirm that the appropriate accounting treatment has been
adopted for each of these classifications of investment in the
group accounts.
Changes in the group





For acquisitions: Confirm fair values, the calculation of
purchased goodwill and accounting treatment in accordance
with IFRS 3 and any other relevant standards;
Where there has been an acquisition during the year involving
deferred consideration as part payment, check that the
amount of the deferred consideration has been included in the
cost of the acquisition at discounted present value, using a
current pretax cost of capital as the discount rate;
When there has been an acquisition during the year involving a
possible contingent consideration as part-payment, check the
reasonableness of the assumption that the recent value of the
contingent consideration should be included in the cost of the
acquisition; and
For disposals: confirm the sale proceeds, and the calculation of
the gain or loss on sale.
Check that the correct accounting treatments of items are
applied in the consolidated statement, statement of
comprehensive income and the consolidated statement of
financial position. For example, when a subsidiary has been
acquired during the year, check that the calculation of preacquisition and post-acquisition profit is correct.
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(iv)
Consolidation adjustments





(v)
Loss-making investments



(vi)
Consider whether any goodwill on acquisition has suffered an
Impairment.
Consider whether a write down of the investment in the books
of the parent company is needed.
If a subsidiary makes losses consistently, its going concern
status may be in question, so request a comfort/support letter
from the directors of the parent company to provide comfort.
Related parties

(vii)
Reconcile the inter-company transactions and balances or
review the reconciliation of the intercompany transactions and
balances that have been made by the client‟s staff.
Confirm the inter-company balances.
Check calculations of the adjustments for unrealized profit.
Check the calculations and disclosure of non-controlling
interests.
Check the accounting treatment of inter-company dividends
and other dividends.
Ensure the provisions of IAS 24 - Related Party Disclosures, are
complied with, as many components of the group will be
related to other components.
Reporting

Reach a conclusion about whether the group financial
statements present a true and fair view.
Conclusion
The above notes provide general key issues that are peculiar to a typical group
audit and some procedures that need to be performed. It is important that these
guide our discussions during the scheduled meeting with the group audit
committee. More specific issues will be considered within the context of the above
after the meeting and when full details of the group would have been obtained.
Thank you.
Regards.
Audu
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EXAMINER‟S REPORT
The question tests candidates understanding of group audits.
Almost 80% of the candidates attempted the question, but performance was poor.
The commonest pitfall of the candidates was lack of knowledge of the question and also
not being able to prepare the memo.
Candidates are enjoined to cover the syllabus and read the Study Text properly before
embarking on future examinations.
MARKING GUIDE
SOLUTION 6
Proper heading of memo
a.
b.
c.
D
MARKS
MARKS
1
Challenges
Different accounting date
Complexity
Foreign associates, with different accounting practice
Consolidated adjustments
Different audit firm for other associates
1 mark for each point
5
General procedures that may be performed
Analytical
Component materiality
Noticing risk of material misstatement
1 mark each
3
Salient items include
Ethical requirement
Component materiality
Identification of significant risks
Related parties
Use of their work by group auditor
Work to be done by component auditor
½ mark for each of any 4 points
2
Procedures to be performed relating to consolidation of the group
Clerical accuracy
Status of investments
Changes in the group
Consolidation adjustments
Related partners
Reporting
Loss-making investment
½ mark for each of any 6 points
3
Conclusion and proper closing of memo
1
15
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SOLUTION TO QUESTION 7
Date:
20 May, 2017
To:
The Board of Directors, Aluwo Bank
From:
Thomas Abuja
Subject:
Clarification on Auditor Rotation
Introduction
I am happy to provide some clarifications on auditor rotation, particularly on the
strategy adopted by the regulators of the banking industry in Nigeria as stated in
the CBN Code of Corporate Governance – Post Consolidation, which was issued in
2006. Below are the required clarifications.
(a)
Suggestions made about how auditor rotation could be achieved: Two
different suggestions have been made about how auditor rotation could be
achieved i.e. either by audit partner rotation or audit firm rotation.
i.
Audit partner rotation: Audit partner rotation is where the accounting
firm may remain as auditors of the same client company for an
unlimited number of years, or until the company decides to change its
auditors. However, the „lead‟ engagement partner and other key
members of the audit team should be „rotated‟ regularly. Audit
partner rotation has been adopted by most jurisdictions of the world.
ii.
Audit firm rotation: Audit firm rotation is where the accounting firm
itself remains as auditor of a client company but for no longer than a
specified number of years. The CBN Code of Corporate GovernancePost Consolidation, issued effective 1st April, 2006 requires audit firm
rotation after 10 years.
Please note that in many countries, including Nigeria, audit firm rotation
would require legislative amendment as the law frequently provides that
auditor‟s appointment is for one year renewable indefinitely.
(b)
Arguments in favour of audit firm rotation
The arguments in favour of the rotation of firms providing independent audit
include:
i.
Audit firm rotation limits the effect of over-familiarity of the firm over
an extended period of relationship. In a long-term audit relationship,
the auditors may become too close to management of the client
company. This may weaken their professional scepticism and
independence. They may be more likely to compromise when
disagreements with management occur, in order to preserve the
relationship, the audit, and their fees.
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ii.
(c)
Audit firm rotation improves the public perception of independence,
and so may increase confidence in the quality of external audits.
Arguments against audit firm rotation
The underlisted are the arguments against the rotation of audit firms:
i.
Audit firm rotation may have negative effects on audit quality and
effectiveness in the years immediately following a change. This is
because the new auditors may take several years to familiarize
themselves with their new client and its procedures. There is some
evidence to suggest that there may be a higher instance of audit
failures in the years immediately following a change of auditors. If
this evidence is valid, the connection between company failures and a
change of auditors might reflect an inability of the newly-appointed
auditor to identify problems in the client company.
ii.
The costs of changing auditors regularly are substantial as the auditor
attempts to familiarize himself with the new client. More management
time is also needed to assist the new auditor to learn about the client
company, its operations and its systems. This also adds to the cost of
firm rotation.
iii.
There is no evidence yet that compulsory audit firm rotation has a
positive impact on auditor independence and audit quality.
iv.
The market for auditing listed companies is dominated by the „Big
Four‟ accountancy firms. If this domination of the audit market
continues (which is probable), it may be difficult to change auditors
easily. The other large firms may not have available resources to take
on the audit, or may not be „independent‟ because of other non-audit
services that they already provide.
Conclusion
Considering the above, audit firm rotation has its pros and the cons, and it has not
yet been established empirically if the CBN‟s adoption of this strategy improves
auditor independence and quality. I hope the above clarifies your understanding of
auditor rotation. I am happy to provide further clarifications if necessary.
Thank you.
Regards.
Thomas Abuja
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EXAMINER‟S REPORT
The question tests candidates understanding of rotation of auditors.
Almost all the candidates attempted the question, but the performance was poor.
The commonest pitfall of the candidates was their inability to distinguish between the
arguments for and against auditor rotation.
Candidates are enjoined to read the Study Text exhaustively when preparing for future
examinations.
MARKING GUIDE
SOLUTION 7
Proper formatting of memo
a.
MARKS
Suggestion for audit rotation
Partner rotation
Firm rotation
1 mark for mentioning and 1 mark for developing each point
b. Argument in favour of rotation
Over-familiarity
Improves public perception
2 marks each
MARKS
1
3
4
Argument against rotation
Cost of changing auditors
Lack of resources of some firms
Domination by the big four
Inability of new firm to identify problem
1½ marks each
Conclusion and proper closing of memo
6
1
15
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
NOVEMBER 2017 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
Plus
Examiner‟s Reports
NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION - NOVEMBER 2017
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3¼ hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY
(30 MARKS)
QUESTION 1
Bode, Ugo, Musa and Company is a firm of Chartered Accountants that has existed
for over 20 years and achieved a strong reputation for quality audit work. The firm
has expanded significantly over the past ten years - doubling its client base across
the different sectors of the Nigerian economy. The firm currently audits two banks,
five listed entities and over seventy other companies. It has also increased its audit
staff base and grown the number of its partners from two to seven over the same
period.
However in the last two years, the firm has series of regulatory reviews due to a
number of instances of errors noted in some financial statements audited by the
firm. One of the clients, the shareholders of NigerKap Plc, petitioned the regulator
over a misstatement in the value of their investment property. This resulted in
overstatement of profit and overpayment of taxes by the company based on the
financial statements for the year ended December 31, 2015. The shareholders also
threatened to take legal action against the firm.
The Managing Partner (MP) of the firm is apparently very concerned about this
situation and has commenced internal procedures to evaluate the quality of audits
performed by the firm especially for the NigerKap audit of 2015. A committee set
up by him has conducted a review of a number of audit files and has noted among
others, that very poor audit work was performed by the NigerKap engagement
team of 2015 led by Amy Smith, one of the partners who is supposed to retire in
2018. The MP has therefore instructed that Oluwatoyin Bede-Nwokoye, a new
partner of the firm, should perform the 2016 audit of NigerKap Plc. The Statement
of Financial Position of NigerKap Plc as at December 31, 2016 has been provided to
the firm and some of the balances therein are shown below:
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Extract from Non-current assets
Property, plant and equipment
Intangible assets
Investment property
Deferred tax*
2016
N'million
2015
N'million
2,640
1,200
3,700
2,800
2,620
900
6,150
-
1,350
250
1,100
310
Extract from current assets
Inventories
Trade receivables
*The deferred tax relates to unused tax losses that have accumulated during the
past three years. Management is confident that there will be sufficient future
operating profits to claim the benefit of the tax losses in full in future years.
Required:
a. Discuss FOUR consequences of the poor audit work on the firm of Bode, Ugo,
Musa and Company (Chartered Accountants).
(5 Marks)
b. Recommend SIX actions that the new partner should implement to ensure that
a high overall quality of the audit of 2016 financial statements of NigerKap plc
is achieved.
(9 Marks)
c.
What are the FOUR key audit procedures that should be carried out by the
engagement team to determine whether the recognition of the deferred tax
asset of the company in 2016 is appropriate?
(8 Marks)
d. What specific audit procedures should be carried out by the audit team in
respect of the following balances in the financial statements of the company
(other than casting and agreement of amounts per schedule to the general
ledger/trial balance)?
i.
Inventories balance
(4 Marks)
ii. Intangible assets
(4 Marks)
(Total 30 Marks)
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SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION
(40 MARKS)
QUESTION 2
Chuks Roberts Plc (CRP) operates as auto-parts manufacturing company in Nigeria
and has its head office in Lagos. It has plans to manufacture drones for the
distribution of parcels within Africa. To actualise this, it has just acquired Zaka
Roberts Limited (ZRL), a South African company operating in Johannesburg, to
make the drone production a reality.
Zaka manufactures computer-controlled equipment for university laboratories and
other industries in Africa and the Middle East. It was owned by a group of five
friends who graduated from a South African University and were the directors and
shareholders of the company.
On February 1, 2016 they accepted CRP‟s offer to buy Zaka‟s manufacturing
equipment and technology, which is protected by patent rights, the factory
premises in Cape Town and the head office in Johannesburg for US$450million,
being 75 percent of the value of Zaka. Management notified the employees,
suppliers, customers and other stakeholders that Zaka would cease all
manufacturing undertakings on March 31, 2016.
All employees, apart from a few in the marketing, accounts and administration
departments were rendered redundant, and were given one month‟s notice with
effect from March 31, 2016.
Zaka would now operate under the new name, Chuks Zaka Limited (CZL) from its
former head office in Johannesburg as a marketing company selling CRP‟s drones
in the South African Region. To this effect, CRP will take up 55 percent of CZL, for
which payment was due by February 1, 2017.
Your firm of Chartered Accountants has been the external auditors to CRP and the
company has now engaged your firm to also audit its subsidiary, CZL.
You are required to:
a. Analyse and evaluate the business risks that would be assessed by the
management of CZL.
(6 Marks)
b. Analyse and evaluate the business risks that would be assessed by the directors
of CRP.
(6 Marks)
c. Assess and advise on the financial statements‟ risks to be considered in
planning the audit of CZL for the year ended December 31, 2016.
(8 Marks)
(Total 20 Marks)
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QUESTION 3
Tophem Bank Nigeria Plc has been operating for 20 years and your firm took over
the audit 5 years ago.
Tophem Bank‟s investment in Accra Insurance Limited, a foreign associate acquired
during the year and accounted for by the equity method, is carried at ₦575 million
on the Statement of Financial Position at December 31, 2016. Tophem‟s share of
Accra‟s net income is included in Tophem‟s income for the year then ended.
However, you were denied access to the management, auditors and the financial
information of Accra Insurance Limited.
Your partner has reviewed the audit file for the year ended December 31, 2016 and
has approved the issuance of a modified opinion. He drew a titular sketch of the
audit report and has asked you to fill up some gaps.
NB: Assume the underlying financial reporting frameworks are applicable to
Tophem Bank Nigeria Plc – Financial Reporting Council of Nigeria Act 2011,
Companies and Allied Matters Act, CAP C20 LFN 2004, International Financial
Reporting Standards, Banks and Other Financial Institutions Act CAP B3 LFN 2004
and other Central Bank of Nigeria guidelines and circulars.
You are required to:
a. Evaluate the circumstance in which a matter could be both material and
pervasive in its effect on the financial statements.
(4 Marks)
b. Explain EIGHT of the appropriate procedures to be followed in the audit
assignment before reaching the audit opinion.
(8 Marks)
c.
Draft appropriate basis of opinion paragraph suitable for inclusion in the
auditor‟s report.
(4 Marks)
d. Draft appropriate opinion paragraph suitable for inclusion in the auditor‟s
report.
(4 Marks)
(Total 20 Marks)
QUESTION 4
The management of Pony Bank Plc. and its fully owned subsidiary Ponte Micro
Finance Bank Limited arranged and invented bogus loans that totalled N5.5 billion
worthless assets which the former auditors did not detect.
The former auditors claimed that a clique of highly clever and organised swindlers
among the staff of Pony Bank deceived the auditors and devoted themselves to
defeating the audit and covering up their nefarious acts.
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Your firm of chartered accountants, Vic Viv & Co, has just taken up the audit of Pony
Bank Plc.
You are required to:
a.
Advise the engagement partner on the risks involved in taking up the audit.
(4 Marks)
b.
Recommend appropriate actions on the part of management and your firm
to overcome the financial statements‟ risks.
(8 Marks)
c.
Prepare a management letter which includes two matters suitable for
submission to the directors.
(8 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION
(30 MARKS)
QUESTION 5
You are the audit manager for XYZ Bank Limited for the year ended December 31,
2016.
From your review of the Bank‟s Board of Directors minutes of meetings, you noted
that during the year, the Board was concerned about a litigation issue involving the
Bank and another company named BBB Limited, in which the Bank is the
defendant.
BBB Limited had sued the Bank for converting a cheque worth N2.1billion and the
high court has declared the Bank guilty and imposed a penalty in the sum of N2.1
billion (i.e. the value of the cheque) on the Bank.
From the available information, it was noted that the claimant (i.e. BBB Limited)
had commenced the process to claim the judgment amount from the Bank.
The Bank was not satisfied with the case and had immediately filed for objection at
the Court of Appeal. The Directors of the Bank, based on the professional legal
counsel obtained, are of the opinion that the judgment issued by the Federal High
Court is baseless and unjustifiable, and that a favourable judgment would be
obtained at the Court of Appeal.
The summary of financial information of the Bank is as follows:
Provision for litigation (already recognised in the Bank‟s financial statements)
N96 million
Number of existing litigation cases as defendant
Number of existing litigation cases as plaintiff
50 cases
10 cases
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Litigation claims in favour of the Bank
N2.7 billion
Litigation claims made against the Bank including the N2.1
billion above
N3.2 billion
You are required to:
a.
b.
c.
Discuss FOUR of ISA 501 Audit evidence - specific consideration for selected
items requirements on the procedures the auditors can perform to obtain
sufficient and appropriate audit evidence on the litigation provision.
(5 Marks)
Comment on the adequacy or otherwise of the amount recognised as
provision for litigation in the financial statements as at December 31, 2016.
(5 Marks)
Prepare a summary disclosure of the entity‟s litigation status for inclusion in
the notes to the financial statements as at December 31, 2016.
(5 Marks)
(Total 15 Marks)
QUESTION 6
During the course of your audit of fixed assets of Next Engineering Plc at December
31, 2016 two problems arose:
(i)
The calculations of the cost of direct labour incurred on assets in the course
of construction by the company‟s employees have been accidentally
destroyed for the early part of the year. The direct labour cost involved is
₦20,000,000.00; and
(ii)
The company has received a government grant of ₦50,000,000.00 towards
the cost of plant and equipment acquired during the year and expected to
last for ten years. The grant has been credited in full to the income statement
as exceptional item.
Required:
a.
Discuss the general forms of modifications available to the auditors in
drafting their report in accordance with appropriate standards and state the
circumstance in which each form is appropriate.
(6 Marks)
b.
On the assumption that you decide that a modified audit report would be
necessary with respect to the treatment of government grant, prepare a draft
of the section that deals with the matter (whole report not required).
(5 Marks)
c.
Analyse the auditor‟s general responsibility with regard to the statement in
the directors‟ report concerning the valuation of land and building.
(4 Marks)
(Total 15 Marks)
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QUESTION 7
Young Entrepreneur Trading (YET) is an on-line trading business established by
Yemisi Tumfere. The business buys assorted household goods from different
manufacturers locally and abroad. Orders are made on-line from suppliers.
Customers also order goods on-line from YET and their invoices are processed and
transmitted to the store from where the goods are dispatched to the customers
through the delivery stores scattered all over the country.
YET has not been satisfied with the work of the previous auditors and has
approached your firm to be appointed as the new auditors. Appropriate
professional clearance has been resolved for the work to commence. You are the
audit manager responsible for the engagement. You have also been assigned on
the job with some new trainees who are not conversant with controls in on-line
businesses.
Required:
a.
Discuss FIVE of the controls an auditor should focus on to assess the
effectiveness of controls in an on-line system such as YET.
(5 Marks)
b.
Evaluate FOUR risks associated with the business of YET in the application of
electronic data interchange in an on-line business and FOUR effective controls
that may be put in place to minimise the risks.
(10 Marks)
(Total 15 Marks)
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SOLUTION I
i. a.
The consequences of the poor audit work could be the following:
(i) legal damages and legal costs;
(ii) losing the client;
(iii) adverse publicity and damage to the reputation of the audit
firm;
(iv) disciplinary proceedings by a professional body such as ICAN
(v) loss of high performing employees who would not wish to be
associated with poor image; and
(vi) increased regulatory focus and the associated time lost in
regulatory inspections and reporting
b.
The new engagement partner should put procedures in place to ensure
that:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
ethical standards are complied with and appropriate action taken
if there is evidence to the contrary;
independence requirements are met, including:
- identifying circumstances and relationships that might give
rise to threats to independence;
- assessing the impact of breaches of the firm‟s independence
policies and procedures and whether such breaches create a
threat to
- independence; and
- taking suitable action to eliminate identified threats or to
withdraw from the engagement if appropriate.
the audit is carried out by an audit team with the appropriate
competence and capabilities;
appropriate management of the engagement is in place, including
the direction and supervision of staff and the review of audit
work;
on or before the date of the audit report, the engagement partner
must, through a review of audit documentation and discussion
with the audit team, be satisfied that sufficient and appropriate
evidence has been obtained to support the conclusions reached.
adequate consultations have taken place on difficult or
contentious matters and the conclusions from such consultations
implemented;
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(vii)
(viii)
(ix)
Appropriate materiality amount is determined for the financial
statements as a whole and may consider lower performance
materiality at account balance level, in order to focus on high risk
areas and achieve improved audit quality;
(x)
An engagement quality control reviewer is appointed and
involved on the engagement to perform an objective evaluation of
the significant judgements made by the audit team, the
conclusions reached and to evaluate the appropriateness of the
audit report;
Adequate planning of the audit to ensure proper coverage; and
Review of prior year working papers.
(xi)
(xii)
c.
relevant specialists within the audit firm or experts to be engaged
by the audit team are involved to assist in auditing relevant
difficult areas of the engagement;
the following matters are documented:
- issues in respect of compliance with ethical requirements and
how they were resolved;
- conclusions on compliance with independence requirements;
- conclusions in respect of new and continuing engagements;
and
- the nature and scope of conclusions from consultations
undertaken.
The auditor should assess whether it is appropriate to include a deferred tax
asset in the financial statements and so needs evidence about whether the
tax losses will be recoverable. The procedures involved are:
(i)
Obtain a copy of the client‟s tax computations and agree the figures in
the calculation to the accounting records. Also consider recalculating
the amount to check it‟s accuracy;
Review any correspondence about tax that may exist with a view to
verifying the propriety of the tax losses used in the calculation;
(ii)
(iii)
(iv)
Make an assessment about whether the tax losses will be recoverable,
by obtaining forecasts from the client of future profitability. The
assumptions used in the forecast should be assessed for
reasonableness in the context of the auditor‟s understanding of the
client‟s business;
If the forecasts of future profitability are reasonable, the auditor should
assess how long it will be before the losses are recovered in full. This
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period should be checked against tax regulations, to confirm that there is
no statutory limit on carrying forward tax losses;
(v)
Determine from the tests above, whether the deferred tax asset should be
recognised in full or whether some amounts should not be fully
recognised; and
(vi)
Check that relevant disclosures required in respect of deferred taxes have
been made in the financial statements.
di
Inventories
Important specific audit procedures for inventories include the following:






Evaluation of carrying amount of inventories to ensure that it is stated at
the lower of cost and net realisable value, on an item-by-item basis;
Evaluation of the valuation method used to estimate inventory cost to
ensure that an acceptable method per IAS 2 was used (Remember that
LIFO is not permitted by IAS 2.);
Observe physical count of inventory items;
Obtain evidence that an appropriate method has been used for the
treatment of overheads (overhead absorption);
Check that any obsolete inventory items have been isolated and written
down/off; and
Check that relevant disclosures have been made in the financial
statements in respect of inventories.
(ii) Intangible Assets
Important specific audit procedures for Intangible assets include the following:






Evaluate whether purchased intangible assets have been recognised and
measured in accordance with IAS 38;
Obtain evidence that the useful lives of intangible assets have been
estimated in a reasonable way;
Obtain evidence to support the non-amortisation of intangible assets with an
indefinite useful life where applicable;
Check that intangible assets have been appropriately subjected to annual
impairment reviews and that the resulting adjustments (if any) have been
appropriately determined and recorded;
Evaluate that the relevant disclosures contained in the relevant movement
schedules have been appropriately presented; and
Obtain evidence with respect to disposals during the year and that the
relevant gain or loss has been appropriately recorded in the books.
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EXAMINER‟S REPORT
The question tests candidates understanding of Audit Quality.
Almost all the candidates attempted the question and performance was average.
i. a.
B.
c.
d(i)
(ii)
MARKING GUIDE
1¼ marks each for any four points
1½ marks each for any six points
2 marks each for any four points
1 mark each for any four points
1 mark each for any four points
TOTAL
MARKS
5
9
8
4
4
30
SOLUTION 2
(a) Business risks that will be assessed by CZL‟s management are:
i.
The parent company operates in another country with different laws and
regulations;
ii.
The parent company operates in high-tech environment and inventories
might be subject to obsolescence, and this will affect the survival of CZL
being a subsidiary;
iii.
CZL is now a new company selling items different from its erstwhile
products. New customers would be sought and new marketing efforts
would be employed, yet only skeletal staff were retained;
iv.
Staff of Zaka may sue for redundancy costs. Redundancy payments have
not been made. There may be need to make provisions;
v.
Possibility of increased errors in processing accounting transactions
because the skeletal staff retained may not allow for segregation of
duties;
vi.
The change in line of business will affect after-sales service for customers
of the old company and they may sue for damages;
vii.
Receiving products for sale only from its parent company is a limitation
to going concern of the company; and
viii.
The parent company is yet to pay for its investment.
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(b) Business risks that will be assessed by the directors of CRP are:
i.
ii.
iii.
iv.
v.
vi.
vii.
The subsidiary company operates in another country with different laws
and regulations;
The company operates in high-tech environment and inventories might
be subject to obsolescence;
The factory in South Africa may have been acquired at an amount far
more than its value;
The engineering expertise belonged to another company, which had
ceased from existence. It might be difficult getting technical help;
Moving from auto parts manufacture to the manufacturing of drones is a
dramatic shift requiring new expertise in manufacturing and sales;
There is need to patronise national carriers and international
organisations like DHL for economically sustainable sales to be attained
since these have had arrangements with airlines for the lifting of mails
and parcels; and
There are no plans yet for the distribution of the products, beyond using
the subsidiary the acquisition of which is yet to be consummated by
making payment.
(c)
Financial Statement risks to be considered in planning the audit of CZL
includes:
i.
Due to the possibility of rapid obsolescence, inventories in the financial
statements might be overstated. Serious attention needs to be paid to net
realisable value in the valuation;
The worth of the factory in South Africa may have been overstated, as it was
acquired from another company. There is need to do proper valuation of the
net assets acquired so as to determine the right amount of goodwill or
bargain purchase as relevant;
Provision must be made for 55 percent of the value of the subsidiary CZL, (55
percent of US$450 million) payable in February 2017.
There is need to consolidate the accounts of CZL in the financial statements
of CRP;
Exchange rate volatility will affect transactions between the company and its
parent company; and
Risk of misstatement of opening balances.
ii.
iii.
iv.
v.
vi.
EXAMINER‟S REPORT
The question tests candidates understanding of analysis, assessment and
evaluation of business risks.
About 95% of the candidates attempted the question but performance was poor.
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Candidates‟ commonest pitfall is lack of understanding of the question.
Candidates are enjoined to use the Institute‟s study text extensively.
a
b
c
Marking Guide
Marks
Different regulatory environment
High-tech environment
New product
Redundancy payments
Errors in accounting transactions
After sales service
Going concern
Part of company sold on credit
Different regulatory environment
High-tech environment
Over-valued factory
Technical help needed
New expertise
Patronage for product
Distribution of product in other
regions
Valuation of inventories
Valuation of factory
Payment for subsidiary – provisions
Consolidated financial statements
Exchange rate volatility
1¼ marks each for
any 4 points
6
1¼ mark each for
any 4 points
6
Total
Marks
2 marks each for
any
four points
8
20
SOLUTION 3
(a)
Generally, a matter will be material when it impacts the financial/economic
decision of the users of the financial statements.
„Pervasive‟ effects on the financial statements are defined by ISA 705 as
those that, in the auditor‟s judgement:
i.
are not confined to specific elements, accounts or items of the financial
statements; or
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ii.
are confined to specific elements in the financial statements, but these
represent (or could represent) a substantial proportion of the financial
statements; or
in relation to disclosures in the financial statements, are fundamental to
users‟ understanding of those statements.
iii.
When a „material‟ issue becomes „pervasive‟ then it is significant and affects
substantial proportion of the financial statements. This calls for a modification
of the auditors‟ opinion.
(b)
REACHING THE AUDIT OPINION
In reaching his audit opinion, the auditor is required to evaluate whether:
i.
ii.
iii.
iv.
c.
He has obtained sufficient appropriate audit evidence as to whether the
financial statements are free from material misstatements;
Uncorrected misstatements are material, individually or in aggregate
The financial statements give a true and fair view;
The financial statements have been prepared in accordance with the
relevant financial reporting framework and in particular whether:
- The financial statements adequately describe the relevant financial
reporting framework;
- The financial statements adequately disclose the entity‟s significant
accounting policies;
- The significant accounting policies are appropriate and consistent
with the relevant financial reporting framework;
- Accounting estimates are reasonable;
- The information in the financial statements is relevant, reliable,
comparable and understandable;
- The financial statements provide adequate disclosures; and
- The terminology used in the financial statements is appropriate.
Basis for qualified opinion
Tophem Bank Plc.‟s investment in Accra Insurance Ltd, a foreign associate,
acquired during the year and accounted for by the equity method, is carried
at ₦575 million on the Statement of Financial Position at 31 December 2016.
Tophem Bank Plc‟s share of Accra Insurance‟s net income is included in
Tophem Bank Plc‟s income for the year then ended. We were unable to
obtain sufficient appropriate audit evidence about the carrying amount of
Tophem Bank Plc‟s investment in Accra Insurance Limited at 31 December
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2016 and Tophem Bank Plc‟s share of Accra Insurance‟s net income for the
year because we were denied access to the management, auditors and the
financial information of Accra Insurance Limited. Consequently, we were
unable to determine whether any adjustments to these amounts were
necessary.
d.
Qualified opinion
In our opinion, except for the possible effects of the matter described in the
basis for Qualified Opinion paragraph, the accompanying financial
statements give a true and fair view of the financial position of Tophem Bank
Plc as at 31 December 2016 and the financial performance and cash flows
for the year then ended in accordance with the International Financial
Reporting Standards, the Companies and Allied Matters Act Cap C20 LFN
2004, the Banks and other Financial Institutions Act CAP B3 LFN 2004, the
Financial Reporting Council of Nigeria Act, 2011, and other relevant Central
Bank of Nigeria guidelines and circulars.
EXAMINER‟S REPORT
The question tests candidates understanding of the concept of materiality as
regards financial statements.
About 56% of the candidates attempted the question and performance was poor.
Candidates lacked understanding of the question.
Candidates are advised to prepare adequately for the examination by reading the
Institute‟s study text in detail.
MARKING GUIDE
3a
3b
POINTS TO MENTION
Material
Pervasive
Material and pervasive- impact on Audit report
SUB TOTAL
He has obtained sufficient appropriate audit evidence
as to whether the financial statements are free from
material misstatements
Uncorrected misstatements are material, individually or
in aggregate
Marks
1
2
1
1 mark
each for
any 8
points
Marks
4
8
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The financial statements give a true and fair view
The financial statements have been prepared in
accordance with the relevant financial reporting
framework and in particular whether:
- The financial statements adequately describe the
relevant financial reporting framework
- The financial statements adequately disclose the
entity‟s significant accounting policies
-
-
The significant accounting policies are appropriate
and consistent with the relevant financial reporting
framework
- Accounting estimates are reasonable
- The information in the financial statements is
relevant, reliable, comparable and understandable
- The financial statements provide adequate
disclosures
- The terminology used in the financial statements is
appropriate
3c
Basis of Qualified Opinion – as title
Reference to foreign investment
Unable to obtain appropriate audit evidence
Denied access to the management, auditors and the
financial information
Unable to determine the necessary adjustments
SUB TOTAL
Qualified Opinion – as title
Except for
Reference to Basis of Qualified Opinion
Accompanying financial statements
True and fair view
Name of company
Date of financial statements
Financial Position, Financial Performance & Cash flows
International Financial Reporting Standards
Companies and Allied Matters Act Cap C20 LFN 2004
Banks & Other Financial Institutions Act CAP B3 LFN
2004
Financial Reporting Council of Nigeria Act, 2011
SUB TOTAL
Total
1
1
1
1
1 (Any
four
points)
0.25
0.5
0.5
0.25
0.5
0.25
0.25
0.5
0.25
0.25
0.25
0.25
4
4
20
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SOLUTION 4
a. The engagement partner should take cognisance of the following risks that the
firm could be exposed to, if it takes up the audit:
i.
The client‟s working environment has been corrupted with lack of integrity
among staff leading to the creation of non-existent loans;
ii. Internal evidence therefore cannot be relied upon, as they have no weight;
and
iii. The opening balances cannot be relied upon because the financial
statements of prior years have been misstated.
b
ACTIONS TO REDUCE THE RISKS
Granted that the business risks are high and that these will create financial
statements risks, the partner must take appropriate actions to reduce their
effects on the financial statements.
The firm must be cautious in dealings with client‟s staff. External evidence
should be used to corroborate whatever internal evidence that would be
presented. Management representation should be obtained, covering
significant matters in the financial statements.
It is important to remember that the firm has taken professional indemnity
insurance. The insurance broker should be notified of this new client and
legal counsel should be obtained.
The specific actions to be taken include the following:
i.
ii.
iii.
iv.
v.
vi.
c
Client to conduct an investigation into the activities that created the
fictitious loans;
Do a 100 percent review work on the loans and advances;
Change or modify the accounting package and give new passwords to
new set of staff that would handle the general ledger;
Do a complete overhaul of the credit and marketing department;
Stop inter-company loans between the bank and the subsidiary, at
least in the short term. There should be no joint loan syndication
within the Group; and
Obtain further information from culpable staff and block all loopholes.
MANAGEMENT LETTER
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Date: 15 April, 2017
Viv Vic & Co
(Chartered Accountants)
The Directors
Pony Bank Plc.
Dear Sir
MANAGEMENT LETTER
We have completed the audit of your Bank‟s financial statements for the year ended
31 December 2016 and we made some observations during the course of the audit.
The observations are presented below.
1.
CREATION OF FICTITIOUS ASSETS
Observation
The staff of your bank and the subsidiary Micro Finance Bank colluded and created
bogus loans totalling N5.5 billion over a period of seven years.
Implication
This means that assets have been overstated by N5.5 billion.
Recommendation
There is an urgent need to write off this fictitious asset from the books.
Response
2. BREAKDOWN OF INTERNAL CONTROLS
Observation
The staff of your bank colluded to cover up fraud and gross misstatement.
Implication
This means that the backbone of the internal control system has been broken and it
is difficult to rely on the system for the preparation of the financial statements.
Recommendation
There is an urgent need to overhaul the human resource of the bank. There is need
for thorough investigation and those found culpable should be relieved of their
positions.
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Response
Conclusion
Please provide a response and action plan for each weakness identified in the
report. This should be inserted in the space provided. Additional sheets could be
attached for further explanation that could help us to serve you better. The contents
of this letter and your response thereupon will be followed up in future audits.
Thank you.
Truly yours,
Engagement Partner.
EXAMINER‟S REPORT
The question tests candidates understanding of audit risks associated with financial
statements.
About 90% of the candidates attempted the question and performance was poor.
Candidates displayed inadequate preparation, and lack in-depth knowledge of audit risks.
Candidates are advised to read the Institute‟s study text thoroughly before attempting the
examination.
MARKING GUIDE
4a
4b
POINTS TO MENTION
Client staff lacked integrity.
Internal evidence cannot be relied upon.
The opening balances cannot be relied upon.
SUB TOTAL
The firm should:
Be cautious in dealings with staff.
Use external evidence to corroborate.
Obtain management representation letter.
Inform Insurance Broker
Client should:
Conduct an investigation into the fictitious loans.
Change or modify the accounting package
New set of staff to handle the general ledger.
Do complete overhaul of credit & marketing
Marks
2 marks
each for
any 2
points
Marks
4
1 mark
each for
any 3
points
1 mark
each for
any 5
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4c
department.
Do a 100 percent review work on the loans and
advances.
Stop inter-company loans or loan syndication.
Obtain further information from culpable staff
SUB TOTAL
Letter format
Proper Introduction
First observation, Implications, recommendations
Second
observation,
Implications,
recommendations
Space for management response
Conclusion
Signed by Partner
SUB TOTAL
TOTAL
points
8
0.5
0.25
3
3
0.5
0.5
0.25
8
20
SOLUTION 5
(a)
ISA 501 states that the auditor shall design and perform audit procedures in
order to identify litigation and claims involving the entity which may give
rise to a risk of material misstatements, including:
i
inquiry of management and, where applicable, others within the
entity, including in-house legal counsel;
ii
direct communication with the entity‟s external legal counsel. The
auditor shall do so through a letter of inquiry, prepared by
management and sent by the auditor, requesting the entity‟s external
legal counsel to communicate directly with the auditor;
iii
reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel;
iv
reviewing adequacy of existing litigation provisions;
v)
review legal expense account; and
vi)
obtain written representation: The auditor shall request management
and, where appropriate, those charged with governance to provide
written representations that all known actual or possible litigations
and claims whose effects should be considered when preparing the
financial statements have been disclosed to the auditor and
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accounted for and disclosed in accordance with the applicable
financial reporting framework.
(b)
The existing provision of N96million is inadequate since it has not
been updated to include the liability arising from the High Court
judgment of N2.1 billion obtained in current year.
The auditor should consider proposing audit adjustment for an
additional N2.1 billion to the existing litigation provision based on the
following:
There is a past event - the relevant past event for the litigation
provision is the event that gives rise to the claim, i.e. the high court
judgment.
The adjusted litigation provision as at 31 December 2016 should then
be N2.196 billion.
(c)
Typical disclosure on litigation in the financial statement is presented
below:
“The Bank, in its ordinary course of business, is presently involved in
50 litigation cases as a defendant and 10 cases as a plaintiff. The total
amount claimed in the 10 cases instituted by the Bank is estimated at
N2.7 billion, while the total amount claimed in the 50 cases instituted
against the Bank is N3.2 billion, for which provisions amounting to
N2.196 billion have been made.
The Directors are of the opinion that no other significant liability will
arise therefrom in excess of the provision made in the financial
statements.”
EXAMINER‟S REPORT
The question tests candidates‟ understanding of the specific consideration of
litigation provision of ISA 501- Audit Evidence.
About 65% of the candidates‟ attempted the question but performance was poor.
The commonest pitfall of the candidates was that they applied general knowledge
rather than being specific. They were not familiar with ISA 501 requirement.
The extensive use of the Institute‟s study text is recommended for improved
performance.
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,
MARKING GUIDE
5a.
b.
c.
POINTS TO MENTION
MARKS
1¼ marks each for any four points
5
Existing provision of N96m not adequate
2
Consider proposing audit adjustment for an additional
N2.1b
1
Relevant past event for the litigation provision re High Court
Judgement
1
Adjusted litigation provision at 31 December 2016 should be
N2.1966
1
SUB TOTAL
5
Mentioning of - 50 Litigation cases
1
- N2.7billion in respect of litigation cases
1
- Total amount of claim to be N3.2b
1
- Provision of N2.196b
½
- Directors opinion that no other significant liability will arise
1½
SUB TOTAL
TOTAL
5
15
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SOLUTION 6
a.
The general forms of modifications available to the auditors in drafting their
report as stated in ISA 705 are as follows:
Qualified Opinion
This is issued when financial statements are materially misstated, but in the
auditor‟s judgment, the effect of the misstatement is not considered
pervasive.
OR
Issued when the auditor is unable to obtain sufficient appropriate audit
evidence (limitation scope), but in the auditor‟s judgment, the possible effect
of the misstatement is not considered pervasive.
Adverse opinion
Issued when financial statements are materially misstated, and in the
auditor‟s judgment, the effect of the misstatement is pervasive on these
financial statements.
Disclaimer of opinion
Issued when the auditor is unable to obtain sufficient appropriate audit
evidence and the possible effect of the misstatement is material and
pervasive on the financial statements.
b
Basis for modified opinion
“As explained in note xx an amount of ₦50,000,000 has been credited to the
Income Statement and included as exceptional items. International Financial
Reporting Standards require that such items should be recognised and
credited to Income Statement over the expected useful economic lives of the
related plant and machinery. The effect of the charge would be to make
operating profit ₦yy instead of ₦zz with a corresponding change in
shareholders‟ funds”.
c
The directors are solely responsible for the Directors‟ report and the auditors
have no general responsibility for it.
However, they are required to consider whether the information in the
Directors‟ report is consistent with the information in the financial
statements and information they are aware of in the course of their audit.
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If they are of the opinion that the valuation of land and building are
inconsistent with any information given in the accounts then, they must get
the directors to change that or say so in their report.
This is unlikely, but any information at all in the Directors‟ report which
seems to the auditor as dubious would put the auditor on enquiry.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on Audit Report on financial statements.
About 45% of the candidates attempted the question, but performance was poor.
The commonest pitfall of the candidates was lack of practical knowledge to be
applied in answering the question.
Constant use of the Institute‟s study text is recommended. Also reading of
published financial statements to get the feel of practical approach is
recommended.
MARKING GUIDE
a.
b.
c.
POINTS TO MENTION
Discussing/indicating when each form is required
- The draft of the modification section
- Reference to IFRS
- Reference to appropriation of plant and machinery
- Inclusion of effect on profit
Marks
Marks
2 marks
each for
any three
points
6
( 1 mark
each for
any of the
five (5)
points)
- Description of the error and indication of right
treatment
- Disclosure of directors‟ responsibility
- Auditors‟ duty to ensure information is consistent
with financial statements and/or information
already known to the auditor in the cause of the
audit.
1 mark
- Stating that directors are responsible
1 mark
- Indicating the action the auditor will take, if 2 marks
there is inconsistency
Total
5
4
15
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SOLUTION 7
a)
Although on-line systems are usually efficient and effective for the users,
they create additional problems for the auditor who needs to assess the
effectiveness of the system‟s controls. There are two categories of system
controls in an on-line system. These are general and application controls.
General controls in an on-line system could include the following:
i.
Access Control - There must be effective controls over access to the
system and its file. This is because in online systems, transactions are
processed as soon as they are inputted;
ii.
Software Control -There should be controls written into the system
software to prevent or detect unauthorised changes to programs;
iii.
Transaction Log Control - Transaction logs should be used to create an
“audit trail”. The computer program should be written in such a way
as to generate the audit trail for any transaction on request; and
iv.
Internet Access Control - Firewalls should be used for systems that
have access to the internet.
Application controls in an on-line system could include the following:
i)
ii)
iii)
b.
Pre-processing authorisation Control - such as logging on to the
system, and the user‟ names and passwords;
Data Validation Control
Data validation checks is the software to check the completeness and
accuracy of processing such as checking that a product code has been
entered with the correct number of digits; and
Balancing Control “Balancing”- checking control totals of data
submitted from remote terminals before and after processing.
Electronic Data Interchange (EDI) systems can improve the operational
efficiency of an entity, but they may generate the following problems for the
auditor who has to access the efficiency of the system controls:
i)
ii)
The lack of proper audit trail;
An increased level of dependency on the computer systems of the
organization and possibly the computer systems of other entities. Any
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iii)
iv)
failure or control weakness in one computer system may have an
impact on the computer system that is being audited;
There may be a risk of loss or corruption of data in the process of
transmission; and
There will be security risk in the transmission of data.
Auditors should expect to find effective controls in place to minimise the risk
inherent in EDI systems. Typically, controls will cover such matters as:
i)
ii)
iii)
iv)
Control over transmission of data such as the encryption of data
before transmission, acknowledgement systems, and the use of
authentication codes for senders of data;
Monitoring and checking of output;
Virus protection systems; and
Contingency plans and back-up arrangements.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of on-line real-time business audit.
About 90% of the candidates attempted the question but performance was poor.
The commonest pitfall of the candidates was that their solutions tend towards
controls in a Non-Electronic Data Processing.
Candidates are enjoined to read the question and interpret it correctly before
attempting it. Also, the Institute‟s study text should be used by the candidates in
preparing for future examinations.
Marking Guide
a
b
Any 5 (five) controls, I mark each
Points on operational efficiency -1¼ mark each for four
Any 4 (four) controls, 1¼ mark each
5
5
5
15
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
MAY 2018 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Examiner‟s Reports
Plus
Marking Guides
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION - MAY 2018
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3¼ hours (including 15 minutes reading time)
INSTRUCTION:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER
SECTION A:
COMPULSORY
(30 MARKS)
QUESTION 1
a.
You are a manager in Puposola & Company (Chartered Accountants) responsible for
the audit of the Honey Group (the Group), a quoted company. The Group‟s
main activity is steel manufacturing and it comprises of a parent company and
three subsidiaries. Your firm currently audits all components of the Group.
You are working on the audit of the Group‟s financial statements for the year
ended June 30, 2017. This morning, the audit engagement partner left a note
for you.
“Hello
I have gone through the draft consolidated financial statements and
accompanying notes which summarise the key audit findings and some
background information.
Although, at the planning stage, materiality was initially determined to be
N900,000, and was calculated based on the assumption that Honey Group is a
high risk client due to its listing status. However, due to a number of issues
that arose during the audit, there is a need to revise the materiality level for
the financial statements as a whole. The revised level of materiality should
now be N700,000.
Thank you.
The Group‟s draft consolidated financial statements, with notes referenced to
key audit findings, are shown below:
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Draft Consolidated Statement of Comprehensive Income
Note
June 30 2017
June 30 2016
Draft
Actual
N‟000
N‟000
98,795
103,100
Cost of sales
(75,250)
(74,560)
Gross profit
23,545
28,540
(14,900)
(17,500)
Operating profit
8,645
11,040
Share of profit of associate
1,010
900
Finance costs
(380)
(340)
Profit before tax
9,275
11,600
Taxation
(3,200)
(3,500)
Profit for the year
6,075
8,100
Revenue
1
Operating expenses
2
Other comprehensive income for the year, net of tax:
Gain on property revaluation
3
800
-----
Actuarial losses on defined benefit plan
4
(1,100)
(200)
Other comprehensive loss
(300)
(200)
Total comprehensive income for the year
5,775
7,900
Notes: Key audit findings on statement of comprehensive income
1. Revenue has been stable for all components of the Group with the exception of
one subsidiary, Copesink Company, which witnessed a 25% decrease in revenue.
2. Operating expenses for the year to June 2017 is shown net of profit on a
property disposal of N2 million. Our evidence includes agreeing the cash
receipts to bank statement and sale documentation, and we have confirmed that
the property has been removed from the non-current asset register. The audit
junior noted when reviewing the sale document, that there is an option to
repurchase the property in five years‟ time, but did not discuss the matter with
management.
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3. The property revaluation relates to the Group‟s head office. The audit team has
not obtained evidence on the revaluation, as the gain was immaterial based on
the initial calculation of materiality.
4. The actuarial loss is attributed to an unexpected stock market crash. The
Group‟s pension plan is managed by Axial Company, a firm of independent
fund managers who maintain the necessary accounting records relating to the
plan. Axial Company has supplied written representation as to the value of the
defined benefit plan‟s assets and liabilities at June 30, 2017. No other audit
work has been performed other than to agree the amount reported in the
financial statements to supporting documentation supplied by Axial Company.
Draft Consolidated Statement of Financial Position
Note
ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Investment in associate
Non-current assets held for sale
5
6
7
Current assets
Inventory
Receivables
Cash and cash equivalents
Total assets
June 30 2017
Draft
N‟000
June 30 2016
Actual
N‟000
81,800
5,350
4,230
7,800
99,180
76,300
5,350
4,230
85,880
8,600
8,540
2,100
19,240
118,420
8,000
7,800
2,420
18,220
104,100
12,500
3,300
33,600
4,350
53,750
12,500
2,500
29,400
4,000
48,400
10,820
43,000
1,950
55,770
9,250
35,000
1,350
45,600
6,200
2,700
7,300
2,800
EQUITY AND LIABILITIES
Equity
Share capital
Revaluation reserve
Retained earnings
Non-controlling interest
Total equity
Non-current liabilities
Defined benefit pension plan
Long-term borrowings
Deferred tax
Total non-current liabilities
Currents liabilities
Trade and other payables
Provisions
8
9
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Total current liabilities
Total liabilities
Total equity and liabilities
8,900
64,670
118,420
10,100
55,700
104,100
Notes: Key audit findings on statement of financial position
5.
The goodwill relates to each of the subsidiaries in the Group. Management
has confirmed in writing that goodwill is stated correctly, and our other audit
procedure was to arithmetically check the impairment review conducted by
management.
6.
The associate is a 30% holding in Jamil Company, purchased to provide
investment income. The audit team has not obtained evidence regarding the
associate as there is no movement in the amount recognised in the statement
of financial position.
7.
The non-current assets held for sale relate to a trading division of one of the
subsidiaries, which represents one third of that subsidiary‟s net assets. The
sale of the division was announced in May 2017, and is expected to be
complete by December 31, 2017. Audit evidence obtained includes a review
of the sales agreement and confirmation from the buyer obtained in July
2017, that the sale will take place.
8.
Two of the Group‟s subsidiaries are partly owned by shareholders external to
the Group.
9.
A loan of N8 million was obtained in October 2016 at an interest rate of 2%,
payable annually in arrears. The terms of the loan have been confirmed from
the loan agreement provided by the bank. There was no repayment of the
loan in the books as at prior year end.
Required:
a.
Explain why auditors may need to reassess materiality as the audit
progresses.
(4 Marks)
b.
Assess the implications of the key audit findings for the completion of
the audit.
Note:
Your assessment must consider whether the key audit findings indicate a risk
of material misstatement. Where the key audit findings refer to audit
evidence, you must also consider the adequacy of the audit evidence
obtained, but you do not need to recommend further specific procedures.
(18 Marks)
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c.
Discuss TWO advantages and TWO disadvantages of a joint audit being
performed on the financial statements.
(8 Marks)
(Total 30 Marks)
SECTION B:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF TTHREE
QUESTIONS IN THIS SECTION
(40 MARKS)
QUESTION 2
Audit firms have been castigated over the years by the public whenever their
clients have any financial or operational crises. The potential liability of auditors
has also become an important topic in recent years due to the growing complexity
of business and legal environment and increase in legal actions against auditors.
One reason put forward to explain the high number of legal actions against
auditors is the “expectation gap”.
Required:
a)
Explain “expectation gap” and describe its THREE main elements. (5 Marks)
b)
Discuss the strategies that could assist in closing the expectation gap.
(10 Marks)
c)
i. Explain briefly the concept of professional skepticism.
(2 Marks)
ii. Evaluate the importance of professional skepticism in the audit of
financial statements.
(3 Marks)
(Total 20 Marks)
QUESTION 3
A new hotel opened for operations on February 1, 2016 in Abuja. The directors at
their board meeting of September 2016 selected December as the hotel‟s year end.
Also, from conception of the hotel, it was decided to fully computerise the hotel and
its operations. This will make the hotel stand out and attract clientele in the federal
capital territory where there are many other hotels with strong competition.
The room doors are electronically operated and use electronic cards for opening. If
a customer did not specify his/her duration and has the lock properly programmed,
the door will lock at 12 noon and the customer has to go back to the reception for
access. Furthermore, all accounting and other processes are computerised.
The IT company that handled the computerisation agreed to leave a member of
staff who will train the staff of the hotel for three months and ensure that the
system operates efficiently. Management believes that the staff will familiarise
themselves with the system within that period. The server handles all doors,
accounting processes including billing and determination of room occupancy rate
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on daily basis. Various units of the hotel have desk-top units which key employees
use in both ordering and communication between themselves. The server is next to
the operations manager‟s office with the responsibility on him to oversee this in
addition to his other duties.
The last quarterly report on the hotel activities was not consistent with expectation,
and occupancy rate failed to agree with turnover. The management of the hotel
approached your firm of chartered accountants to be engaged as auditors to the
hotel. Your review and interactions as the leader of the audit team revealed the
information disclosed above.
Required:
Evaluate and apply the relevant general and application controls necessary to be
installed in the hotel‟s information environment.
(Total 20 Marks)
QUESTION 4
You are the HR partner in Ekemode & Company (Chartered Accountants). As part of
continuous training programme of your firm, you are to organise an in-house
seminar to educate the staff of your firm on Rules of Professional conduct. You have
decided to emphasise the IFAC‟s Code of Ethics for Professional Accountants
published by the International Ethics Standard Board for Accountants (IESBA)
recently adopted by ICAN into their localised code called “The Professional Code of
Conduct and Guide for Members.”
Required:
a.
Explain briefly the FIVE fundamental principles of the IFAC‟s Code of Ethics
for Professional Accountants.
(7½ Marks)
b.
c.
Explain independence of mind and independence of appearance to the staff.
(5 Marks)
Explain briefly THREE general sources of threat to the fundamental principles
of the IFAC‟s Code of Ethics for Professional Accountants.
(7½ Marks)
(Total 20 Marks)
SECTION C:
YOU ARE REQUIRED TO ANSWER TWO OUT OF THREE
QUESTIONS IN THIS SECTION
(30 MARKS)
QUESTION 5
The management of QQ Limited had engaged an expert valuer, Segun & Company
in the valuation of its investment property situated at Ojo Oniyun Street, Victoria
Island for disclosure in the financial statements as at year end.
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Required:
As auditors to QQ Limited;
a. Discuss the factors to be considered when assessing the objectivity of the expert
employed by management
(5 Marks)
b. Explain the procedures to be performed by the auditor to assess whether the
work of the management expert provides sufficient and appropriate evidence
for the audit of the financial statements.
(10 Marks)
(Total 15 Marks)
QUESTION 6
Reliance Ventures Limited has been trading in imported goods for many years. The
company‟s fortune has started to diminish as a result of current economic
environment. Your firm has been the auditor of the company in the last three years.
You have noticed that the shareholders‟ equity of the company has been eroded
and is currently in deficit. This condition has raised significant doubt on the entity‟s
ability to continue as a going concern.
Required:
Draft a briefing note for the audit team of the company. Your briefing note should:
(a)
Identify and explain FOUR audit procedures to be performed by the audit
team to determine the going concern status of the company.
(10 Marks)
(b)
Discuss FOUR of the steps that the auditor should take if he considers that
the going concern assumption is invalid whereas management considers it
to be valid.
(5 Marks)
(Total 15 Marks)
QUESTION 7
a.
You are the accountant to Banana Follow Me Limited and the audit of the
financial statements for the year ended December 31, 2016 is currently
ongoing. The company is a cocoa processing entity with various factories
across the country. During the year end audit, the auditors, Akinfenwa &
Company. (Chartered Accountants), observed that the company purchased
200,000 units of XYZ Plc. shares during the year and that the company had
not recognised dividends on these shares as at year end.
Upon enquiry, the Managing Director of the company explained that the
shares were purchased ex-dividend and had promised to provide suitable
representations to confirm this. The auditors have verified this and are
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satisfied with the explanation but expect representation letter which includes
all other relevant representations from the company.
Required:
As the accountant to the company, prepare the management representation
letter to be issued to the company‟s auditors.
(8 Marks)
b.
Management of Banana Follow Me Limited is planning to invest in all its
factories in order to attract more customers. The company has sufficient cash
to fund all its necessary capital expenditure. Most of the cash will be used to
invest in equipment and fittings while the remaining cash will be used for
the refurbishment of the factories.
The audit strategy relevant to the audit of the company reveals the existence
of a significant risk associated with money laundering, largely due to the
high volume of cash-based transactions. The majority of the customers
purchase cocoa in cash, and the company transfers its cash to overseas bank
accounts on a regular basis.
Required:
i. Discuss THREE requirements of an anti-money laundering programme
which the auditor of Banana Follow Me Limited should have in place for
detecting and reporting suspicion of money-laundering.
(6 Marks)
ii.
State ONE example of the criminal offences connected with money
laundering.
(1 Mark)
(Total 15 Marks)
SOLUTION 1
(a) Materiality
Materiality is a matter of judgment and is commonly determined using a
numerical approach based on percentages calculated on revenue, profit
before tax and total assets. ISA 320: “Materiality in Planning and Performing
an Audit” requires that the auditor shall revise materiality for the financial
statements as a whole in the event of becoming aware of information during
the audit that would have caused the auditor to determine a different level of
materiality initially.
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During the audit, the auditor becomes aware of a matter which impacts on the
auditor‟s understanding of the client‟s business and which leads the auditor to
believe that the initial assessment of materiality was inappropriate and must
be revised. For example, the actual results of the audit client may turn out to
be quite different to the forecast results on which the initial level of
materiality was based.
Also, a change in the client‟s circumstances may occur during the audit, such
as a decision to dispose a major part of the business. This again may cause the
auditor to consider if the previously determined level of materiality is still
appropriate.
If adjustments are made to the financial statements subsequent to the initial
assessment of materiality, then the materiality level may need to be revised
accordingly.
The initial calculation of materiality for the Honey Group was based on the
client‟s listing status and on an assumption that the group is a high risk client.
It is therefore important that events such as explained above, are taken into
account in assessing a new level of materiality for this client to ensure that
sufficient appropriate evidence is obtained to support the audit opinion.
b.
Puposola & Company
(Chartered Accountants)
From:
Audit Manager
To:
The Audit Engagement Partner
Subject:
Implications of Key Audit Findings
I refer to your note this morning regarding key audit findings on the audit of
Honey Group financial statements. Please find below, my viewpoint and
assessment of the implications of the key audit findings as noted:
KEY AUDIT FINDINGS
ASSESSMENT OF THE IMPLICATION
OF THE AUDIT FINDINGS FOR THE
COMPLETION OF THE AUDIT
Statement of Comprehensive Income
i.
Revenue has been stable for all components We need to verify that all revenues of
except for Copeskin with 25% decrease in Copeskin has been fully recorded and
revenue.
that understatement of invoices or
under-billing did not occur.
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ii.
Operating expenses for the year ended
The option to repurchase the property
June 2017 is shown net of profit on a after 5 years needs to be discussed
property disposal of N2 million.
with management.
If the option
results in a loan, then the N2m should
be adjusted and loan recognized
(possibly with interest). Inappropriate
treatment of the impact of the
repurchase option could result in
material misstatement of the financial
statements given the amount of
materiality used for audit.
iii.
Property Revaluation
iv.
Actuarial loss attributed to unexpected stock Representation letter would be
market crash.
obtained from the management of
Honey Group.
We need to obtain sufficient and
appropriate audit evidence on the
revaluation. Since the transaction is
now considered material being
N900,000 and the revised materiality
level is N700,000, there is a likely risk
of material misstatement.
We shall carry out more audit
procedures to verify the loss, which
may include obtaining expert opinion
such as Actuarial Practitioner or
Stocks expert.
Statement of Financial Position
v.
Goodwill relates to each of the subsidiaries in
the group
The three subsidiaries are owned and
controlled by the Group. It is proper
to recognise the goodwill of each of
the subsidiaries at this time, however,
impairment would be assessed.
We have to pass adjustment journal to
recognize impairment of goodwill
attributable to the subsidiaries where
applicable.
vi.
Associate is a 30% holding in Jamil Company
There is need to obtain sufficient and
appropriate audit evidence regarding
this associate.
30% holding is significant and can
result in material misstatement.
vii. The non-current assets held for sale relate to
trading division of one of the subsidiaries.
The non-current assets held for sale
amounts to 331/3% of the net assets of
the subsidiary, which is very
significant.
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Additional audit evidence is required
especially to determine likelihood of
the future sale.
viii. Two of the Group‟s subsidiaries are partly
owned by shareholders external to the Group.
We need to ascertain the equity
participation
of
the
external
shareholders to determine the extent
of their interest in the subsidiaries.
We shall also obtain sufficient and
appropriate audit evidence to verify
external shareholders investment in
the subsidiaries.
The financial statements will be
materially
misstated
if
the
investments are significant and not
corrected.
ix.
Loan of N8m obtained in October 2016 at an
interest rate of 2%.
We shall inquire from management
regarding the reason for non-payment
of the amount that fell due in
December 2016. This may be an
indication of going concern issues.
We need to also check that interest
expense relating to the un-repaid loan
has been fully charged in the
statement of profit or loss and other
comprehensive income.
(signed)
Audit Manager
Puposola & Company
(Chartered Accountants)
(c) Advantages of joint audits
i.
After the acquisition of a large subsidiary, using joint auditors may help the
transition process while the group auditors become familiar with the new
subsidiary. The „old‟ auditors should be familiar with the business of the
subsidiary and should pass their knowledge over to the parent company
auditors. For the parent company auditors, this should accelerate the process
of getting to know the business of the new subsidiary.
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ii. Joint auditors may provide a higher level of technical expertise than either
audit firm could provide individually.
iii. Improved geographical coverage may be obtained for the audit, where each of
the joint auditors on its own does not have offices that cover all the
geographical locations of the component companies in the group.
iv. It has been suggested that two medium-sized accountancy firms might „join
forces‟ and tender for the audit of a company for which the auditors would
normally be one of the „Big 4‟ accountancy firms. This is possibly a way in
which medium-sized firms might try to „break the monopoly‟ of the Big 4 on
large company audits.
Disadvantages of joint audits
i.
The extra cost to the client. It is likely to cost more to use two accountancy
firms than to use one.
ii. Possible inconsistencies between the two joint auditors in the audit methods
that they use. If so, there may be problems in reaching agreement on whose
audit method to use.
iii. The possible difficulty the two firms may have in agreeing the division of
work.
iv. Additional problems that will arise in monitoring and controlling the audit
work of two different firms.
v. The two firms may find it difficult to work well together, and each firm may try
to become the leading firm in the joint audit.
vi. If there is a claim against the auditors for negligence in the conduct of the
audit, there may be some difficulty in identifying which of the joint auditors is
potentially liable.
vii. Disagreement on sharing of fees
EXAMINER‟S REPORT
The question is in three parts. Part (a) tests candidates‟ knowledge on materiality;
Part (b) tests assessment of key audit findings while Part (c) tests their knowledge
on joint audit.
Being a compulsory question, almost all the candidates attempted the question and
performance was fair.
Candidates‟ commonest pitfall is their inability to assess correctly the implications
of key audit findings.
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Candidates are advised to read the Institute‟s Study Text in details in preparing for
future examinations.
Marking Guide
1a.
1 mark each for any 4 points
b.
½ mark each for 9 key audit findings
1½ marks each for any 9 points on
assessment of implication of key audit findings
c.
2 marks each for any 2 points on advantages
2 marks each for any 2 points on disadvantages
Total
Marks
4½
13½
4
4
Marks
4
18
8
30
SOLUTION 2
a.
The expectation gap is the difference between what the users
of financial statements and other members of the public think that the
auditors should do and what the auditors are actually required by law and
the profession to do.
There are three main elements in the expectations gap, these are:
i.
A standard gap: This occurs because of a perception that auditing
standards are more prescriptive than they actually are, and that
auditors have wide-ranging rules that they must follow;
ii.
A performance gap: This occurs because of a perception that audit
work has fallen below the required standard; and
iii. A liability gap: This arises from a lack of understanding about the
auditor‟s liability and who the auditor may be liable to.
b.
A number of strategies that could assist in closing the expectation
gap are discussed below.
i.
The profession should attempt to improve the general level of
knowledge and understanding about the audit process. One of such
attempts has been made with the issuance of ISA 700, the auditing
standard on auditor‟s reports. This requires an audit report to include
an explanation of the nature of an audit;
ii.
Controls over the auditing profession are important in enhancing
public confidence. For example, the European Union requires the
audit of companies whose shares are quoted on a stock market in the
European Union (EU) to be conducted in accordance with
International Auditing Standards (ISAs).
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National oversight bodies such as Public Company Accounting
Oversight Board (PCAOB) in USA and Financial Reporting Council
(FRC) in the UK and Nigeria monitor the compliance of audit firms in
their conduct of audits by performing audit inspections.
iii.
Significant guidance for auditors and management aimed at
increasing quality and addressing issues such as going concern has
been issued by standard setters, professional bodies and regulators.
There has been an increased focus on corporate governance and role
that audit committees play in companies, reducing inconsistences and
enhancing quality.
iv.
Open and candid communication between internal and external
auditors, finance management and the audit committee is
increasingly being seen as critical in helping reduce the expectation
gap.
Such communication helps the audit committee to perform their
governance role transparently and realistically that will help achieve
effective risk management.
v.
Enhanced communication between the parties and confirmation of
their respective roles and responsibilities should be presented in the
audit committee and directors reports to the shareholders. This will
motivate the users to be more aware of the various parties‟ roles and
responsibilities beyond the understanding they gain just from the
audit report.
vi.
The expectation gap will hopefully narrow further as financial
reporting participants work together more effectively to improve the
deterrence and detection of financial reporting fraud.
c) i.
The ISA 200 defines professional skepticism as “an attitude that
includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud and a critical
assessment of audit evidence”. They explicitly require the auditor to
plan and perform an audit with professional skepticism recognising
that circumstances may exist that cause the financial statements to be
materially misstated.
ii. Professional skepticism plays an important role in auditing and forms
an integral part of an auditor‟s skill. Professional skepticism is closely
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interrelated with professional judgment. Both are essential to the
proper conduct of the audit and ensure quality audit.
Professional skepticism facilitates the exercise of professional
judgment by an auditor, regarding decision in the following arears:
The nature, timing and extent of audit procedures to be
performed;
Whether or not sufficient and appropriate audit evidence has been
obtained or more needs to be done to achieve the objectives of the
ISA 200;
The evaluation of management‟s judgment in applying an entity‟s
applicable financial reporting framework; and
The drawing of conclusions based on the audit evidence obtained,
for example, assessing the reasonableness of the estimates made
by management in preparing the financial statements.




EXAMINER‟S REPORT
The question tests candidates‟ knowledge on expectation gap.
About 90% of the candidates attempted the question but performance was poor.
The commonest pitfall was lack of understanding of strategies that could assist in
closing expectation gap and the importance of professional skepticism.
Candidates are advised to study the Institute‟s Study Text very well before entering
for future examinations.
Marking Guide
2a.
b.
c.
2 marks for explaining the gap
1 mark each for the 3 elements of the gap
2 marks each for any 5 points
Explanation of professional skepticism
1 mark each for any 3 illustrative examples
Total
Marks
2
3
2
3
Marks
5
10
5
20
SOLUTION 3
General Controls
General controls are controls over the environment in which the computer-based
information system is designed, developed, operated and maintained.
The main categories of general controls that an auditor would expect to find in a
computer-based information system are summarised in the table below.
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Control Area
Development of computer-based
information systems and applications
Controls
Appropriate
standards
should
be
established and enforced for designing,
developing,
programming
and
documenting each new system.
viii.
ix.
x.
xi.
xii.
xiii.
Documentation and testing of
programme changes
Suitable testing procedures should be
carried out on each new system.
The design of a new system should be
approved formally by the management
and the system users.
There should be segregation of duties
between system designers and system
testers to reduce the risk of error or fraud
There should be suitable staff training in
the designing and testing of systems.
Formal testing procedures should be
applied for any change to an existing
programme.
There should be formal authorisation
procedures for programme changes.
There should be suitable staff training in
making and testing programme changes.
Prevention or detection of unauthorised
programme changes
There should be a segregation of duties
between programmers and computer
system operators.
All programme changes must be fully
documented.
Access to programme files must be
restricted.
Programme logs should be used to record
access to programme files
There should be anti-virus software to
prevent, detect or deal with malicious
changes to programme.
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Back-up copies of files and programme
should be kept outside the computer
environment.
Prevention of the use
programmes or data files
of
incorrect Standard operating procedures should be
performed by suitably-trained staff.
The scheduling of „jobs‟ for a computer
centre should specify the programme files
and data files to be used.
There should be effective supervision of
computer centre operations.
Review of operations should be carried
out regularly by management.
There must be restricted access to data
files that should be limited to authorised
personnel
Prevention of unauthorised
amendments to data files
Ensuring continuity of operations
-
Transaction logs should be kept of all
users of data files, and these should be
reviewed by management.
Secured back-up of programme files and
data files should be kept.
Measures should be implemented for the
protection of equipment against fire,
power failure and other hazards.
Disaster recovery programmes should be
in place so as to restore operation in the
event of major disaster that may put the
main computer systems out of operation.
There should be suitable maintenance
and service agreements for all major
externally acquired software.
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Additional general controls that could be applied to the hotels information
environment are as follows:
GENERAL CONTROLS
1. Room door programmed to lock at
12 noon
EVALUATION OF CONTROLS
This ensures that guests do not extend their
stay in the hotel without making further
payment.
This control will be adequate if the
automatic lock system neither malfunctions
nor gets manipulated.
Also, collaboration with guests by IT function
will circumvent the control and make it
ineffective.
2. Accounting and other procedures are
computerised
The computerisation of accounting and other
procedures will guard against human errors
and late recording of transactions.
However, the effectiveness of this control
depends on the continuous functioning of the
procedures installed.
3. Post-implementation support
arrangement
This arrangement ensures continuity of
operations. However, it is for a short period
of 3 months.
Adequate arrangement ought to be made to
replace the staff of the IT company or to put
in place adequate Continuity and Disaster
Recovery Plan.
4. Staff training
Training of staff ensures that employees
understand what to do at any point in time
and are not likely to misuse the system or
cause it to malfunction.
However, it does not prevent collusion or the
tendency of staff to abuse the system or to
attempt fraudulent practices.
5. Server under the watch of the
Operation‟s Manager
This is good control to ensure that the Server
is not accessed by unauthorised persons to
corrupt or steal data.
However, it relies on the Operation‟s
Manager being physically present to monitor
the server,
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A better control would be putting the server
in a secure enclosure where unauthorised
persons would not be able to have access to
it.
Also a camera could be installed to monitor
and record movements around the server
area.
Programme applications should be installed
on the server such as, Antivirus software,
firewall, etc.
Logical access such as password should be
implemented on the server to prevent
unauthorized access to data files.
A list of application controls that might be found in a computer system is set out below.
Input
Authorisation
- Data for input should be authorised
before input.
- Data is input only by authorised
personnel.
Completeness
There should be checks to ensure that all
data has been processed. Checks might
consist of:
- Document counts (for example, counting
the number of invoices);
- Control totals;
- Checking output to input; and
- Review of output against expected values
(for example, is the total payroll cost
broadly in line with expectations).
Accuracy
There should be some checks within the
computer software on the validity of input
data items (data validation checks). These
may include:
- Check digits for key code items, such as
supplier codes, customer codes and
employee identification numbers;
- Range checks (a check on whether a
particular value or figure is feasible and
within a realistic range of values);
- Existence checks (a check on whether a
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Processing
Master files and standing data
particular code exists);
- Review and reconciliation of output and
use of control totals.
There should be checks that all input has
been processed and that processing is
complete. Checks might include:
- Control total;
- Batch totals (where the computer counts
the number of transactions in a processed
batch, and this is checked against a
manual record of the number of items in
the batch);
- Manual review; and
- On-screen warning that processing is not
complete.
- Management review of master files and
standing data.
- Regular updates of master files.
- Record counts.
The auditor should review the application controls for each application to establish
whether they are effective „on paper‟. He should then carry out tests of controls to
establish whether the application controls are operating effectively in practice.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge in respect of IT controls in a hotel
environment.
About 30% of the candidates attempted the question and their performance was
poor.
The commonest pitfall of the candidates was lack of technical ability to relate IT
controls to an hotel environment.
Candidates are enjoined to acquaint themselves with what operates practically in
the global audit environment when preparing for future examinations.
Marking Guide
Marks
2 marks each for any 3 application controls
2 marks each for any 7 general controls
Total
6
14
Marks
20
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SOLUTION 4
a) The fundamental principles of the code of conduct for Professional Accountants
are as follows:
i.
Integrity: A professional accountant should be straight forward and honest
in all professional and business relationship;
ii. Professional competence and due care: A professional accountant has a
continuing duty to maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent
professional service based on current developments in practice, legislation
and techniques. A professional accountant should act diligently and in
accordance with applicable technical and professional standards when
providing professional services;
iii. Objectivity: A professional accountant should not allow bias, conflict of
interest or undue influence of others to override his or her professional or
business judgments;
iv. Confidentiality: A professional accountant should respect the confidentiality
of information acquired as a result of professional or business relationships
and should not disclose any such information to third parties without
proper and specific authority unless there is a legal or professional right or
duty to disclose. Confidential information should not be used for the
personal advantage of the professional accountant or third parties; and
v. Technical standard: A professional accountant should comply with relevant
laws and regulations and should avoid any action which discredits the
profession.
b) Independence of mind and independence of appearance
Independence of mind describes a state of mind that permits the auditor to
express a conclusion without being affected by influences or prejudices that
compromise within professional judgment. This allows the auditor to act with
integrity, exercise objectivity and professional skepticism.
Independence of appearance means the avoidance of facts and circumstances
that are so significant that a reasonable and informed third party, having
knowledge of all relevant information (including any safeguards applied)
would reasonably conclude that a firm‟s or a member of the assurance team‟s,
integrity, objectivity or professional skepticism has been compromised.
The presumption is that if an auditor is not independent in appearance then
they cannot possibly think with objectivity, that is, be independent in mind.
Even if this may not be technically true, it is a presumption that must be held in
order to protect the reputation of auditors
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c) Threats to the fundamental principles are matters that could result in the
accountant or audit firm acting without integrity, sufficient competence,
ensuring confidentiality or in a way that discredits the profession. However,
threats to the fundamental principles are largely threats to the independence
and objectivity of the accountant or the audit firm.
The code recognizes the following general sources of threat to the fundamental
principles:
i. Self-interest threat: This arises when the accountant or the audit firm has a
financial interest or other interest in a matter. Typically, this means that the
accountant‟s decisions may be influenced by self-interest and the accountant
will therefore not act with objectivity and independence;
ii. Self-review threat: This occurs when an accountant is required to review or
re-evaluate (for a different purpose) a previous judgment he has made or
action that he has taken. Self-review threats can also apply to audit firm, for
example, if an audit firm prepared the financial statements for a client
company and then acted as auditor, it would be reviewing its own work and
would be reluctant to criticize or question it. This would be a threat to
objectivity and independence;
iii. Advocacy threat: This occurs when the accountant is in a position where he is
expected to defend or justify the position of the client and act as an advocate
for the client‟s position or point of view. This would be a threat to objectivity
and independence;
iv. Intimidation threat: This occurs when the accountant is deterred from acting
with objectivity due to threats against him or his firm. The nature of the
threat may be a threat by the client that it will take engagement away from
the firm unless it agrees with the point of view of the client management;
and
v. Familiarity threat: This occurs when the accountant becomes too sympathetic
with the client‟s position due to close relationship. For example, this may
occur due to a long association over many years in carrying out the annual
audit.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on IFACs Code of Ethics for Professional
Accountants.
About 95% of the candidates attempted the question and performance was very
good.
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Marking Guide
4a.
½ mark for each of the 5 principles
b.
c.
1 mark for each of the explanations of the principles
2½ marks for independence of mind
2½ marks for independence in appearance
2½ marks each for any 3 general sources of
threats identified
Total
Marks
2½
5
2½
2½
Marks
7½
5
7½
20
SOLUTION 5
(a)
When assessing the objectivity of an expert employed by management,
issues for the auditor to consider would include whether:
(i) the expert has a financial interest in the audit client, for example
shareholding;
(ii) the expert has a personal relationship with a senior manager in the
audit client; and
(iii) the fee paid for the expert‟s services was a fair commercial price.
(b)
When assessing whether the work of management‟s expert provides
sufficient and appropriate evidence for audit purposes.
i.
The auditor should review the terms on which the expert was engaged
by the audit client, such as the objective and scope of the expert‟s
work and whether the expert was notified that his work may be relied
on by the auditors.
ii.
The auditor should obviously study the content of the expert‟s report
and the conclusions that the expert reached. Any assumptions used by
the expert may be significant (for example in making an asset
valuation) and the auditor should compare those assumptions with his
own understanding of the audit client‟s busin
iii.
The auditor may also need to check the methods used by the expert.
For example, for the valuation of Investment Property, the method of
valuation used should be consistent with the requirements of IAS 40.
iv.
If the expert has been used to provide a valuation, the date of the
valuation should be close to the end of the financial year of the audit
client so that it is current.
There may be additional evidence that the auditor could obtain to
confirm the evidence provided by the expert. For example, if a
property valuation expert has been used by the audit client to value a
number of properties, the auditor may be able to obtain some
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additional evidence of the reliability of the valuations in a number of
ways:
- By inspecting some of the properties to assess their condition.
- By checking the cost of similar assets acquired by the audit client
during the financial year.
v.
For assets acquired during the year, by comparing their cost with the
end-of-year valuation: unless there has been a large rise or fall in
property values during the year, current valuation should be fairly
close to original cost.
vi.
By checking events after the reporting period: if any of the properties
has been sold since the end of the year, their sale value should be
compared with their end-of-year valuation. They ought to be similar
amounts.
vii.
By obtaining representations from management that the key
assumptions used in arriving at estimated values are reasonable.
viii.
Use of fair value accounting may require more frequent use of experts
by the auditor.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on the work of accountants‟ expert.
About 80% of the candidates attempted the question but performance was poor.
The commonest pitfall of the candidates was lack of knowledge in the area of the
syllabus tested.
Candidates are enjoined to thoroughly read the Institute‟s Study Text before sitting
for future examinations.
Marking Guide
5a.
2½ marks each for any 2 points
b.
Marks
2 marks each for any 5 points
Total
Marks
5
10
15
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SOLUTION 6
(a)
Going concern assumptions-audit procedures
Where events or conditions have been identified that may cast significant
doubt on the entity‟s ability to continue as a going concern, the auditor must
obtain sufficient appropriate evidence to determine whether in fact, a
material going concern uncertainty does exist. He does this by performing
additional audit procedures.
i.
Discussion with management: Management should be asked to explain the
reasons why they consider the going concern assumptions to be valid. They
should also be asked about their future plans for the business. If the entity is
expecting to make a loss next year, the possible implications of this for the
going concern assumption should be discussed extensively.
ii.
Obtain a cash flow forecast: A cash flow forecast should be obtained from
the entity and this should also be discussed with management; the
assumptions in the forecast should be checked and, if appropriate,
challenged. If the forecast shows a cash shortage, the auditor should discuss
with management their plans for obtaining the additional financing that will
be required.
iii.
Review the sales order book: If this indicates a decline in sales orders, the
issue should be discussed with management.
iv.
Review ageing of receivables: Check a list of ageing receivables and assess
the average time to pay. If customers are taking longer to pay, this may have
adverse implications for operational cash flow.
v.
Consider whether planned capital expenditure by the entity may be
insufficient to support the business as a going concern in the future.
vi.
If a key senior employee has left the business entity recently, the entity may
start losing key customers and key employees. This should be discussed with
management.
vii.
Litigation: If the company is involved in continuing litigation and faces the
possibility of having to pay a large amount of money to settle the dispute,
the implication should be discussed.
viii.
Information from the client entity‟s bank: If the client entity is expecting to
rely on continuing financial support from its bank, for example, a
continuation of its bank overdraft facility, the bank should be asked to
confirm that the finance will remain available.
ix.
After discussing the issues with management: the auditor should obtain a
letter of representation from management confirming their opinion that the
entity is a going concern.
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(b)
The financial statements are the responsibility of management, and if the
auditor considers that the going concern assumption is invalid whereas
management considers it to be valid, the steps available to the auditor are
to:
i. Discuss the matter with management, having carried out audit
procedures to obtain more evidence;
ii. Try to persuade management to change their mind and prepare the
financial statements on a different basis (a break up basis);
iii. If management does not agree to change its view, consider making a
qualified audit report; and
iv. Unless all those charged with governance are also involved in managing
the entity, the auditor must communicate to those charged with
governance any events or conditions that may cast significant doubt on
the entity‟s ability to continue as going concern, such communication
must include the following:
 Whether the events or conditions constitute a material uncertainty;
 Whether the use of the going concern assumption is appropriate; and
 Whether the related disclosures in the financial statements are
adequate.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of going concern assumption.
About 80% of the candidates attempted the question but performance was poor.
The commonest pitfall of the candidates was inability to identify sufficient and
appropriate evidence to determine whether a material going concern issue exists.
Candidates should read the Institute‟s Study Text thoroughly before sitting for
future examinations.
Marking Guide
6a.
2½ marks each for any 4 points
b.
Marks
10
1 /4 marks for each of the 4 points
Total
5
15
1
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SOLUTION 7
a.
Akinfenwa & Co. (Chartered Accountants)
7, Idiogun Street,
Lanfenwa,
Ibadan.
(Date in full and must be after 31 Dec. 2016)
Dear Sir,
Management Representation Letter for the year ended 31 December 2016
This representation letter is provided in connection with your audit of the financial
statements of Banana Follow me Limited for the year ended 31 December 2016, for
the purpose of expressing an opinion as to whether these financial statements give
a true and fair view in accordance with the International Financial Reporting
Standards (IFRSs).
We confirm that, to the best of our knowledge and belief, having made such
inquiries as we considered necessary for the purpose of appropriately informing
ourselves.
Financial Statements
1. We have fulfilled our responsibilities, as set out in the terms of the audit
engagement dated ……….., for the preparation and fair presentation of
financial statements in accordance with IFRSs.
2. Measurement methods and significant assumptions used by us in making
accounting estimates, including those measured at fair value, are reasonable
(ISA 540).
3. Related party relationships and transactions have been appropriately accounted
for and disclosed in accordance with IFRSs (ISA 550).
4. All events subsequent to the date of the financial statements and for which
IFRSs require adjustment or disclosure have been adjusted or disclosed (ISA
560).
5. The effects of uncorrected misstatements are immaterial, both individually and
in the aggregate, to the financial statements as a whole. A list of uncorrected
misstatements is attached to the representation letter (ISA 450).
Information Provided
6. We have provided you with:
 Access to all information such as records, documentation and other matters
that are relevant to the preparation of the financial statements;
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 Additional information that you have requested from us for the purpose of
the audit; and
 Unrestricted access to persons within the company from whom you
determined it necessary to obtain audit evidence.
7. We confirm to you that the company does not keep two or more different sets of
accounting books and does not have any off balance sheet set-offs as at the end
of the period.
8. All transactions have been recorded in the accounting records and are reflected
in the financial statements.
9. We have disclosed to you the results of our assessment of the risk that the
financial statements may be materially misstated as a result of fraud.
We have disclosed to you all information in relation to fraud or suspected fraud
that we are aware of and that affects the company and involves:
 Management;
 Employees who have significant roles in internal control or,
 Others where the fraud could have a material effect on the financial
statements (ISA 240).
10. We have disclosed to you allegations of fraud, or suspected fraud, affecting the
company‟s financial statements communicated
employees, analysts, regulators or others. (ISA 240).
by
employees,
former
11. We have disclosed to you all known instances of non-compliance or suspected
non-compliance with laws and regulations whose effects should be considered
when preparing the financial statements. (ISA 250).
12. We have disclosed to you the identity of the company‟s related parties and all
the related party relationships and transactions of which we are aware and all
related party relationships and transactions have been appropriately accounted
for and disclosed in accordance with IFRSs.
13. We confirm that the company purchased 200,000 units of XYZ Plc shares during
the year and that these shares were bought ex-dividend.
14. We also have the positive intention and ability to hold the investment securities
as „available for sale‟, in accordance with IAS 39-Financial Instruments:
Recognition and Measurement.
Yours truly,
Signed on behalf of the Board of Directors by:
Chief Financial Officer
Managing Director
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b(i)
There are many elements which should be in place as part of an anti-money
laundering programme.
The audit firm must appoint a Money Laundering Reporting Officer (MLRO),
who should have a suitable level of seniority and experience; usually this
would be a senior partner in the audit firm. Suspicions of money laundering
should be reported to the MLRO, who considers whether the matter should
be referred to security agencies, prepares and keeps the appropriate
documentation.
There are also firm-wide elements of an anti-money laundering
programme. A training programme is essential to ensure that individuals
are aware of the relevant legislation and regulations regarding money
laundering. Individuals should also be trained in the firms identification,
record keeping, reporting policies, money laundering risk factors,
identifying such risk factors, appropriate response and tipping off offences.
An important part of anti-money laundering is customer due diligence or
know your client procedures. This means that audit firms must establish the
identity of clients using documents such as certificates of incorporation and
passports, and should obtain information about business activities in order
to gain an understanding of matters such as sources of income and the
rationale for business transactions.
Finally, the audit firm must ensure that it maintains records of client
identification procedures and of all transactions relevant to audit clients,
for example, the receipt of cash for services performed. This is important to
ensure that the audit firm does not inadvertently become party to a
transaction involving money laundering.
b(ii)
The examples of criminal offences connected with money laundering
are:

Failure by a person in the regulated sector to inform the appropriate party
of a knowledge or suspicion that another person is engaged in money
laundering; and

Failure to make a disclosure which is likely to prejudice an investigation
into money laundering (tipping off).
EXAMINER‟S REPORT
The question tests candidates‟ understanding of management‟s representation
letter and anti-money laundering matters.
About 80% of the candidates attempted the question but performance was poor.
The commonest pitfall of the candidates was failure to distinguish between
management representation letter and management letter.
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Candidates are enjoined to be familiar with the Institute Study Text when preparing
for future examinations.
Marking Guide
7a. - Giving name and address of auditor
- Stating date of report to be after year end
- Heading of subject matter of the letter
- Purchase of 200,000 units of XYZ Plc shares
- Closing remark and show signing of letter by
Managing Director or Chief Finance Officer or both
- Mentioning any other 3 out of the 13
other points in a letter of representation (1 mark each)
bi. Mentioning and explaining any 3 of
- Money Laundering Reporting Officer – (MLRO)
- Training
- Record Keeping
- Reporting policy
- Know your client
- Firm not inadvertently become party to the act
(2 marks for any 3)
bii. 1 mark for any one point
Total
Marks
1
1
1
1
Marks
1
3
6
1
8
7
15
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
NOVEMBER 2018 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
Plus
Examiner‟s Reports
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION - NOVEMBER 2018
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3¼ hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY
(30 MARKS)
QUESTION 1
You are the audit partner of Rolami Adiatu & Company, a firm of Chartered
Accountants. In the process of planning an audit, you have identified the need to
train audit personnel involved in the audit of clients engaged in on-line businesses.
You have concluded arrangements with your human resources department to
organise training for the firm‟s audit team which includes trainees, supervisors and
managers. You are preparing notes which will assist you to train the team and
make them appreciate the problems that may arise in the audit of on-line
businesses and how they could be minimised.
Required:
a. Prepare briefing notes which explain on-line systems and the operational
advantages they offer to entities that use them.
(6 Marks)
b. Identify the general and application controls which need to be put in place to
tackle the audit problems created by on-line systems.
(9 Marks)
c.
i. Discuss Electronic Data Interchange (EDI).
ii. Explain four possible problems EDI may create for the auditor.
iii. Explain four relevant controls to be put in place to minimise the audit risk
inherent in EDI systems.
(15 Marks)
(Total 30 Marks)
SECTION B:
YOU ARE REQUIRED TO ANSWER TWO OUT OF THREE
QUESTIONS IN THIS SECTION
(40 MARKS)
QUESTION 2
Yusuf Olatunji & Co., (Chartered Accountants) have been auditors to XBC Bank
Limited. There has been some regulatory and compliance issues for which the bank
was sanctioned and paid penalties to both the Central Bank of Nigeria and the
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Financial Reporting Council of Nigeria. At the board of directors meeting to
consider the last annual report audited by the firm, some of the problems caused
by the auditors were raised. Following the reoccurrence of such issues, it was
proposed that another audit firm be engaged in addition to the present firm. To
achieve their objective, a bigger firm that has international affiliation was
considered to take a leading position in a joint audit arrangement and to ensure
appropriate compliance.
Your firm has been approached for the appointment. A meeting was scheduled
between your firm, Yusuf Olatunji & Co. and the executive management of the
bank. In preparation for the meeting, you are informed that you will address the
meeting on the advantages and disadvantages of joint audit, being an area some
members of the management team have expressed concerns.
After the meeting, your firm was subsequently appointed and the necessary
formalities were properly followed. Your partner has directed that you liaise with
Yusuf Olatunji & Co. to obtain the necessary materials for the preparation of the
audit and that you review your firm‟s audit manual with respect to the concerns of
management on joint audit.
Your assessment of the documents obtained from the other auditor revealed the
following amongst others:
i.
Part of the penalty was on improper disclosure relating to a material
property, plant and equipment (PPE) acquired during the previous year and
a substantial loan above the limit authorised for a sector of the economy;
ii.
The classification of unresolved transactions as debit balances in the
statement of financial position resulting in an increase in operating profit
and the payment of higher taxes than projected;
iii.
The IT operations of the bank had weak controls such that it was possible for
some staff to over-ride some of them;
iv.
The net current assets have continued to fall and in the preceding year have
fallen below industry average despite increase in gross earnings.
Required:
a.
Evaluate the advantages and disadvantages of joint audit.
(8 Marks)
b.
Prepare an agenda for the scheduled meeting between the two audit firms.
(4 Marks)
c.
Develop the appropriate audit approach to address each of the issues
identified from the review of the documents obtained from Yusuf Olatunji &
Co.
(8 Marks)
(Total 20 Marks)
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QUESTION 3
You are the auditor in charge of the audit of Big Bank Plc. Two new associates who
recently joined the firm have been assigned to your team and you need to provide
them on-the-job training on audit process. The training should focus on audit
evidence and testing procedures for gathering audit evidence.
Required:
a. Explain six procedures for gathering audit evidence.
(6 Marks)
b. Explain to members of your team the terms “sufficient” and “appropriate” audit
evidence.
(2 Marks)
c.
Explain four principles that an auditor uses in assessing the reliability of audit
evidence in line with ISA 500.
(4 Marks)
d. You have allocated the following audit areas to the two new associates on
your team:
i. Bank and cash balances; and
ii. Payroll.
Identify the audit procedures that you will discuss with your team members for
substantive testing of audit areas mentioned above.
(8 Marks)
(Total 20 Marks)
QUESTION 4
You are an audit senior in a firm of Chartered Accountants. You are about to
commence work on the audit of B & Z Pharmaceuticals Limited, a family owned
and managed limited liability company. You have been informed by a business
contact that the company has not been trading very successfully and is having
difficulties with its bankers. However, you are not aware of any specific details.
The Engagement Manager on the audit is also aware of this information and is
concerned about the ability of B & Z Pharmaceuticals Limited to continue in
business for the foreseeable future. He has asked you to visit the company in order
to ascertain the current state of affairs.
Required:
a. Prepare a list of questions that you would wish to ask and details of any
information that you would wish to obtain from the Finance Director of B & Z
Pharmaceuticals Limited, so as to enable you identify indicators and assess
ability of the company to continue as a going concern.
(16 Marks)
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b. Explain briefly the audit opinion that you would give assuming you concluded,
after carrying out appropriate audit procedures, that there was a material
uncertainty regarding the ability of the company to continue in business and
management has included appropriate disclosures in the financial statements.
(You are not required to draft the audit report).
SECTION C:
(4 Marks)
(Total 20 Marks)
YOU ARE REQUIRED TO ANSWER TWO OUT OF THREE QUESTIONS
IN THIS SECTION
(30 MARKS)
QUESTION 5
As a result of recent global financial crises, audit inspection reports in various
jurisdictions have noted areas requiring professional judgment. Such areas include
fair value, related party transactions and going concern assessments, where
regulators and oversight bodies believe that auditors should clearly demonstrate
professional scepticism.
Required:
a. Explain the term “Professional Scepticism”
(3 Marks)
b. Identify the stages in the audit process where professional scepticism is
necessary
(3 Marks)
c.
Discuss three ways in which the application of professional scepticism can be
demonstrated by the auditor.
(9 Marks)
(Total 15 Marks)
QUESTION 6
You are the Group Engagement Partner on the audit of the consolidated financial
statements of GoodLife Investment Plc for the year ended 31 December 2017.
GoodLife Investment Plc is a group of companies with subsidiaries in various
countries across Africa.
Based on the relative size of the components in terms of revenue, profit before tax,
total assets, total liabilities and net assets, you have identified some of the
subsidiaries as significant components.
Component materiality has been determined as N22 million. In addition, from your
preliminary risk assessment, you have identified some components that are likely to
contain significant risk of material misstatements of the group financial statements.
You plan to request component auditors to perform work on the financial
information of the following components as at 31 December 2017.
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Component
ID
Component
Name
GIP
Goodlife
Investment
Plc
Component
Auditor
Country Classification Component is likely to
of Component include the following
significant
risks
of
material misstatement
in the group financial
statements
JPM & Co.
Nigeria
(Chartered
Accountants),
Lagos, Nigeria
Significant
component



Fraudulent
recognition of
revenue
Credit risk allowance for loan
impairment and
impairment of other
financial assets
Valuation of
financial
instruments
GISAL
Goodlife
Investments
South Africa
Limited
QSS Audit
South
(Chartered
Africa
Accountants),
Guateng,
South Africa
Significant
component
GIL
Goodlife
Insurance
Limited
JPM & Co.
Nigeria
(Chartered
Accountants),
Lagos, Nigeria
Insignificant Valuation of insurance
component
liabilities
GPRS
Goodlife
Properties &
Real Estate
Services
Adibe & Co.
Nigeria
(Chartered
Accountants),
Lagos, Nigeria
Significant
component
GSL
Goodlife
Kwesi & Co.
Ghana
Stores Limited (Chartered
Accountants),
Accra, Ghana
Insignificant
component
Required:
a.
Identify four factors that need to be considered by the group auditor in
determining the use of component auditors to work on the financial
information of these components.
(4 Marks)
b.
Discuss three principles to be applied when determining the type of work to
be performed on each of the components above. (Link specific consideration
to relevant components as shown above).
(9 Marks)
c.
List four contents of a Group Audit Instruction to a component auditor
(2 Marks)
(Total 15 Marks)
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QUESTION 7
You are the partner responsible for the audit of JJ Industries Limited for the year
ended 31 December 2017. The final audit has been completed and you are aware
that there is a guidance for auditors relating to audit reports - ISA 706-Emphasis of
Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor‟s
Report.
Required:
ai.
Explain “Emphasis of Matter paragraph” and provide three examples and
the potential situations in which such a paragraph may be used.
(6 Marks)
ii.
Define “Other Matter paragraph” and give two examples of the use of such a
paragraph.
(4 Marks)
Note: You are not required to produce draft paragraphs
ISA 705-Modifications to the Opinion in the Independent Auditor‟s Report
b.
require the auditor to modify his opinion in the audit report.
Discuss the two situations under which the auditor must issue a modified
opinion in line with ISA 705.
(5 Marks)
(Total 15 Marks)
SECTION A
SOLUTION 1
a. On-line systems are network computer systems that allow users direct access to
centrally-held data and programs. Access to the central files is through remote
terminals.
On-line systems offer a number of operational advantages to entities that use
them. These include:
i.
They permit the immediate entry of transactions from many different
locations, instead of having to submit transactions to a central computer
for processing. For example, if a retailing company operates an on-line
system for sales, sales transactions data can be inputted immediately for
centralized processing through terminals in each retail store;
ii.
In the same way, centralized master files, such as master files for
inventory, are updated immediately. This means that subsequent users of
the system can use the up-to-date versions of master files;
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iii.
On-line system allows users to make inquiries and obtain immediate
responses, by having access to master files or reference files. For
example, users are able to give immediate answers to customers about
prices of product or the current status of their order; and
(iv)
Reduction in operational costs
b. On-line systems are usually efficient and effective for the user, however, they
create additional problems for the auditor who needs to access the
effectiveness of the system controls. There should be sufficient general controls
and application controls to minimise the risks that arise from using on-line
systems, as specified below:
i.
ii.
General controls in an on-line system could include the following:
There must be effective controls over access to the system and its files.
This is because in on-line systems, transactions are processed as soon
as they are inputted.

There should be controls written into the system software to prevent
or detect unauthorised changes to programs.

Transactions logs should be used to create an “audit trail”. An audit
trail refers to the ability of the auditor to trace a transaction through
all its processing stages. An audit trail may not exist in paper form in
computer systems. The computer programs should therefore be
written in such a way as to generate the trail for any transactions on
request.

Firewalls should be used for systems that have access to the internet.
Firewalls are hardware or software devices that prevent
unauthorised access to a system from an internet user; and

Back up mechanism for transactions.
Application controls in an on-line system could include the following:
 Pre-processing authorisation, such as logging on to the system, and the use
of user names and passwords.
 Data validation checks in the software, to check the completeness and
accuracy of processing such as checking that a product code has been
entered with the correct number of digits; and
 Balancing, that is checking control totals of data submitted from remote
terminals before and after processing.
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C.i.
Electronic Data Interchange (EDI) systems are systems that allow the
electronic transmission of business documents, such as invoices or payroll
information between different computer systems. The EDI system provides a
form of translation service so that the data transmitted from one computer
system is changed into a form that can be read by the other computer,
without any need for human intervention.
Electronic Data Interchange may operate within the organisation for
example, the sales department may use EDI to transfer copies of customer
orders electronically to a separate computer system of the accounting
department.
EDI may also operate externally, for example, a company may use EDI to
submit payroll data for processing to the computer system of a payroll
agency, or may submit purchase orders for inventory electronically to the
computer system of a supplier.
ii.
iii.
EDI systems can improve the operational efficiency of an entity, but may also
generate the following problems for the auditor who has to assess the
efficiency of the system controls.

The lack of a paper audit trail

An increased level of dependence on the computer systems of the
organisation and possibly the computer systems of other entities. Any
failure or control weakness in one computer system may have an impact
on the computer system that is being audited.

There may be a risk of loss or corruption of data in the process of
transmission; and

There will be security risks in the transmission of data.
Auditors should expect to find effective controls in place to minimise the
risks inherent in EDI systems. Typically, controls will cover such matters as:




Controls over transmission of data, such as the encryption of data before
transmission, acknowledgement systems, and the use of authentication
codes for senders of data;
Monitoring and checking of output;
Virus protection systems; and
Contingency plans and back-up arrangements.
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EXAMINER‟S REPORT
The question tests candidates‟ understanding of information and communication
technology (ICT).
Being a compulsory question, about 99% of the candidates attempted the question,
but performance was poor.
The commonest pitfall of the candidates was inability to differentiate between online systems and electronic data interchange.
Candidates are enjoined to read the Institute‟s Study Text properly before enrolling
for future examinations.
Marking Guide
Marks Marks
a.
Definition of on-line system
Operational advantages to users (2 marks each for any 2 points)
2
4
6
b.
General controls (2 marks each for any 3 points)
Application controls (1 mark each for any 3 points)
6
3
9
c.
Explanation of EDI
Areas of operation of EDI (2 marks each for 2 points)
Problems that may be generated for the auditor
(1 mark each for any 4 points)
Controls to be put in place to minimise risks
(1¼ mark each for any 4 points)
Total
2
4
4
5
15
30
SOLUTION 2
SECTION B
ai.
Advantages of joint audits include:

A large company may, because of its size benefit from the services of
more than one firm of auditors in order to sufficiently cover its
operations;

After the acquisition of a large subsidiary, using joint auditors may help
the transition process while the group auditors become familiar with the
new subsidiary. The „old‟ auditors should be familiar with the business of
the subsidiary and should pass their knowledge over to the parent
company auditors.
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For the parent company auditors, this should accelerate the process of
getting to know the business of the new subsidiary;
ii.
Joint auditors may provide a higher level of technical expertise than
either audit firm could provide individually;
iii.
Improved geographical coverage may be obtained for the audit, where
each of the joint auditors on its own does not have offices that cover all
the geographical locations of the component companies in the group;
 Improve quality of work done by the auditors;
 Reduces time spent on audit;
 Sharing of experience between firms; and
 It has been suggested that two medium-sized accountancy firms
might join forces and tender for the audit of a company for which the
auditors would normally be one of the „Big 4‟ accountancy firms. This
is possibly a way in which medium-sized firms might try to „break the
monopoly‟ of the Big 4 on large company audits.
iv.
Disadvantages of joint audits
Possible disadvantages of joint audits include the following:
 The extra cost to the client.
accountancy firms than one;
It is likely to cost more to use two
 The possible difficulty the two firms may have in agreeing the division
of work and coverage of branches;
 Difficulty in sharing the audit fees between the firms; and
 There is joint liability for claims against the firms.
b.
Areas of focus at the planning meeting between the two audit firms are:
i. Introduction of the audit firms and their participating staff
ii. Planning meetings and sessions to ensure the effective delivery of the
assignment;
iii. Communication channels for the joint auditors and the management of the
company being audited;
iv. Documents to be prepared by each firm and the review of working papers
of the component auditors;
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c)
v.
Risk assessment of the client, based on the previous issues raised;
vi.
Evaluation of the audit procedures to be performed to address the
risk identified in the evaluation of the client‟s systems;
vii.
Materiality basis for the various accounts and account balances; and
viii.
Agreement of fees between the parties.
The audit approach to address each of the issues include:
i.
Property plant and equipment (PPE) acquired during the previous
year and substantial loan above the limit authorized for a sector of
the economy
-
ii.
Confirm the cost of acquisition of the PPE by checking the official
receipt obtained when they were acquired.
Review the minutes of the board of directors‟ meeting which gave
rise to the acquisition of the PPE.
Confirm the calculation of the depreciation for the year using
company accounting policy.
Confirm the authorisation of the loan obtained during the period.
Ascertain the existence of the loan by comparing the interest
charged on it.
Review the company‟s policy on loans vis-a-vis the amount
obtained during the period.
Debit Balances
This will require a thorough review of the items classified as debit
balances on the statement of financial position.
The effect of the debit balance is a misstatement of both actual
profit/performance and the financial position of the entity. Hence a
detailed evaluation and proper classification will be necessary.
Excess tax paid:
The tax laws allow the over or under provision to be adjusted in the
subsequent year. This allows for proper adjustments to be made on
the tax issue. An evaluation needs to be made to determine whether
this issue would result in a re-statement of the prior year statements
of financial position.
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iii.
IT operation
-
iv.
The IT operations require to be evaluated properly. There should
also be a specified administrator. This will give authority to assign
levels of control as functions overriding control could lead to fraud.
There should also be sufficient audit trail of IT system, a situation
activities report (systems log) to avoid where no particular person
would be held accountable.
Decline in net current assets
This could be made possible by a number of factors, such as:

Growing current liabilities as a result of borrowings, or
improper classifications of either assets or liabilities,

Each of these options portends a negative signal and requires
a proper review of the assets and liabilities balances to ensure that
the appropriate amounts are recorded;

Treatment and classification issues would be evaluated to ensure
proper presentation in the financial statements and determination
of a true position for the entity; and

It would be important to also discuss with the appropriate level of
management regarding the business operations and outlook of the
entity.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of joint audit.
About 85% of the candidates attempted the question and performance was poor.
The commonest pitfall of the candidates was their inability to prepare agenda for
the maiden meeting of the joint auditors and identification of key audit issues.
Candidates are advised to read the Institute Study Text properly and interpret
questions correctly before attempting them.
Marking Guide
Marks
a.
b.
c.
8
4
4
4
8
20
1 mark each for any four advantages and four disadvantages
1 mark each for any four points
Identification of each of the four problems- 1 mark each
Proposal of method of resolution - 1 marks each
of each of the four problems
Total
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SOLUTION 3
a)
Procedures for gathering audit evidence
i.
Inspection: This involves looking at an item - support documents e.g.
invoices, entries in accounting records of intangible assets.
ii.
Observation: This involves watching a procedure e.g. physical
inventory counts, distribution of wages, opening of mail. This
procedure is limited to the point in time when the observation takes
place. It should also be noted that the person performing the
procedure may act differently when being observed.
iii.
Inquiry: This involves seeking information from knowledgeable
persons inside or outside the entity, evaluating responses to those
inquiries, and corroborating those responses with other audit
evidence. As such, inquiry alone does not provide sufficient audit
evidence when performing controls or substantive testing. Other audit
procedures are performed in conjunction with inquiry.
iv.
External confirmation: A specific type of inquiry – seeking
confirmation from a third party e.g. a bank or trade receivable.
v.
Recalculation: This involves checking the mathematical accuracy of
documents or records e.g. adding up the list of year-end trade
receivables.
vi.
Re-performance: This involves independently carrying out procedures
or controls, which were originally performed by the client e.g. reperforming the aging of year-end trade receivables.
vii.
Analytical procedures: This involves evaluating and comparing
financial and/or nonfinancial data for plausible relationships and
investigating unexpected fluctuations. For example, using period-toperiod changes in the employee count and increase in payroll to
develop an expectation for payroll expenses for current period and
investigating unexpected differences/fluctuations.
b) “Sufficient” relates to the quantity of evidence. There must be enough audit
evidence to support the auditor‟s conclusion or opinion.
“Appropriate” relates to the quality, relevance and reliability, of the
evidence.
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c) Principles that an auditor uses in assessing the reliability of audit evidence.
There are a number of general principles set out in ISA 500 to assist the
auditor in assessing the reliability of audit evidence. These can be
summarized as follows:
i.
Audit evidence is more reliable when it is obtained from independent
sources outside the entity under audit. However, internally generated
audit evidence is more reliable when the related controls are effective;
ii.
Audit evidence obtained directly by the auditor is more reliable than
audit evidence obtained indirectly or by inference. For example,
observation of the operation of a control by the auditor is more
reliable than inquiry about the operation of that control;
iii.
Audit evidence is more reliable when it exists in documentary form.
This could be paper, electronic or other medium. For example, a
written record of a meeting taken at the time is more reliable than a
subsequent oral representation of the matters discussed; and
iv.
Audit evidence provided by original documents is more reliable than
audit evidence provided by photocopies, or documents that have been
filmed, or otherwise transformed into electronic form. This is because
the reliability of those other forms may depend on the controls over
their preparation and maintenance.
di.
Audit Procedures for Bank and Cash balances
Bank Balances
Request and obtain confirmation of balances from banks
Review bank reconciliation statements and test the validity of
reconciling items on a sample basis
Review large or round-sum amounts just before and immediately
after the reporting period.
Agree balances in the bank confirmation to the bank
reconciliation statements.
Assess audit significance of other information in the confirmation
obtained from the bank.
Perform analytical procedures
Cash Balances
i.
Carry out cash counts and agree amounts in the ledger to cash count
certificates.
ii.
Check that postings are made correctly to ledger accounts.
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dii.
Audit Procedures for Payroll
Check the arithmetical accuracy of the calculations in payroll and
payroll records.
Check postings to ledger accounts.
Check that correct pay rates are used.
Check that correct, authorised rates are used for statutory
deductions, such as tax and voluntary deductions.
Check that overtime, bonuses and similar payments have been
properly authorised.
Check that inclusion of new employees are properly authorised
Check that inclusion of new employees have not been paid for
periods before they join or after they leave.
Check the pay for hours worked or output produced against the
authorised documentation.
Check that payments of deductions have been made to the
appropriate authorities
Check the signed receipts for wages paid in cash.
Check that the correct entries have been made in the wages
control account.
Verify the existence of a sample of employees on the payroll.
When wages are paid in cash, observe the distribution of pay
packets.
Carry out analytical procedures, such as trend analysis and
average pay per employee.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of audit evidence.
About 90% of the candidates attempted the question and performance was good.
Marking Guide
Marks
a.
1 mark each for any six (6) procedures listed
6
b.
1 mark each for explanation of Sufficient and Appropriate
2
c.
1 mark each for the four (4) principles listed
4
d.i)
ii)
1 mark each for any four (4) points
½ mark each for any eight (8) points
Total
4
4
Marks
20
20
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SOLUTION 4
a)
The determination of the viability of B & Z Pharmaceuticals Ltd. is to
ascertain that the company is still a going concern. Viability implies
continued existence and survival. Such continued survival and existence
implies that the entity is a going concern.
Usually, entity‟s financial statements is prepared on the assumption that the
entity will continue in operational existence in the foreseeable future.
However, the financial, operational and other indicators will continue to
show the appropriate signals.
ISA 570-Going Concern requires that the auditor of a company must perform
risk assessment procedures to consider whether there are events or
indications that may cast significant doubt on the entity‟s, ability to continue
as a going concern.
Such assessment is usually in three areas of analysis as follows:



Financial indicators;
Operational indicators; and
Other indicators
The questions to be asked will be on the indicators of assessing going
concern in the three areas.
Questions on financial indicators
-
Maturing outstanding borrowings: How much of outstanding
borrowing have become due and are yet unsettled; what is
responsible for their being unsettled?
-
Withdrawal of financial support: What are the reasons for the
withdrawal of financial support by the external financial suppliers?
-
Change of credit to cash from suppliers: How many of the suppliers
have cancelled credit sales to the company and have reverted to cashon-delivery sales?
- Inability to obtain financing for essential new development or other
essential investment: Has any approaches to any financing agency for
funds for investment been rejected and to what extent?
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Questions on operating indicators
-
Management intentions to liquidate the entity or cease operations: Is
there any consideration or intentions to liquidate the company or
cease operations?
-
Loss of key management staff without replacement: How many key
management staff have resigned in the last twelve to twenty four
months without replacement?
-
Loss of major market, key customer(s), franchise, license, or principal
supplier(s): Have there been losses of any key component of the
business such as market share, specific big customer?
Labour difficulties e.g. riot, strike or conflict: Has there been labour
related issues and the nature of the specific issues in contention?
-
-
Shortage of important suppliers: Has there been shortage of important
suppliers to the company?
-
Emergence of highly successful competitor: Has the business been
threatened by the emergence of highly successful competitor? Any
idea about the estimated share of the market under threat of being
captured by the competitor?
Other indicators
b)
-
Pending legal or legal regulatory proceedings against the entity that
may, if successful, result in claims that the entity is unlikely to be able to
satisfy: Are there any pending legal proceedings and what is the amount
of the impending liability?
-
Change in law or regulation or government policy expected to adversely
affect the entity: Are there new laws or regulations that are expected to
affect the company‟s business and how is this being handled?
-
Uninsured or underinsured catastrophes when they occur: What are the
expected value of the uninsured or underinsured catastrophes and what
is the likelihood of occurrence?
If it is concluded that there is material uncertainty regarding the company‟s
ability to continue as a going concern, an unmodified audit opinion will be
issued on the financial statements since management has made sufficient
disclosures in those financial statements.
However, the audit report will include an Emphasis of Matter which would
be used to draw attention of users to the issue which is fundamental to the
users‟ understanding of the financial statements.
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EXAMINER‟S REPORT
The question tests candidates‟ understanding of going concern.
About 80% of the candidates attempted the question and performance was poor.
The commonest pitfall of the candidates was lack of understanding of the question
thereby giving same solution for parts „a‟ and „b‟.
Candidates are advised to read and interpret questions correctly before attempting
them.
Marking Guide
a.
2 marks each for any 8 points
Marks
16
b.
2
2
20
Decision on Emphasis of matter
Decision on unmodified audit opinion and inclusion of reason
Total
SECTION C
SOLUTION 5
a.
Professional scepticism as defined by ISA is an attitude that includes a
questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of audit
evidence. It requires the auditor to plan and perform an audit recognizing
that circumstances may exist that cause the financial statements to be
materially misstated. i.e. an inquisitive mind.
The need for professional scepticism in an audit cannot be overemphasized.
Professional scepticism is an essential attitude that enhances the auditor‟s
ability to identify and respond to conditions that may indicate possible
misstatements. It includes a critical assessment of audit evidence. It also
means being alert for audit evidence that contradicts other audit evidence or
that brings into question the reliability of information obtained from
management and those charged with governance (TCWG). This critical
assessment is necessary in order for the auditor to draw appropriate
conclusions.
b. Professional skepticism is relevant and necessary throughout the audit even
though reference to it is not repeated within each ISA, including:

engagement acceptance: integrity of owner and management;
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


identifying and assessing risks of material misstatements;
designing nature, timing and extent of further audit procedures that are
responsive to assessed risks of material misstatements; and
evaluating audit evidence; and
forming audit opinion
c. The auditor can demonstrate the application of professional scepticism in the
following ways:
i. Communication: Professional scepticism is often demonstrated in the
various communications and inquiries with management and those
charged with governance (TCWG) held by the auditor during the course of
an audit. For example, the auditor‟s communication with TCWG includes,
where applicable, why the auditor considers a significant accounting
practice that is acceptable under the applicable financial reporting
framework not to be most appropriate to the particular circumstances of
the entity;
ii. Documentation: Documentation remains critical. The ISAs require
auditors to document discussions of significant matters with
management, TCWG, and others, including the nature of the significant
matters discussed and when and with whom the discussions took place.
Such documentation helps the auditor demonstrate how significant
judgments and key audit issues were addressed and how the auditor has
evaluated whether sufficient and appropriate audit evidence has been
obtained.
Examples of circumstances where it is particularly important to prepare
documentation include:





Significant decisions from engagement team discussions regarding
fraud;
Identified or suspected non-compliance with laws and regulations;
Basis of auditor‟s conclusions about estimates;
Identifying information that is inconsistent with the auditor‟s final
conclusions on a significant matter;
Reasonableness of areas of subjective judgments;
iii. Use of persons with specialist skills to work on specific areas of the audit
that relate to the specialist‟s skills-set; and
iv. Consultation with more senior personnel of the audit or consultation with
a technical unit set aside by the firm. Consultation with a regulator on a
contentious issue is also one of the ways the auditor can demonstrate
professional skepticism.
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EXAMINER‟S REPORT
The question tests candidates‟ understanding of professional skepticism.
About 85% of the candidates attempted the question but performance was poor.
The commonest pitfall was candidates‟ inability to interpret the questions properly
thereby confusing part „b‟ with „c‟.
Candidates are enjoined to read the Study Text in details and interpret questions
correctly before attempting them.
Marking Guide
a. 1 mark each for 3 points
b. 1 mark each for any 3 points
c.
3 marks each for any 3 points
Total
Marks
3
3
9
15
SOLUTION 6
a.
When the group auditor plans to request a component auditor to perform work
on the financial information of a component, he must assess the following
issues:
i.
ii.
iii.
iv.
Whether the component auditor understands and will comply with the
ethical requirements that are relevant to the group audit. In particular
that he is independent;
The component auditor‟s professional competence;
Whether the group engagement team will be able to be involved in the
work of the component auditor to the extent necessary to obtain sufficient
appropriate audit evidence; and
Whether the component auditor operates in a regulatory environment that
actively oversees auditors.
The group auditor cannot simply rely on the work performed by the component
auditor without assessing the likely quality of that work. If the component
auditor is not independent or there are serious concerns about any of the other
matters above, the group auditor will need to obtain evidence.
b.
The three principles when determining the type of work to be performed on
each of the components are as follows:
i.
Where a component is of individual financial significance to the group,
the group auditor or a component auditor must perform an audit using
component materiality;
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ii.
Where a component is significant because of likely significant risk of
material misstatement, the group auditor or a component auditor must
perform one or more of the following:
An audit using component materiality;
An audit of one or more account balances, classes of transactions
or disclosures, depending on where the risk of material
misstatement lies; and
Specified audit procedures to address the risk of material
misstatement; and



iii.
For non-significant components the group auditor should perform
analytical procedures at a group level. If the group auditor does not
consider that sufficient appropriate audit evidence will be obtained
from all of the above work, then additional work should be performed
on non-significant components, similar to that for significant
components. The selection of such components should be varied from
year to year.
However, linking specific considerations to relevant components in
the group, the following principles will be adopted by the auditor:
Goodlife Investment Plc (GIP)
-
This is a component that is of individual significance to the
group and also acts as a parent company:
-
The group auditor in the name of Messrs. JPM & Co. should
perform its audit using the following principles:
i.
ii.
Its component materiality
An audit of one or more account balances, classes of
transactions such as valuation of financial instruments
Specific audit procedures to address the risk of material
misstatements e.g. ascertain whether revenue recognition has
been treated in line with relevant IFRS.
iii.
Goodlife Investments South Africa Limited (GISAL) and Goodlife
Properties and Real Estate Services (GPRS)
These are also significant components and the same principle
mentioned above apply.
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Goodlife Insurance Limited (GIL) and Goodlife Stores Limited (GSL)
The two companies above are insignificant components and as such
the component auditor should perform analytical procedures to obtain
relevant audit evidence in carrying out their audit.
In addition, GIL audit emphasis should be placed on appropriate
valuation of insurance liabilities as this constitute significant risk of
material misstatements.
c. Contents of group auditor‟s instruction to the component auditor
The group auditor‟s instructions to the component auditor should set out the
following:







the work required;
the use to be made of that work;
the form and content of the component auditor‟s communication with
the group engagement team;
a request for co-operation;
ethical requirements;
component materiality; and
identified significant risks.
EXAMINER‟S REPORT
The question is on group audit.
About 30% of the candidates attempted the question but performance was poor.
The commonest pitfall of the candidates was that rather than giving comments on
each event, they gave a summary comment.
Candidates are advised to read and interpret the question correctly before
attempting it.
They should also read the Study Text properly while preparing for future
examinations.
Marking Guide
a
b
c
Marks
1 mark each for any 4 points
1 mark each for any 9 points
½ mark each for any 4 points
Total
4
9
2
15
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SOLUTION 7
a(i)
An Emphasis of Matter (EOM) paragraph is a paragraph included in the
auditor‟s report that refers to a matter appropriately presented or disclosed
within the financial statements, that, in the auditor‟s judgement is of such
importance that it is fundamental to the users‟ understanding of the
financial statements. ISA 706 states that the paragraph must only be used
provided the auditor has sufficient appropriate audit evidence that the
matter is not materially misstated in the financial statements. Such a
paragraph should refer only to information presented or disclosed in the
financial statements.
The paragraph is therefore used to highlight a fundamental issue to the
users of the financial statements. It does not relate to a disagreement or a
limitation in scope, and therefore is not in any way a qualification of the
audit opinion. An EOM paragraph should clearly state that the auditor‟s
opinion is not modified in respect of the matter emphasized.
An EOM paragraph should include a clear reference to the matter being
emphasized, and to where relevant disclosures that fully describe the matter
can be found in the financial statements.
Examples are provided in ISA 706 of the potential situations in which an
EOM paragraph may be used:
(ii)

An uncertainty relating to the future outcome of exceptional litigation
or regulatory action;

Early application, where permitted, of a new accounting standard that
has a pervasive effect on the financial statements in advance of its
effective date;

A major catastrophe that has had, or continues to have, a significant
effect on the entity‟s financial position; and

Significant going concern issues.
Other Matter paragraph deals with a matter which is not included in the
financial statements but which is relevant to an understanding of the audit,
the auditor‟s responsibilities, or the auditor‟s report.
ISA 706 gives the following examples of circumstances in which an „other
matter‟ paragraph may be necessary:
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b.
-
Where the auditor is unable to resign from the engagement even though
the possible effect of a limitation of scope imposed by management is
pervasive (relevant to users‟ understanding of the audits). This should be
rare in practice;
-
Where local law or custom allows the auditor to elaborate on his
responsibilities in his report, (relevant to users‟ understanding of the
auditors responsibilities or audit report); and
-
If revision of other information issued with audited financial statements
e.g the director‟s report is considered necessary by the auditor but
management refuses to make the revision.
When the auditor must issue a modified opinion
ISA 705-Modifications to the Opinion in the Independent Auditor‟s Report
requires the auditor to modify his opinion in the audit report in two
situations:
Material misstatement: This occurs when the auditor concludes that, based
on the audit evidence obtained, the financial statements as a whole are „not
free from material misstatement‟. In other words, the auditor considers that
there is a material misstatement in the financial statements; and
Limitation on scope: This occurs when the auditor is unable to obtain
sufficient appropriate evidence to conclude that the financial statements as a
whole are free from material misstatement. In other words, the auditor has
been unable to obtain sufficient appropriate audit evidence to reach an
opinion that the financial statements give a true and fair view. Therefore the
financial statements may contain a material misstatement.
ISA 705 suggests that a limitation on scope may occur as a result of:

circumstances beyond the control of the entity, such as when the
entity‟s accounting records have been destroyed;

circumstances relating to the nature or timing of the auditors work: an
example is when the auditor is appointed too late to enable him
attend the physical inventory count;

limitations imposed by management. Management of the client entity
may prevent the auditor from obtaining the audit evidence required,
for example by:
-
preventing the auditor from observing the physical inventory
count;
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
preventing the auditor from asking for confirmation of specific
account balances, for example, receivables circularization; and
Non-receipt of written representations requested by the auditor from
management/those charged with governance.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of some international standards on
auditing, particularly ISA 705 and ISA 706.
About 95% of the candidates attempted the question but performance was poor.
The commonest pitfall of the candidates was their inability to restrict themselves to
the specific requirements of the question.
Candidates are enjoined to read the Study Text properly and interpret the question
correctly before attempting it.
Marking Guide
a.(i)
(ii)
b.
3 marks for the explanation of EOM
1 mark each for any three (3) points
2 marks for the explanation of OM
1 mark for any two (2) points
21/2 marks each for the two (2) situations
Total
Marks
Marks
3
3
2
2
10
5
15
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
MAY 2019 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Examiner‟s Reports
Plus
Marking Guides
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – MAY 2019
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS
IN THIS PAPER
COMPULSORY
(30 MARKS)
QUESTION 1
Ayeniromo Microfinance Bank Limited has been operating for more than five years
in Ekemode Local Government area of a state in Nigeria. The bank opened three
cash centres in three locations in the local government area in 2013.
Business activities have been very encouraging in one of the cash centres until a
sudden change in activities in 2016. This resulted in the negative performance of
the cash centre. The managing director thereafter decided to investigate the
causes of the problems in the cash centre.
An interim report of the preliminary investigation on the cash centre identified
infractions on cash takings from customers by some staff of the cash centre during
the year 2016.
The managing director and the board decided to engage your firm as forensic
accountants with the following terms of reference:
(i.)
investigate whether fraud has actually occurred and if so, to obtain evidence
to support that assertion in a court of law;
(ii.) identify the individual(s) who has/have committed the fraud and obtain
evidence that can be used in a court of law to link them with the fraud; and
(iii.) estimate the financial loss that has occurred because of the fraud.
You are required to:
a.
Discuss the concept of forensic accounting and explain the nature of forensic
investigation and forensic audit.
(10 Marks)
b.
Analyse and apply the FIVE fundamental principles of the IFAC‟s Code of
ethics for professional accountants to forensic investigation.
(10 Marks)
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c.
Explain the procedures to be followed in a forensic investigation engagement
for Ayeniromo Microfinance Bank Limited.
(10 Marks)
(Total 30 Marks)
SECTION B:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE
QUESTIONS IN THIS SECTION
(40 MARKS)
QUESTION 2
Bolokupalemo Pharmaceuticals Limited is a fast growing company operating with
its head office in Onitsha. The management of the company is targeting the
takeover of another company located in the south – south zone of Nigeria with the
intention of expanding its business frontier. Preliminary discussions reveal that the
management of the other company has not shown any effective resistance to the
proposed takeover. However, the management of Bolokupalemo wants a clear due
diligence work to be performed to determine the viability of the acquisition.
As the auditor of the acquiring company, its management has approached you to
carry out a due diligence work on the company that it has proposed to acquire.
The management also requires your firm to carry out the engagement in
accordance with the provisions of International Standard on Review Engagements
(ISRE 2400).
You are required to:
a.
Explain the concept of “due diligence engagement”
(2 Marks)
b. Discuss the items to be investigated in a due diligence exercise
(5 Marks)
c.
Explain the benefits of using an audit firm for due diligence engagement.
(5 Marks)
d. Discuss the objectives of “International Standard on Review Engagement”
(ISRE 2400)
(5 Marks)
e.
Explain the principles to be applied in review engagements as set out by
ISRE 2400.
(3 Marks)
(Total 20 Marks)
QUESTION 3
Jemigboran Commercial Industries has been operating for some years. Its
management has sought your input as the auditor of the company on a proposal by
the information technology (IT) team of the company to introduce a framework as
“control objectives for information and related technologies (COBIT)” for its
operations.
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Required:
a.
Explain COBIT as an IT governance tool, and the purpose it serves in an
organisation.
(8 Marks)
b. Identify and explain SIX specific components of COBIT.
(12 Marks)
(Total 20 Marks)
QUESTION 4
Itanforiti Publishers Limited has been in printing and publishing business for many
years in Ibadan. The company has been performing well with a competitive
advantage over many companies in the industry as a result of the engagement of
high profile team of personnel and in-house printing of its published books.
The board of directors comprises of two brothers and their wives. The older brother
is the chairman and the younger, the managing director. The fortunes of the
company started dwindling in 2013 when conflicts could no more be resolved
amicably among the members of the board of directors.
The chairman, being a majority shareholder assumed executive powers by
combining the roles hitherto played by the managing director with his own as
executive chairman in 2015. Governance of the company became unsettled and key
staff of the organisation started resigning in turn.
In 2016, the financial reports of the company revealed its inability to pay creditors
and supply of raw materials became irregular. In addition, the level of receivables
became too high with high figure of doubtful and irrecoverable debts.
Your firm acts as auditors to the company and you have been presented with the
financial statements for the year ended 31st December, 2017 for audit.
The financial statements were prepared on a going concern basis.
Required:
a.
Identify and explain the objectives of the auditor in the area of going concern
in accordance with International Standards on Auditing (ISA 570). (5 Marks)
b.
Explain the going concern assumption and the implications for the financial
statements if the entity is not a going concern.
(5 Marks)
c.
Explain the going concern duties of the directors.
d.
Evaluate the risk assessment procedures to be performed by the auditor on the
going concern status of the entity. (ISA 570).
(7 Marks)
(Total 20 Marks)
(3 Marks)
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SECTION C:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION
(30 MARKS)
QUESTION 5
Insurgency Relief Providers (IRP) is a non-governmental organisation set up by a
popular philanthropist from the southwest part of the country. The philanthropist
sits as the chairman of the board of trustees and has a manager who is a close
relative of the chief executive officer. All the management activities are in the
hands of the manager and the board of trustee sits occasionally to formalise major
decisions. Initially the sum of ₦50,000,000 was provided by the philanthropist and
fund raising was organised to raise additional ₦200,000,000 in cash and pledges
by political associates. The activity of IRP has been carried out with these and
other donations from friends and well wishers.
Activities of IRP are essentially performed in the north east region of the country.
These activities include food and materials supply using chartered vehicles and
police/military escorts. The distribution is carried out with the involvement of some
staff of the NGO who travel by air and within the safe zones of the region.
Due to the successes recorded and the need to increase these activities, the
chairman of the board of trustee has made appeals to some foreign friendly
associates to be involved in his organisation‟s activities by providing financial
support. A number of these organisations have shown interest and would want to
review the operational activities and financial statements of IRP over the past three
years.
For the purpose of the current request from foreign associates and other agencies, a
statutory audit of the financial statements is required.
Your firm was appointed and has accepted the engagement.
Required:
a.
Assess the inherent risks associated with the audit of the financial statements
of IRP.
(10 Marks)
b. Identify FIVE audit risks to be addressed by the auditor.
(5 Marks)
(Total 15 Marks)
QUESTION 6
During the recent audit of Ogundu Commercial Limited, a privately owned trading
company, you discovered that the former chief accountant resigned immediately
after the conclusion and approval of the previous audited financial statements. The
new chief accountant came in during the month of May and was working at
familiarizing himself with the systems and financial operations of the company;
and also ensuring that the accounting records are ready for board of directors
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quarterly meetings and finalising the accounts for the next audit. Due to the
pressure of work, the chief accountant lost part of the journals raised by the
previous auditors but proceeded to finalise the accounts. This resulted into least
expected financial performance for the year. The previous auditor is a sole
practitioner and is now deceased.
The directors are concerned because the financial statements would be used to seek
facilities from banks. The success or otherwise of the facility will impact on the
operations of the company and may lead to a reduction in both operation and staff
engagement.
Required:
a.
b.
c.
Evaluate the effect of the loss of the audit journals on the financial statements
and the factors you would consider, as auditors in drafting your report.
(5 Marks)
In accordance with ISA 570, evaluate the actions required of the auditors in
relation to the observed misstatement.
(5 Marks)
Discuss the content of the communication expected of the auditors to the
client before and after the audit other than the auditors‟ report.
(5 Marks)
(Total 15 Marks)
QUESTION 7
You are an audit manager in a firm of Chartered Accountants. Your firm has been
appointed as joint auditors with another firm to carry out the audit of Opeloyeru
Automotive Company Limited which has acquired another company in the same
industry to expand its business across six states in the south west zone of Nigeria.
You are required to:
a.
Explain the concept of joint audit.
b. Discuss the reasons why joint audit is considered desirable.
c.
Explain possible setbacks for engagement in joint audits
(5 Marks)
(5 Marks)
(5 Marks)
(Total 15 Marks)
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SOLUTION ONE
SECTION A
a.
Forensic accounting involves the preparation of financial information for use
as evidence by a court of law. Examples include the provision of financial
information relating to:
- Loss of earnings;
- Settlement of a legal dispute involving the valuation of a business;
- Losses relating to an insurance claim;
- A divorce settlement; and
- Investigation into fraudulent activities within an entity
There are two aspects of forensic accounting:
 Forensic investigations; and
 Forensic audit
Forensic Investigation
A forensic investigation is an aspect of forensic accounting carried out in response
to a suspicion of wrongdoing, usually to prove or disprove certain assumptions.
The objective of a forensic investigation is to obtain evidence that might be used in
legal proceedings to resolve a dispute or prove innocence/guilt in a criminal case,
such as providing evidence of money laundering.
Forensic investigations are usually reactive, meaning that they seek to prove or
disprove suspicions of wrongdoing and provide evidence for legal proceedings.
However, investigations can also be proactive or preventative.
Techniques of forensic auditing can be used to identify risks of wrongdoing and
then steps can be taken to improve the situation.
Forensic Audit
Forensic audit is an element in forensic accounting. It refers to the methods and
procedures used to obtain audit evidence in a forensic investigation.
Forensic auditing may be defined as the process of:
 Gathering, analysing and reporting on data, much of it financial in nature, in
the pre-defined context of legal dispute or investigation into suspected
irregularities and
 In some cases, giving preventative advice in the area.
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(b)
Application of ethical principles to forensic investigations
The ethical principles that apply to accountants carrying out forensic work
are the same as accountants in every situation. These are:
(i) Integrity
In legal disputes and criminal investigations, individuals may be
dishonest. However, the forensic accountant must act with integrity and
honesty at all times;
(ii) Objectivity
The forensic accountant is paid by a client to carry out an investigation,
and the client will presumably be hoping for a particular outcome to the
investigation. For example, in a fraud investigation, the criminal
investigators who use a forensic accountant may be hoping for evidence
of guilt. However, the forensic accountant must remain independent (in
spite of the advocacy threat) and should seek to obtain evidence to reach
a fair opinion;
(iii) Professional competence and due care
Forensic accounting is a specialised area of work, and individuals should
be sufficiently competent to do the work;
(iv) Confidentiality
The normal ethical rule is that accountants should maintain client‟s
confidentiality, and should not disclose information without the client‟s
consent. An exception is that the duty of confidentiality is overridden by
the requirement to provide evidence when requested by a court of law.
Legal requirements for disclosure override the rules of client
confidentiality; and
(v) Professional behavior:
Forensic accountants often appear as witnesses in court, and in the
public eye they should display professional behavior and act in a way
that is not detrimental to the image of the accounting profession.
(c)
Procedures to be followed in forensic investigations
The procedures that a forensic accountant will follow will depend on the
terms and the objectives of the engagement.
In many cases, procedures will be similar to auditing procedures and will
depend on exactly what is being proved or disproved, these are;
(i)
Establishing the objectives of the investigation;
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(ii)
Planning the investigation with a view to achieving the objectives. For
example, in an investigation into suspected fraud, the auditor should
plan how to establish whether fraud has occurred, how it could have
happened and how long has it been going on – as well as who has
committed the fraud and how much has been lost;
(iii)
The audit work should be planned in a way that will provide sufficient
appropriate evidence to achieve the objectives of the audit. The
evidence should be strong enough to „stand up‟ to scrutiny in court if
required: in fraud cases, audit evidence should therefore try to
establish a motive for the alleged fraudster, identify the opportunity
that the fraudster had to commit the fraud and also any evidence of
measures by the fraudster to conceal his crime;
(iv)
Audit evidence may be gathered in various ways – similar to the
methods used in a normal audit. This includes interviewing
individuals (including individuals suspected of fraud).
Evidence could be obtained by using the following methods:
- Assess the overall control environment and controls in
particular, segregation of duties;
- Ascertain the staff of the bank that are charged with the
responsibilities of cash taking from customers including
posting into the system;
- Obtain a print out or master files from the system in respect of
cash takings for the periods;
- Review any unauthorised changes to the system and identify
the staff involved; and
- Scrutinise any entries into the suspense account and obtain an
explanation as to what each entry relates;
(v)
The auditor should use the evidence obtained to form an opinion. If
the evidence is insufficient, he should try to obtain additional
evidence; and
(vi)
At the end of the investigation, a report is prepared for the client.
EXAMINER‟S REPORT
The question tests candidates understanding in respect of forensic accounting,
forensic investigation and forensic audit.
Being a compulsory question, all the candidates attempted the question and
performance was good.
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Marking guide
(i) Discussion of the concept of forensic accounting
(ii) Two aspects of forensic accounting (½ x 2)
(iii) Explanation of forensic investigation (4 x 1)
(iv) Explanation of forensic audit
(v) Definition of forensic auditing
(b) Application of ethical principle to forensic
Investigation
(c) Procedures to be followed in forensic
Investigation
Total marks
Marks
1
1
4
2
2
Marks
5×2
10
5x2
10
30
10
SECTION B
SOLUTION TWO
a) Concept of due diligence engagements
(i) One of the most common forms of direct reporting engagement is „due
diligence‟ work. This term refers to any engagement where the
practitioner is engaged to make inquiries into the accounts, organisation
or activities of an entity.
(ii)
b)
Due diligence work is most commonly used in the context of mergers and
takeovers. The work involves obtaining information about the target
company prior to the takeover (or merger). The objective should be to
find out everything that may be relevant about the target company‟s
operations, financial performance, financial position and future
prospects. In addition, information should also be gathered about the
business environment in which the target company operates.
The following items are to be investigated in a due diligence exercise:
(i)
Financial performance and financial position
The practitioner will look at the available historical financial information
about the target company, such as its financial statements for the past
few years. Ratio analysis will often be used to make an assessment. The
practitioner will also look at the target company‟s management
accounts, budgets and profit/cash flow forecasts, and any current
business plan;
(ii)
Operational issues
The practitioner should also look for any operational issues in the target
company that may raise questions about its value. For example, the
target company might have important contracts with major customers,
and the practitioner should try to find out when these contracts reach
their termination date and the probability that the contracts will be
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renewed. Other operational problems may be discovered, such as a high
rate of labour turnover, high costs incurred in meeting warranties or
guarantees to customers;
(iii) Management representations
Management of the takeover target may have provided representations
to the potential buyer. For example, they might have given a written
assurance that the target company is not subject to any tax investigation
or potential litigation. Due diligence work should seek to establish that
these representations appear to be correct;
(iv) Identification of assets
A takeover usually results in purchased goodwill in the consolidated
financial statement. However, the takeover target may have several
intangible assets that do not appear in its statement of financial position
(because they were internally – generated assets) but which should be
recognised for the purpose of consolidation. Examples are internally –
generated patent rights, customer lists, databases and brand names.
These should be identified and valued, for inclusion in the consolidated
statement of financial position after the acquisition. It is also useful for
the management of the potential buyer to be aware of the nature and
estimated value of the intangible assets that they would be acquiring;
and
(v)
Benefits and costs of a takeover
Due diligence may also include an attempt to estimate the future
benefits of the takeover, such as cost savings from synergies and
economies of scale. Any „one off‟ expenses such as redundancy costs and
reorganisation costs will have to be estimated – by the potential buyer if
not by the due diligence process.
c)
Benefits of using an audit firm for due diligence engagement
Management could do some or all the due diligence works themselves.
However, using an accountancy firm to do the work has two potential
benefits thus:
(i)
Hiring an accountancy firm to do the work saves management time
of the potential buyer. In addition, the practitioners assigned to the
due diligence work should have suitable experience in this type of
work. For large takeover, the amount of time and resources
required to carry out proper due diligence can be substantial.
(ii)
Using a professional firm to do due diligence may help to reassure
shareholders in the potential buyer (or investors who will be asked
to provide loan/finance for the takeover) that the acquisition has
been properly evaluated.
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d)
Objectives of International Standard on Review Engagements –(ISRE 2400)
ISRE 2400 Engagements to review financial information sets out the
objective of a review of financial statements as follows:
(i) “The objective of such a review is to enable an auditor to state whether,
on the basis of procedures which do not provide all the evidence that
would be required in an audit, anything has come to the auditor‟s
attention that causes the auditor to believe that the financial statements
are not prepared, in all material respects, in accordance with an
identified financial reporting framework”
(ii) Note that a review:
 requires less evidence than an audit; and
 has an opinion that is expressed in negative terms (it gives „negative
assurance‟)
(iii)
e)
A review engagement provides a lesser form of assurance than an
audit, As a result of this, the work for the review will usually be
limited to analytical review and other review procedures. Detailed
verification work (for example, substantive tests) will not usually be
carried out. This will usually mean that fewer but more experienced
staff, will be required for a review engagement than for an audit.
ISRE 2400 sets out the following general principles that should be applied to a
review engagement. The practitioner should:
i)
Comply with relevant codes of ethics;
ii)
Plan and perform the work with an attitude of professional skepticism,
recognising that material misstatements may exist in the information
that is subject to review; and
iii)
Obtain sufficient and appropriate evidence, primarily through inquiry
and analytical procedures.
The actual terms of a review engagement should be agreed with the client,
and set out in an engagement letter.
EXAMINER‟S REPORT
The question tests candidate‟s knowledge in respect of due diligent engagement.
About 90% of the candidates attempted the question and performance was good.
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Marking guide
a) Explanation of due diligence engagements
b) Items to be investigated in due diligence
exercise (1 mark each for 5 points)
c) Benefits of using an audit for due diligence
(2½ marks each for two points)
d) Objectives of ISRE 2400:
Explanation of objective of the review
Detailed review
e)
General principles to be applied in
ISRE 2400 Review
Total marks
Marks
Marks
2
5
5
2
3
5
3 3
20
SOLUTION THREE
a)
Control Objectives For Information And Related Technologies (COBIT)
(i)
COBIT is an IT governance tool that has been of tremendous benefits to IT
professional and has contributed immensely to effective control of
information systems. Linking information technology and control
practices, COBIT consolidates and harmonises standards from prominent
global sources into a critical resource for management control
professional and auditors. As such, COBIT represents an authoritative,
up-to-date control framework, a set of generally accepted control
objectives and a contemporary product that enables the easy application
of the framework and control objectives, referred to as the audit
guidelines.
(ii)
COBIT applies to enterprise-wide information systems, including personal
computers, mini-computers, mainframes and distributed processing
environments. It is based on the philosophy that IT resources need to be
managed by a set of naturally grouped processes in order to provide the
pertinent and reliable information which an organisation needs to
achieve its objectives.
(iii) COBIT has been developed as a generally applicable and accepted
standard for good information technology (IT) security and control
practices that provides a reference framework for management, users
and information system auditors as well as control and security
practitioners.
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(iv) The purpose of COBIT is to provide management and business process
owners with an information technology (IT) governance model that helps
in understanding and managing the risks associated with IT. COBIT helps
to bridge the gaps between business risks, control needs and technical
issues. It is a control model to meet the needs of IT governance and
ensure the integrity of information and information system.
b)
Specific components of COBIT are:
i)
ii)
iii)
iv)
v)
vi)
i)
Management guidelines;
Executive summary;
Framework;
Control objectives;
Audit guidelines; and
Implementation tool set
Management guidelines
To ensure a successful enterprise, one has to effectively manage the
union between business processes and information systems. The
management guidelines are composed of:

Maturity models, to help determine the stages and expectation
levels of control and compare them against industry norms;

Critical success factors, to identify the most important actions for
achieving control over the IT processes;

Key goal indicators to define target levels of performance; and

Key performance indicators, to measure whether an IT control
process is meeting its objective.
These management guidelines will help answer the questions of immediate
concern to all those who have a stake in enterprise success.
(ii)
Executive summary
Sound business decisions are based on timely, relevant and concise
information. Specifically designed for time pressed senior executives and
managers, COBIT includes an executive overview which provides thorough
awareness and understanding of COBIT‟s key concepts and principles. Also
included is a synopsis of the framework providing a more detailed
understanding of the concepts and principles, while identifying COBIT‟s four
domain (planning and organisation, acquisition and implementation,
delivery and support, and monitoring) and 34 IT processes.
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(iii)
Framework
A successful organisation is built on a solid framework of data and
information.
The framework explains how IT processes deliver the information that the
business requires to achieve its objectives. This delivery is controlled through
34 high-level control objectives, one for each IT process, contained in the
four domains. The framework identifies which of the seven information
criteria (effectiveness, efficiency, confidentiality, integrity, availability,
compliance and reliability), as well as which IT resources (people,
applications, technology, facilities and data) are important for the IT
processes to fully support the business objective.
(iv)
Control objectives
The key to maintaining profitability in a technologically changing
environment is how well control is maintained. COBIT‟s control objectives
provide the critical insight needed to delineate a clear policy and good
practice for information technology controls. Included are the statements of
desired results or purposes to be achieved by implementing the specific and
detailed control objectives throughout the 34 information technology
processes.
(v)
Audit guidelines
To achieve desired goals and objectives one has to constantly and
consistently audit one‟s procedures. Audit guidelines outline and suggest
actual activities to be performed corresponding to each of the 34 high level
IT control objectives, while substantiating the risk of control objectives not
being met. Audit guidelines are an invaluable tool for information system
auditors in providing management assurance and/or advice for
improvement.
(vi)
Implementation tool set
Implementation tool set contains:

Management awareness and IT control diagnostics

Implementation guide frequently asked questions (FAQ)

Case studies from organisations currently using COBIT; and

Slide presentations that can be used to introduce COBIT into
organisations.
The tool set is designed to facilitate the implementation of COBIT, relate
lessons learned from organisations that quickly and successfully applied
COBIT in their work environments, and lead management to ask about each
COBIT process: Is this domain important for our business objectives? Is it well
performed? Who does it and who is accountable? Are the processes and
control formalised?
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EXAMINER‟S REPORT
The question tests candidate‟s knowledge on Information Technology.
About 80% of the candidates attempted the question, but performance was poor.
The commonest pitfall of the candidates was that they could not identify and
explain the component of Control Objectives for Information and Related
Technology (COBIT).
Candidates are enjoined to read the Institute‟s Study Text properly and understand
the requirements of questions before attempting them.
Marking guide
a) Control objectives for information and related
technologies (COBIT) (2 marks for any four)
b) Specific components of COBIT:
Listing
6x½
Explanation
6 x 11/2
Total marks
Marks
Marks
8
3
9
12
20
SOLUTION FOUR
a) The objectives of the auditor in this area, according to ISA 570, are to:
i)
Obtain sufficient appropriate evidence about the appropriateness of
management‟s use of the going concern assumption in the preparation and
presentation of the financial statements;
ii)
Conclude whether a material uncertainty exists that may cast significant
doubt on the entity‟s ability to continue as a going concern; and
iii)
Determine the implications for the audit report.
This is a subjective area where judgment is usually required to assess the
uncertainties surrounding the assumptions that were made by management in
reaching their conclusion about the going concern status of the entity.
b)
The going concern assumption means that the income statement/statement of
comprehensive income and statement of financial position are prepared on
the assumption that the entity will continue in operational existence for the
foreseeable future.
If the entity is not a going concern, there will be significant implications for
the financial statements.
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For example:
 The distinction between „current‟ and „non-current‟ for both assets and
liabilities ceases to have any meaning; all assets and liabilities become
„current‟;

All assets must be carried in the statement of financial position at their
net realisable value; and

There may be additional liabilities.
The auditor needs to be satisfied that the going concern assumption is
appropriate to the financial statements under audit. This will involve an
investigation of the financial and operating position of the client before the
end of the reporting period. If this review indicates that the going concern
assumption may not be appropriate, further investigation will be needed.
c)
Going concern: duties of the directors
In preparing the financial statements, the directors must satisfy themselves (in
accordance with IAS 1) that the going concern basis is appropriate. In some
countries, there is a requirement for large companies (listed companies) to
disclose the fact that, in the opinion of the directors, the company is a going
concern.
It is therefore the responsibility of management to make the going concern
assessment.
d)
ISA 570 requires that the auditor must perform risk assessment procedures to
consider whether there are events or conditions that may cast significant
doubt on the entity‟s ability to continue as a going concern.
If management has already performed such an assessment, the auditor must:

Discuss this assessment with management;

Determine whether the assessment identified any relevant events or
conditions, and, if so;

Determine management‟s plans to address them.
If management has not yet performed such an assessment, the auditor must:

Discuss with management the basis for the intended use of the going
concern assumption; and

Inquire of them whether events or conditions exist that may cast
significant doubt on the entity‟s ability to continue as a going concern.
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In evaluating management‟s assessments, the auditor must consider the same
time period. If management looked less than 12 months into the future, the
auditor should ask management to make a re-assessment looking at least 12
months into the future. The auditor must also inquire if management is aware
of any relevant events or conditions beyond this time period.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge in respect of going concern assumption
and implication on financial statements.
About 80% of the candidates attempted the question and performance was good.
Marking guide
a) Explaining three (3) objectives 1x3 points
Conclusion on the objectives
b) Meaning of going concern
Implication of not being a going concern
Examples of the implications (1/2x 2 points)
Conclusion on the explanation of going concern
c) Explaining the going concern duties of the
directors
d) Requirements of ISA 570 on risk assessment
Under “if management has performed the
test” (1/2x any 2 points)
“if management has not performed the test”
(1 x 2)
Conclusion on evaluation of management‟s
assessment
Total marks
Marks
3
2
2
1
1
1
2
Marks
5
5
3
1
2
2
7
20
SECTION C
SOLUTION FIVE
a)
The inherent risks associated with the audit of the financial statement
of IRP include:
i)
Operations have not been audited for the past years implies that
controls may be very weak;
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(b)
ii)
Funds for political associations will create the risk of political
interference in the operations of IRP;
iii)
Management by a family member may indicate risks involving
accounting controls and misappropriation;
iv)
The expenses of the fund-raising organised are not adequately
accounted for suggests the risk of financial statements misstatement;
v)
The apparent lack of operational structure could lead to poor business
and control decisions;
vi)
The risk of freighting through chartered vehicles and operational
hindrances for the size of the organisation;
vii)
The management being handled by a single family member creates
room for business risks for both business and financial statements
risks;
viii)
Lack of the application of a proper structure and set up for
management of IRP;
ix)
Regulation and frequency of travels which could lead to loss of funds
through non-essential travels.
x)
Governance of the NGO appear not to be strong because the Board of
trustees meet occasionally and therefore risk may not be adequately
monitored
Audit risk areas to be addressed by the auditor in the audit of IRP financial
statements include:
i)
ii)
iii)
iv)
v)
vi)
vii)
Understatement of revenue (income from donations);
Overstatement of expenses;
Overstatement of liabilities;
Understatement of current assets (cash and bank balances);
Overstatement of non-current assets (PPE);
Fraud (misappropriation of assets); and
Financial statements are prepared for a purpose and it is likely to be
misstated.
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EXAMINER‟S REPORT
The question tests candidates understanding of audit risks.
About 75% of the candidates attempted the question, but performance was poor.
The commonest pitfall of the candidates was their inability to identify the inherent
risk associated in the scenario.
Candidates are advised to study the Institute‟s Study Text properly before
embarking on future examination.
Marking guide
a) 2 marks each for any Five points
Marks
10
b) 1 mark for each FIVE (5) risks identified
Total
5
Marks
15
SOLUTION SIX
a)(i)
Two issues concerning the effect of the loss of the audit journals are:
-
Loss of document impacting on the entries and completeness of
entries.
-
Initial audit engagement will be considered in accordance with ISA
510.
-
The absence of the audit journal will lead to an incomplete
information of the financial statement.
-
Going concern problems
Also, the going concern status of the company will be assessed in
accordance with ISA 570;
-
ISA 705 on modification of the audit report. The modification will be
based on financial statement misstatement and also inability to
obtain sufficient appropriate audit evidence.
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(ii)
Factors to be considered:
-
Loss of accounting documents implying incompleteness of accounting
records;
-
Loss of financial capability to continue business at expected standard;
-
Possible decline in operations and staff strength;
-
The competence and skill of the chief accountant will impact on the
quality of the financial statements‟ preparation.
b.)
ISA 570 Going concern states the duties of both directors and auditors
with respect to the going concern.
The objectives of the auditor with regard to this in accordance with
ISA 570 are to:
-
Obtain sufficient appropriate audit evidence about the
appropriateness of management‟s use of the going concern
assumption in the preparation and presentation of the financial
statements;
-
Conclude whether a material uncertainty exists that may cast
doubt on the entity‟s ability to continue as a going concern; and
-
Determine the implication for the audit report.
ISA 570 requires that the auditor must perform risk assessment
procedure to consider whether there are conditions that may cast
significant doubts on the entity‟s ability to continue as a going
concern.
The auditor must:
-
Discuss with management the basis for an intended use of the
going concern assumption;
-
Enquire from management whether events or conditions exist
that may cast significant doubt on the entity‟s ability to continue
as a going concern;
-
The auditor will consider factors in the following areas on the
going concern assumptions:

Financial;

Operational; and

Other issues.
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c.)
The auditor will perform additional audit procedures.
Communication between the auditor and the client is necessary in an audit
engagement.
In accordance with ISA 260 „communication with those charged with
governance‟, the following will be part of the communication:
-
Auditors responsibilities in relation to the audit, including the
notification that he is responsible for forming and giving an opinion
on the financial statements prepared by management;
-
The auditor does not relieve management or those charged with
governance of their responsibilities;
-
An overview of the planned scope and timing of the audit; and
-
After the audit, the auditor will communicate any significant findings
from the audit which are called management letter points. They are
communicated with any deficiencies in internal control as required by
ISA 265.
The management letter will normally include:
auditor‟s view on the entity‟s accounting policies, estimates and
financial statement disclosures;
any significant difficulties encountered during the audit;
any significant matters arising from the audit brought to the attention
of management and written representation requested; and
any other matters arising from the audit that significant to the
oversight of the financial reporting process.
EXAMINER‟S REPORT
The question tests candidates understanding concerning audit report.
About 90% of the candidates attempted the question, but performance was poor.
The commonest pitfall of the candidates was their inability to evaluate the required
actions of an auditor in relation to observed misstatements.
Candidates are advised to study properly, particularly the Institute‟s Study Text and
have understanding of the questions requirement before attempting the question.
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Marking guide
a) Issues affecting loss of journal
Any two factors at 1 mark each
b)
c)
Marks
3
2
Introduction of ISA 570
Discussion of objectives of ISA 570 1mk x 2
Duties of the auditor under ISA 570 1mk x 2
Necessity for communication
Requirements of ISA 260
Management letter points 1mk x 2
1
5
2
2
1
2
2
Total
Marks
5
5
15
SOLUTION SEVEN
a)
b)
Concept of Joint Audit
 A joint audit involves two (or more) audit firms appointed to audit the
financial statements of an entity.

Joint audit may occur in other situations, but they are most commonly
found in group audits. In particular, when a group acquires a new
subsidiary, it is not unusual to appoint the group‟s auditors jointly with
the subsidiary‟s existing auditors, at least for a period of time after the
acquisition.

The joint audit provides a joint opinion on the financial statements of the
subsidiary.

The key to a successful joint audit is good communication between the
firms, including joint planning meetings and regular discussions
between the firms at all key stages of the audit process. The meetings
and discussions should be fully documented.
Reasons for the desirability of joint audit
The reasons why joint auditors might be appointed include the following:
(i)
The client company may be so large that it requires the services of
more than one firm of auditors;
(ii)
After the acquisition of a large subsidiary, using joint auditors may
help the transition process while the group auditors become familiar
with the new subsidiary. The „old‟ auditors should be familiar with the
business of the subsidiary and should pass their knowledge over to
the parent company‟s auditors. For the parent company‟s auditors,
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this should accelerate the process of getting to know the business of
the new subsidiary;
c)
(iii)
Joint auditors may provide a higher level of technical expertise than
either audit firm could provide individually;
(iv)
Improved geographical coverage may be obtained for the audit,
where each of the joint auditors on its own does not have offices that
cover all the geographical locations of the component companies in
the group; and
(v)
It has been suggested that two medium – sized audit firms might „join
forces‟ and tender for the audit of a company for which the auditors
would normally be one of the „Big‟ audit firms. This is possibly a way
in which medium – sized firms might try to „break the monopoly‟ of
the Big 4 on large company audits.
Possible setbacks for engagement in joint audit
Possible disadvantages of joint audit include the following:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Extra cost to the client: it is likely to cost more to use two audit firms
than to use one;
Possible inconsistencies between the joint auditors in the audit
methods that they use. If so, there may be problems in reaching
agreement on whose audit method to use;
The possible difficulty that the two firms may have in agreeing on the
division of work;
Additional problems that will arise in monitoring and controlling the
audit work of two different firms;
The two firms may find it difficult to work well together, and each
firm may try to become the lead firm in the joint audit; and
If there is a claim against the auditors for negligence in the conduct of
the audit, there may be some difficulty in identifying which of the
joint auditors is potentially liable.
EXAMINER‟S REPORT
The question tests candidates understanding in respect of joint audit.
About 95% of the candidates attempted the question and performance was good.
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Marking guide
a) Concept of joint audit (2½ marks for any 2
points)
b) Reasons for desirability of joint audit (1 mark
each for 5 points)
c) Possible setbacks for engagement in
joint audit (1 mark each for 5 points)
Total
Marks
5
Marks
5
5
15
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
NOVEMBRT 2019 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Examiner‟s Reports
Plus
Marking Guides
NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2019
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FOUR OUT OF THE SIX
QUESTIONS IN THIS PAPER
COMPULSORY QUESTION
(40 MARKS)
QUESTION 1
Yoga Limited is one of your audit clients. The company is into e-commerce,
procuring and selling goods online to interested buyers, in and outside the country.
The company also delivers goods sold to the buyers. Furthermore, the company
provides an online platform for third party sellers (sellers not affiliated with the
company) to sell goods to interested buyers. The interest in online trades has
increased and the business is flourishing. The payments system has been
outsourced to Heidi Limited, a third party payments company.
The audit of the company for the year ended December 31, 2018 is about to
commence and some members of the team are new to the engagement. As the
audit manager, you have decided to brief them on what they need to know about
the engagement.
Required:
a.
Explain the elements of the audit approach that an auditor should deploy in
auditing an e-commerce system.
(5 Marks)
b.
Explain management‟s responsibilities with regards to the risks that arise
from e-commerce systems.
(5 Marks)
c.
Sometimes in an outsourcing situation, the external supplier controls the
information from which the figures in the general ledger are obtained,
and
the audit client might hold none of this information.
Required:
Discuss the issues that the auditor ought to consider in this situation
d.
(4 Marks)
Discuss the possible reasons for the following changes found at the planning
stage of the audit:
i.
ii.
iii.
An increase in inventory turnover;
Marks)
An increase in average collection period;
An increase in the debt ratio;
(4
(4 Marks)
(4 Marks)
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iv.
v.
A decrease in the times interest earned ratio; and
An increase in the return on total assets;
e. Discuss the advantages and disadvantages of outsourcing.
(4 Marks)
(4 Marks)
(6 Marks)
(Total 40 Marks)
SECTION B: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE QUESTIONS
IN THIS SECTION
(60 MARKS)
QUESTION 2
You are an audit manager in Anthill & Co., a firm of chartered accountants. Dotun
Limited, which manufactures tissue papers is one of your audit clients. In February
2018, Dotun Limited purchased Udanga Limited, a competitor group of companies.
Significant synergies are expected as the operations of Dotun Limited and Udanga
Limited are being combined into one group of companies.
In November 2018, Dotun Limited purchased Gango Limited a large manufacturer
of home appliances in Gambia, where your firm has no representation. The
financial statements of Gango Limited for the year ending December 31, 2018 will
continue to be audited by a local firm of chartered accountants. The Chief Finance
Officer of Dotun Limited has informed you that he does not intend to consolidate
the results of Gango Limited‟s activities in the group financial statements.
Required:
a.
Explain THREE conditions under which a parent company need not present
consolidated financial statements in line with the requirements of IFRS 10.
(3 Marks)
b. Explain the conditions that must be met for an investor to control an investee
as stated in IFRS 10.
(3 Marks)
c.
If the group engagement team plans to request a component auditor to
perform work on the financial information of a component, the group
engagement team is required to obtain an understanding of the component
auditor.
Required:
Explain the FOUR matters that the engagement team needs to consider in
obtaining an understanding of the component auditor.
(4 Marks)
d.
The group engagement team shall request the component auditor to
communicate matters relevant to the group engagement team‟s conclusion
with regards to the group audit.
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Required:
Explain FIVE matters that could be covered in the communication from the
component auditor to the group engagement team.
(10 Marks)
(Total 20 Marks)
QUESTION 3
Auditing standards require auditors to carry out procedures designed to obtain
sufficient and appropriate audit evidence. In order to do this, the external auditors
may use the work of internal auditors.
The Institute of Chartered Accountants of Nigeria has organised a Mandatory
Continuing Professional Education (MCPE) session to sensitise members on the work
of internal auditors. As a senior manager in an audit firm, the Institute has asked
you to facilitate the session.
Required:
a.
Describe an internal audit function.
(2 Marks)
b.
Explain with FOUR examples, the work of the internal auditor that the
external auditors could rely on.
(4 Marks)
c.
Evaluate three matters that the external auditors need to consider in
determining whether the work of the internal auditor could be used for the
purpose of the audit or not.
(6 Marks)
d.
Describe how external auditor may evaluate the objectivity and competence of
the internal auditors.
(8 Marks)
(Total 20 Marks)
QUESTION 4
You are a partner in a large audit firm, Ande & Associates. The firm is a part of a
network of audit firms operating in different countries around the world. As part of
the quality control practices of the network of firms, a peer review is done every
year. During the peer review, partners from other firms in the network visit your
firm to review the working papers for selected audit engagements that were carried
out during the year.
After the peer review, the reviewers compile the review comments and categorised
them into recurrent themes. The recurrent themes identified after the review in the
current year include the following:
(i)
No evidence of review of audit working papers by the senior team members;
(ii)
Review comments were not properly cleared before the signing of the audit
report;
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(iii) In some instances, despite evidence of review of working papers during the
audit, the peer review identified deficiencies in the audit documentation,
which led the reviewers to question the quality of the review done during the
audit; and
(iv) In some instances, all audit working papers were not in the file prior to
signing of the audit report.
At the end of the peer review exercise, a report was prepared and sent to the
Managing Partner of the firm, the head of audit and the risk management partner.
The Managing Partner of the firm was alarmed at the nature of the findings from
the review and decided that necessary steps had to be taken to address the
deficiencies noted.
As part of the initiatives to address the situation, you were asked to facilitate a
refresher course for the management team on the requirements of ISQC 1 – Quality
Control for firms that perform audits and reviews of financial statements.
Required:
a.
Explain the purpose of a review of audit work.
(1 Mark)
(4 Marks)
b.
c.
Explain the FOUR types of audit reviews.
Discuss the requirements of ISQC 1 on the system of controls that a
firm should have that addresses any FIVE elements.
(15 Marks)
(Total 20 Marks)
QUESTION 5
XBS Plc. has been experiencing declining fortunes in the market in which the
company operates. This was reflected in the financial statements in the last two
years. The management has tried to assuage the concerns of shareholders by
proposing and getting approval for the issue of bonus shares out of the share
premium account. Despite this, the shareholders have registered their displeasure
about the declining revenue and distributable profits. Concerted efforts are being
made by the shareholders to vote out the directors unless something very
significant happens.
Worried by this reaction of the shareholders and the position of other stakeholders,
the management engaged a consultant to help improve the financial fortunes of
the company and ensure that the company is back on track. The consultant, after a
review of the information available to him and based on detailed discussions with
management, proposed the raising of additional capital from the public, based on
the existing goodwill of the company in the stock market. The funds raised from
this exercise will be used in technology enhancement, marketing and new product
development. These initiatives are aimed at more efficient operations and
increased sales volume. Accordingly, the consultant has produced the necessary
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financial projections that management believes will convince investors to put up
the desired capital.
The company‟s management, in a bid to ensure the success of the capital raising
exercise, decided to seek a second opinion on the work done by the consultant
before actual implementation. The firm which you work for was chosen to provide
the second opinion. Your senior partner in whose team, the responsibility falls, has
asked you to make preparations to handle the task with him. The task requires that
you are conversant with the company, the background to the crisis and the market
in which the company operates. It is expedient that you verify the information
prepared by the consultant, address any deficiencies in the report and uphold the
reputation of your firm.
Required:
a.
b.
c.
Develop a work plan necessary for the task in accordance with the
requirements of ISAE 3400 – The Examination of Prospective Financial
Information.
(5 Marks)
Evaluate the considerations to be made and the procedures to be carried out
before accepting the engagement, in accordance with ISAE 3400 – The
Examination of Prospective Financial Information.
(5 Marks)
Prepare an outline of the report to be presented on the engagement.
(10 Marks)
(Total 20 Marks)
QUESTION 6
A group of small practitioners realized that they had not taken advantage of the
opportunities provided by the Institute‟s Mandatory Continuing Professional
Education (MCPE) for members‟ professional development.
At a recent seminar which they attended, while waiting for the commencement of
the programme, one of them overheard a discussion by some other professional
colleagues about difficulties they were encountering because of the restriction on
the types of non-audit services that can be offered to the audit clients. The group
of small practitioners became curious and wanted to know more.
Your partner who was also listening, interjected that one of the seniors in his firm
could help improve their knowledge on the topic. You were therefore given the
responsibility to prepare a presentation to the sole practitioners, focusing on ways
to improve auditor‟s independence generally.
Required:
a.
(i) Discuss the current position on the independence of the auditor and the
basis for this position.
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(ii)
Discuss the services that may impair the independence of an auditor if
provided to the same audit client.
(12 Marks)
b.
Evaluate the advantages and disadvantages of a firm‟s provision of non-audit
services to an audit client.
(4 Marks)
c.
Evaluate for your audience, the arguments in favour of and against
mandatory audit firm rotation.
(4 Marks)
(Total 20 Marks)
SECTION A
SOLUTION 1
a.
The elements of audit approach to an e-commerce system should include the
following:
i.
The auditor should decide whether or not the engagement should be
accepted (as in any professional engagement);
ii. The auditor should then plan the engagement: an important aspect of
planning may be to make available audit staff with appropriate expertise
in e-commerce systems;
iii. The auditor should obtain a detailed knowledge of the client‟s business;
iv. He should consider liaising with the internal auditors of the client, if
there had been internal audit investigations into the client‟s e-commerce
transactions or system;
v.
The auditor should identify and evaluate the risks in the system;
vi. He should ascertain and evaluate the control environment and the
specific internal controls that are in operation; and
vii. He may also be appropriate to perform a going concern review,
particularly in the case of entities that rely mainly on e-commerce
activities for their revenue.
b.
As in all risk situations, management should evaluate the risks to which the
entity is exposed and take appropriate action to manage those risks. The
general approach that should be taken is summarised below:
i.
ii.
iii.
iv.
v.
Management should carry out risk assessment exercises on a regular
basis;
Management should create an appropriate control environment,
including an information systems security policy;
The entity should make appropriate use of an internal audit function, to
obtain assurance that the e-commerce system is functioning properly;
There should be adequate audit trails for e-commerce transactions;
The entity should keep up-to-date back-up copies of data files;
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vi.
For some systems, it may be appropriate to use encryption for dataencryption involves the electronic conversion of data into a secure coded
language for transmission, so that it will be incomprehensible to anyone
who intercepts it in transmission; and
vii. The system user should comply with generally accepted standards and
register with the Web Trust or similar organisations.
c.
d.
Issues for the auditor to consider in this type of situation include:
i.
Materiality- The auditor should decide whether or not the outsourced
operation is material in terms of the financial statements. If payroll work
is outsourced, this is likely to be a material item and the auditor will
have to consider how to obtain sufficient appropriate evidence about
payroll costs;
ii.
Accessibility to the records- It is important that access to the relevant
records is available for the auditor, and the auditor should discuss with
the service organisation the arrangements for obtaining the information
required;
iii.
Control risk- The auditor will need to assess control risk in the
outsourced operation. A systems audit will be possible only if the auditor
is satisfied with the control system in the service organisation, otherwise
substantive auditing procedures will be needed;
iv.
Compliance- Where the outsourced work is subject to regulatory
requirements, the auditor will need to consider how to gather evidence
about compliance with the regulations. An example is the need to check
compliance with tax regulations for deductions of tax, in the case of
outsourced payroll activities; and
v.
Transfer of information- It may also be necessary to check the
procedures for the transfer of information between the service
organisation and the audit client, to establish how information is
transferred, how often it is transferred and whether the method of
transfer is reliable.
Possible reasons for changes found at the planning stage of the audit in
relation to the following areas are as follows:i.
An increase in inventory turnover includes:
 Greater demand of products;
 Increase in sales or turnover over the period;
 Advertising and marketing strategy;
 Scarcity of competing products; and
 Sales promotion, etc.
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ii.
Increase in average collection period:
This has to do with collection of debts from customers. Payment period
relative to 365 days, hence, increase in average collection period can be as a
result of:

Economic conditions affecting cashflows of consumers; and

Poor credit control policy.
iii.
An increase in debt ratio
Total liabilities
Debt ratio
=
Total assets
Increase could be caused by:

Borrowing to meet essential activities;

Slow rate of recovery of debts from customers;

Economic downturn affecting demand for Company‟s products; and

Overtrading leading to employing more resources than the company‟s
cashflow capabilities.
iv.
Decrease in times interest earned ratio:
 Increase in average collection period;
 Increasing debt profile – customers not paying promptly; and
 Decrease in inventory turnover.
v.
Increase in return on total assets
Net profit after int erest and tax
Return on total assets =
Total assets
Increase could be caused by:

Increase in turnover;

Reduction in expenses;

Reduction in income tax for the year;

Ageing assets
e.
Advantages of outsourcing include:
i.
Cost savings- It may be cheaper to outsource work to an external service
provider than to do the work in-house;
ii.
The skills of the external agency or service provider- An external service
provider may have skills and expertise for doing the work which the
entity itself does not have „in house‟;
iii.
Access to the most up-to-date techniques and technology might not be
readily available within the entity, but the external agency may have
them; and
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iv.
The management of the entity are able to focus their time and efforts on
„core activities‟, and do not have to spend as much time monitoring the
outsourced activities.
Disadvantages of outsourcing include:
i.
The management of the entity needs to make sure that the service
provider understands the requirements of the entity in respect of the
service that it is providing. If the work is not properly specified, the
service provider may fail to do everything that the entity requires it to
do;
ii.
There may be problems with negotiating an appropriate fee for the work
with the service provider;
iii.
Management needs to ensure that the service provider gives the
organisation an appropriate level of priority and „customer care‟. This
means that management must carry out regular reviews of the service
level and service quality provided; and
iv.
There may be issues of confidentiality and security of the company‟s data
and documents on the part of the service provider.
v.
Continuity of service
vi.
Stability of price
vii. Acceptable level of quality
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of (a) e-commerce business (b) outsourcing and (c) financial analysis.
Being a compulsory question, all the candidates attempted the question and
performance was good.
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Marking Guide
a.
Any five of the element of the audit approaches to an ecommerce system
(1 mark each)
Explanation of any five of management responsibilities
(1 mark each)
1
/2 mark each for mentioning any four
1
/2 mark for elaborating on each of the mentioned points
2 marks each for any two reasons
2 marks each for any two points
b.
c.
d.(i)
(ii)
Mark
5
5
2
2
4
4
(iii)
(iv)
2 Marks each for any two points
2 marks each for any two points
4
4
(v)
2 marks each for any two points
4
e.
Mentioning any three advantages of outsourcing
(1 mark each for any three points)
Mentioning any three disadvantages of outsourcing
(1 mark each for any three points)
Mark
4
20
3
3
Total
6
40 Marks
SECTION B
SOLUTION 2
a.
Conditions under which a parent company need not present consolidated
financial statements in line with the requirements of IFRS 10 are: if
i.
It is a wholly-owned subsidiary or is a partially-owned subsidiary of
another entity and its other owners, including those not otherwise
entitled to vote but have been informed about, and do not object to the
parent company not presenting consolidated financial statements.
ii.
Its debt or equity instruments are not traded in a public market (a
domestic or foreign stock exchange or an over-the-counter market,
including local and regional markets)
iii.
It did not file nor is it in the process of filing, its financial statements
with a securities and exchange commission or other regulatory
organization for the purpose of issuing any class of instruments in a
public market, and
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v.
b.
Conditions that must be met for an investor to control an investee as stated in
IFRS 10
An investor controls an investee, if and only if, the investor has all of the
following elements:
i.
ii.
iii.
c.
d.
Its ultimate or any intermediate parent or the parent company produces
financial statements available for public use that comply with IFRS, in
which subsidiaries are consolidated or are measured at fair value
through profit or loss in accordance with IFRS 10
Power over the investee, that is the investor has existing rights that give
it the ability to direct the relevant activities (the activities that
significantly affect the investee‟s returns);
Exposure or rights, to variable returns from its involvement with the
investee; and
The ability to use its power over the investee to affect the amount of the
investor‟s returns.
Matters that the engagement team needs to consider in obtaining an
understanding of the component auditor include:
i.
Whether the component auditor understands and will comply with the
ethical requirements that are relevant to the group audit (in particular
that he is independent);
ii.
The component auditor‟s professional competence;
iii.
Whether the group engagement team will be involved in the work of the
component auditor to the extent necessary to obtain sufficient
appropriate audit evidence;
iv.
Whether the component auditor operates in a regulatory environment
that actively oversees auditors; and
v.
Reputation of the component auditor.
The component auditor‟s communication with the group auditor will usually
be in the form of a memorandum or report of work performed and this will
include the following:
i.
A statement of compliance with ethical and group auditor‟s
requirements;
ii. Identification of the financial information on which the component
auditor is reporting;
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iii.
Any instance of non-compliance with laws and/or regulations which
could lead to a material misstatement of the group financial statements;
iv. A list of uncorrected misstatements of the financial information of the
component entity;
v.
Indicators of possible management bias;
vi. Any identified material weakness in internal control;
vii. Any other significant matters the component auditor expects to
communicate to those charged with governance of the component entity;
viii. Any other matter that may be relevant to the group audit; and
ix. The component auditor‟s overall findings, conclusions or opinion.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of consolidated financial statements
and joint audit.
About 90% of the candidates attempted the question and performance was good.
MARKING GUIDE
MARKS
a.
b.
c.
d.
Conditions under which a parent company need not present
consolidated financial statements in line with the
requirement of IFRS 10
(11/2 marks each for any two points)
Conditions that must be met for an investor to control an
investee as stated in IFRS 10
(11/2 marks each for any two points)
Matters that the engagement team needs to consider in
obtaining an understanding of the component auditor
(1mark each for any four points)
Communication matters relevant to the group engagement
teams‟ conclusion with regards to the group audit
(2 marks each for any five points)
3
3
4
Total
10
20
SOLUTION 3
a.
The Internal Audit function has been defined as
„An appraisal system established by management for the review of the
accounting and internal control systems as a service to the entity:‟
There are several parts to this definition as follows:
i.
Internal auditing is an appraisal system;
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ii.
iii.
iv.
It is established by management as a service to the entity;
It involves the review of accounting systems; and
It also involves the review of internal control systems, which are
systems for financial controls, operational controls and compliance
controls.
Internal auditing is separate and distinct from accounting. The role of
internal auditing has become more significant in larger entities and is now
regarded as an important management tool.
b.
The internal audit function is a service to management generally. However,
the external auditors can rely on some of the functions of the internal audit,
if it meets the requirements and criteria that guarantee objectivity,
competence and independence of the functions.
Some of the functions of the internal audit are:
i.
Documentations of the accounting and internal control systems;
ii. Audit of inventory and work in progress;
iii. Circularization of payables and receivables;
iv. Provision of schedules, breakdown and analysis required by the
external auditors, and
v. Providing the outcome of the review of the accounting and internal
control systems that are in existence within an entity.
c.
The following factors should be considered by the external auditor in making
the assessment of internal audit:
i.
The status of the internal audit department within the entity, in
particular, the objectivity of the internal audit department. The external
auditors will be more willing to rely on the internal auditor if the internal
audit department has a considerable degree of operational
independence, for example, in deciding the nature of the audit work it
will carry out, and in reporting to an „independent‟ senior person or body
within the entity, such as the audit committee (rather than the finance
director).
The external auditors will also need to consider the scope of the internal
audit work and any restrictions placed by senior management on the
scope of its work and whether management act on recommendations in
internal audit reports. If management ignores recommendations in
internal audit reports, the external auditor cannot have much confidence
in the ability of internal auditors to ensure the effectiveness of internal
control;
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ii.
The technical competence and due professional care of the internal
auditor. The external auditors must be satisfied that the internal audit
staff have sufficient technical competence and take a professional
approach towards their work; and
iii.
There will need to be effective communication between the external and
internal auditors with meetings held at appropriate intervals and each
notifying the other of any significant matters that might affect the
other‟s work.
In addition to the general assessment of the internal audit, ISA 610 also requires
the external auditors to evaluate each specific piece of work performed by internal
audit before it is used as external audit evidence.
d.
Because the external auditors are fully responsible for the audit opinion, he
will need to test the work performed by the internal auditor. Before using
specific work of internal audit, the external auditors are required to evaluate
whether or not;
i.
The work was performed by an internal auditor with adequate technical
training and proficiency;
ii. The work was properly supervised, reviewed and documented;
iii. Adequate audit evidence was obtained;
iv. Appropriate conclusions were reached, consistent with any reports
prepared; and
v. Any exceptions or unusual matters were properly resolved.
Procedures to achieve this might include:
i.
ii.
iii.
Examining items already examined by internal audit;
Examining other similar items; and
Observing procedures performed by internal audit.
The external auditor‟s evaluation of the internal audit function and its work should
be fully documented in the external auditor‟s working papers.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of internal audit.
About 90% of the candidates attempted the question and performance was good.
MARKING GUIDE
a.
b.
MARKS
Giving definition of internal audit function
Functions of internal audit
1 mark for each function, maximum of 4 points
2
4
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c.
Factors to be considered by the external auditors in making
the assessment of internal audit
Two marks per points, maximum three points.
Issues to be mentioned.
i.
ii.
iii.
Objectivity;
Technical Competence and due professional care;
Effective communication.
(1 mark each for a point subject to a maximum of 2 points=2
Marks
(2 marks for explaining any 2 points=4 Marks
d.
Evaluation of the work of the internal auditor by the external
auditor.
(2 mark each for any 4 points)
6
Total
8
20 Marks
SOLUTION 4
a.
The purpose of audit review is to check whether:
i.
The audit work was carried out to proper professional standards;
ii. The objectives of the audit have been achieved; and
iii. The work carried out during the audit and the audit evidence is suitably
documented, and that the audit evidence supports the conclusions that
have been reached.
b.
The following are various types of audit reviews :
i.
Peer review- This is a review carried out by an audit firm on another
audit firm of comparable size and standard.
ii. Engagement quality control review (EQCR)- A peer review performed
before the audit report is signed as required by ISQC1 during the audit of
a listed or public interest entity. An EQCR forms part of the quality
control procedures specific to an individual assignment;
iii. Hot review- Similar in substance to an EQCR except that the hot review
is not performed as a direct requirement of ISQC1, for example, when an
engagement partner on a non-listed/public interest entity audit wants a
second opinion or to monitor the work of a new partner during
probation.
iv. Monitoring review (also called a „cold review‟)- This is a peer review
performed after the audit report is signed. A cold review forms part of
the monitoring of quality control procedures.
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c.
Requirements of ISQC 1 on the system of controls that a firm should address
include:
i.
Leadership responsibilities for quality
ISQC 1 requires the firm to establish policies and procedures designed to
promote an internal culture recognising that quality is essential.
Ultimate responsibility for quality control policies and procedures should
rest with the firm‟s CEO (or equivalent) or managing board of partners
(or equivalent). Any person who has operational responsibility for quality
control should have appropriate experience and ability and the
necessary authority.
ii.
Ethical requirements
ISQC 1 requires the firm to establish policies and procedures to provide it
with reasonable assurance that the firm and its staff:
Comply with relevant ethical requirements;
 Maintain independence where required to do so by those
requirements;
 Communicate its independence requirements to staff; and
 Identify and evaluate circumstances and relationships that create
threats to independence, assessing the impact of such threats and
applying safeguards or withdrawing from the engagement if
appropriate.

The policies and procedures should include requiring:




iii.
Staff to notify the firm of circumstances and relationships that might create a
threat to independence;
Staff to notify the firm of any breaches of independence of which they have
become aware;
The firm to communicate such breaches to the engagement partner and
other relevant staff; and
The engagement partner to advise the firm of actions to be taken.
Acceptance and continuance of engagements
ISQC 1 requires the firm to establish policies and procedures to provide it
with reasonable assurance that the firm will only take on or continue work
where the firm:

Is competent to perform the engagement;

Has the capabilities (including the necessary resources) to do so;

Can comply with the relevant ethical requirements; and

Has considered the integrity of the client and does not have information
which would lead it to conclude that the client lacks integrity.
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The policies and procedures should include requiring the firm to:



iv.
Obtain sufficient information to make such decisions (for new or existing
engagements);
Consider potential conflicts of interest (and therefore whether it should
accept the engagement); and
Document all identified issues and how they were resolved.
Human resources
ISQC 1 requires the firm to ensure:


It has sufficient personnel with the competence, capabilities and
commitment to ethical principles to meet its overall quality control
objectives; and
That for each engagement, an appropriate engagement partner and
team are assigned.
Policies should therefore exist for the recruitment, training and development of
staff. The firm should ensure compliance with ISAs and audit staff should have a
good knowledge of accounting standards and local/national statutory accounting
regulations.
The firm‟s technical auditing procedures should be set out in a manual and
reinforced by training. Newsletters and/or meetings could be used as a means of
ensuring that professional staff are kept up-to-date on current developments.
Work should be assigned to staff that are competent to perform that work. There
should be procedures for ensuring that an audit team collectively has the
appropriate level of technical knowledge for the audit engagement and includes
individuals with:


Experience of audits of a similar complexity; and
An ability to apply professional judgment.
v.
Engagement performance policies and procedures are required to include:

Those to promote consistent quality engagement performance

Supervision responsibilities;

Review responsibilities (on the basis that more experienced team
members review the work of less experienced team members);

Guidance on consultation to ensure that:
ix.
Appropriate consultation takes place on difficult or contentious matters;
x.
Sufficient resources are available for such consultation;
xi.
The nature, scope and conclusions of the consultation are documented
(by both parties); and
xii.
Conclusions arising from the consultation are implemented.
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





vi.
Guidance on engagement quality control reviews to ensure that:
An engagement quality control review is required for audits of all listed
entity clients;
Criteria are established to determine which other engagements should be
subject to an engagement quality control review;
The review covers certain procedures (the same as set out in ISA 220);
Engagement quality control reviewers are eligible to carry out such
reviews via technical qualifications, experience, authority and objectivity
from the engagement; and
Engagement quality control reviews are properly documented (again, as
also set out in ISA 220).
Monitoring of quality control procedures
The firm is required to establish a monitoring process designed to provide it
with reasonable assurance that its quality control system is relevant,
adequate and operating effectively. This process should include inspecting,
on a cyclical basis, at least one completed engagement for each engagement
partner.
Responsibility for the monitoring process should be given to a partner or
other appropriate person with sufficient experience and authority. When
monitoring reviews (also referred to as „cold reviews‟) are carried out they
should not be performed by those involved with the engagement or the
engagement quality control review.
The firm should:
 Evaluate the effect of deficiencies found to determine if they indicate a
failing in the firm‟s quality control system; and
 Communicate such deficiencies to relevant personnel, together with
appropriate remedial action.
vii.
Documentation of quality control procedures
The following matters are required to be documented:
 Evidence of the operation of each element of the system of quality
control;
 Complaints and allegations made against the firm and how these were
resolved; and
 Documentation must be retained for a sufficient period of time, as a
minimum to comply with relevant laws and regulations.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the review of audit working papers.
About 60% of the candidates attempted the question and performance was poor.
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The commonest pitfall of the candidates was lack of understanding of the
requirements of ISQC 1 as they relates to the system of controls.
Candidates are enjoined to study the Institute‟s study text properly for future
examinations.
MARKING GUIDE
a.
Mentioning any two purposes of audit review
(1/2 mark each maximum of two)
Mentioning the four types of audit review, with
explanations:-It is essential to mention:i.
Peer review
ii.
Engagement quality control review
iii.
Hot review
iv.
Monitoring review/cold review
(1/2 mark each for mentioning)
(1/2 mark each for explaining)
Discussing the requirements of ISQC 1 on the system of
controls that a firm should have:
i. Leadership responsibility for quality- Establish policies and procedures
- Responsibility rests with CEO
- Appropriate experience for necessary authority
b.
c.
MARKS
MARKS
1
2
2
4
ii. Ethical requirements
iii. Acceptance and continuance of engagement.
iv. Human resources
v. Engagement performance policies and procedures
vi. Monitoring of quality control procedures
vii. Documentation of quality control procedures
15 Marks
3 marks for each point subject to a maximum of five points.
Total
20 Marks
SOLUTION 5
a.
The following are the work plans to be carried out in examining the prepared
prospective financial information (PFI):
i.
Where the audit firm has no previous knowledge of the entity, it should
obtain sufficient knowledge of the company and its environment;
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ii.
If best estimate assumptions have been used in preparing the PFI (a
forecast), the auditor should seek evidence to support these estimates;
iii.
The auditor should also check the arithmetical accuracy and consistency
of the projected financial information that has been prepared;
iv.
The auditor should obtain representations from management on:
 Management‟s acceptance of responsibility for the information;
 The intended use of the information; and
 The completeness of the assumptions that were made to prepare the
PFI;
v.
If hypothetical assumptions have been used (to prepare a projection), the
auditor should assess whether they are realistic and sensible, and
whether the full implications of the hypothetical assumptions have been
properly reflected in the PFI;
vi.
The auditor should assess whether the PFI contains all the relevant
material items and that nothing of significance has been omitted; and
vii. If part of the „future period‟ in the forecast or projection has already
passed, the auditor should review the actual results for that part of the
period, and compare actual results with the forecast or projection. The
differences will help the auditor to assess the reliability of the forecast or
accuracy of the projection.
b.
In accordance with ISAE 3400 – The consideration to be made and the
procedures to be carried out before accepting the engagement of the
examination of prospective financial information include:
i.
The availability of resources and staff with the necessary expertise;
ii.
The timescale for the completion of the engagement; and
iii.
Agreeing a fee for the work with the client.
The accountant should also establish with the client the form that the
assurance report should take. It is particularly important that the client
should understand that in a review of forward-looking information, only
negative assurance can be provided. The client should also be informed that
the audit firm will comply with the requirements of ISAE 3400 when
reviewing the prospective financial information. An engagement letter
should be agreed and signed by both parties before the work is actually
started.
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There are several specific points that might apply to PFI engagements and
these include:
i.
ii.
iii.
iv.
v.
c.
Understanding the nature of the information to be examined;
Establishing the intended use of the information (and the intended
recipients of the final report);
Establishing whether the information will be for general distribution or
limited distribution to a small number of users;
The nature of the assumptions that have been made by management
(whether they are best estimate assumptions for a forecast, or
hypothetical assumptions for the purpose of making a projection); and
The time period covered by the information.
The following are the outlines of the report to be presented on the
engagements of prospective financial information:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
Title;
Addressee;
Identification of the PFI (for example by page references to pages in
same document as the report, where the PFI can be found);
A reference to the ISAE;
A statement that management is responsible for the PFI, including the
assumptions on which it is based;
A reference to the purpose of the PFI and/or the restricted distribution of
the report (and the PFI) to a limited number of users;
A statement of negative assurance as to whether the assumptions that
management have made provide a reasonable basis for the PFI.
An opinion as to whether the PFI is properly prepared on the basis of
these assumptions, and whether the PFI is presented in accordance with
the relevant financial reporting framework;
The report should also contain warnings (caveats) that the PFI is a
forecast or projection, and the results indicated by the PFI might not be
achieved;
Date, address and signature of the accountant/auditor.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of ISAE 3400- The Examination of
Prospective Financial Information.
About 75% of the candidates attempted the question, but the performance was
poor.
The commonest pitfall of the candidates was their misinterpretation of the
question, by applying general audit plan to PFI audit.
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Candidates are advised to read and understand the requirements of the question
before attempting to answer it and also read the study text in depth before future
examination.
MARKING GUIDE
MARKS
a.
Development of work plan
(1 mark each for any five points)
Consideration for acceptance of engagement
(1 mark each for any five points)
Outline of report
(1 mark each for ten points)
b.
c.
5
5
Total
10
20
Marks
SOLUTION 6
a(i)
It is well established that independence is fundamental to the credibility of
the audit process. Much of the current thinking on independence has been
developed by the Securities and Exchange Commission (SEC) in the United
States of America (USA). The work of the SEC was a fall out from the
corporate scandals in the USA in 2001 and 2002 such as Enron and
Worldcom.
In 2003 the SEC adopted rules to implement the Sarbanes-Oxley Act 2002 on
corporate governance. The rules aim to strengthen auditors‟ independence
and require additional disclosures to investors about the services provided to
a corporation by an independent accountant.
(ii)
According to Sarbanes-Oxley Act, the following services may impair the
independence of auditors:

Book-keeping or other services related to the accounting records or
financial statements of the audit client- This rule prohibits an accountant
from auditing the book-keeping work performed by his or her accounting
firm on behalf of a client;

Financial information systems design and implementation- The rules
prohibit a firm from providing any service related to the information
systems of the audit client, unless it is reasonable to conclude that the
results of these services will not be audited. These rules do not prevent a
firm from working on the hardware or software systems of an audit client,
if these are unrelated to the client‟s financial statements or accounting
records and provided that the provision of these services by the firm is
approved in advance by the audit committee;
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
Appraisal or valuation services, fairness opinions, or contribution-in kind
reports- All these activities are services involving a report from an
accountancy firm on the valuation used in a transaction. The rule
prohibits an accounting firm from providing such services, unless the
results of these services will not be audited as part of the audit of the
financial statements;

Actuarial services- The rule prohibits an accounting firm from providing
any actuarial advisory service to an audit client that involves a decision
about amounts to be recorded in the financial statements (and related
accounts) of the audit client. Such a service may apply, for example, to
the valuation of pension funds (which is connected to the valuation of
pension fund liabilities). An accounting firm may, however, assist a client
in understanding the methods, models, assumptions and inputs used in
computing an amount;

Internal audit outsourcing services- The rules prohibit the accounting
firm from providing any internal audit service that has been outsourced
by the audit client, where the internal audit work relates to the audit
client‟s internal accounting controls, financial systems or financial
statements. This means that internal audit work relating to operational
controls and compliance (operational audits, Value for Money (VFM)
audits and compliance audits) by the accounting firm are permissible;

Management functions or human resources- The rules prohibit an
accounting firm from:
 Acting (even in a temporary capacity) as a director, officer or
employee of an audit client;
 Performing any decision-making, supervisory, or ongoing
monitoring function for the audit client;
 The independence of an accounting firm will also be impaired if
the firm aids the audit client in connection with any senior level
management appointment. An accountant‟s independence is
impaired with respect to an audit client when the accountant;
 Seeks out prospective candidates for managerial, executive or
director positions within the client company;
 Acts as negotiator, on the audit client‟s behalf, with any person
who has applied for a senior management position;
 Under this rule, an accountant‟s independence will also be
impaired when the accountant;
 Engages in psychological testing or other formal testing or
evaluation programmes; or
 Recommends or advises the audit client to hire a specific
candidate for a specific job.
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b.

Broker or dealer, investment adviser, or investment banking servicesActing as a broker-dealer, promoter or underwriter on behalf of an audit
client will make the accountant an advocate for the audit client and will
impair his independence.

Legal services- An accounting firm is prohibited from providing to an
audit client any service that could be provided only by someone qualified
to practice law in the jurisdiction in which the service is provided; and

Expert services unrelated to the audit- The rules prohibit an accounting
firm from providing expert opinions to an audit client, for the purpose of
advocating that audit client‟s interests in litigation or in any regulatory
or administrative proceeding or investigation.
Advantages of providing non-audit services by the auditors for their clientsThe accounting firm is in an excellent position to provide its client with nonaudit services. This is because:
i.
It already has an extensive knowledge of its client, the client‟s business
and its systems; and
ii.
It should therefore be able to provide the additional non-audit services
to the client at a lower cost than other accountancy firms, and with less
disruption to the client.
Non-audit work also makes accounting firms more attractive in the recruitment
market, because a wider range of work experience can be offered to trainees.
Disadvantages of providing non-audit services by the auditors for their clients
There are some obvious disadvantages for providing non-audit services:
c.
i.
The accounting firm may be seen by the world at large to lack
independence from the client, because of the huge fees it receives for
audit and non-audit work. This was a criticism levelled at the Houston
office of accounting firm Andersens, following the collapse of Enron; and
ii.
Accountants from the accounting firm may find themselves in a position
where they are making management decisions. If so, their independence
is impaired.
Arguments in favour of mandatory audit firm rotation are:
i.
In a long-term audit relationship, the auditors may become too close
to management of the client company. This may weaken their
professional scepticism and independence. They may be more likely to
compromise when disagreements with management occur, in order to
preserve the relationship; and
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ii.
Even if rotation would not protect the independence of the accounting
firm, it improves the public perception of independence, and so may
increase confidence in the quality of external audits.
Arguments against mandatory audit firm rotation include:
i.
There may be negative effects on audit quality and effectiveness in
the first years following a change. This is because the new auditors
may take several years to familiarise themselves with their new client
and its procedures. There is some evidence to suggest that there may
be a higher instance of audit failures in the first years following a
change of auditors. If this evidence is valid, the connection between
company failures and a change of auditors might reflect an inability
of the newly-appointed auditor to identify problems in the client
company;
ii.
There are also substantial costs from changing auditors regularly, as
the auditor attempts to familiarize himself with the new client. More
management time is also needed to assist the new auditor to learn
about the client company, its operations and its systems;
iii.
There is no evidence that compulsory audit firm rotation has a
positive impact on auditor independence and audit quality; and
iv.
The market for auditing listed companies is dominated by the „Big
Four‟ accountancy firms. If this domination of the audit market
continues (which is probable), it may be difficult to change auditors
easily. The other large firms may not have available resources to take
on the audit or may not be „independent‟ because of other non-audit
services that they already provide.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the independence of the auditor.
About 90% of the candidates attempted the question and performance was good.
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MARKING GUIDE
MARKS
a.
b.
c.
current position on independence of the auditor
The reference to the cases and the explanation of
Independence
Reference to Sarbane-Oxley Act
ii. Services that may impair independence of the
auditor:
Any 6 non-audit services:
mentioned - 1/2 mark each)
Discussed - ½ mark each
MARKS
i.
4
2
3
3
12
Evaluation of advantages of providing non-audit
services to an audit client
2
(1 mark each for any two)
Disadvantages of providing non-audit services to an
2
audit client
(1 mark each for any two)
Arguments in favour of audit firms rotation
(1 mark each for any two)
2
Arguments against audit firm rotation
(1 mark each for any two)
2
4
4
20 Marks
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
MARCH/JULY 2020 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
and
Examiner‟s Reports
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – MARCH/JULY 2020
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX
QUESTIONS IN THIS PAPER
SECTION A:
COMPULSORY QUESTION
(40 MARKS)
QUESTION 1
1.
You are a Senior Manager at DARTH, a firm of chartered accountants,
responsible for reviewing quality control and ethical matters which arise
with regards to the firm‟s portfolio of clients.
During recent investigations, you identified the following matters:
(i)
Dotun Limited
The company‟s audit committee has asked whether one of DARTH‟s
audit partners can be appointed as a non-executive director and serve
on the audit committee. The audit committee lacks a financial
reporting expert, and the appointment of an audit partner would
bring much needed knowledge and experience.
(ii)
Kate Nigeria Limited
Kate Nigeria Limited is currently a non-audit client of your firm and
has provided a range of non-audit services to the company including
bookkeeping, payroll and tax computation, and advice. The company
recently applied for additional financing from its bankers, the amount
requested is significant and the purpose of the loan is to finance the
growth aspirations of the company.
The management of Kate Nigeria Limited has ambitious plans for
growth which they believe will result in revenue tripling within one
year and then continuing to grow at a 50% growth rate for at least the
next five years.
As a pre-requisite for approving the additional financing request, the
bankers have asked the directors of Kate Nigeria Limited to audit the
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financial statements by a big accounting firm, hence, Kate Nigeria
Limited has asked if your firm will become the company‟s auditors, as
well as continuing to provide the existing services. This will include
auditing the financial statements for the year ended December 31,
2019 at the request of the new financers.
(iii)
Bucket Group Limited
Bucket Group Limited is an audit client. An investigation into the
group‟s tax affairs started in January 2019. The tax authorities are
investigating the possible underpayment of taxes by each of the
companies in the group, claiming that tax laws have been breached.
The group‟s tax planning was performed by another firm of
accountants, Ada & Co, but the group‟s audit committee has asked if
your firm will support the group by looking into its tax position and
liaising with the tax authorities in respect of the tax investigation on
its behalf. Ada & Co has resigned from their engagement to provide
tax advice to the Group. The matter is to be resolved by a tribunal
which is scheduled to sit in March 2020.
(iv)
Danladi Nigeria Limited
Danladi Nigeria Limited is an audit client of your firm. The
management team of the company has asked you to perform a
valuation of the shares of another audit client, Moko Nigeria Limited,
with a view to buying the entire shareholding. Moko Nigeria Limited
is a private company whose shares are owned entirely by the original
founder, Mrs Janet Moko.
Required:
From the scenario above, discuss the ethical and other professional issues raised,
and recommend any actions which should be taken in respect of:
a.
b.
c.
d.
Dotun Limited
Kate Nigeria Limited
Bucket Group Limited
Danladi Nigeria Limited
(10 marks)
(10 marks)
(10 marks)
(10 marks)
(Total 40 marks)
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SECTION B:
YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE
QUESTIONS IN THIS SECTION
(60 MARKS)
QUESTION 2
Ode Nigeria Limited provides an on-line trading platform which connects buyers
and sellers in the country, and around the world. The platform provides an avenue
for the sale and purchase of goods and services. In addition to providing a
platform, it assists sellers in invoicing and collating data on transactions done on
the platform.
On receipt of sales orders, sellers are responsible for processing and transporting
the orders to customers. Customers also pay directly to the sellers but through the
platform. Ode collects a fee from the sellers for the use of the platform and for the
invoicing services.
Ode has decided to change its auditors in line with the requirements of the Code of
Corporate Governance because they have had the auditors for over 10 years and
has approached your firm to be appointed as the new auditors. Appropriate
professional clearance has been obtained and work is set to commence.
You are the Audit Manager responsible for the engagement. You have met with
your team members and noted that there are some trainees in the team who are
not conversant with controls in on-line businesses.
Required:
a. Evaluate FOUR risks associated with the application of electronic data
interchange in an on-line business and FOUR effective controls that may be put
in place to minimise the risks.
(8 marks)
b. Discuss the main categories of general IT controls that an auditor can expect to
find in a computer-based information system.
(12 marks)
(Total 20 Marks)
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QUESTION 3
You are a Senior Manager at Haggai Partners, a firm of chartered accountants. In
your capacity as an engagement quality control reviewer, you have been asked to
review the audit files of Handel Nigeria Limited, with a financial year ended June
30, 2019. However, the audit is nearing completion.
Handel Nigeria Limited is a producer of canned tomatoes and pepper, selling its
products to wholesalers and supermarkets. From your review of the audit working
papers, you have noted that the level of materiality was determined to be N170
million at the planning stage, and this materiality threshold has been used
throughout the audit. There was no evidence in the audit file that this threshold has
been reviewed during the course of the audit.
From your review of the audit planning, you noted that a building was acquired in
March 2019 by Handel at a cost of N205 million and was recognised in the draft
statement of financial position at a carrying amount of N210 million as at June 30,
2019.
The building is located in Akure and was acquired for the purpose of housing the
employees working in the company‟s factory in Akure. The building has not been
physically verified by any member of the audit team. Based on the audit working
papers, it was concluded that „we have obtained the sales agreement in relation to
the building, and therefore can conclude that the asset is appropriately valued and
that it exists. In addition, the Factory Manager of the Akure factory has confirmed
in writing that the building is located within their premises and it is in good
condition. No further work is required in respect of this item.‟
Inventory was recognised at N290 million in the draft statement of financial
position. You have reviewed the results of audit procedures performed at the
inventory count, where the test counts carried out by the audit team indicated that
the count of some items performed by the company‟s staff was not correctly done
but the team did not consider the discrepancies to be material.
The audit senior spoke to you yesterday about his concern regarding the review of
the audit working papers. Apparently, the audit manager‟s review and the
partner‟s review occurred concurrently. The partner only asked the audit senior if
there were any residual issues on the audit, scanned through the audit
documentation and signed off in the working papers.
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Required:
Comment on the quality of the audit performed, discussing the quality control
issues raised.
(20 marks)
QUESTION 4
You have been approached by Suppy Nigeria Limited, a retail company, to provide
audit and tax services. In response, you have written to the outgoing auditor to ask
if there are any matters which you should be aware of which might prevent you
from accepting the assignment. Despite a number of follow up telephone calls, you
have not been able to obtain a response from the outgoing audit firm.
On discussing this with the management team of Suppy Nigeria Limited, you are
aware that the previous auditor resigned due to a dispute over audit fees for the
last audit which have not been paid. The management of the company also
expressed the view that the previous auditors were too materialistic.
Required:
a.
Analyse the professional issues noted with regards to accepting the audit.
(10 marks)
b.
Describe the information that International Standard on Quality Control (ISQC)
1 requires the firm to consider before accepting an audit engagement.
(4 marks)
c.
Describe the matters that ISQC 1 requires the firm to consider before assigning
personnel to audits.
(6 marks)
(Total 20 Marks)
QUESTION 5
XBS Plc has been experiencing declining fortunes in the market in which the
company operates. This was reflected in the financial statements for the last two
years. The management has tried to assuage the concerns of shareholders by
proposing and getting approval for the issue of bonus shares out of the share
premium account. Despite this, the shareholders have registered their displeasure
about the declining revenue and distributable profit. Concerted efforts are being
made by the shareholders to vote out the directors unless something very
significant happens.
Worried by this reaction of the shareholders and the position of other stakeholders,
the management engaged a consultant to help improve the financial fortunes of
the company and ensure that the company is back on track. The consultant, after a
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review of the information available to him and based on detailed discussions with
management, proposed the raising of additional capital from the public, based on
the existing goodwill of the company in the stock market. The funds raised from the
public will be used in technology enhancement, marketing and new product
development. These initiatives are aimed at more efficient operations and
increased sales volume. Accordingly, the consultant has produced the necessary
financial projections that management believes will convince investors to raise the
desired capital.
The company‟s management, in a bid to ensure the success of the capital raising
exercise, decided to seek a second opinion on the work produced by the consultant
before actual implementation. The firm which you work for was chosen to provide
the second opinion. Your senior partner in whose team, in the firm, the
responsibility falls, has asked you to make preparations to handle the task with
him. The task requires that you are conversant with the company, the background
to the crisis and the market in which the company operates. It is expedient that you
verify the information prepared by the consultant, address any deficiencies in the
report and uphold the reputation of your firm.
Required:
a.
Develop a work plan necessary for the task in accordance with the
requirements of ISAE 3400 – The Examination of Prospective Financial
Information.
(5 marks)
b.
Evaluate the considerations to be made and the procedures to be followed
before accepting the engagement, in accordance with ISAE 3400 – The
Examination of Prospective Financial Information.
(5 marks)
c.
Prepare an outline of the report to be presented on the engagement.
(10 marks)
(Total 20 marks)
QUESTION 6
Emtex Engineering and Construction Company Limited, is a company having a
significant long term civil engineering contracts in the troubled North Eastern part
of the country. The accounting year-end of the company is December 31, every
year. For the year ended December 31, 2018, the Finance Director informed you
that a substantial part of the work on the contract, equipment and materials on site
were destroyed on January 18, 2019 as a result of insurgent activities in that area.
It was also discovered that part of the facilities on site were looted by unknown
persons.
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On December 31, 2018, the contract was not yet completed but profit would be
recognised in accordance with IFRS 15 – Revenue From Contracts With Customers.
The contract was due for completion in three years to the end of February 2021.
Based on the telephone discussions, a meeting has been arranged to evaluate the
circumstances ahead of the audit for the year and to ensure proper and smooth
completion of the audit process.
You have been directed by your partner in charge of the audit to develop an outline
for your firm‟s meeting with the company‟s team including the Finance Director
and points to note for your audit.
Required:
a.
Discuss the details of the additional background information you would
require in assessing the extent of loss occasioned by the destruction, and its
impact on the financial statements of the company.
(7 marks)
b.
Discuss the technical accounting considerations of the situation in accordance
with the requirements of IAS 10 – Accounting for Post Balance Sheet Events.
(3 marks)
c.
Explain the accounting and disclosure requirements giving due consideration
to IAS – 10 for possible scenarios involving whether the contract is onerous
and whether the incident poses a threat to the company‟s going concern
assumption.
(4 marks)
d.
According to IFRS 15 – Revenue From Contracts with Customers, revenue is
recognised as control is passed, either over time or at a point in time.
i. Explain some of the benefits relating to the asset in the context of IFRS 15.
(3 marks)
ii. Explain the criteria given in IFRS 15, of which one must be met for an
entity to recognise revenue over time.
(3 marks)
(Total 20 marks)
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Solution 1
a.
Dotun Limited
The assurance team‟s independence may be threatened if a director or other
senior employee at the DARTH‟s office is employed by DOTUN Limited. There
may be self-interest, familiarity and intimidation threats, particularly if close
connections remain between the individual and the assurance firm. Such
treats include:
i. Self-interest threats - This arises when the accountant or the audit firm
had a financial interest or other interest in a matter. Typically this means
that the accountant‟s decisions may be influenced by self-interest and the
accountant will therefore not act with objectivity and independence.
ii. Self-review threats - This occurs when an accountant is required to
review or re-evaluate (for a different purpose) a previous judgment he
had made or action that he had taken. Self-review threats can also apply
to audit firms. For example, if an audit firm prepared the financial
statements for a client and then acted as auditor, it would be reviewing
its own work and would be reluctant to criticise or question it. This would
be a threat to objectivity and independence;
iii. Advocacy threats - This occurs when the accountant is in a position where
he is expected to defend or justify the position of the client, and act as an
„advocate‟ for the client‟s position or point of view. This would be a threat
to objectivity and independence;
iv. Intimidation threats - This occurs when the accountant is deterred from
acting with objectivity due to threats against him or his firm. This may
be a threat by the client to terminate the auditor‟s appointment, unless it
agrees with the point of view of the client management; and
v. Familiarity threats - This occurs when the accountant becomes too
sympathetic to the client‟s position due to close relationships. For
example this may occur due to a long association over many years in
carrying out the annual audit.
However, it may be possible to reduce the threat with safeguards, such as
involving an independent third party to review the audit file.
In respect of audit clients, a key audit partner should not accept key
management position from their clients until at least two years after the
conclusion of the audit.
Self-interest threats may also arise if a member of the assurance team has
reason to believe that they might soon be employed by the assurance client,
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for example, if they had applied for a job there. This threat can be avoided
by having disclosure policies within the firm if an employee is entering into
employment negotiations with an assurance client.
b.
Kate Limited
The points to note are as follows:
i. Independence threats;
ii. Objectivity threats;
iii. Use of separate audit team;
iv. Use of separate departments in the audit firm;
v. New engagement letter; and
vi. Ensure no management decision is taken by the auditors
Appropriate safeguards to be put in place are as follows:
c.
i.
Dividing the work of the audit firm into different functions.
Employees involved in audit work should not be the same as those
involved in providing consultancy advice to the same client;
ii.
Legally separating the consultancy department from accounting/
auditing arm of the firm to preserve auditor‟s objectivity and
independence; and
iii.
Ensuring that different members of staff and partners are responsible
for different services provided to clients.
Bucket Group Limited
The points to note are as follows:
i.
ii.
iii.
Potential threat of professional competence;
Due care; and
Lack of/or incomplete information
A member invited to undertake recurring or non-recurring work, which is
additional to and related to continuing work carried out by another
chartered accountant or adviser should normally notify that other chartered
accountant (Ada & Co) of the work he has been asked to undertake.
It is generally in the interest of the client that the existing auditor (DARTH)
be aware of the nature of the additional work being undertaken. The
existing chartered accountant will be provided with the opportunity to
communicate with the member to provide information, absence of which,
might otherwise prevent the additional work from being carried out
effectively. Additionally, such notification could affect the way an existing
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chartered accountant discharges his continuing responsibilities to his client.
Notification should always be given to the existing chartered accountant.
It should be noted that the application of accounting standards or principles
clearly requires particular sensitivity to avoid adversarial positions between
an auditor and other chartered accountants wherever possible.
d.
Danladi Limited
The points to note are as follows:
i.
ii.
iii.
iv.
v.
vi.
Objectivity threats;
Lack of independence;
Confidentiality threats;
Conflicts of interest;
Advocacy threats; and
Self review threats
Advise to clients involved in take-over bids or share issues
Auditors are often asked to give advice. However, where clients are involved
in a contested take-over bid, the auditors could find themselves in a position
where they are potentially acting for both parties where the situation arises:
i.
There is a danger that the firm cannot give objective professional
advice in the best interest of both parties due to a possible lack of
independence; and
ii.
The firm may be in possession of confidential information relating to
each party, with a risk that the information may inadvertently become
available to the other party due to a possible breach of confidentiality.
Guidelines in this area are as follows:
iii.
i.
There is no reason, in principle, why firms should not act for both
parties when a contested takeover bid occurs. However, a firm should
not be the sole or main advisor to both parties;
ii.
If the accountants are in possession of material confidential
information and feel that their position in this respect is questionable,
they should take advice from the appropriate financial regulatory
authority for example, the stock exchange involved in the take-over or
the national regulator of the financial market; and
Conflicts of interest may arise in connection with issues of shares to the
public because the accountants may be advising both the company
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issuing the shares and potential investors, such as companies interested
in buying the shares.
Examiner‟s report
The question tests candidates‟ knowledge on ethical and other professional issues
relating to audit engagements.
Most of the candidates attempted the question, but performance was poor.
The common pitfall was the candidates‟ poor knowledge of the requirements of the
question.
Candidates are enjoined to read ICAN Study Text properly before attempting future
examinations.
Marking guide
Marks
a. Explaining ethical issues involved if a director in
DARTH takes up employment in DOTUN Limited
Marks
2
Stating and explaining the threats
5
Stating how threats can be reduced
1
Stating how self-interest threats may arise
2
10
Kate Nigeria Limited
- Independence threats,
- Objectivity threats,
- Use of separate audit team
- Use of separate departments in the audit firm
- New engagement letter,
- Auditor not making management decision
10
c.
Bucket Group Limited
10
d.
Danladi Nigeria Limited
10
40
b.
Total
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Solution 2
a.
The risk associated with Electronic Data Interchange (EDI) systems are as
follows:
i.
Lack of paper audit trail;
ii.
An increased level of dependency on the computer systems of the
organisation and possibly the computer systems of other entities. Any
failure or control weakness in one computer system may have an
impact on the computer system that is being audited;
iii.
Risk of loss or corruption of data in the process of transmission; and
iv.
Security risks in the transmission of data.
Auditors should expect to find effective controls in place to minimise the
risks inherent in EDI systems. Typically, controls will cover such matters as:
i.
Controls over the transmission of data, such as the encryption of data
before transmission, acknowledgement systems and the use of
authentication codes for senders of data;
ii.
Monitoring and checking of output;
iii.
Virus protection systems; and
iv.
Contingency plans and back-up arrangements.
b. General IT controls
General IT controls are controls over the environment in which the computerbased information system is designed, developed, operated and maintained.
The main categories of general IT control that an auditor would expect to
find in a computer-based information system are summarised in the table
below:
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Control area
Development of
computer-based
information
systems and
applications
Documentation
and testing of
program
changes
Prevention or
detection of
unauthorised
program change
Controls
i.
Appropriate standards should be
established and enforced for designing,
developing, programming and
documenting each new system.
ii.
Suitable testing procedures should be
carried out on each new system.
iii.
The design of a new system should be
approved formally by the management of
the system user.
iv.
There should be a segregation of duties
between system designers and system
testers (to reduce the risk of errors or
fraud).
v.
There should be suitable staff training in
the design and testing of systems.
Formal testing procedures should be
applied for any change to a current
program.
i.
ii.
There should be formal authorisation
procedures for program changes.
iii.
There should be suitable staff training in
making and testing program changes.
There should be a segregation of duties
between programmers and computer
system operators.
i.
ii.
All program changes must be fully
documented.
iii.
Access to program files must be restricted.
iv.
Program logs should be used to record
access to program files and programs.
v.
There should be anti-virus software and
back-up copies of program files should be
kept, to prevent, detect or deal with
„malicious‟ changes to programs.
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Control area
Controls
Prevention of the i.
Standard operating procedures should be
use of incorrect
established and operations should be
programs or data
performed by suitably trained staff.
files
ii.
The scheduling of „jobs‟ for a computer
centre should specify the program files
and data files to be used.
iii.
There should be effective supervision of
computer centre operations.
iv.
Reviews of operations should be carried
out regularly by management.
There must be restricted access to data
files and limited to authorised personnel.
Prevention of
unauthorised
amendments to
data files
i.
Ensuring
continuity of
operations
i.
ii.
Transaction logs should be kept of all uses
of data files and these should be reviewed
by management.
Secured back-up copies should be kept of
program files and data files.
ii.
Measures should be implemented for the
protection of equipment against fire,
power failure and other hazards.
iii.
Disaster recovery programmes should be
in place, in the event of major disaster
that puts the main computer system out of
action.
iv.
There should be suitable maintenance
and service agreements for all major
externally-acquired software.
These general IT controls should apply to most or all of the entity‟s computer-based
information system applications, not just to computerised accounting systems. If
general controls are weak, it is unlikely that the processing work undertaken by the
system will be complete and accurate.
The auditor should review and test the general IT controls in order to reach a
conclusion about their effectiveness. This will enable him to assess the control risk
attached to the entity‟s computer-based information systems as a whole.
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Examiner‟s report
The question tests candidates‟ knowledge of Electronic Data Interchange/Computer
based information system in an online business.
About 70% of the candidates attempted the question and performance was average.
The common pitfall of the candidates was their poor understanding of the
requirements of the question.
Candidates are advised to read ICAN Study Text before sitting for future
examinations.
Marking guide
a.
b.
Risk associated with application of EDI
Stating effective controls that an auditor expects to
find in place
Categories of general IT controls
Total
Marks
4
Marks
4
8
12
20
Solution 3
Comments on the quality of the audit performed by Haggai Partners include the
following:
a.
Materiality
ISA 320 requires the auditor to apply the concept of materiality when
planning an audit. Auditors must consider materiality at the planning stage
of the audit because it helps them to determine which items to test which is
a good control in determining sample size. As the audit progresses, ISA 320
requires the auditor to review the materiality of N170m set at the planning
stage and should not used throughout the audit. For example, the building
cost of N205m was recognised as N210m resulting in a difference of N5m.
The auditor may regard this as not material and not carry out test to confirm
the difference.
There is the possibility of low audit quality if the auditor fails to carry out
test on the carrying amount of N210m as at June 30, 2019.
The same principle is applied to inventory counts. The fact that proper
counting was not carried out by management staff indicates the possibility
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of material misstatement in the inventory balance as at the end of June
2019.
Materiality at the final stage of the audit helps the auditor in determining
the reasonableness of the audit carried out and at what level the audit report
will be modified. Therefore, failure to review materiality as the audit
progresses may result to very low audit quality and this may also result to
high audit risk. If the auditor had used a lower materiality level than the
N170m set, the auditor will be able to carry out many tests on inventory,
thereby reducing the risk of detection and invariably overall audit risk.
b.
Building
The building acquired during the year should be categorised as non-current
asset and as such the following detail substantive tests need to be carried
out by the firm so as to confirm financial statements assertion as relate to
cost, authorisation, valuation, existence, beneficial ownership and its
presentation in the statement of financial position. Absence of evidence of
all these assertion in the current audit working papers of the firm would be
regarded as poor audit work on verification of building.
Taking the above listed financial statement assertions one after the other,
the audit firm should confirm the following:
i. Cost
The building was acquired during the year. Relevant documents such as
sales invoice and original receipt obtained from the vendor should be
sighted by the firm and a copy should be kept in the current audit
working papers file.
ii. Authorisation
Evidence of the authority to purchase the building by the company
should be obtained and also reviewed in the minutes of meetings of the
board of directors. Also, the payment voucher in respect of this newly
acquired building should also be reviewed and a copy should be kept in
the audit file.
iii. Valuation
The initial cost of the building was N205m but was recognised in the
draft statement of financial position at a carrying amount of N210m. The
reason for this may be that the building must have been revalued and
based on this; the audit firm should have ascertained the following:


Whether or not the valuation was carried out by the company
or by an external valuer;
If the valuation was carried out by the company, the firm
should have ascertained the basis of valuation; and
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
If the valuation was carried out by an external valuer, the firm
should ascertain the reputation, experience and independence
of the external valuer.
iv. Existence
The audit team did not carry out physical confirmation of where the
building is located. They only relied on sales agreement and confirmation
in writing from the Factory Manager in respect of the building.
To actually confirm the existence of this building, physical confirmation
needs to be carried out.
v. Beneficial ownership
The audit firm needs to confirm whether or not the acquired building is
being used for the purpose and benefits of the company. This can be
done by checking relevant documents relating to its usage, such as
checking expenses in respect of repairs and maintenance of the building.
vi. Presentation
The statement of the financial position should be reviewed as a whole to
confirm whether or not the building has been properly classified and
presented in accordance with relevant accounting standard.
Comments
It is obvious from the review of the current audit working papers file that all
the above assertions were not carried out and as such, the quality of the
audit was very poor.
c.
Inventory
Inventory of N290m was recognised in the draft statement of financial
position. This amount is considered to be a material figure and since the
audit team has indicated that the count of some items by the company‟s staff
was not correctly done, there is need for the firm to do the following:
i.
Order a recount of the inventory items while representative of the audit
firm will be in attendance to observe the procedures;
ii.
The valuation method used should be confirmed whether or not it is in
line with relevant accounting standard;
iii.
The condition and obsoleteness of the inventory items should be
considered;
iv.
The cut-off procedures in relation to the inventory should be reviewed;
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v.
Relevant documents such as purchase invoices and receipts should be
checked so as to confirm the ownership of the inventory; and
vi.
The firm should review the available internal control put in place by the
management of the company on the existence and movement of the
inventory.
Comments
The firm needs to do more audit work as per the above procedures in
relation to inventory.
d.
Review by the engagement partner and audit manager
As discussed above, before the audit report is issued, the engagement
partner needs to be satisfied that sufficient appropriate audit evidence has
been obtained to support the conclusions reached and for the audit report to
be issued, he should therefore:

Review the audit documentation; and

Hold discussion with the audit team.
This process is usually referred to as the partner‟s review. It should be
scheduled into the audit plan towards the completion of the audit.
Before the partner‟s review, the audit senior should ensure that every file is
complete and cross-referenced in order to cut down the number of points
that might be raised by the partner‟s review.
The partner‟s review will usually be preceded by a manager‟s review, in the
hope that the audit manager will identify some matters that can be resolved
before they come to the attention of the engagement partner, but in
electronic environment, it is possible to do it concurrently.
Quality control issues include:
i.
ii.
iii.
iv.
Poor or inadequate planning of the audit, such as failure to identify
the key audit risks;
Giving complex audit work to relatively inexperienced member of the
audit team;
Inadequate supervision; and
Inadequate review of the audit working papers by the audit manager.
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Examiner‟s report
The question tests candidates‟ knowledge on quality control issues in an audit
engagement.
About 50% of the candidates attempted the question and performance was slightly
below average.
The common pitfall of the candidates was their poor knowledge of the requirements
of the question.
Candidates are advised to read and understand the requirements of questions
before attempting them.
Marking guide
Marks
Discussing materiality in line with IAS 320
2
Discussing matters relating to building such as
cost, authorisation, valuation, existence, beneficial
ownership and presentation
5
Giving comments
1
Stating any five points relating to Inventory
6
Giving comment on Inventory
1
Stating what to do on the review by the engagement
partner and manager concurrently
2
Quality control issues
Total
3
20
Solution 4
a.
Professional issues to be noted before accepting a new audit appointment
Before accepting an appointment, the audit firm should take the following
steps:
i. Assess whether or not there are any professional problems attached to
accepting the engagement. These might include, for example, problems
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of lack of independence, or a lack of technical expertise, or a conflict of
interest;
ii. Ensure that resources are available to complete the audit assignment; in
particular, it must ensure that there will be sufficient staff of the right
level of expertise available at the right time;
iii. Take up references on the proposed client company and its directors, if
they are not already known to the auditors. This is usually referred to as
client screening; and
iv. Communicate with the existing auditors, if any, to discuss the
appointment, the client and the audit work.
The method of
communication is referred to in ICAN‟s Code of Conduct as professional
enquiry.
Client identification
In order to comply with anti-money laundering regulations, the audit firm
should carry out client identification procedures. The purpose of these
procedures is to confirm that the client „is who he says he is‟ and there are
no grounds for suspicion that the client may be involved in money
laundering activities. The procedures include:
i.
If the client is a company or other business entity, document of the
identity of the entity should be obtained, for example, a certificate of
incorporation in the case of a company;
ii.
Evidence should also be obtained to confirm the address of the entity,
such as letter head;
iii.
If the client is an individual, evidence of identity can be obtained
from an international passport or driver‟s licence and evidence of
address from recent utility bill;
iv.
The audit firm should consider whether or not the business of the
potential new client „makes commercial sense‟, for example, it would
not make sense for a very large company to be engaged in operating
a number of dry cleaning shops because the size of the company
would be too large for the nature of its business operations. When
this happens, the client‟s declared business may simply be a front or
cover for hidden illegal activities.
In most cases, the client identification procedures should be a formality and
the client may be surprised that they are necessary. The audit firm should
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explain the regulatory purpose of client identification, to remove any doubt
or concerns that the new client may have.
Professional enquiry
The firm should communicate with the current auditor, if any, to establish if
there are any matters that it should be aware of when deciding whether or
not to accept the appointment. Although, this is partly a matter of courtesy
between professionals, this will involve discussion of the appointment, the
client and the audit work. Such discussion will allow the firm to decide if
the client is someone for whom it would wish to act.
The following points should be noted when communicating with the current
auditor:
i.
When a member is first approached by a prospective client to act or
be nominated, he should explain that he has a professional duty to
communicate with the existing auditor;
ii.
Client permission is required for any such communication. If the client
refuses to give its permission, the appointment as auditor should not
be accepted;
iii.
If the client does not give the current auditor permission to reply to
any relevant questions, the current auditor should communicate this
fact to the prospective auditor who should subsequently not accept
appointment;
iv.
If the current auditor does not provide any information relevant to the
appointment, the new auditor should accept or reject the engagement
based on other available knowledge;
v.
The existing auditor should answer without delay the communication
from the prospective auditor. If there are no matters of which the
latter should be aware, the existing auditor should write to say that
this is the case;
vi.
If, however, there are such matters, he should inform the prospective
auditor of those facts within his knowledge of which, in his opinion,
the prospective auditor should be aware. It is not sufficient to state
that unspecified facts exist;
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vii.
The existing auditor might prefer to explain these facts orally and the
prospective auditor should be prepared to confer with the existing
auditor if the latter so desires and each should make his own record of
such discussion;
viii.
If an issue of conflicting viewpoints between the client and himself
has been raised by the existing auditor in the reply, the prospective
auditor should discuss the conflict with the client and satisfy himself
either that the client‟s view is one which he can accept as reasonable
or that the client will accept that the incoming auditor might have to
express a contrary opinion;
ix.
Where the existing auditor does not respond within a reasonable time,
the prospective auditor should endeavour to contact the existing
auditor by some other means, for instance, by telephone or email;
x.
Should this fail, and where the prospective auditor has no reason to
believe that there are untoward circumstances surrounding the
change, he should send a final letter by recorded delivery service
stating that unless he receives a reply within a specified time he will
assume that there are no matters of which the existing auditor is
aware that should be brought to his attention. A member who accepts
nomination in such circumstances is not precluded from complaining
to the Institute that the existing auditor did not respond to his letter of
enquiry; and
xi.
If the prospective auditor is satisfied that he can properly act, and is
prepared to accept nomination/appointment, he should so inform the
client in writing.
Unpaid fees
A member in public practice should not accept an audit assignment
previously carried out by another member, without first ensuring that the
other member has been properly removed from office as auditor and that all
outstanding fees due to the other member have been fully paid.
b.
Acceptance of an audit engagement
ISQC 1 requires the firm to establish policies and procedures to provide it
with reasonable assurance that the firm will only take on or continue work
where the firm:
i.
Is competent to perform the engagement;
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ii.
Has the capabilities and necessary resources to do so;
iii.
Can comply with the relevant ethical requirements; and
iv.
Has considered the integrity of the client and does not have
information which would lead it to conclude that the client lacks
integrity.
The policies and procedures should include requiring the firm to:
i.
Obtain sufficient information to make such decisions (for new or
existing engagements);
ii.
Consider potential conflicts of interest and therefore whether or not it
should accept the engagement; and
iii.
Document all identified issues and how they were resolved.
These requirements mean that there should be a review of proposed new
clients and (at regular intervals) of existing clients, to make sure that the
firm will be independent, that there are no conflicts of interest and the firm
has the technical competence to do the audit work.
When an audit firm accepts an audit engagement from a new client, suitable
procedures should therefore be carried out to ensure that:
i.
The firm will be independent and there are no conflicts of interest;
ii.
The firm has the technical competence to do the work ;
iii.
Professional clearance has been obtained from the previous auditors
of the new client; and
iv.
Appropriate anti-money laundering procedures are performed.
Before the start of the audit each year, the engagement partner for the audit
should:
i.
Ensure that all members of the audit team are independent of the
client and there are no conflicts of interest; and
ii.
Be satisfied with the ethical integrity of the client entity and its
management; and
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c. Matters to be considered before assigning personnel to audits as required by
ISQC 1
i.
ISQC 1 requires the firm to ensure:

It has sufficient personnel with the competence, capabilities
and commitment to ethical principles to meet its overall quality
control objectives, and

That for each engagement, an appropriate engagement partner
and team are assigned.
ii.
Policies should, therefore, exist for the recruitment, training and
development of staff. The firm should ensure compliance with ISQC1
and audit staff should have a good knowledge of accounting
standards and local/national statutory accounting regulations;
iii.
The firm‟s technical auditing procedures should be set out in a
manual and reinforced by training. Newsletters and/or meetings could
be used as a means of ensuring that professional staff are kept up-todate on current developments;
iv.
Work should be assigned to staff that are competent to perform that
work. There should be procedures for ensuring that an audit team
collectively has the appropriate level of technical knowledge for the
audit engagement and includes individuals with:
v.

Experience of audits of a similar complexity; and

An ability to apply professional judgement.
Policies and procedures are required to include:

Those to promote consistent quality engagement performance;

Supervision responsibilities; and
Review responsibilities on the basis that more experienced
team members review the work of less experienced team
members.
Guidance on consultation to ensure that:

vi.

Appropriate consultation takes place on difficult or contentious
Matters;
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vii.

Sufficient resources are available for such consultation;

The nature, scope and conclusions of the consultation are
documented by both parties; and

Conclusions arising from the consultation are implemented.
Guidance on engagement quality control reviews to ensure that:

An engagement quality control review is required for audits
of all listed entity clients;

Criteria are established to determine which other
engagements should be subject to an engagement quality
control review;
The review covers certain procedures;


Engagement quality control reviewers are eligible to carry out
such reviews via technical qualifications, experience,
authority and objectivity from the engagement;
and

Engagement
documented.
quality
control
reviews
are
properly
Examiner‟s report
The question tests candidates‟ knowledge on issues of acceptance of audit
assignment and quality control matters to be considered before accepting an audit
engagement.
About 70% of the candidates attempted the question and performance was poor.
Candidates were at a loss as to the requirements of the question. Their solutions
were not detailed enough to garner sufficient marks.
Candidates are enjoined to read the study text very well and understand the
requirements of questions before attempting them.
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Marking guide
a.
b.
c.
Marks
Marks
2
2
5
1
10
Acceptance of an audit engagement
ISQC 1 requirements
Policies and procedures
After acceptance
What to do before audit starts
1
1
1
1
4
Requirements of ISQC 1 on human resources
2
Policies and procedures required in engagement
performance
Total
4
Procedure before accepting a new audit
appointment
Client identification
Professional enquiry
Unpaid fees
6
20
Solution 5
a.
Development of work plan in accordance with ISAE 3400
i.
ISAE 3400 - The Examination of Prospective Financial Information
(PFI) provides guidance on


The examination of PFI; and
Reporting on PFI
It focuses mainly on numerical information and numerical forecasts or
predictions.
ii.
Many of the points relevant to deciding whether to accept any audit
or assurance engagement will apply to accepting a PFI assurance
engagement. Issues to consider will include, for example:

The availability of resources and staff with the necessary
expertise;

The timescale for the completion of the engagement; and
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
b.
Agreeing a fee for the work with the client.
iii.
The accountant should also establish with the client the form that the
assurance report should take. It is particularly important that the
client should understand that in a review of forward-looking
information, only negative assurance can be provided.
iv.
The client should also be informed that the audit firm will comply
with the requirements of ISAE 3400 when reviewing the prospective
financial information.
v.
An engagement letter should be agreed and signed by both parties
before the work is actually started.
Procedures to be followed in a PFI assurance engagement
There are several specific points that might apply to PFI engagements which
include:
i.
Understanding the nature of the information to be examined;
ii.
Establishing the intended use of the information and the intended
recipients of the final report;
iii.
Establishing whether the information will be for general distribution
or limited distribution to a small number of users;
iv.
The nature of the assumptions that have been made by management
whether or not they are best estimate assumptions for a forecast, or
hypothetical assumptions for the purpose of making a projection; and
v.
The time period covered by this information.
When deciding the nature, timing and extent of the procedures required to
complete a PFI assurance engagement, the auditor should consider the
following issues:
i.
The likelihood of material misstatement in the forecast or projection;
ii.
The knowledge that the auditor has obtained during any previous
similar engagements;
iii.
The competence of the client‟s management with regard to the
preparation of PFI;
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iv.
The extent to which the PFI is affected by management‟s judgment, in
other words, to what extent does the PFI depend on judgment about
best estimates or hypotheses; and
v.
The adequacy and reliability of the underlying data and assumptions
that have been used as the basis for preparing the prospective
financial information.
The general approach to the assurance work should be similar to the
approach for audit work or other assurance work, but with some
modifications to allow for the specific nature of the work.
Procedures will include the following:
i.
Where the audit firm has no previous knowledge of the entity, it
should obtain sufficient knowledge of the entity and its environment;
ii.
If best estimate assumptions have been used in preparing the PFI (a
forecast), the auditor should seek evidence to support these estimates;
iii.
If hypothetical assumptions have been used to prepare a projection,
the auditor should assess whether they are realistic and sensible, and
whether the full implications of the hypothetical assumptions have
been properly reflected in the PFI;
iv.
The auditor should assess whether the PFI contains all the relevant
material items and that nothing of significance has been omitted; and
v.
If part of the „future period‟ in the forecast or projection has already
passed, the auditor should review the actual results for that part of the
period, and compare actual results with the forecast or projection. The
differences will help the auditor to assess the reliability of the forecast
or accuracy of the projection.
c. Reporting outline on PFI engagement
A report from the audit/accountancy firm on PFI should contain the following
elements:
i.
Title;
ii.
Addressee;
iii.
Identification of the PFI, for example, by page references to pages in
same document as the report, where the PFI can be found;
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vi.
A reference to ISAE, 3400;
v.
A statement that management is responsible for the PFI, including
the assumptions on which it is based;
vi.
A reference to the purpose of the PFI and/or the restricted
distribution of the report to a limited number of users;
vii.
A statement of negative assurance as to whether the assumptions
that management have made provide a reasonable basis for the PFI;
viii.
An opinion as to whether or not the PFI is properly prepared on the
basis of these assumptions, and whether or not the PFI is presented
in accordance with the relevant financial reporting framework;
ix.
The report should also contain warnings that the PFI is a forecast or
projection, and the results indicated by the PFI might not be
achieved; and
x.
Date, address and signature of the accountant/auditor.
Marking guide
a.
b.
Guidance provided by ISAE 3400
Issues to consider when deciding to accept PFI
engagement
Procedures in a PFI assurance engagement
c.
Outlines of a report in respect of PFI
Marks
2
Marks
3
5
5
Total
10
20
Examiner‟s report
The question tests candidates‟ knowledge of prospective financial information
engagement.
About 30% of the candidates attempted the question and performance was poor.
The common pitfall of the candidates was that they were neither able to develop a
work plan nor evaluate procedures to be carried out before accepting the
engagement.
Candidates are advised to read widely, particularly ICAN Study Text before
attempting future examinations.
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Solution 6
Emtex Engineering and Construction Company Limited
a.
Details of the additional background information required to assess the
extent of loss occasioned by the destruction, and its impact on the financial
statements of the company include:
i.
Determine Expected Outcome of the Contract - Costs and revenue
should be accounted for using stage of completion method;
ii.
Calculate the stage of completion - Completion is due in three years,
that is, end of February 2021. This is done by valuing the work
certified as completed as a percentage of total contract price;
iii.
Determine the amounts to be recognised in income statement for
profit, revenue and cost, recognising that substantial part of the work
on the contract, equipment and materials were destroyed early in the
contract period;
iv.
When stage of completion is calculated using value based method,
revenue to be recognised is equal to the value of work certified as
complete. Profit is calculated based on the percentage of completion
of the contract whereas cost recognised in the income statement is the
balancing amount arrived at by calculating the difference between
revenue and profit;
v.
Calculate amounts to be recognised in the statement of financial
position for gross amounts due to/from customers and trade
receivables;
vi.
Consider going concern issues due to destruction of equipment and
materials.
vii.
Trade receivables are calculated by finding the difference between
amount billed to the customer for progress payments and the amount
of progress payments received from the customer;
viii.
Prepare extracts of financial statements in respect of the construction
contracts; and
ix.
Prepare construction contract control account.
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b.
Technical accounting considerations as per IAS 10
These include:
c.
i.
Defining events after the reporting period (as defined by IAS 10) has
been properly applied;
ii.
Ensuring that correct distinction between adjusting and non-adjusting
events after the reporting period has been made;
iii.
Ensuring that adjustments have been made correctly for adjusting
events, in accordance with the appropriate IAS/IFRS; and
iv.
Confirmation that non-adjusting events have been adequately
disclosed.
Disclosures for non-adjusting events after the reporting period
These include:
i.
Non-adjusting events after the reporting period are treated
differently. A non-adjusting event relates to conditions that did not
exist at the end of the reporting period; therefore, the financial
statements must not be updated to include the effects of the event.
IAS 10 states quite firmly: „An entity shall NOT adjust the
amounts recognised in its financial statements to reflect nonadjusting events after the reporting period‟;
ii.
However, IAS 10 states that if a non-adjusting event is material, a
failure by the entity to provide a disclosure about it could influence
the economic decisions taken by users of the financial statements. For
material non-adjusting events, IAS 10, therefore, requires disclosure
of:

The nature of the event; and

An estimate of its financial effect or a statement that a
reasonable estimate of the effect cannot be made.
This information should be disclosed in a note to the financial statements.
IAS 10, gives the following examples of non-adjusting events;
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d.
i.
A fall in value of an asset after the reporting period, such as a large
fall in the market value of some investments owned by the entity,
between the end of the reporting period and the date the financial
statements are authorised for issue;
ii.
The acquisition or disposal of a major subsidiary;
iii.
The formal announcement of a plan to discontinue a major operation.
iv.
The announcement or commencement of the implementation of a
major restriction; and
v.
The destruction of a major plant by fire insurgent activities after the
reporting period.
i.
Benefits relating to the asset in the context of IFRS 15
If a performance obligation is not satisfied over time, an entity
satisfies the performance obligation at a point in time. To determine
the point in time at which a customer obtains control of a promised
asset and the entity satisfies a performance obligation, the entity shall
consider the requirements for control. In addition, an entity shall
consider indicators of the transfer of control, which include, but are
not limited to, the following:

The entity has a present right to payment for the asset
If a customer is presently obliged to pay for an asset, then that
may indicate that the customer has obtained the ability to
direct the use of, and obtain substantially all of the remaining
benefits from, the asset in exchange;

The customer has legal title to the asset
Legal title may indicate which party to a contract has the
ability to direct the use of, and obtain substantially all of the
remaining benefits from, an asset or to restrict the access of
other entities to those benefits. Therefore, the transfer of legal
title of an asset may indicate that the customer has obtained
control of the asset. If an entity retains legal title solely as
protection against the customer‟s failure to pay, those rights of
the entity would not preclude the customer from obtaining
control of an asset;

The entity has transferred physical possession of the asset
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The customer‟s physical possession of an asset may indicate
that the customer has the ability to direct the use of, and obtain
substantially all of the remaining benefits from the asset or to
restrict the access of other entities to those benefits. However,
physical possession may not coincide with control of an asset,
for example, in some repurchase agreements and in some
consignment arrangements, a customer or consignee may have
physical possession of an asset that the entity controls.
Conversely, in some bill-and-hold arrangements, the entity may
have physical possession of an asset that the customer controls;
ii.

The customer has the significant risks and rewards of
ownership of the asset
The transfer of the significant risks and rewards of ownership of
an asset to the customer may indicate that the customer has
obtained the ability to direct the use of, and obtain
substantially all of the remaining benefits from the asset.
However, when evaluating the risks and rewards of ownership
of a promised asset, an entity shall exclude any risks that give
rise to a separate performance obligation in addition to the
performance obligation to transfer the asset. For example, an
entity may have transferred control of an asset to a customer
but not yet satisfied an additional performance obligation to
provide maintenance services related to the transferred asset;

Collection of consideration to which an entity is entitled;

Commitment of parties to performance of obligation; and

The customer has accepted the asset
The customer‟s acceptance of an asset may indicate that it has
obtained the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the asset over
time.
Criteria given in IFRS 15 that must be met for an entity to recognise
revenue over time.
According to IFRS 15, the criteria that must be met for revenue to be
recognised are as follows:

Identification of the contract to a client;

Identification of the performance obligation in the contract;

Determination of transaction (contract) price;

Allocation of contract price to each performance obligations;
and
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
Recognition of revenue when or as each performance
obligation is satisfied.
Marking guide
Marks
a.
Background information required to assess the extent
of loss occasioned by the destruction of the company
b.
Technical accounting consideration as required by IAS 10
c.
Disclosures required for non-adjusting events after
the reporting period as per IAS 10
2
Information to be disclosed in a note to the financial
statements as per IAS 10
2
d.
i. Benefits relating to the assets in the context of IFRS
15
Marks
7
3
10
4
3
ii. Conditions to be satisfied for revenue recognition
as stipulated by IFRS 15:
Identify the contract to a client;
Identify the performance obligations in the
contract;
Determine transaction (contract) price;
Allocate contract price to each performance
obligation;
Recognise revenue when or as each performance
obligation is satisfied
Total
3
6
20
Examiner‟s report
The question tests candidates‟ knowledge on the requirements of IAS 10 –
Accounting for Post Balance Sheet Events, and IFRS 15 – Revenue from Contracts
with Customers in an Audit Engagement.
About 10% of the candidates attempted the question and performance was woeful.
The common pitfall was that the candidates were unable to apply the requirements
of IAS 10 and IFRS 15 to the given business scenarios.
Candidates are enjoined to read ICAN Study Text properly before embarking on
future examinations.
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
NOVEMBER 2020 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
and
Examiner‘s Reports
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2020
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX QUESTIONS IN
THIS PAPER
COMPULSORY QUESTION
(40 MARKS)
QUESTION 1
You are a manager in Obuns & Co, a firm of Chartered Accountants, responsible for
the audit of Akudre Plc, a listed entity, for the year ended 31 May 2020. The
company operates in the textile industry. It manufactures a range of goods
including clothing, linen and soft furnishings. The company employs a team of
approximately 750 sales staff around the country who sell the company‘s products
to both households and small to medium-sized businesses. Your firm was appointed
as auditor in January 2020. Around 75% of Akudre Plc‘s sales transactions are cashbased and each of the company‘s sales staff prepares a cash sales report on a
monthly basis.
According to Akudre Plc‘s Chief Executive Officer, Adu Oke, and in order to foster
‗an entrepreneurial spirit‘ amongst his staff, each staff member (including the
senior management team) is encouraged to make cash sales on a commission basis
to friends and family. Mr. Oke leads the way with this scheme and recently sold
products with a value of N4,000,000 to his business associates. He transferred these
funds directly into an off-shore bank account in the company‘s name to which he is
the sole signatory.
Review of audit working papers
Your review of the audit working papers and an initial meeting with Mr. Oke
identified the following potential issues.
The audit engagement letter and the working papers of the taxation section of the
audit file, you established that Obuns & Co. performed the taxation computation for
Akudre Plc and completed the tax returns for both the company and Mr. Oke. All of
the taxation services have been invoiced to Akudre Plc as part of the total fee for
the audit and professional services. Mr. Oke‘s personal tax return includes a
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significant number of transactions involving the purchase and sale of properties in
various international locations.
The taxation working papers include a detailed review of a number of off-shore
bank accounts in Mr. Oke‘s name which identified the transactions on the
properties.
Financing
In addition, the audit committee requests that the audit engagement partner
attends a meeting with the company‘s bank officials, which is planned to be held
the week after the auditor‘s report is issued. The purpose of the meeting is for the
company to renegotiate its existing lending facility and to extend its loan. The
meeting will be attended by the Chief Finance Officer, a representative of the audit
committee, as well as the bank manager. The company is hoping that the audit
partner will be able to confirm the company‘s strong financial position at the
meeting, and also confirm that the audit included procedures on going concern,
specifically the audit of the company‘s cash flow forecast for the next two years,
which the bank has requested as part of their lending decision.
Required:
a.
Discuss the policies and procedures which Obuns & Co. should have in place
in relation to an anti-money laundering programme.
(5 Marks)
b.
Evaluate whether there are any indicators of money laundering activities by
either Akudre Plc or its staff.
(4 Marks)
c.
Describe the requirements of ISA 250: Consideration of Laws and Regulations
in an Audit of Financial Statements.
(5 Marks)
d.
Discuss the actions required when an auditor identifies or suspects material
instances of non-compliance by a client with the requirements of ISA 250.
(5 Marks)
e.
Using the information provided in the financing section, identify and
evaluate any ethical threats and other professional issues which arise from
the requests made by the audit committee.
(3 Marks)
f.
If it is the view of the auditors that the loan finance is essential to the
continued survival of the company and that at the time of reporting the
absence of a finalised agreement represents a material uncertainty
regarding going concern.
Evaluate the additional audit procedures that the auditor would carry out to
ascertain if a material uncertainty exists.
(10 Marks)
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g.
i
ii.
iii.
iv.
Evaluate the impact of the following scenarios on the audit report:
Use of going concern assumption appropriate but a material
uncertainty exists
Use of going concern assumption appropriate, a material uncertainty exists
and adequate disclosures have been made in the financial statements
Use of going concern assumption appropriate, a material uncertainty exists
but disclosures made in the financial statements are inadequate
Use of going concern assumption inappropriate
(8 Marks)
(Total 40 Marks)
SECTION B: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE
QUESTIONS IN THIS SECTION
(60 MARKS)
QUESTION 2
You are the engagement partner on the audit of Uchenna & Associates. The audit
senior sent you the schedule of uncorrected misstatements as shown below,
including notes to explain each matter included in the schedule.
Profit or loss
A
b
c
Litigation provision
Restructuring provision
Correction of deprecation
Statement of financial
position
Debit
Credit
Debit
Credit
20,000,000
20,000,000
13,000,000 13,000,000
5,000,000
5,000,000
The audited financial statements recognised revenue of N250 million and total
assets of N1.24 billion. The materiality threshold was determined as N12.5million.
You are holding a meeting with the management tomorrow, at which the
uncorrected misstatements will be discussed.
Notes:
(i)
The entity was involved in a litigation in respect of a dispute with a customer
over the quality of goods shipped. The customer had obtained a court
judgement against Uchenna & Associates and was awarded N20million in
damages. Uchenna & Associates has appealed the judgement and its
solicitors are confident that it would win the appeal. Management has not
recognised any amount in the financial statements in relation to the
litigation, arguing that they are likely to win the appeal. The audit
conclusion is that a provision should be included in the financial statements.
(ii)
Management had recognised a provision in respect of a restructuring
involving the closure of one of its factories. Management approved the
closure at a board meeting in April 2019, but no announcement has been
made to the employees.
The audit conclusion is that the provision should not be recognised.
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(iii)
a.
b.
The audit team had recomputed depreciation expense and noted an
understatement of N5,000,000.
Required:
Explain the requirements of ISA 450: Evaluation of Misstatements
Identified during the Audit, with regards to uncorrected audit
misstatements.
(15 Marks)
The matters which should be discussed with management in relation to
each of the uncorrected misstatements.
(5 Marks)
(Total 20 Marks)
QUESTION 3
You are the Audit Manager at HWO, an audit firm. HWO has secured the audit of SIGMA
For Africa, a not-for-profit organisation. You have been assigned the audit of SIGMA
For Africa. The extract of the unaudited financial statements is as follows:
SIGMA For Africa
Statement of financial position
Notes
As at 31 December
2019
2018
N‘000
N‘000
76,465
90,492
Non-current assets
3
Other assets
4
28,659
1,327
Current Assets:
Receivables
Cash and cash equivalents
Total assets
5
6
29,636
196,546
331,306
39,486
476,087
607,392
Long term liabilities
7
63,908
66,853
Current Liabilities:
Suppliers and service providers
Creditors and credit balances
Total liabilities
8
9
(B)
34,509
92,164
190,581
69,776
158,985
295,614
Total assets less liabilities:
(A)-(B)
140,725
311,778
50,495
90,230
140,725
219,959
91,819
311,778
(A)
Accumulated fund (Unrestricted net assets):
Used for current activities
Used for non-current assets and other assets
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SIGMA for Africa
Statement of activities
Notes
Income from activities
Cost of activities
Net income from activities
General and administrative expenses
Net deficit for the year
10
11
12
For the year ended
31 Dec 2019
31 Dec 18
N‘000
N‘000
2,456,890
2,863,219
(1,245,679)
(1,734,568)
1,211,211
1,128,651
(1,382,264)
(1,416,036)
(171,053)
(287,385)
Furthermore, you were assigned an audit senior. Based on preliminary discussions
with your audit senior, you noted that the senior had no prior experience with audits
of not-for-profit entities.
Required:
To help your audit senior understand how to audit a not-for-profit organisation,
prepare a presentation note summarising the key considerations in the audit for the
following areas:
a. Planning
(4 Marks)
b. Risk analysis
(4 Marks)
c. Internal control
(4 Marks)
d. Audit evidence
(4 Marks)
e. Reporting
(4 Marks)
(Total 20 Marks)
QUESTION 4
Holloway Interiors Limited operates a large shop at Garki, Abuja. The company‘s year
end is April 30. The company sells expensive furniture and does interior decoration.
Normally, a sale transaction is initiated when a walk-in customer signs off on an
invoice duly filled by the sales clerk. The customer pays for the goods using cash,
bank transfers or POS. The sales clerk records the sale on the system and prints out a
receipt in duplicate. The customer gets a copy and the sales clerk files the second
copy. Thereafter, the customer carries the purchased item away or the company
delivers the item. However, due to the COVID 19 pandemic, the Federal Government
announced a lock down of Abuja, thereby imposing a restriction on movement of
goods and persons. In response, the company closed its showrooms and all of its
products were showcased online and all sales were made online. Furthermore, the
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company delivers all purchases by customers and customers are given the choice to
pay before or after delivery. Due to the logistics of delivery, sometimes the delivery of
items can take a week after the sale was initiated online.
You are the Audit Manager on the audit of Holloway Interiors Limited.
Required:
a.
Discuss the general IT controls that you expect to find in Holloway Interiors.
(10 Marks)
b. Discuss the FIVE steps model of recognising revenue under the requirements of
IFRS 15 Revenue from Contracts with Customers.
(10 Marks)
(Total 20 Marks)
QUESTION 5
Maideline Nigeria Limited manufactures tyres for use by cars, trucks and trailers.
The company is owner-managed, that is, the shareholders are also the directors of
the company. On June 1, 2020, the directors made a decision to wind up the
company. The high cost of operating in the country, the depreciation of the Naira
against the US dollar and the economic impact of COVID 19 has led to harsh
operating conditions that had severely impacted the entity‘s ability to carry on
business in the country.
Management notified the employees, suppliers and customers that Maideline would
cease all manufacturing activities on September 30. All the factory workers and
most of the employees in the accounts and administration departments were
terminated, effective September 30. Most of the employees who remained in
employment with the company after September 30 will be made redundant on
November 30. However, the company retained a small head office operations,
consisting of the Company Secretary and a small accounting and administrative
support team. This head office unit will continue to operate for a few more years
until the company‘s operations are wound down completely.
Maideline had 20 branches and a head office. 12 of these branches operate from
buildings owned by the company. The remaining 8 branches operate from leased
buildings. The expiration of the lease terms ranges from three to five years. Under
the terms of the lease agreements, none of these premises can be sub-let and the
leases cannot be sold.
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On the adoption of IFRS 16, the entity had assumed that the lease will be renewed
at the end of the lease tenure and had recorded a lease liability and a right-of-use
asset. A small head office building will continue to be occupied and used until the
lease expires in three years‘ time. Maideline accounts for all its tangible noncurrent assets at cost less depreciation. The entity had recognised deferred tax
assets in prior years due to unrelieved tax losses and unutilised capital allowances.
All the products sold by Maideline carry a one-year warranty. Until May 31, 2020,
the company sold extended two-year and three-year warranties, but extended
warranties were not offered on any products sold from March 1, 2020. Maideline
sold its products through national and international distributors, under three-year
agreements. Maideline also had annual contracts with its major suppliers for the
purchase of components. So far, none of the distributors or suppliers has initiated
legal proceedings against Maideline for breach of contract. However, some
distributors are withholding payments from Maideline on their account balances,
awaiting settlement of the penalty payments they claimed are now due to them
from Maideline.
Required:
Using the information provided, identify and explain the financial statement risks
to be taken into account in planning the final audit of Maideline in respect of the
year ended December 31, 2020.
(20 Marks)
QUESTION 6
Nash Investigations Limited specialises in conducting investigations for corporate
clients. It employs ex-police officers, security consultants, IT and fraud specialists.
Nash Investigations recently dropped its firm of auditors and has approached your
firm to participate in a tender process for selecting the new auditor. You are a
manager in the audit firm and you will be working with a senior auditor on this
assignment. The senior auditor has never been involved in a tender process or
appointment of new auditor. You have been provided with the following
information:
(i)
Nash Investigations is a major service provider to your firm, particularly in
the provision of IT and fraud consultancy;
(ii)
Nash Investigations has acrimoniously dropped their previous auditors and
are withholding fees, pending the resolution of a number of issues especially
to their accusations on the competence of the auditors;
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(iii)
Nash Investigations is currently facing a hostile take-over bid from Technical
Investigations Group, a company you also audit;
Media reports of a fraud allegation leveled against one of the directors of the
Company; and
One of the partners in the audit firm is also a director in Nash Investigations.
(iv)
(v)
Required:
Prepare briefing notes to explain the following matters to the audit senior:
a.
The audit tendering process in terms of the stages that the audit firm will go
through should it decide to participate in the tender.
(5 Marks)
The requirements of the ICAN Code of conduct on advertising and publicity
(5 Marks)
The requirements of the ICAN code of conduct on fees
(5 Marks)
The impact of each additional piece of information provided above and how
the information would influence your decision to participate in the audit
tender for Nash Investigations.
(5 Marks)
(Total 20 Marks)
b.
c.
d.
SOLUTION 1
1a. The policies and procedures which Obuns & Co. should have in place in
relation to an anti-money laundering programme include the following:
i.
Putting in place systems, controls and procedures to ensure that the
firm is not used for money laundering purposes;
ii.
Appointing a Money Laundering Reporting Officer (MLRO), whose
responsibility is to receive reports on suspected money laundering
activities from firm‘s employees and report them to the appropriate
authorities;
Establishing and enhancing record-keeping systems for all
transactions (which must be kept for at least five years, with controls
to ensure that they are not inadvertently destroyed);
iii.
iv.
Establishing and enhancing record-keeping systems for verifying the
identity of clients (by obtaining official documents, such as – for an
individual – passport or driving license, supported by recent utilities
bills, and for a company – certificate of incorporation and Tax
Identification Number (TIN));
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v.
vi.
b.
Training and educating staff on procedures for detecting and reporting
suspicions of money laundering activities.
Indicators of possible money laundering activities by both Mr. Oke and the
company include the following:
i.
ii.
iii.
iv.
v.
c.
Establishing procedures within the firm for reporting any suspicion of
money laundering by the client; and
The number of staff involved in cash sales and the difficulty in
ensuring that all cash takings enter the proper channel;
Mr. Oke‘s personal tax returns includes a significant number of
transactions involving the purchase and sale of properties in various
international locations;
The taxation working papers include a detailed review of a number of
off-shore bank accounts in Mr. Oke‘s name which identified the
property transactions;
Each staff (including the senior management team) is encouraged to
make cash sales and is paid on a commission basis to sell the
company‘s products to friends and family; and
When Mr. Oke recently sold products with a value of N4,000,000 to his
business associate, he transferred the funds directly into an off-shore
bank account in the company‘s name to which he is the sole signatory
ISA 250: Consideration of Laws and Regulations in an Audit of Financial
Statements requires the auditor to:
i.
ii.
iii.
iv.
v.
Obtain a general understanding of the applicable legal and
regulatory framework and how the entity is complying with that
framework. This is part of obtaining an understanding of the entity
and its environment – here, the legal environment – as required by
ISA 315 (Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and its Environment);
Obtain sufficient appropriate audit evidence in respect of compliance
with those laws and regulations which might be expected to have a
direct effect on material amounts and disclosures in the financial
statements;
Make enquiries of management as to whether or not the entity is
complying with the relevant laws and regulations;
Inspect any correspondence with the relevant authorities;
During the audit, remain alert to the possibility that other audit
procedures might bring instances of non-compliance to the auditor‘s
attention;
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vi.
vii.
d.
When an auditor identifies or suspects material instances of non-compliance
with the requirement of ISA 250, the following actions are required:
i.
ii.
iii.
iv.
v.
vi.
e.
Obtain written representations from management that all known
instances of non-compliance or suspected non-compliance have been
disclosed to the auditor; and
Document all identified or suspected instances of non-compliance and
the results of discussions with management and/or other parties.
Obtain an understanding of the nature of the act and the
circumstances under which it has occurred;
Evaluate the possible effect of the non-compliance on the financial
statements;
For suspected non-compliance, discuss the matter with management.
If compliance is not demonstrated, take legal advice;
If there is insufficient evidence of a suspected non-compliance,
consider the impact on the audit report;
Consider whether or not the non-compliance impacts on other areas of
the audit (for example, on the overall risk assessment); and
Consider how to report the non-compliance – to those charged with
governance and/or to shareholders and/or to the authorities.
Ethical threats and professional issues arising from the request made by the
audit committee include the following:
i.
The audit committee has asked the audit engagement partner to
attend a meeting with the bank, the objective of the meeting being
the renegotiation of the company‘s loan. This is an advocacy threat to
objectivity, as the audit partner will be supporting the client in its
renegotiation and may be perceived as supporting or confirming the
company‘s financial position;
ii.
If the partner were to attend the meeting and confirm the strength of
the company‘s financial position, or confirm any work performed on
the cash flow forecast, there could be legal implications;
iii.
Partner attending the meeting and confirming the company‘s strong
position would potentially expose the audit firm to liability; it could
be perceived that the audit firm is in some ways guaranteeing the
loan or guaranteeing that the company is in a position to service the
debt;
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f.
iv.
The partner‘s attendance at the meeting could be seen as supporting
the company in its attempt to raise further finance; and
v.
These ethical issues should be discussed with the audit committee,
with an explanation provided as to why the audit firm should not
attend the meeting with the bank.
The following are additional audit procedures which the auditor would carry
out to ascertain whether a material uncertainty exists:
i.
Discussions with management: Inquire of management as to the
validity of its going concern assumptions and implications of these
assumptions and also future plans for the business.
Where management has not yet performed an assessment of the
entity‘s ability to continue as a going concern, a request should be
made that an assessment be carried out by management;
ii.
Evaluation of management‘s future plans and actions: The auditor
should carry out an evaluation of management‘s future plans and
actions with regards to its going concern assessment. The auditor
should also assess whether the outcome of these plans would improve
the situation and the feasibility of these plans;
iii.
Obtain a cashflow forecast: Where the entity has prepared a cashflow
forecast, the auditor should discuss with management, evaluate the
reliability of the underlying data generated to prepare the forecast
and determine whether there is adequate support for the assumptions
underlying the forecast.
The auditor should consider whether any additional facts or
information have become available since the date on which
management made its assessment;
iv.
Information from the client‘s bank: If the client is expecting to rely on
continuing financial support from its bank (for example, a
continuation of its bank overdraft facility) the bank should be asked
to confirm that the finance will be available;
v.
Requesting management representation: The auditor should obtain
written representations from management and where appropriate,
those charged with governance, regarding their plan for future action
and the feasibility of these plans; and
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g.
vi.
Management‘s assumptions: Where management assumptions include
continued financial support by third parties, and such support is
important to the ability of the entity to continue as a going concern,
the auditor may need to request written confirmations, including
terms and conditions from those third parties and to obtain evidence
about their ability to provide support.
i.
Use of going concern assumption appropriate but a material
uncertainty exists.
If the auditor concludes that the use of the going concern assumption
is appropriate in the circumstances but a material uncertainty exists,
the auditor shall determine whether the financial statements:


ii.
Adequately describe the principal events or conditions that may
cast significant doubt on the entity‘s ability to continue as a going
concern and management‘s plans to deal with these events or
conditions; and
Disclose clearly that there is a material uncertainty related to
events or conditions that may cast significant doubt on the entity‘s
ability to continue as a going concern and, therefore, that it may
be unable to realize its assets and discharge its liabilities in the
normal course of business.
Use of going concern assumption appropriate, a material uncertainty
exists and adequate disclosures have been made in the financial
statements.
If adequate disclosure is made in the financial statements, the auditor
shall express an unmodified opinion and include an emphasis of
matter paragraph in the auditor‘s report to:


iii.
Highlight the existence of a material uncertainty relating to the
event or condition that may cast significant doubt on the entity‘s
ability to continue as a going concern; and
Draw attention to the note in the financial statements that
discloses the relevant matters.
Use of going concern assumption appropriate, a material uncertainty
exists but disclosures made in the financial statements are inadequate

If adequate disclosure is not made in the financial statements,
the auditor shall express a qualified opinion or adverse
opinion, as appropriate, in accordance with ISA 705
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(Modifications to the Opinion in the Independent Auditor‘s
Reports).
The auditor shall state in the auditor‘s report that there is a
material uncertainty that may cast significant doubt about the
entity‘s ability to continue as a going concern.

iii.
Use of going concern assumption inappropriate
If the financial statements have been prepared on a going
concern basis, but in the auditor‘s judgment, management‘s
use of the going concern assumption in the financial
statements is inappropriate, the auditor shall express an
adverse opinion.
The auditor may give an unmodified opinion if the financial
statements have been prepared on an alternative acceptable
basis (for example, a break-up basis) and there is adequate
disclosure of this basis. An emphasis of matter paragraph may
be required in the auditor‘s report to highlight the alternative
acceptable basis.


Marking Guide
a)
b)
c)
d)
e)
f)
g)
1 mark each for any 5 points
1 mark each for any 4 points
1 mark each for any 5 points
1 mark each for any 5 points
1 mark each for any 3 points
2. marks each for any point subject to a maximum of
five (5) points
1 mark each for any 2 points in the four (4) solutions
Marks
5
4
5
5
3
10
8
40
Examiner’s Report
The question tests candidates‘ knowledge of the regulations that need to be
complied with by companies and the extent of such compliance. It also tests ethical
threats and going concern assumptions on auditors‘ reports.
This being a compulsory question, about 90% of the candidates attempted it but the
performance was below average.
The commonest pitfalls of the candidates were the lack of essential knowledge of
the regulatory frameworks and the difficulty in the identifying the indicators of
money laundering activities.
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Candidates are advised to familiarize themselves with the various regulatory
frameworks and study the Institute‘s Study Text and Pathfinders.
SOLUTION 2
a.
ISA 450: Evaluation of Misstatements Identified during the Audit requires the
following from the auditor with regards to uncorrected misstatements:
i.
Communication with management: The auditor should communicate
on a timely basis all audit misstatements with the appropriate level of
management unless prohibited by law or regulations from doing so.
If management refuses to correct all or some of the misstatements
communicated by the auditor, he shall obtain an understanding of
management‘s reasons for not making the corrections and shall take
that understanding into account when evaluating whether the
financial statements as a whole are free from material misstatements;
ii.
Evaluate the effect of uncorrected misstatements: Prior to evaluating
the effect of uncorrected misstatements, the auditor shall reassess
materiality determined in accordance with ISA 320 to confirm
whether it remains appropriate in the context of the entity‘s actual
financial results.
The auditor shall determine whether uncorrected misstatements are
material, individually or in aggregate. In making this determination,
the auditor shall consider:
iii.
-
The size and nature of the misstatements, both in relation to
particular classes of transactions, account balances or
disclosures and the financial statements as a whole, and the
particular circumstances of their occurrence; and
-
The effect of uncorrected misstatements related to prior periods
on the relevant classes of transactions, account balances or
disclosures, and the financial statements as a whole;
Communication with those charged with governance:
The auditor shall communicate with those charged with
governance uncorrected misstatements and the effect that they,
individually or in aggregate, may have on the opinion in the
auditor‘s report, unless prohibited by law or regulation.
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-
The auditor‘s communication shall identify material
uncorrected misstatements individually. The auditor shall
request that uncorrected misstatements be corrected.
-
The auditor shall also communicate with those charged with
governance the effect of uncorrected misstatements related to
prior periods on the relevant classes of transactions, account
balances or disclosures, and the financial statements as a
whole;
iv.
Audit documentation: The auditor shall include in the audit
documentation the following matters:
The amount below which misstatements would be regarded as
clearly trivial;
All misstatements accumulated during the audit and whether
they have been corrected; and
The auditor‘s conclusion as to whether uncorrected
misstatements are material, individually or in aggregate, and
the basis for that conclusion;
v.
Accumulate all misstatements found during the audit unless they are
clearly trivial;
vi.
Prior to evaluating the effect
reassessing materiality;
vii.
If the total of misstatements identified during the audit approach (or
could approach) materiality, decide if the overall audit strategy and
audit plan need to be revised;
viii.
Communicate all misstatements found during the audit to an
appropriate level of management and request that the misstatements
be corrected; and
ix.
Written representations: The auditor shall request a written
representation from management or those charged with governance
whether they believe the effects of uncorrected misstatements are
immaterial, individually and in aggregate, to the financial statements
as a whole. A summary of such items shall be included in or attached
to the written representation.
of
uncorrected
misstatements,
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b.
The following matters should be discussed with management in relation to
each of the uncorrected misstatements:
i.
ii.
iii.
Litigation provision

The amount of N20m exceeds the materiality threshold of
N12.5m. The item is clearly material.

The precarious nature of litigation is such that the outcome
cannot be determined while litigation is still in progress. The
opinion of the company‘s lawyers cannot be relied upon as a
basis to exclude the provision in the financial statements.

The fact that the customer won the case against Uchenna &
Associates tilts the case in favour of the customer, although the
result of the Appeal is yet to be ascertained.
Restructuring provision

The adjustment in relation to the provision is material to profit.
The provision appears to have been recognised too early.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets,
requires that for a restructuring provision to be recognised,
there must be a present obligation as a result of a past event,
and that is only when a detailed formal plan is in place and the
entity has started to implement the plan, or announced its
main features to those affected.

A board decision is insufficient to create a present obligation as
a result of a past event. The provision should be recognised
when the announcement is made to the employees .

Management should be asked to explain why they have
included the provision in the financial statements, for example,
there may have been an earlier announcement of which the
auditor is unaware.

In the absence of any such further information, management
should be informed that the accounting treatment of the
provision is a material misstatement, which if it remains
unadjusted will have implications for the auditor‘s opinion.
Depreciation

The understatement to depreciation expense is not material on
an individual basis to either the statement of profit or loss or
the statement of financial position.
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Despite the amount being immaterial, it should not be
disregarded, as the auditor should consider the aggregate
effect of misstatements on the financial statements.
ISA 450 does state that the auditor need not accumulate
balances which are ‗clearly trivial‘, by which it means that the
accumulation of such amounts clearly would not have a
material effect on the financial statements.
If this amount remains unadjusted by management, it will not
on an individual basis result in material misstatement to the
financial statements.



Marking Guide
a.(i) 1 mark for each of the 2 points
(ii) 1 mark for each of the 3 points
(iii) 1 mark for each of the 2 points
(iv) 2 marks for specific points
(v) 1 mark each for any two points
(vi – viii) 1 mark for each of the points
b. (i) 1 mark for any of the correct points
(ii) 1 mark each for any 2 points
(iii) 1 mark each for any 2 points
Total
Marks
2
3
2
2
3
3
1
2
2
Marks
15
5
20
Examiner’s Report
The question tests the candidates‘ knowledge on the evaluation and treatment of
misstatements identified during audit according to the requirements of ISA 450. It
also tests the candidates understanding of guidance to management in that regard.
Less than 50% of the candidates attempted the question and the performance was
average.
The commonest pitfall of the candidates was the lack of adequate knowledge of the
process of treatment of misstatements in the audit process.
Candidates are advised to take seriously the practical work experience embedded
in the Institute‘s students training programme.
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SOLUTION 3
The audit senior should recognise the specific features of the not-for-profit
organisation (NFPO). However, it is important to realise that the auditor is still
performing an audit, and the overall structure of the audit of an NFPO will be
similar to the audit of a commercial organisation. However, the detail of the audit
will probably differ. The main points to bear in mind with the audit of an NFPO are
summarised below. These are general principles. They should be modified as
appropriate to reflect the circumstances of each particular NFPO.
a.
Planning
Consider:
i)
ii)
iii)
iv)
v)
b.
The objectives and scope of the audit work;
Any local regulations that apply;
The environment in which the organisation operates;
The form and content of the final financial statements and the audit
opinion; and
Key audit areas, including risk.
Risk analysis
Carry out an audit risk analysis under the usual headings of inherent risk, control
risk and detection risk in respect of the following:
i.
ii.
iii.
c.
Inherent risk (reflecting the nature of the entity‘s activities and the
environment);
Control risk (internal controls, and the risk that these may be
inadequate: controls over cash collection and cash payments may be a
key area for an NFPO such as a charity, because large amounts of
cash may be collected from the public by volunteers)
Detection risk (the risk that the auditor will fail to identify any
material error or misstatement in performing the audit).
Internal control
Key areas of internal control in an NFPO include:
i.
ii.
iii.
Segregation of duties (although this may be difficult in a small NFPO
with only a few employees);
Cash controls;
Controls over income (donations, cash collections, membership fees,
grants); and
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iv.
d.
The use of funds only for authorised purposes.
Audit evidence
A substantive testing approach (rather than a systems-based approach) is
likely to be necessary in a small NFPO, because of weaknesses in its internal
control system.
Key areas may include:
i.
The completeness of recording transactions, assets and liabilities;
ii.
The possibility of misuse of funds;
iii.
Analytical procedures may be used to ‗make sense‘ of the reported
figures; and
iv.
There should be a review of the final financial statements, including a
review of the appropriateness of the accounting policies.
e.
Reporting
The key areas in reporting include:
i.
ii.
If a report on an NFPO is required by law, the standard external audit
report should be used; and
If the audit is performed on a voluntary basis, the report needs to
reflect the agreed objective of the audit.
However, it is good practice for the report to follow the general structure laid
down by ISA 700: Forming an Opinion and Reporting on Financial
Statements
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
Title;
Addressee;
Responsibilities of auditors versus the responsibilities of directors;
Responsibility for financial statements;
Other reporting responsibilities;
Basis for opinion;
Going concern and key audit matters (if applicable);
The audit opinion; and
Date, name and address of auditor.
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Marking Guide
a. 1 mark each for any 4 points
b. 2 marks each for any 2 points
c. 1 mark each for any 4 points
d. 1 mark each for any 4 points
e. 1 mark each for any 2 points
f. ½ mark each for any 4 titles of sections of the report
Total
Mark
2
2
Mark
4
4
4
4
4
20
Examiner’s Report
The question tests candidates‘ knowledge on the procedures and some of the stages
involved in carrying out the audit of an entity.
About 60 % of the candidates attempted the question and the performance was
above average.
The commonest pitfall of the candidates was the lack of understanding processes of
executing an audit engagement.
Candidates are advised to endeavour to read widely for improved performance in
subsequent examinations.
SOLUTION 4
a.
The general IT controls that are expected to be found in Holloway Interiors
Limited are discussed below:
Control area
Controls required
Development of
computer-based
information systems
and applications
 Appropriate standards should be established and enforced for
designing, developing, programming and documenting each
new system.
 Suitable testing procedures should be carried out on each new
system.
 The design of a new system should be approved formally by the
management of the system user.
 There should be a segregation of duties between system
designers and system testers (to reduce the risk of error or fraud)
 There should be suitable staff training in the design and testing
of systems.
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Documentation and
testing of
programme changes
 Formal testing procedures should be applied for any change to a
current programme.
 There should be formal authorisation procedures for programme
changes.
 There should be suitable staff training in making and testing
programme changes.
Prevention or
detection of
unauthorised
programme changes





Prevention of the use
of incorrect
programmes or data
files




There should be a segregation of duties between programmers and
computer system operators.
All programme changes must be fully documented
Access to programme files must be restricted
Programme logs should be used to record access to program files and
programmes
There should be anti-virus software and back-up copies of programme
files should be kept, to prevent or detect or deal with ‗malicious‘
changes to programmes.
Standard operating procedures should be established, and
operations should be performed by suitably-trained staff
The scheduling of ‗jobs‘ for a computer centre should specify the
programme files and data files to be used.
There should be effective supervision of computer centre
operations.
Reviews of operations should be carried out regularly by
management.
Prevention of
unauthorised
amendments to data
files
 There must be restricted access to data files, limited to authorised
personnel because transaction are processed immediately by the
online system and access controls need to be strong.
Ensuring continuity of
operations
 Secure back-up copies should be kept of programme files and
data files.
 Measures should be implemented for the protection of
equipment against fire, power failure and other hazards.
 Disaster recovery programmes should be in place, in the event of
a major disaster that puts the main computer system out of
action.
 There should be suitable maintenance and service agreements
for all major externally-acquired software.
 Transaction logs should be kept of all uses of data files,to
provide an audit trail and these should be reviewed by
management.
 Fire walls (hardware and software) should be used to prevent
unauthorised access through internet.
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b.
The five step model is as outlined as follows:
Step 1: Identify the contract
i.
IFRS 15 defines a contract as an agreement between two or more
parties that creates enforceable rights and obligations and specifies
that enforceability is a matter of law.
ii.
Contracts can be written, oral or implied by an entity‘s customary
business practices.
iii.
A contract with a customer exists if collection of consideration is
probable, rights to goods or services and payment terms can be
identified, it has commercial substance and it is approved and the
parties are committed to their obligations.
Step 2: Identify the performance obligations
i.
Entities are to identify each promise to deliver a good or provide a
service to a customer.
ii.
iii.
A promise constitutes a performance obligation if the promised good
or service is distinct.
A promised good or service is distinct if it meets both of the following
criteria.

the customer can benefit from the good or service either on its
own or together with other resources that are readily available
to the customer; and

the entity‘s promise to transfer the good or service to the
customer separately identifiable from other promises in the
contract.
Step 3: Determine the transaction price
i.
The transaction price is the amount of the consideration to which an
entity expects to be entitled in exchange for transferring goods or
services to a customer.
ii.
To determine this amount, an entity considers factors like the risk of
revenue reversal when determining how much variable consideration
to include in the transaction price, the consideration payable to the
customer, non cash consideration and the significant financing
component.
Step 4: Allocate the transaction price
i.
Entities will generally allocate the transaction price to each
performance obligation in proportion to its stand-alone selling price.
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ii.
The best evidence of the stand-alone price is an observable price from
a stand alone sales of that good or service to a customer. However, if
the stand-alone price is not directly observable, then an entity can
estimate it by either evaluating the market in which it sells its goods
or services and estimating the price that customers are willing to pay,
forecasting expected costs plus an appropriate margin or in limited
circumstances, subtracting the sum of observable stand-alone selling
prices of other goods or services in the contract from the total
transaction price.
Step 5: Recognise revenue when (or as) the entity satisfies a performance
obligation
i.
An entity recognises revenue when (or as) it satisfies a performance
obligation by transferring control of the goods or service to a
customer. Control may be transferred either at a point in time or over
time.
ii.
The indicators that control has passed include a customer having a
present obligation to pay, physical possession, legal title, risks and
rewards of ownership or having accepted the asset.
Marking Guide
a.
b.
½ mark each for each point subject to a maximum 20 points
1 mark each for mentioning each of 5 steps
1 mark each for the explanation of 5 steps
Marks
10
5
5
10
Examiner’s Report
The part (a) of the question tests candidates‘ knowledge on general information
technology (IT) controls, whilst part (b) tests candidates‘ knowledge on the
recognition of revenue from contracts in accordance with IFRS 15: Revenue from
Contracts with Customers.
Almost 80% of the candidates attempted the question because of the popular nature
of the IT and the performance was good.
The commonest pitfall of the candidates‘ was the lack of detailed knowledge of the
requirement of the respective segments of the IT programme, while in part (b),
candidates displayed poor knowledge in itemizing the steps in the model.
Candidates are advised to devote time to their studies and to go through ICAN
Study Texts and Pathfinders.
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SOLUTION 5
The financial statement risks to take into account in planning the final audit are as
follows:
a.
Basis of preparation of the financial statements: The financial statements
should not be prepared on a going concern basis. The directors need to
include a note in the financial statements explaining the basis of the
conclusion and the accounting policies applied in drawing up financial
statements on a non-going concern basis;
b.
Termination expenses: Management needs to determine the amount of
termination expenses required. If termination expenses has not been paid at
year end, provisions for termination payments will be needed in the
financial statements;
c.
Internal control: The use of a small accounting team may increase errors in
processing accounting transactions towards the end of the year. Segregation
of duties (as an internal control) might have been adversely affected;
Accounting policy of own buildings: The accounting policy of the 12
buildings owned by the entity will be changed from depreciated cost to fair
value because there is an expectation that they might be sold;
d.
e.
Impairment of right-of-use assets: It is expected that the right-of-use assets
will have a component on amounts prepaid with regards to the leased
buildings and the assumed renewal of the lease. There will be a need to
assess the right-of-use asset for impairment in the light of the decision to
wind down the company‘s operations;
f.
Provision for warranties: Warranty provisions will be recognised for goods
sold to customers which are still under warranty;
g.
Agreements with suppliers and distributors: Management needs to review
the contracts with distributors and suppliers to identify any breaches as a
result of the decision to wind down the company, the financial impact of
these breaches needs to be determined and potentially recognized in the
financial statements;
h.
Lease liability: The lease liability for the assumed lease renewal should be
derecognised since the company is no longer likely to renew its lease
agreements when they end;
i.
Companies income tax liability: The tax liability will be determined based on
the requirement of the relevant tax laws;
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j.
Inventory valuation: The company operates in auto industries and tyres
have expiring dates or period and inventories might be subject to
obsolescence. Therefore, inventories in the financial statements might be
overstated; and
k.
Deferred tax asset: Considering that the entity is on the verge of ceasing
operations, it is unlikely that there would be future taxable profit for the
recoverability of the deferred tax asset and so this has to be derecognised.
Marking Guide
1 mark each for identifying the risk
1 mark each for the explanation of risk identifying
Total
Marks
10
10
20
Examiner’s Report
The question test candidates‘ knowledge on financial risks inherent in planning for
a final audit.
About 60% of the candidates attempted the question and overall performance was
average.
The commonest pitfall of the candidates was their inability to identify the financial
statement risks to be considered in planning a final audit.
Candidates are advised to link the theoretical issues in the study text to practical
situation when given in a scenario.
SOLUTION 6
a.
Tendering is a commercial process widely-used by companies (especially
larger companies) when they wish to change auditors. The invitation may or
may not include the existing auditor. Tendering involves two or more audit
firms being invited by a company to submit a proposal for its audit work,
which include:
i.
Tendering should commence only when a firm has been approached
by a prospective client. In any case, a firm should not submit a tender
for the work unless it can give satisfactory answers to the following
questions:
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-
-
ii.
Collect background information about the possible new client. (This is
necessary when evaluating any new client, whether the fee is to be
set by tender or by any other method);
iii.
Establish the precise scope of the work to be performed and the
specific requirements of the prospective client;
iv.
Carry out a preliminary audit risk assessment and prepare a
preliminary plan for the audit. The plan must cover the staffing
requirements and the time requirements for the work;
v.
Estimate a fee;
vi.
Prepare a submission document for the potential client. The contents
of this document will typically include:
-
vii.
b.
Does the firm have the expertise to carry out this audit?
Does the firm have (or could it have) sufficient staff available
at the appropriate time?
Are there any ethical reasons why the firm could not act (for
example, a problem with independence, or a conflict of
interest)?
Are there any problems, of which the firm is aware, with the
current audit or auditors?
An outline of the key characteristics of the firm;
Clarification of the nature of the audit work or other non-audit
work to be performed;
A statement of the requirements of the client and how the firm
will comply with them;
An outline of how the work will be performed;
The proposed fee and the basis of its calculation;
The range of other services which the firm could offer to the
client; and
If required, prepare and give a presentation to the potential client.
When a professional accountant in public practice solicits new work through
advertising or other forms of marketing, there may be a threat to compliance
with the fundamental ethical principles.
The main requirements for marketing professional services are that the
advertising and publicity material used by any firm:
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i)
ii)
iii)
iv)
v)
vi)
vii)
c.
Must not bring into disrepute the professional body, the firm or the
profession as a whole;
Should not make exaggerated claims for services offered,
qualifications possessed or experience gained – it should be honest
and truthful and not mislead;
Must not discredit the services provided by other firms or make
disparaging references or unsubstantiated comparisons to the work of
another Chartered Accountant;
Must not break any locally-recognised codes of advertising practice;
In addition, it is recommended that advertising and publicity material
should avoid any reference to fees. If fees are mentioned, there should
be a statement of the basis on which the fees are to be charged;
Comments about fees:
Must not be misleading;
-
Must not offer discounts; and
-
Must not make comparison with the fees of other service
providers; and
ICAN‘s professional code of conduct and guide for members states that
if a Chartered Accountant in public practice is in doubt whether a
proposed form of advertising or marketing is appropriate, he/she
should consult through the Registrar/Chief Executive of ICAN.
ICAN‘s code of conduct provides specific guidance regarding fees as follows:
i)
ICAN advises minimum charge-out rates in respect of fees for
professional services which are intended to set a benchmark below
which members are not ordinarily expected to charge;
ii)
A member should inform a client in writing prior to commencement of
any engagement the basis upon which any fee he proposes to charge
for his services will be calculated and, on request and where
practicable, the level of fees likely to be charged for any assignment;
iii)
The member should discuss and explain the basis on which fees will
be calculated, including the estimated initial fee, at the earliest
opportunity. This discussion should be confirmed in writing, normally
in an engagement letter;
iv)
Firms should not quote a level of fees for new audit work which is
lower than that charged by an existing auditor. Firms should also not
quote by tender a level of fees which they have reason to believe is
significantly lower than those quoted by other tendering firms. In
both instances the firm‘s objectivity could be threatened;
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d.
v)
When performing audit work, firms should ensure that their work
complies with auditing standards and guidelines and, in particular,
quality control procedures. In the event of a complaint being made to
the Institute (which might have arisen as a result of a Professional
Practice Monitoring Committee‘s inspection), where fees were a
feature in obtaining or retaining the work, firms should be prepared
to demonstrate that:

The work done was in accordance with auditing standards; and

The client was not misled as to the basis on which fees for the
current and subsequent years were to be determined;
vi)
A member whose fees have not been paid may be entitled to retain
certain books and papers of a client upon which he has been working
by exercising a lien and may refuse to pass on information to the
client or his successor Chartered Accountant, until those fees are paid.
However, a member who so acts should be prepared to take
reasonable steps to resolve any dispute relating to the amount of that
fee. The incoming auditor has a duty to assist in the recovery of such
fees within a reasonable time; and
vii)
Fees should generally not be based on a percentage or on contingency
calculations for audit work, reporting assignments and similar nonaudit roles.
The impact of the five additional information are as follows:
i)
ii)
iii)
Since Nash Investigation is a major service provider to our firm, the
issue of a possible threat to our independence arises and we may not
be able to submit a tender for the audit;
Also there should be professional clearance when a firm of auditor is
taking up a job which has been previously handled by a professional
colleague, and we were told that Nash Investigation is withholding
fess of her previous auditor, hence, our firm will not participate in the
tendering process;
As a firm of auditors, there is professional requirement which
stipulates that one should not act for two opposing parties in any
negotiation or claim unless one is appointed as an arbitrator due to
process of law and tendering process is not arbitration process, hence,
our firm will not be able to participate in the audit tender. It is of
note that Nash Investigations is currently facing a hostile takeover bid
from Technical Investigations Group. Hence our Firm will not be able
to participate in the audit tender;
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iv)
If we confirm that the reason for parting ways with the old audit firm
is incompetence and there is no independence issue; then we can take
up the audit and press for the payment of the withheld fees on behalf
of the previous auditors. It is of note that Nash investigation is
currently facing a hostile takeover bid from Technical Investigations
Group. Hence our firm will not be able to participate in the audit
tender; and
v)
Having one of our partners as a director in an audit client is a threat
to our independence which will amount to conflict of interest and if
we are to submit a tender for the audit, the partner needs to either
resign as partner or as a member of the board of directors.
Marking Guide
a.
b.
c.
d.
Marks
5
5
5
5
20
1 mark for any point (max 5)
1 mark for any point (max 5)
1 mark for any point (max 5)
1 mark each for the 5 points
Examiner’s Report
The question tests candidates‘ knowledge on various issues on professional
code of conduct and professional ethics.
About 60% of the percentage of candidates that attempted the question and
the performance was poor.
The commonest pitfall of the candidates was their inability to explain the
requirements of the professional code of conduct of members as regards
advertising and publicity, and fees
Candidates are advised to go through ICAN Study Text and other relevant
reading materials.
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
MAY 2021 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
and
Examiner‟s Reports
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – MAY 2021
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX
QUESTIONS IN THIS PAPER
COMPULSORY QUESTION
(40 MARKS)
QUESTION 1
a.
Blackmart Plc is one of your listed audit clients which offers property
management, property financing and mortgage services to its clients. During
the audit of the company, the following matters came to your attention:
(i)
Grace Sadiku, one of the audit team members has provisionally
agreed to take out a mortgage facility with a duration of 10 years
using the facility of Blackmart Plc to finance her first residential
property. In the area where the property is located, the first residential
property gets full tax waiver on the entire installments paid within the
first 5 years which is usually a significant tax incentive. The mortgage
facility would be secured by the property and it has been defined as
the best offer available in the market;
(ii)
Also, during the period, the Human Resources (HR) Manager of
Blackmart Plc resigned, and the company had reached out to your
firm to provide a staff on secondment till a substantive HR Manager is
appointed;
(iii)
The management of Blackmart has also informed your audit team that
the company maintains only two bank accounts and there will be no
need to circularise the banks as the auditors can rely on the balances
as generated from the bank‟s portal as at the end of the year; and
(iv)
The audit committee has asked your firm to work with the internal
audit team to design internal controls over the part of the accounting
system which deals with revenue, and also evaluate the operating
effectiveness of the internal controls.
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Required:
Prepare a memo to your Manager, commenting on the professional and
ethical issues arising from the audit of Blackmart Plc and also suggest to
him/her on how to manage the identified issues.
(15 Marks)
b.
During the audit year, on the review of the audit work done on Community
Microfinance Bank (a new significant audit client), you noted the following
issues:

At the audit strategy stage, it was agreed that the audit of loans and
advances would involve reliance on the effectiveness of internal
controls. However, during the test of controls, it was noted that five
loans were not approved by the appropriate approving officers.
Further review indicated that the loans were genuinely issued to
customers but were only approved by officers whose approval limit
have been exceeded;

During the period under review, the tax authority carried out a tax
investigation and noted significant variance between the company‟s
estimated tax liabilities and the tax authority‟s position. From further
discussion, it was noted that the previous tax computation was done
by a junior staff who does not have the requisite experience and the
computations were not duly reviewed by experienced senior officers of
the company;

The company deployed a new loan disbursement software which is
linked to the financial reporting software. From your review of the
new software, the initiator of a transaction could approve the same
transaction as long as he/she changes the designation to approving
authorities after initiation. You have flagged this as a possible control
risk; and

During your review of the receivables account, a variation was noted
between the amount in a customer‟s receivables balance in the ledger
and the client confirmation. However, the variance was considered not
material and not adjusted for. During discussion with the Receivables
Manager, it came to your attention that the client in focus is a family
member of the Managing Director.
The team is considering the impact of the above observations on the audit.
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Required:
(i)
Draft a report to management evaluating the implications of the
above observations on the control environment and the audit
strategy/procedures.
(15 Marks)
(ii)
Comment on whether the issues are to be reported to those charged
with governance of the entity.
(10 Marks)
(Total 40 Marks)
SECTION B:
OPEN-ENDED QUESTIONS
(60 MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF THE
FIVE QUESTIONS IN THIS SECTION
QUESTION 2
You are a partner in an audit firm – Dogba & Associates. One of your prospective
clients is Edith Enterprises Nigeria Limited, a manufacturer of steel rods. Edith
Enterprises is a private company set up by Madam Edith Adagba in 1985. Madam
Adagba has since retired and handed over the running of the company to her
daughter, Hauwa. Hauwa is determined to expand the operations of the company
and has decided to go to the capital market for financing.
Hauwa has contacted Dogba & Associates and requested that the firm should act as
reporting accountants by reviewing and reporting on its prospective financial
information which has been prepared as part of the offer.
The audit firm has asked that you handle the engagement. In preparing for the
engagement, you are required to do the following:
a.
Explain the matters, as required by ISQC 1 and ISAE 3400, which you would
consider before accepting the engagement to review and report on the
client‟s prospective financial information.
(6 Marks)
b.
Assuming you choose to accept the engagement, recommend the
examination procedures to be performed in respect of the review of the
prospective profit or loss information.
(9 Marks)
c.
Prepare an extract of an unmodified report that the auditor could issue on
the prospective financial information.
(5 Marks)
(Total 20 Marks)
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QUESTION 3
You are the manager responsible for the audit of Seraphim Nigeria Limited, a
manufacturing company which produces biscuits. The company‟s financial year
ended on December 31, 2018 and you are reviewing the audit work which was
completed on a number of material balances and transactions: assets held for sale,
capital expenditure and payroll expenses. A summary of the audit procedures
carried out by the audit team is given below:
(i)
Provision for restructuring: The board approved changes in the
management structure of the company. The directors determined that the
company was „top heavy‟ and decided that 80% of the middle management
staff should be laid off. The Finance Director had estimated the cost of the
restructuring to be N180 million and a manual journal has been posted to
record a provision for restructuring costs. The Finance Director has
overridden the segregation of duties control by posting this journal and
approving it himself. He told the team that he had done it because he
wanted to preserve the confidentiality of the transaction. The audit team
discussed the planned restructuring with the Managing Director (MD). The
audit team relied on the discussions with the MD and the board resolution
approving the restructuring as audit evidence.
(ii)
Investments: The company‟s investments trading portfolio is outsourced to a
fund manager - Hala Funds Management Limited, which processed all trades
done by the company. The investments balance and income on investments
recorded in the financial statements have been traced and agreed to year
end reports from the service organisation. The audit team relied on the
reports from the fund manager which was given to them by the Chief
Financial Officer (CFO) of the company. Based on discussions, the audit team
determined that the CFO had not classified the investments in line with the
requirements of IFRS 9 and the interest income on its bonds investment were
computed using the contractual rate.
The company made some investments directly without passing them through
the fund manager, this is not in line with the company‟s policy. The audit
team traced and agreed those transactions to the bank statement. The
amounts of investments made directly without involving the fund manager
were not considered material.
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Required:
For each of the two matters described above;
a.
b.
c.
Comment on the sufficiency and appropriateness of the audit evidence
obtained.
(10 Marks)
Recommend further audit procedures to be performed by the audit team.
(8 Marks)
Explain the matters which should be included in a report in accordance with
ISA 265: Communicating Deficiencies in Internal Controls to Those Charged
with Governance and Management.
(2 Marks)
(Total 20 Marks)
QUESTION 4
As a Senior Manager in Inagbe and Co. (Chartered Accountants), you act as a
mentor to some of the young auditors in practice. As a mentor, you discuss
frequently with your young mentees on professional and personal matters. Zainab
Nigeria Limited is a cosmetics company and has just recently appointed Inagbe and
Co. as its auditor. One of your young mentees has been asked to be part of the
engagement team. The mentee has come to you for some advice and you decided
to use the opportunity to explain the process and procedures to be carried out when
accepting a new engagement.
Required:
a.
Explain the elements of an engagement letter.
b.
Discuss the circumstances under which an auditor may reject an audit
engagement.
(3 Marks)
c.
Discuss the procedures that an audit firm needs to carry out before accepting
to audit a new client.
(4 Marks)
Explain the audit procedures that should be carried out on opening balances.
(6 Marks)
(Total 20 Marks)
d.
(7 Marks)
QUESTION 5
Judi Nigeria Limited is a company that manufactures bicycles. The company
acquired M&M Tires Limited, a manufacturer of tyres, in 2018 financial year. Six
months after the acquisition, M&M Tires declared for bankruptcy.
The management of Judi Nigeria alleged that there had been financial impropriety
by the previous management of M&M and that the 2017 financial statements of the
company did not show a true and fair view of its financial performance. The
management of Judi Nigeria Limited also alleged that the auditors of M&M had
been negligent in carrying out the audit.
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The Managing Director has asked your audit firm to carry out a forensic audit to
determine if the auditors were negligent in their duties.
Required:
a.
b.
c.
d.
Distinguish among forensic accounting, forensic investigation and forensic
audit.
(6 Marks)
Identify the various government agencies associated with forensic auditing.
(4 Marks)
Apply the fundamental ethical principles to forensic auditor‟s engagement.
(5 Marks)
Describe the procedures to be adopted by an auditor in a forensic audit.
(5 Marks)
(Total 20 Marks)
QUESTION 6
Wazobia Nigeria Limited is a manufacturer of corrugated zinc roofs. Due to the
economic recession, revenue continued to decline each year for the past three years.
You are aware that the company had only N300,000 in cash at the year end.
Extracts from the draft financial statements and other relevant information are
given below.
Revenue
Operating expenses
Finance charge
Loss before tax
Total assets
Long-term liabilities – bank loan
Short-term liabilities – trade payables
Disclosed in notes to financial statements:
Undrawn borrowing facilities
Contingent liability
December
2018
(Draft)
N‟000
48,921
(150,680)
(7,500)
(109,259)
600,500
1,400,000
280,000
December
2017
(Actual)
N‟000
60,956
(158,677)
(5,000)
(102,721)
645,600
300,000
80,000
3,100,000
4 ,350,000
200,000
-
Additional information:
(i)
The bank loan was obtained in 2016 when the company started recording
losses. The collateral for the loan is a fixed and floating charge on the assets
of the company to the tune of the loan balance. The first tranche of
repayment of the loan is due in 2019 and the amount repayable is N300
million.
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(ii)
Wazobia renegotiated its credit line with a major supplier and extended
payment terms from 60 days to 90 days in order to improve working capital.
(iii)
The terms for accessing the undrawn facilities stipulate that the company
must meet certain covenants, including that interest cover is maintained at
2:1 and the ratio of bank loan to total assets does not exceed 1:1.
(iv)
The contingent liability relates to litigation against the company by one of its
customers for an alleged breach of contract to supply roofing sheets based
on agreed specifications.
Required:
a.
Identify and explain the matters which may cast significant doubt on the
company‟s ability to continue as a going concern in the foreseeable future.
(10 Marks)
b.
Recommend the appropriate audit procedures to be performed to
adequately address the going concern matters identified.
(10 Marks)
(Total 20 Marks)
SOLUTION 1
1. (a) From: The Audit Senior
To:
The Audit Manager
Title: Memo on ethical and professional considerations relating to Blackmart
Plc.
Evaluation of ethical and professional issues and the actions on them are a
vital part of the assessment of an auditor‟s independence. An auditor is
expected to be seen to be independent both in appearance and in action.
The issues identified and the circumstances thereof are as given hereunder:
Mortgage facility
In line with the IESBA Code of Ethics for Professional Accountants (the Code),
a loan to a member of the audit team may create a threat to the auditor‟s
independence especially if such facility is not granted under the normal
market conditions.
The following are issues addressed:

The risk of self-interest may exist and may threaten the independence
of the audit team members as it may serve as a motivation to
influence her decisions and opinion;
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
The team is advised to establish that the loan was given under normal
market conditions by comparing the terms and conditions to other
mortgage facilities given by the entity;

Securitization of the loan with the property does not pose any ethical
Threat;
The tax waiver does not constitute any threat as it is generally
available to anybody;

An acceptable safeguard such as the withdrawal of the team member,
non-acceptance of the loan by the team member or seeking for the
loan in another institution that offer same services may be put in
place; and

The Engagement Partner and other senior members of the team may
also review the situation and apply applicable safeguards if the team
member is a junior staff without the power of decision on the team.
Secondment of Staff
(i)
A loan staff secondment situation may lead to a self-review threat to
the auditor‟s independence. They may over-rely on the work done by
the loan staff or will not apply an appropriate level of scepticism when
assessing the work.
(ii)
According to the IESBA Code, an audit firm cannot provide accounting
and bookkeeping services to an audit client which is a public interest
entity unless the services relate to matters which are collectively
immaterial to the financial statements.
(iii)
The team needs to establish whether the HR service role is significant
to the financial statements. Where it is considered significant, the
audit firm should not provide the staff. Where it is considered
immaterial, the staff can be provided with appropriate safeguards put
in place.
(iv)
Assurance providers should not serve as an officer or director of the
assurance client. However, providing routine administrative services
such as those provided by a company secretary may be appropriate.
It is important not to be involved in making management decision.
Balance confirmation
(i)
Balance on bank portal might seem reliable. The auditor has a right to
implement additional audit procedures to satisfy himself/herself.
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(ii)
The audit firm is exposed to the risk of not obtaining appropriate
evidence and issuing an opinion without obtaining appropriate and
sufficient evidence.
(iii)
This can be seen as a familiarity threat.
(iv)
The Partner is advised to communicate this to the Board or those
charged with governance. Where there is no change, an opinion with a
limitation/ subject to paragraph should be considered.
Internal audit
(i)
A self review threat arises from the audit committee‟s request for the
audit team to work with the internal audit team to design and evaluate
internal controls relating to revenue. The code of corporate governance
suggests that providing an audit client with an internal audit service
might create a self-review threat to objectivity. This is because in
subsequent audits, the audit team may use the management work done
with the internal audit in the audit of revenue. They may over-rely on
the internal controls designed and evaluated by the audit firm or will
not apply an appropriate level of scepticism when assessing the work.
(ii)
A threat of management responsibility arises, whereby the audit firm is
making decisions and using judgment which is properly the
responsibility of management. The Code states that taking responsibility
for designing, implementing, monitoring and maintaining internal
control is assuming management responsibility. According to the Code,
an audit firm must not assume management responsibility for an audit
client because the threat to independence created is so significant that
no safeguards could reduce it to an acceptable level.
(iii)
The audit firm should politely decline the request made by the audit
committee and ensure that the committee is fully aware of the ethical
issues raised by their requests.
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Wazobia & Co,
4, Allen Avenue, Ikeja Lagos
(b)
May 7, 2021
Board of Directors
Community Microfinance Bank
4, Sabo Road
Yaba
Lagos
Dear Sirs,
RE: REPORT ON THE IMPLICATIONS OF OBSERVATIONS DURING THE
AUDIT OF COMMUNITY MICROFINANCE BANK
During the course of our audit, we came across certain weaknesses in your
accounting and internal control systems which we consider should be
brought to your attention. These are discussed below:

Loans and advances
The absence of appropriate approval and authorisation of the selected
loans represent an exception to the effective operation of the controls,
hence the auditor may not rely on such controls or perform additional
procedures during the substantive phase.
The genuineness of the loans after extensive reviews does not resolve
the exception in the effective operation of the control, hence the
control is still deemed ineffective as there exist the chances that other
loans may have been disbursed without appropriate authorisation.
The impact on the audit is that the team will need to perform
additional procedures and may not rely on such controls. Prior to
finalising the audit, the audit team needs to assess the extent and
significance of the internal controls as this may be in the form of
increase in sample size, extent the audit focus to other balances with
similar controls. The team should also consider including the matter
in the report to management as this is a significant deficiency in the
operations of internal control.

Tax investigation
The non-review of the tax computations indicate a deficiency in the
management controls around the computation of tax balances. It
would lead to additional tax liability and penalty. Similar to the
above, the control is deemed ineffective and as such, the audit team
should design appropriate audit procedures to review the
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management tax estimates. The control lapse should also be reported
to those charged with governance.
(c)

Loan disbursement software
The initiation and subsequent authorisation of transactions is a
significant deficiency in internal controls. These should be
communicated to the management. The audit team is now expected to
perform extensive procedures over the balances generated over the
new software. The team may not place reliance on the software. A
fraud risk may be attached to the balances generated from such
software.

Receivables account
There was the non-disclosure of related party transaction, but there
exists no risk in the balance since the difference is not material. The
audit team may wish to perform additional procedures to establish if
same pattern exists.
Issues are evaluated and are usually submitted to those charged with
governance
i.
Non- adherence to approval limits for loans and advances
The risk exists that loans will be disbursed without the right level of risk
assessment, thereby leading to higher credit losses for the bank.
This is significant risk and therefore should be reported to those
charged with governance for appropriate remedial action.
ii.
Non review of tax computation
There is a risk that the tax computations might be significantly
misstated leading to a misstatement of the financial statements and
possible penalties form the tax authorities;
This is a significant risk, therefore, it should be reported to those
charged with governance for appropriate remedial action;
iii.
Same initiation and authorization of loan disbursed
The risk exists that the lapse in the control of segregation of duties
could lead to material misstatements due to fraud and/or error;
This is a significant risk therefore, should be reported to those charged
with governance for appropriate remedial action;
iv.
Variation in receivables account
Variation in receivables was considered not material and not adjusted
for.
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v.
This level of deficiency is not significant, therefore, needs not be
escalated to those charged with governance.
Examiner’s report
The question tests candidates‟ knowledge of the professional and ethical issues in
an auditors‟ relationship with a client. It also tests their knowledge on the
evaluation of control environments, communication with management and those
charged with governance.
This being a compulsory question, all candidates attempted it but the performance
was below average.
The commonest pitfalls of the candidates were their lack of essential knowledge of
the rules of professional conduct of accountants, the difficulty in identifying the
indicators that pose specific threats from the scenario created and their display of
poor knowledge on how to draft official reports.
Candidates are advised to familiarize themselves with the rules of professional
conduct in ICAN Code of Conduct for members, improve on their formal
communication and read the Institute‟s Study Text and Pathfinders.
Marking guide
(a)
Ethical considerations:
Memo on Ethical considerations:
From
To
Title of memo
Any four correct points on mortage facility @ 1 mark
Any three correct points on secondment of staff @ 1 mark
Any three correct points on balance confirmation @ 1
mark
Any three points on internal audit @ 1 mark
(b)i. Report on the Micro Finance Bank:
Address
Addressee
Title
Introductory paragraph
Any twelve (12) correct implications and audit strategy @
1 mark
ii. Comments on the issues:
Identification of the four issues @ ½ mark
Two correct comments on each or the total points
identified @ 1 mark
Marks
Total
½
½
1
4
3
3
3
15
½
½
1
1
12
15
2
8
10
40
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SOLUTION 2
a.
Matters to be considered before accepting an engagement
ISQC 1 requires an audit firm to establish policies and procedures to provide
it with reasonable assurance that the firm will only take on or continue work,
where the firm:
(i) Is competent to perform the engagement;
(ii) Has the capabilities (including the necessary resources) to do so;
(iii) Can comply with the relevant ethical requirements; and
(iv) Has considered the integrity of the client and does not have information
which would lead it to conclude that the client lacks integrity.
ISAE 3400 requires that before accepting the engagement to review and
report on the client‟s prospective financial information, the following matters
would be considered:
(i) The availability of resources and staff with the necessary expertise;
(ii) The timescale for the completion of the engagement; and
(iii) Agreeing a fee for the work with the client.
b.
Examination procedures to be performed include:
(i) Understanding the nature of the information to be examined;
(ii) Establishing the intended use of the information and the intended
recipients of the final report;
(iii) Establishing whether the information will be for general distribution or
limited distribution to a small number of users;
(iv) Evaluating the nature of the assumptions that have been made by
management whether they are best estimate assumptions for a forecast,
or hypothetical assumptions for the purpose of making a projection; and
(v) Determining the time period covered by this information.
When deciding the nature, timing and extent of the procedures required to
complete a prospective financial informative (PFI) assurance engagement,
the auditor should consider the following issues:
(i) The likelihood of material misstatement in the forecast or projection;
(ii) The knowledge that the auditor has obtained during any previous
similar engagements;
(iii) The competence of the client‟s management with regard to the
preparation of PFI;
(iv) The extent to which the PFI is affected by management‟s judgement. In
other words, to what extent does the PFI depend on judgement about
best estimates or hypotheses;
(v) The adequacy and reliability of the underlying data and assumptions
that have been used as the basis for preparing the prospective financial
information;
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(vi) The general approach to the assurance engagement should be similar to
the approach for audit engagement or other assurance engageents, but
with some modifications to allow for the specific nature of the work.
c.
An extract of the unmodified audit report that the auditor can issue is as
shown below:
REPORT ON A FINANCIAL FORECAST OF EDITH ENTERPRISES NIGERIA
LIMITED
To the Board of Directors
We have examined the financial forecast of Edith Enterprises Nigeria Limited
for the period … set out on pages … to …. in accordance with the
International Standard on Assurance Engagement 3400.
Management is responsible for the forecast including the assumptions set out
in Note … on which it is based.
Based on our examination of the evidence supporting the assumptions,
nothing has come to our attention which causes us to believe that these
assumptions do not provide a reasonable basis for the forecast. Further, in
our opinion, the forecast is properly prepared on the basis of the assumptions
and is presented in accordance with the requirements of Securities and
Exchange Commission.
Actual results are likely to be different from the forecast since anticipated
events frequently do not occur as expected and the variation may be
material.
Dogba & Associates
Plot 151x Lafia Road, Abuja
June 30, 2021
Examiner’s report
The question tests the candidates‟ knowledge on the regulations relating to the
preparation of prospective financial information and the engagement on
prospective financial information according to ISQC 1 and ISAE 3400. It also tests
their knowledge of reporting on the prospective financial information.
About 60 % of the candidates attempted the question and the performance was
average.
The commonest pitfall of the candidates was their lack of adequate knowledge of
the standards relevant to prospective financial information.
Candidates are advised to review relevant regulations that are essential for the
practice of the accounting profession and acquaint themselves with the Institute‟s
Study Text and Pathfinder.
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Marking guide
(a)
(b)
(c)
Any six points to be considered on both ISQC1 and ISAE
3400 @ 1 mark
For examination procedures and the issues to be
considered, any nine points @ 1 mark
Extract of the report:
Title of report
First paragraph
Management responsibility
Body of report
Disclaimer on forecast
Closing
Marks
Marks
6
9
½
1
1
1
1
½
5
20
SOLUTION 3
(a)
Comments on the sufficiency and appropriateness of the audit
evidence obtained
(i)
Provision for restructuring cost
A constructive obligation to restructure arises only when an entity:

Has a detailed formal plan for the restructuring identifying at
least the business or part of the business concerned, the
principal locations affect ted, the location, function and
approximate number of employees who will be compensated
for terminating their services, the expenditures that will be
undertaken and when the plan would be implemented; and

Has raised a valid expectation in those affected that it will carry
out the restructuring by starting to implement that plan or
announcing its main features to those affected by it.
An Evaluation of the evidences are as follows:

The evidence obtained does not appear to be sufficient to
conclude on the appropriateness of recording the provision for
restructuring costs;

The discussion with management regarding the plan is
relevant, as the audit team will need to understand
management‟s rationale. However, due consideration should
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have been given to check that the requirements of IAS 37 were
met before recognizing the provision;
(ii)

Checking that it is arithmetically correct, while appropriate, is
not sufficient evidence. Further evidence should be obtained in
order to conclude that the basis of the calculation is accurate
and all elements of the expenditure envisaged by management
has been duly accounted for; and

Review of the minutes of board meetings would have provided
evidence as to the costs approved by the board. No audit
evidence appears to have been obtained in respect of these
issues.
Investment
An evaluation of the evidences on investment are as follows:

The audit team relied on the report from the Fund Manager in
auditing the investments and income on investments, this is not
sufficient;

If the audit team had tested the controls, they would have
assessed the risk of material misstatement which would help
determine the nature, timing and extent of substantive
procedures to carry out;

IFRS 9 stipulates that financial instruments be classified into
one of the following categories:
At amortised cost;
At fair value through profit or loss; and
At fair value through other comprehensive income.
The classification of the financial instruments would determine the
measurement basis. Irrespective of the classification, interest income
on financial instruments should be computed using the original
effective interest rate and not the contractual rate;


The audit team should have considered the impact of the
improper classification and measurement of the investments
and interest income in order to propose an adjustment if the
amount is material;
There were investment transactions done directly by the
company.
The audit team traced and agreed them to the bank statements
and this procedure provides evidence that there was an outflow
of cash; however, it doesn‟t provide evidence as to whether the
cash outflow was really done with regards to investments;
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





(b)
The audit team should have also traced and agreed the
transactions to investment contract notes duly executed by the
company‟s representative and the counter party
The amounts were considered to be immaterial so the audit
team can rely on less persuasive audit evidence and does not
need to perform detailed procedures over the transactions;
There is a risk of completeness of such transactions, hence the
audit team should perform substantive procedures like cut off
testing or tests of controls over completeness;
The direct investments made is an indication of non-compliance
with company policy. The audit firm should explain the
implications of the control deficiencies to management and
recommend improvements.
Management needs to strengthen controls to ensure full
compliance with company policies; and
Staff need to be trained on the importance of controls and
management should set an appropriate tone at the top so that
there is no tolerance of controls being ignored or deliberately
circumvented.
Further audit procedures
(i)
Provision for restructuring cost

Discuss with management to confirm if the planned
restructuring had been communicated to those affected and
obtained evidence to this effect;

Review minutes of board meetings to ascertain the elements of
The cost approved by the directors in respect of the
restructuring.
(ii)
Investment

Review the service agreement between Seraphim Nigeria
Limited and Hala Funds Managers to understand the terms of
the engagement and how Seraphim uses Hala Funds as a
service organisation.

Identify, evaluate and test the controls at Seraphim which
relate to services provided by Hala Funds Managers.

If the auditor is unable to obtain sufficient audit evidence from
the Client, then he should use one or more of the following
procedures:

Contact the Hala Funds, via the client, to obtain specific
information.

Visit the Hala Funds to obtain necessary information;
and

Use another auditor to perform such procedures.
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



c.
Perform tests of detail by selecting a sample of the transactions
and agreeing the amounts and dates to investment contract
notes and the bank statements.
Ask management to determine the classification of the
investments and recompute the carrying amounts based on the
measurement requirements for each class. Compute the
difference and consider the need to propose audit adjustments.
Perform analytical review on investment income, setting an
expectation of the investment income and determining an
acceptable difference; then, comparing the expectation to the
amount recognised in the financial statements and discussing
variances with management.
The team needs to carry out procedures to ascertain the
completeness, existence and accuracy of the transactions
documented in the report. ISA 402 Audit Considerations
Relating to an Entity Using a Service Organisation requires the
auditor to obtain assurance over the operation of controls at the
service organisation.
Matters to be included in the report to those charged with governance
(i)
Provision for restructuring costs
ISA 265 Communicating Deficiencies in Internal Controls to Those
Charged with Governance and Management requires the auditor to
communicate significant deficiencies in internal control to those
charged with governance and management.
In deciding whether a control deficiency is significant, one of the
matters which should be considered is the importance of the control to
the financial reporting process. Controls that ensure segregation of
duties over journal entries are very important as they often deal with
the risk of fraudulent financial reporting.
The Finance Director should not have overridden the control over
segregation of duties on the approval and authorisation of journal
entries. The report to those charged with governance should
recommend that controls are embedded in the system such that one
person cannot initiate, process and authorise a transaction.
(ii)
Investment
The direct investments made indicate non-compliance with company
policies. The audit firm should explain the implications of the control
deficiencies to management and recommend improvements, for
example, management needs to strengthen controls to ensure full
compliance with company policies. Staffs need to be trained on the
importance of controls and management should set an appropriate
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standard at the top so that there is no tolerance of controls being
ignored or deliberately circumvented.
Examiner’s report
The question tests candidates‟ knowledge on the procedures for identifying
and obtaining relevant evidence in forming an opinion and evaluation of the
adequacy of audit work.
About 50 % of the candidates attempted the question and the performance
was average.
The commonest pitfall of the candidates was their lack of understanding on
sufficiency and appropriateness of the audit evidence obtained.
Candidates are advised to endeavour to read widely for improved
performance in subsequent examinations.
Marking guide
(a)
Comment on audit evidence obtained:
i. Provision for restructuring:
Any 5 correct points @ 1 mark
ii. Investment: Any 5 correct points @ 1 mark
(b)
Further audit procedures:
i. Provision for restructuring
Any 3 correct points @ 1 mark
ii. Investment
Any 5 correct points @ 1 mark
(c)
Report to those charged with governance:
i. Provision for restructuring
Any valid point
ii. Investment
Any valid point
Marks
Marks
5
5
10
3
5
8
1
1
2
20
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SOLUTION 4
(a)
The engagement letter must include references to the following:
(i)
The objective and scope of the audit;
(ii)
The responsibilities of the auditor;
(iii) The responsibilities of management;
(iv) Identification of the underlying financial reporting framework;
(v)
The expected form and content of any reports to be issued;
(vi) Applicable regulations, ISAs, and ethical pronouncements;
(vii) There is an unavoidable risk that some material misstatements may
Not be detected even though the audit was properly planned and
performed in accordance with ISAs; due to inherent limitations of an
audit, and the inherent limitations of internal control;
(viii) Arrangements regarding the planning and performance of the audit,
including the composition of the audit team;
(ix)
The expectation that management will provide written
representations;
(x)
The basis on which fees are computed and any billing arrangements;
(xi)
A request for management to acknowledge receipt of the engagement
letter and to agree to its terms;
(xii) Arrangements concerning the involvement of other auditors, experts
or internal auditors (or other staff of the entity);
(xiii) Any restriction of the auditor‟s liability when such possibility exists;
and
(xiv) Best practice also recommends that the engagement letter should
include an explanation of the auditor‟s responsibility with regard to
anti-money laundering checks and procedure.
(b)
The auditor may reject an engagement if any of the following circumstances
occurs:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
A limitation on scope is imposed by management such that the
auditor would be unable to express an opinion on the financial
statements.
The financial reporting framework to be used in the preparation of the
financial statements is unacceptable.
Management does not agree to the following responsibilities:
 The preparation of the financial statements;
 Provision of adequate internal controls to ensure that the financial
statements are not materially misstated; and
 Providing the auditor with all relevant and requested information
and unrestricted access to all personnel.
Lack of requisite technical skill to perform the engagement.
The proposed client is suspected to be involved in illegal activities, for
example, money laundering.
There is reputation risk in dealing with the proposed client, for
example, where there is perceived lack of integrity with the client.
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(c)
Procedures to be carried out before an audit firm accepts an audit
engagement from a new client, include ensuring that:
(i)
The auditor will be independent and there are no conflicts of interest;
(ii)
There will be performance of anti-money laundering review
procedures;
(iii) There should be an assessment of the evidence of any professional
problems attached to accepting the engagement. These might include,
for example, problems of lack of independence, or a lack of technical
expertise, or a conflict of interest;
(iv) Resources are available to complete the audit assignment; in
particular, it must ensure that there will be sufficient staff (of the right
level of expertise) available at the right time;
(v)
It takes up references on the proposed client company and its
directors, if they are not already known to the auditors. This is usually
referred to as client screening; and
(vi) It should communicate with the incumbent (existing) auditors, if there
are any, to discuss the appointment, the client and the audit work. The
method of communication is referred to in ICAN‟s Code of Conduct as
professional enquiry.
(d)
The following audit procedures are required to be carried out over opening
balances:
(i)
Read the most recent financial statements and audit report, if any, for
information relevant to opening balances;
(ii)
Check that the prior period‟s closing balances have been correctly
brought forward;
(iii) Check that opening balances reflect appropriate accounting policies;
(iv) Carry out either or both of the following procedures:
 Where the prior period‟s financial statements were audited,
reviews the proceeding joints working papers to obtain evidence
regarding this opening balances; and
 Consider whether audit procedures carried out in the current
period provide evidence on some of the opening balances, for
example, cash received from customers in the current audit period
gives evidence of the existence of a receivable at the opening date;
(v)
Carry out a review of the audit report on the financial statements for
the previous period;
(vi) Consider if the evidence found in the opening balances could contain
material misstatements affecting the current period‟s financial
statements and perform appropriate additional procedures to assess
the effect;
(vii) Evaluate if material misstatements do exist and communicate this to
those charged with governance in accordance with ISA 450;
(viii) Check that the accounting policies reflected in the opening balances
have been consistently applied in the current period or a change of
accounting policy has been properly accounted for and disclosed
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Examiner’s report
The parts (a), (b) and (c) of the question test candidates‟ knowledge on new client
engagement processes, while part (d) tests their knowledge on the procedures
applied to ensure the completeness and the reliability of opening balances.
Almost 70% of the candidates attempted the question and the performance was
good.
The commonest pitfall of the candidates was their lack of detailed knowledge of
new client engagement procedures.
Candidates are advised to devote more time to their studies and read ICAN Study
Texts and Pathfinders.
Marking guide
(a)
(b)
(c)
(d)
Content of engagement letter:
Any seven valid points @ 1 mark
Refusal of engagement:
Any three valid points @ 1 mark
Procedure for new engagement:
Any four valid points @ 1 mark
Audit procedure required:
Any six valid points @ 1 mark
Total
Marks
7
3
4
6
20
SOLUTION 5
(a)
The differences among forensic accounting, forensic investigation and
forensic audit are as analysed hereunder:
In general terms, „forensic‟ means used in connection with courts of law. In
accounting, the term „forensic‟, therefore, refers to the use of accounting
information for legal purposes, in the resolution of legal disputes or in
disputes that are resolved by a court of law. It may be used in both criminal
cases, for example, fraud cases and civil cases.
Forensic accounting
Forensic accounting involves preparing financial information for use as
evidence by a court of law. Examples include the provision of financial
information relating to:
(i)
Loss of earnings;
(ii)
Settlement of a legal dispute involving the valuation of a business;
(iii) Losses relating to an insurance claim; and
(iv)
A divorce settlement.
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There are two aspects to forensic accounting:
(i)
Forensic investigations; and
(ii)
Forensic audits.
Forensic investigations
A forensic investigation is a forensic audit carried out in response to a
suspicion of wrong-doing, usually to prove or disprove certain assumptions,
for example, „X person is carrying out a fraud‟ or „Y person was negligent in
carrying out that piece of work‟.
The objective of a forensic investigation is to obtain evidence that might be
used in legal proceedings to resolve a dispute or prove innocence/guilt in a
criminal case, such as providing evidence of money laundering.
Often, forensic investigations are usually reactive, meaning that they seek to
prove or disprove suspicions of wrongdoing and provide evidence for legal
proceedings. However, investigations can also be proactive or preventative.
Techniques of forensic auditing can be used to identify risks of wrongdoing
and then steps can be taken to improve the situation.
Forensic audit
Forensic audit is an element in forensic investigations. It refers to the
methods and procedures used to obtain audit evidence in a forensic
investigation.
Forensic auditing may be defined as the process of:
(i)
(ii)
Gathering, analyzing and reporting on data, much of it being financial
in nature, in the pre-defined context of legal dispute or investigation
into suspected irregularities; and
In some cases, giving preventative advice in this area.
The terms „forensic accounting‟, „forensic investigations‟ and „forensic audits‟
are closely connected.
However, forensic audit can be grouped into two broad approaches namely:
(i)
(ii)
(b)
Reactive forensic; and
Proactive forensic.
The government agencies associated with forensic auditing include the
following:
(i)
(ii)
The Economic and Financial Crimes Commission (EFCC) which is
empowered by the EFCC Act 2004;
The Independent Corrupt Practices and Other Related Offences
Commission (ICPC) which is empowered by the ICPC Act 2000;
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(iii)
(iv)
(v)
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
c.
The Nigeria Financial Intelligence Unit which is empowered by the
Money Laundering (Prohibition) Act 2011, as amended;
The Federal Inland Revenue Service which is empowered by the FIRS
Act to adopt measures to identify, trace, freeze, confiscate, or seize
proceeds derived from tax fraud or evasion; and
The Central Bank of Nigeria which is empowered by the Banks and
Other Financial Institutions Act (BOFIA) 2020, to order a special
investigation of the books and the affairs of any bank where it is in
the interest of the public to do so.
Other government agencies associated with forensic auditing are:
Nigerian Police Force (Criminal Investigation Department);
State Security Service (SSS);
National Drug Law Enforcement Agency (NDLEA);
Nigeria Deposit Insurance Corporation (NDIC);
National Insurance Corporation (NAICON);
National Pension Commission (PENCOM);
Security and Exchange Commission (SEC);
Nigeria Stock Exchange (NSE); and
Federal and State Ministries of Justice.
The ethical principles apply to accountants carrying out forensic work as they
apply to accountants in every situation.
The fundamental ethical principles to forensic auditor‟s engagement are as
follows:
(i)
Integrity: In legal disputes and criminal investigations, individuals
may be dishonest. However, the forensic accountant must act with
integrity and honesty at all times;
(ii)
Objectivity: The forensic accountant is paid by a client to carry out an
investigation, and the client will presumably be hoping for a
particular outcome to the investigation, for example, in a fraud
investigation, the criminal investigators who use a forensic accountant
may be hoping for evidence of guilt. However, the forensic accountant
must remain independent (in spite of the advocacy threat) and should
seek to obtain evidence to reach a fair opinion;
(iii) Professional competence and due care: Forensic accounting is a
specialised area of work, and individuals should be sufficiently
competent to do the work.
(iv) Confidentiality: The normal ethical rule is that accountants should
maintain client confidentiality, and should not disclose information
without the client‟s consent. An exception is that the duty of
confidentiality is overridden by the requirement to provide evidence
when requested to a court of law. Legal requirements for disclosure
override the rules of client confidentiality; and
(v)
Professional behaviour: Forensic accountants often appear as
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witnesses in court, and in the public eye, they should display
professional behaviour and act in a way that is not detrimental to the
image of the accounting profession.
d.
The procedures that might be performed in a forensic audit are as follows:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Establish the objectives of the audit which is to determine if the
auditor is negligent in performing his duties;
Plan the audit with a view to achieving the objectives;
Audit evidence should be gathered. This can be done in different
ways, like interviewing the members of the audit team, reviewing the
audit working papers, re-performing some of the audit procedures
done by the audit team;
The forensic auditor should use the evidence obtained to reach an
opinion. If the evidence is insufficient, he/she should try to obtain
additional evidence;
At the end of the audit, a report is prepared for the client; and
The audit work should, therefore, be planned in a way that will
provide sufficient and appropriate evidence to achieve the objectives
of the audit.
Examiner’s report
The question tests candidates‟ knowledge on forensic services, the agencies
involved, the ethical principles relating to an auditor in forensic engagement and
the forensic audit procedures.
Approximately 75% of the candidates attempted the question as it had an appeal
amongst candidates because of its inclusive nature but the performance was just
below average.
The commonest pitfall of the candidates was their inability to properly distinguish
the features amongst the various forensic concepts.
Candidates are advised to ensure thorough preparation for subsequent
examinations and to focus on the intrinsic features of forensic concepts in the study
materials.
Marking guide
(a)
Differences:
Explanation/basis of forensic accounting
Definition
Two aspects
Forensic investigation
Any two points on explanation/definition @ 1 mark
Forensic audit
Marks
Marks
1
1
2
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(b)
(c)
(d)
Any valid explanation
Identification of the group
Agencies:
Any four agencies identified @ 1 mark
Ethical principles:
Identification and explanation of each principle @ 1
mark
Procedure for forensic audit
Any 5 points @ 1 mark
1
1
6
4
4
5
5
5
5
20
QUESTION 6
(a)
The matters which cast significant doubts on the ability of the company to
continue as a going concern are:
(i)
Revenue and profitability
Based on the extract financial statements, the company‟s revenue
reduced by 19.7% and the company made losses for the two
consecutive years, the loss was N102 million in 2017 and N109 million
in 2018. Earnings before interest and taxes was negative for both
2017 and 2018. The loss-making position of the company does not in
itself indicate that the company is not a going concern. However, a
trend seems to have developed and the company needs to urgently
return to profit in the 2019 financial year.
(ii)
Bank loan
The bank loan increased by N1.1 billion between 2017 to 2018. The
loan represents 46% of the total assets of the company in 2017 and
233% in 2018. Considering that the reason for obtaining the loan was
to support the working capital of the bank, it might have been better
to obtain an overdraft instead of a term loan so as to reduce the cost
of financing. The collateral is a fixed and floating charge on the
company‟s assets, so if the company is unable to pay the loan
installment due, the bank has a right to seize and sell the company‟s
assets to settle the loan. This poses a risk to the bank‟s ability to
continue as a going concern.
(iii)
Trade payables
The trade payables balance increased by N200 million or 250%,
probably as a result of the extension of the credit days from 60 to 90
days. The request for extension indicates that the company is not
generating enough cash from its sales to pay its suppliers. If the
situation persists or worsens and the company finds itself unable to
meet the payment terms agreed with its trade payables, they might
stop supplying to the company or insist on cash and carry. If this
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happens, the company‟s operations would be hampered and its going
concern assumption threatened.
(iv)
Borrowing facility
The undrawn lines of credit provides Wazobia with a possible source
of cash which could help ease its cash flow problems. However, to
access it, Wazobia has to show that it has met the covenants of the
loan contract. From the calculations below, it is clear that Wazobia is
in breach of the loan covenants, so the bank could withdraw the line
of credit leaving Wazobia with no additional source of cash to fall
back on.
2018
Interest cover 2:1
(N101,759)/N7,500= (13.57)
Borrowings to total N1,400,000/600,500 = 2.33:1
assets 1:1
(v)
2017
(N97,721)/N5,000 = (19.54)
N300,000/N645,600= 0.46:1
Contingent liability
The litigation exposes the company to a possible cash outflow of N200
million, the timing of which is uncertain. Considering the company‟s
financial performance, if it loses the case, satisfying the judgement debt
would lead to a significant reduction in available cash reserves and the
company might be declared insolvent which might lead to bankruptcy.
(b)
Audit procedures in relation to going concern matters identified include:
(i)
Discuss with management: Management should be asked to explain the
reasons why they consider the going concern assumption to be valid.
They should also be asked about their future plans for the business. If
the entity is expecting to make a loss the following year, the possible
implications of this for the going concern assumption should be
discussed extensively;
(ii) Obtain a cash flow forecast: A cash flow forecast should be obtained
from the entity and this should also be discussed with management.
The assumptions in the forecast should be checked and, if appropriate,
challenged. If there is a forecast of a cash shortage, the auditor should
discuss with management their plans for obtaining the additional
financing that will be required especially proprietary capital;
(iii) Review the sales order book: If this indicates a continued decline in
sales orders, the issue should be discussed with management.
(iv) Review ageing of receivables: Check a list of ageing receivables and
assess the average time to pay. Compare the average time to pay by
trade receivables to the credit period of 90 days obtained from the
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supplier, if customers are taking longer than 90 days to pay, this may
have adverse implications for operational cash flow;
(v)
Consider whether any planned capital expenditure by the entity may be
insufficient to support the business as a going concern in the future;
(vi) If a key senior employee has left the business entity in the recent past,
the possible implications (for example, the possibility of losing key
customers with the loss of the key employee) should be discussed;
(vii) Litigation: If the company is involved in continuing litigation, and faces
the possibility of having to pay a large amount of money to settle the
dispute, the implications should be discussed;
(viii) Obtain information from the client‟s bank. Since the client is expecting
to rely on continuing financial support from its bank, the bank should
be asked to confirm that the financing arrangement will remain
available;
(ix) After discussing the issues with management, the auditor should obtain
a letter of representation from management confirming their opinion
that the entity is a going concern;
(x)
Read the minutes of the meetings of shareholders, those charged with
governance and relevant committees for reference to trading and
financing difficulties; and
(xi) Evaluate management‟s willingness to accept the preparation of the
financial statements in a different basis (break up basis) and if
management does not agree to change its view, consider making a
qualified audit report
Examiner’s report
The question tests candidates‟ knowledge on various issues relating to going
concern status of a business organisation.
This was poorly attempted as only about 50% of the candidates attempted the
question and the performance was below average.
The commonest pitfall of the candidates was their inability to evaluate the
indicators of going concern concept and also the inability to determine the
appropriate audit procedures to address the issues.
Candidates are advised to read ICAN Study Text and other relevant study materials
to ensure improved performance in future.
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Marking guide
(a)
(b)
Going concern matters:
Identification of the 5 matters @ 1 mark
Explanation of each of the matters identified @ 1 mark
Audit procedures
Any 10 procedures discussed @ 1 mark
TOTAL
Marks
10
10
20
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
NOVEMBER 2021 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
and
Examiners‘ Reports
NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2021
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF THE SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
Eat Well Bakeries is a private limited liability company. It bakes bread and other
confectioneries which produces from the main bakery and another small bakery, in
another part of the town. The bakeries‘ products are sold from the two bakeries and
five other outlets in the same town. Those who sell the products to other
neighbouring towns are distributors who buy the products outright and bear the
risk of sale or lose subsequently.
The main administrative functions and the management of the bakeries are
undertaken from the main bakery. The small bakery and the sales outlets keep
some basic records on activities. These records are transmitted to the main office
every morning by the support staff in each location. Detailed accounting records
and putting everything together to ascertain performance is done in the main and
administrative office.
Though Eat Well Bakeries is a private business, the chairman has insisted on
transparently ensuring that proper standards are maintained as he believes and
shares the view that the bakery is to be competitive and is able to excel among
competitors and remain relevant.
The partner you work under and the chairman of the bakeries met in a social
gathering and after interactions between the two, the chairman decided to transfer
the company‘s audit to your firm. Professional clearance was sought and obtained
from the predecessor auditor but not much other documentation were found to
have been available. The partner knew the company to be a small one but did not
bother to do detailed documentation when the audit was started.
You have come to continue from where the associates assigned to the task have
reached and to ensure that the expectations and confidence of the chairman is met.
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Required:
a.
b.
c.
d.
Evaluate the Auditor‘s objective in respect of ISA 250 that would be
discussed with the chairman.
(5 Marks)
Prepare in an outline format the matters that are to be communicated.
(5 Marks)
Your review of the system of operations shows some challenges with the
internal control processes of the company. Based on this, prepare a brief on:
i.
The meaning of deficiency which may need to be focused on as
identified by ISA 265;
(3 Marks)
ii.
The things required to be included in the communication to the
chairman on deficiencies
(5 Marks)
Evaluate the audit strategies available from which an appropriate model
would be selected for application to Eat Well Bakeries
(12 Marks)
(Total 30 Marks)
SECTION B:
OPEN-ENDED QUESTIONS
(40 MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION
QUESTION 2
The auditors of Sunsit Manufacturers Limited had disagreements with the company
on various issues. This came to a climax with the withholding of a part of the
payment of the last audit fees. The auditors had also been disenchanted with the
undue pressures of management, and have decided that as a result of this and the
withheld fees would disengage from the client.
The company‘s chairman, in consideration of the issues in the past has considered
the size of the audit firm as being partly responsible for its inability to manage
adequately the pressures from the company accounting and management team. He
has subsequently approached your firm for a change and the partners have
accepted the engagement despite the predecessor auditor‘s declaration of the
forfeiture of the firm‘s outstanding fees and none further involvement with the
client and issues relating to the company.
Required:
a.
Following the background to the client and the engagement, evaluate the
internal and external business risks that need to be considered with respect
to the client.
(10 Marks)
b.
Discuss the pre-engagement activities to be carried on the client. (10 Marks)
(Total 20 Marks)
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QUESTION 3
a.
The availability of Computer Assisted Audit Techniques (CAATs) should be
considered by the Auditor when planning the nature, extent and timing of
tests in an audit. Hence the auditor must determine his testing strategies
which will depend on his decision of either using a Manual Testing method
or CAATs method, to avoid loss of audit trail.
Required:
b.
i.
Discuss FIVE solutions to loss of audit trail.
ii.
Evaluate the merits and demerits of the application of CAATs.
(7 Marks)
(5 Marks)
You have been appointed as the auditor of a company that processes its
accounting functions using a computer system. You have decided to use
computer assisted audit techniques (CAATs) to generate necessary audit
evidence for this engagement.
Required:
i.
ii.
Discuss the activities members of the audit team could perform with
their computers in the client‘s office.
(4 Marks)
Analyse TWO types of audit software in use in computer based
information systems.
(4 Marks)
(Total 20 Marks)
QUESTION 4
Your firm is the auditor of Sharp Electronics Co. Plc a listed company, which
assembles electronic home appliances for sale on retail and wholesale bases. The
electronic appliances parts are purchased from within and outside the country. The
extract from the statement of financial position of the company is as follows:
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Sharp Electronics Co. Plc
Statement Of Financial Position
Non-current assets
Development cost
Tangible assets
Investments
Current assets:
Inventory
Receivables
Cash at bank and in hand
Current liabilities:
Payables: amounts falling due within one year
Payables: amount falling due after one year
Equity:
Share capital
Share premium account
Revaluation reserve
Retained earnings
2019
N’000
2018
N’000
59,810
99,400
85,100
244,310
101,400
73,000
174,400
58,190
184,630
9,970
479,100
63,010
156,720
62,620
456,750
231,510
101,180
170,900
93,840
89,700
11,300
19,750
43,660
497,100
89,700
11,300
9,750
81,260
456,750
You have been asked by the partner in charge of the audit to consider your firm's
audit responsibilities with respect to subsequent events, and the associated audit
on such matters.
Required:
a.
Discuss the responsibilities of the auditors for detecting misstatements in the
financial statements during the following periods.
i.
ii.
iii.
b.
From the end of the reporting period and up to the date of the audit
report.
(8 Marks)
After the date of the audit report and before financial statements are
issued.
(6 Marks)
After the financial statements have been issued.
(3 Marks)
State the details of the work you will carry out in period (a)(ii) above to
confirm that no adjustments are required on the financial statements.
(3 Marks)
(Total 20 Marks)
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SECTION C:
OPEN-ENDED QUESTIONS
(30
MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION
QUESTION 5
Yeye Oge Limited has decided to change its auditors after the current year‘s audit.
The present auditor has served for a number of years and there is a mutual
agreement on the change. The relationship between the company‘s key officials
and the partner of the present audit firm had become so cordial that both parties
are now getting concerned about the likely deviation from professional
relationship, hence, the mutual agreement for the change of auditors.
You work for the present audit firm and your partner who is involved in this case
has been asked to participate in the selection of a new audit firm for this client.
Both the Chief Executive of the company and your partner have agreed also to
follow due processes in selecting the new auditor. For proper understanding of
what is required, it is necessary that certain background processes required for
professional selection are made available to the chief executive of the company.
Required:
a.
b.
Evaluate the requirements of the Institute on advertising and publicity that
need to be focused on while considering the competing firms.
(5 marks)
Discuss the approved tendering process and evaluation of tender as a guide,
giving proper meaning to the term ―Low balling‖.
(10 marks)
(Total 15 Marks)
QUESTION 6
The firm you work for has considered the growing development in some sectors of
the economy and the opportunities this development portends.
Your firm is a sole practitioner and though the partner has the skills and
professional competences necessary to undertake big jobs, applications for big jobs
have always been turned down.
In order to get involved and secure some of these big jobs, your partner has
dialogued with some other sole practitioners who share the same view with him.
They have agreed and decided to operate a merged firm from the year 2022. The
appropriate registration of the new practice name with Corporate Affairs
Commission and application for licence in the new name from the Institute are also
being processed.
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To get ready to secure and execute some of these big jobs, preparations are to
commence immediately the registrations are approved. Some of the target jobs are
computerised entities, hence your partner has assigned you some tasks to prepare,
as he is the lead partner.
Required:
a.
Prepare a document showing the application controls that will be focused on
in the computerised systems of the entities.
(7 Marks)
b.
Develop an appropriate audit strategy in accordance with ISA 300,
―Planning an audit of financial statements‖.
(8 Marks)
(Total 15 Marks)
QUESTION 7
Egunje Distributors Limited is a private company in which Chief Idowu is the major
shareholder. Chief Idowu set up the business to help provide resources for his
philanthropic gestures. He has been involved in the major control activities and the
business was achieving its purpose and things were working well.
After a number of years, Chief Idowu stepped aside from the business and handed
over the effective management to one of his subordinates who he equally elevated
to the rank of General Manager (GM). The GM followed the control processes of
Chief Idowu for only one year and began to introduce new ideas and processes
which has led to undue amounts going into his private accounts rather than the
accounts of the business. This has affected the results of the company.
While Chief Idowu has not decided to take any hasty action, he has decided to bring
in your firm, because of your firm‘s size so that through your work, he may
understand the reasons for the dwindling performance. It has also been discussed
and agreed that your report on the audit will give insight into the reasons for the
observed decline in performance.
Required:
a.
Discuss the control environment focusing on the requirements of ISA 315 –
Identifying and assessing the risk of material misstatement through
understanding the entity and its environment, that will be relevant to this
b.
situation.
(9 Marks)
Evaluate the control activities that will require your attention.
(6 Marks)
(Total 15 Marks)
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SOLUTION 1
a.
The objectives of the auditor in respect of ISA 250 that would be discussed
with the chairman are:
 obtain a general understanding of the applicable legal and regulatory
framework and how the entity is complying with that framework. This is
part of obtaining an understanding of the entity and its environment
 obtain sufficient appropriate audit evidence in respect of compliance with
those laws and regulations which might be expected to have a direct effect
on material amounts and disclosures in the financial statements
 perform the following audit procedures to help identify such instances of
non-compliance:
 Make enquiries of management as to whether or not the entity is
complying with the relevant laws and regulations
 Inspect any correspondence with the relevant authorities
 during the audit, remain alert to the possibility that other audit procedures
might bring instances of non-compliances to the auditor‘s attention
 obtain written representations from management that all known instances
of non-compliance have been disclosed to the auditor
 document all identified or suspected instances of non-compliance and the
results of discussions with management and other parties.
b.
The matters to be communicated include the following:
 the auditor‘s responsibilities in relation to the audit, including notification
that
 he is responsible for forming and giving an opinion on the financial
statements prepared by management, and
 the audit does not relieve management or those charged with
governance of their responsibilities, with respect to the financial
statements.
 an overview of the planned scope and timing of the audit.
 any significant findings from the audit.
These are often called the management letter points and are usually
communicated along with, any deficiencies in internal control as required by
ISA 265. They also include:
 the auditor‘s views on the entity‘s accounting policies, estimates and
financial statement disclosures
 any significant difficulties encountered during the audit
 any significant matters arising from the audit already brought to the
attention of management and written representations requested
 any other matters arising from the audit that are significant to the oversight
of the financial reporting process.
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c.
(i)
a deficiency is defined by ISA 265 as where:
 A control is designed, implemented or operated in such a way that it is
unable to prevent, or detect and correct misstatements in the financial
statements on a timely basis, or
 A control necessary to prevent, or detect and correct misstatements in
the financial statements on a timely basis is missing.
 A significant deficiency is one which merits the attention of those
charged with governance.
(ii)
The communication to the chairman of significant deficiencies must be in
writing and is required to cover:
 A description of the deficiencies and explanation of their potential
effects.
 Sufficient information to allow those charged with governance and
management to understand the context of the communication,
including an explanation that:
 The purpose of the audit was to express an opinion on the financial
statements
 The audit did include consideration of internal controls in order to
design appropriate audit procedures. This was not done for the
purpose of expressing an opinion on the effectiveness of internal
control, and
 The matters being reported are limited to those deficiencies identified
during the audit and considered of sufficient importance to be
reported.
d.
The main audit strategies are summarised in the table below:
Strategy/approach
Outline of approach
Statement of financial (i) This approach concentrates on the statement of
position approach
financial position figures using substantive
testing, on the argument that if the opening
and closing statements of financial position are
accurate, then the profit or loss for the year
must also be stated accurately.
Substantive testing
(ii)
This approach focuses on applying
approach
substantive test to a large number of
transactions and account balances recorded in
the accounting system of the client.
(iii) This focus on recorded transactions and
balances means that under-statements may not
be detected. (The auditor may ignore
transactions that have not been recorded.)
(iv) This approach is time consuming and costly
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Systems-based
approach
Risk-based approach
and business risk
approach
for the audit of large companies.
(v)
This approach is appropriate where systems
and controls are weak or not operating.
Substantive tests on transactions and balances
are therefore necessary to reach an opinion
about the financial statements.
(vi) It is widely used for the audit of smaller
entities where controls are likely to be weak
and also some specialized audit.
(vii) There is a danger of spending too much
time auditing transactions or balances that
are not material.
(viii) There is a risk that misstatements in the
financial transactions will not be detected
unless all transactions are tested, not just a
sample.
 The audit focus is on the application of tests of
control to the systems that produce the figures
in the financial statements, rather than on the
figures themselves.
 A systems-based approach is supported by
some degree of substantive testing, because of
the unavoidable transactions or weaknesses in
the internal control systems. (The amount of
substantive testing required will depend on the
auditor‘s judgement about the effectiveness of
the internal controls.)
 It is also supported by the use of analytical
procedures.
 It is more cost-effective than a full substantive
testing approach, but there is still a danger of
doing too much unnecessary auditing of areas
where controls are operating well.
(i) An assessment is made of the likelihood of
material misstatement existing in each area of
the audit.
(ii) Areas that are assessed as high risk are audited
extensively (using substantive test, a systemsbased approach and analytical procedures.)
(iii) Areas assessed as low-risk are given a low
level of attention in the audit.
(iv) Auditing methods (applied mainly by large
audit practices) focus on ‗business risk‘ rather
than ‗overall audit risk‘.
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Examiner’s report
The question tests candidates‘ knowledge of the requirements of ISA 250:
Consideration of Laws and Regulations in an Audit of Financial Statements, matters
for communication, internal control processes and deficiencies in accordance with
ISA 265; and audit strategy.
This is a compulsory question and all candidates attempted it. Candidates‘
performance was poor.
The common pitfalls of the candidates were the presumption that the requirement
of part (a) of the question tested the requirements of ISA 260: Communication with
those Charged with Governance and lack of knowledge of the required standards.
Candidates are advised to farmiliarise themselves with the Institute‘s Study Texts
and Pathfinders which are freely available on the Institute‘s website.
Marking guide
1
a)
b)
ci)
cii)
d)
1 mark each for any 5 points
1 mark each for any 5 points
1½ marks each for any 2 points
1 mark each for any 5 points
1 mark each for identification of each strategy/approach
1 mark each for any 8 points subject to at least one point
from each strategy
Total
Marks
4
8
Marks
5
5
3
3
12
30
SOLUTION 2
a.
The internal business risks for consideration include the following:
 Risks arising from ineffective employees or weak management;
 The risks from a lack of customer care and attention to customer needs:
poor customer awareness will eventually have an effect on sales demand.
 Poor financial management such as excessive levels of gearing, poor cash
management and poor working capital control.
 Lack of finance for capital expenditure on equipment replacement or
modernization.
 Risks due to systems weaknesses or system failures: internal control
weaknesses.
 Risk from over-reliance on one or two key individuals.
 Risk of fraud or misappropriation of assets.
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The external business risks for considerations include the following:
 The possible loss of a major contract as a result of a dispute with a
customer.
 Long-term decline in demand for the company‘s products, and failure to
invest in research and development of new products.
 The impact of new competitor moving into the market.
 The impact of proposed changes in laws and regulations, for example
where a company needs a licence to operate (as in financial services) there
may be a risk that the licence will be withdrawn or will not be renewed.
 The effect of new technology.
 The effect of changes in the macro-economy, such as changes in interest
rates or exchange rates or a downturn in the economy (lower economic
growth or possibly an economic recession).
 The impact of natural hazards (such as storms and flooding that may affect
the company‘s ability to maintain operational capacity).
 Threats from competitors to a company‘s patents or copyrights.
 Uncomfortable business environment.
b.
The pre-engagement activities necessary for the situation include:
 Agreeing the terms of engagement in accordance with ISA 210 – Agreeing
Terms of Audit Engagement, and this is done by –
(i) Establishing whether the preconditions for an audit are present; and
(ii)
Confirming that there is a common understanding between the
auditor and the management.
To establish if the preconditions for an audit are present, ISA 210 requires the
auditor to:
 To establish if the financial reporting framework to be used in the
preparation of the financial statements is acceptable.
 Obtain the agreement of the management that it acknowledges and
understands its responsibility:
 for the preparation of the financial statements;
 for internal controls to ensure that the financial statements are not
materially misstated;
 to provide the auditor with all relevant and requested information and
unrestricted access to all personnel.
 ISA510: Initial audit engagements, provide guidance on the auditor‘s
responsibility in relation to balances where:
 The financial statement for the prior period were not audited; or
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 The financial statements for the prior period were audited by another
auditor (referred to as predecessor auditor)
The objective of the auditor when considering such an initial audit
engagement is to obtain sufficient appropriate audit evidence about whether:
 The opening balances contain misstatements that materially affect the
current period‘s financial statements, and
 Appropriate accounting policies reflected in the opening balances
have been properly accounted (or change of accounting policy has
been accounted for and disclosed).
The following audit procedures are required:
(i)
Read the most recent financial statements and audit report, if any, for
information relevant to opening balances.
(ii)
Check that the prior period‘s closing balances have been correctly
brought forward.
(iii)
Check that opening balances reflect appropriate accounting policies.
(iv)
One or more of the following procedures:
 Where the prior period financial statements were audited, review the
predecessor auditor‘s working papers to obtain evidence in relation to
opening balances.
 Consider whether audit procedures carried out in the current period
provide evidence on some of the opening balances. For example if
cash received from customers in the current period gives evidence of
the existence of a receivable at the opening date.
 Carry out audit procedures to obtain evidence in relation to opening
balances and a review of the audit report on the financial statements
for the previous period.
 if evidence is found that opening balances could contain material
misstatements affecting the current period‘s financial statements, perform
appropriate additional procedures to assess the effect,
 if such misstatements do exist, communicate to those charged with
governance in accordance with ISA 450.
 check that the accounting policies reflected in the opening balances have
been consistently applied in the current period (or a change of accounting
policy has been properly accounted for and disclosed).
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Examiner’s report
The question tests candidates‘ knowledge of the business risks associated with a
clients‘ operations and pre-engagement activities.
The question was attempted by about 90% of the candidates. The performance of
the candidates in part (a) of the question was good, but they displayed poor
understanding of part (b). The overall performance was below average.
The commonest pitfall of the candidates was their inability to evaluate the risks
associated with an audit.
Candidates are advised to familiarise themselves with practical aspects of audit
engagement and also to study properly the Institute‘s Study Texts and Pathfinders.
Marking guide
2
a)
1 mark each for any 5 internal points
1 mark each for any 5 external points
b)
1 mark each for 2 points on the terms with ISA 210
1 mark each for the precondition on ISA 210
1 mark each for any 2 points on ISA 510
1 mark each for any 4 points on the audit procedures
Total
Marks
5
5
2
2
2
4
Marks
10
10
20
SOLUTION 3
a
(i) Solutions to loss of audit trail include:
 External back up of the data to ensure there is another copy;
 Restriction of unauthorised personnel into the data processing
environment;
 Transmission of the control of specified and responsible personnel;
 Production of a hard copy of the evidence generated through the audit
process;
 The application of a computer assisted audit technique e.g test data and
computer audit program to provide the necessary audit trail;
 ‗Getting into the computer system‘ to check the completeness of the data;
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 Ensuring that the computer system is maintained in a dust or hazardous
free environment;
 The auditor may perform alternative audit procedure such as third party
confirmation and physical verification as a basis for corroborating
computer generated balance.
(ii)
Merits of CAATs:
 They give the auditor an ability to test the completeness and accuracy of
the electronic processing itself (the computer software), rather than
relying only on testing the accuracy and completeness of inputs and
outputs.
 They give the auditor an ability to test a large number of transactions in
a relatively short amount of time: testing large amounts of data reduces
overall audit risk.
 They allow the auditor to test the effectiveness of the controls that are
programmed into the computer.
Demerits of CAATs
CAATs give the auditor the ability to audit the processing transactions in a
computer-based information system. However, the value of using CAATs
should be assessed on the cost-benefit basis. CAATs should only be used if
the benefits from their use exceed the costs.
The costs related to the use of CAATs may include:
 Purchasing or developing the programs;
 Keeping the programs up-to-date, for changes in hardware and software;
 Training audit staff in their use. CAATs are of no value unless auditors are
properly trained in how to use them;
 Obtaining time on the client‘s computer systems to run the CAATs.
b. (i)
It is usual for members of an audit team to take laptop computers with
them to the client‘s premises, for use with the administration,
documentation and performance of the audit assignment. Laptop computers
may be used for tasks such as:
 Audit administration and control (for example, preparing time sheets and
audit work programs);
 Audit planning work ( for example, for risk and materiality assessments);
 Preparing audit working papers;
 Analytical procedures (including holding on file a record of statistics and
financial ratios for the client for previous years);
 Sampling software, if appropriate.
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(ii) Audit software is computer programs used by the auditor to extract
information from a clients computer-based information system, for use in the
audit.
The main types of audit software include:
 Interrogation programs, to access the client‘s files and records and
extract data for auditing;
 Interactive software, for use in interrogation of on-line computer systems;
 ‗Resident code‘ or ‗embedded software‘, to monitor and review
transactions as they are being processed by the client‘s programs. This
type of software is called embedded audit facilities.
Examiner’s report
The question tests the concept of loss of audit trail, CAATs, use of computer systems
in audit and audit software.
The question was attempted by about 70% of the candidates, but the performance
was poor.
Majority of the candidates failed to exhibit good knowledge of the use of computers
in performing audit functions in a client‘s environment and were unable to discuss
the two types of audit software in use in computer audit systems.
Candidates are advised to pay close attention to the technicalities associated with
computerised audit environments and to read the Institute‘s Study Texts and
Pathfinders.
Marking guide
3 a) (i) 1 mark each for any 5 points
(ii) 1 mark for each point on merits
1 mark for each point in demerits
b) (i) 1 mark each for any 4 points
(ii) 2 marks for any 2 points
Total
Marks
5
3
4
4
4
20
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SOLUTION 4
a(i) Events occurring after the reporting period and up to the date of the audit
report.
Between the end of the reporting period and the date of the audit report, the
auditor is required to obtain sufficient appropriate evidence that all events
that require adjustment of or disclosure in the financial statements:
 have been identified, and
 are suitably reported in the financial statements.
Normal audit verification work
The auditor may find sufficient evidence of subsequent events in the course of
normal audit verification work. Where this is the case he is not required to
perform additional audit procedures. Such normal audit verification work will
include looking at sales, invoices and cash transactions after the year-end in
order to verify items in the statement of financial position at the year end. For
example:




The audit of receivables will consider whether receivables at the end of
the reporting period are collectable. Cash receipts after the year-end may
indicate a significant non-payment, suggesting the need to write off a
debt as ‗bad‘.
The audit of inventory procedures includes a review of the net realizable
value of inventory. Sales of inventory after the year-end may indicate that
some inventory in the statement of financial position is over-valued
(because subsequent events have shown that its NRV was less than cost).
A search for unrecorded liabilities may discover the existence of some
unrecorded liabilities, from invoices received after the reporting period
but relating to the period covered by the financial statements.
A review of the entity‘s cash position at the end of the reporting period
may find that a cheque from a customer, recorded as part of the bank
balances, was dishonoured after the reporting period.
Procedures aimed specifically at identifying subsequent events
The auditor should also actively look for ‗subsequent events‘, up to the
time that he prepares the audit report. Taking into account his risk
assessment of this area, he should:
 obtain an understanding of management‘s procedures for identifying
subsequent events;
 inquire of management as to whether any subsequent events have
occurred which might affect the financial statements;
 read the entity‘s latest subsequent financial statements;
 read minutes of shareholders‘ meetings, meetings of the board of directors
and senior management meetings held after the date of the financial
statements and inquire about matters discussed at any such meetings
where minutes are not available;
 obtain written representations in respect of subsequent events.
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(ii)
Facts discovered after the date of the audit report and before the financial
statements are issued
Even after the date on which the audit report is signed, the auditor retains
some degree of responsibility for events of which he becomes aware, up to
the time that the financial statements are issued. He is not required, during
this period, to actively look for subsequent events. His level of responsibility
is therefore much reduced compared with the period before the signing of
the audit report.
If the auditor becomes aware of a fact that, had it been known to him at the
date of the report, may have caused him to amend his report then he must:
 discuss the matter with management;
 determine whether the financial statements need amending; and
 inquire how management intend to address the matter in the financial
statements.
If the financial statements are amended, the auditor is required to:
 carry out the necessary audit procedures on the amendment(s), and
 extend his review of subsequent events up to the date of the new audit
report.
If management do not amend the financial statements for the subsequent
event, but the auditor feels that an amendment should be made, the auditor
should take the following action.
 If the audit report has not yet been provided to the entity, modify his
opinion as appropriate.
If the audit report has been provided to the entity:
 instruct management not to issue the financial statements before the
necessary amendments have been made
 if they do so, take appropriate action to prevent reliance on the audit
report, after taking legal advice.
(iii)
Facts discovered after the financial statements have been issued
The auditor has no obligation to perform audit procedures or make inquiries
regarding the financial statements after they have been issued.
However, if he becomes aware of a fact that, had it been known to him at the
date of his audit report, may have caused him to amend his report then he
should:
 discuss the matter with management
 determine how the financial statements need amending, and
 inquire how management intend to address the matter in the financial
statements.
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If the financial statements are amended, the auditor is required to:
 carry out the necessary audit procedures on the amendment
 extend his review of subsequent events up to the date of the new audit
report (as above)
 review the steps taken by management to inform anyone who received the
original financial statements and audit report of the situation
 issue a new audit report, containing an emphasis of matter paragraph or
other matter paragraph. This should refer to a note in the revised financial
statements that explains in more detail the reason for the re-issue of the
financial statements.
b
Disclosures for non-adjusting events after the reporting period
Non-adjusting events after the reporting period are treated differently. A nonadjusting event relates to conditions that did not exist at the end of the
reporting period, therefore the financial statements must not be updated to
include the effects of the event. IAS 10 states quite firmly: ‗An entity shall not
adjust the amounts recognized in its financial statements to reflect nonadjusting events after the reporting period.
However, IAS 10 goes on to say that if a non-adjusting event is material, a
failure by the entity to provide a disclosure about it could influence the
economic decisions taken by users of the financial statements. For material
non-adjusting events IAS 10 therefore requires disclosure of:
i. the nature of the event; and
ii. an estimate of its financial effect, or a statement that such an estimate
cannot be made.
This information should be disclosed in a note to the financial statements.
IAS 10 gives the following examples of non-adjusting events:
i. A fall in value of an asset after the reporting period, such as a large fall in
the market value of some investments owned by the entity between the end
of the reporting period and the date the financial statements are authorized
for issue.
ii. The acquisition or disposal of a major subsidiary.
iii. The formal announcement of a plan to discontinue a major operation.
iv. Announcing or commencing the implementation of a major restructuring.
v. The destruction of a major plant by a fire after the reporting period.
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Examiner’s report
This question tests knowledge of the auditor‘s responsibility for detecting
misstatements in financial statements at various stages of the audit and reporting
processes.
Only about 45% of the candidates attempted this question and this performance
was poor.
The commonest pitfall was the candidates‘ lack of understanding of the auditors‘
responsibilities with respect to misstatements in financial statements.
Candidates are advised to pay close attention to the requirements of each question,
and ensure that they read the Institute‘s Study Texts and Pathfinders when
preparing for future examinations.
Marking guide
Marks
8
6
3
4 a) (i) 1 mark each for any 8 points
(ii) 1 mark each for any 6 points
(iii) 1 mark each for any 3 points
b)
1 mark each for any 3 points
Total
3
20
SOLUTION 5
a. Advertising and publicity
When a professional accountant in public practice solicits new work through
advertising or other forms of marketing, there may be a threat to compliance
with the fundamental ethical principles. For example, a self-interest threat to
compliance with the principle of professional behaviour is created if services,
achievements, or products are marketed in a way that is inconsistent with that
principle.
Advertising and publicity activities by accountancy firms are therefore
regulated by IFAC and ICAN through their codes of ethics and conduct
respectively.
Note that ICAN has adopted all of IFAC‘s guidance in this
matter.
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The main requirements for marketing professional services are that the
advertising and publicity material used by any firm:
i. must not bring into disrepute the professional body, the firm or the
profession as a whole;
ii. should not make exaggerated claims for services offered, qualifications
possessed or experience gained – it should be honest and truthful and
not mislead;
iii. must not discredit the services provided by other firms or make
disparaging references or unsubstantiated comparisons to the work of
another Chartered Accountant
iv. must not break any locally-recognised codes of advertising practice.
In addition, it is recommended that advertising and publicity material
should avoid any reference to fees. If fees are mentioned, there should be a
statement of the basis on which the fees are to be charged. Comments about
fees:
(i)
must not be misleading;
(ii) must not offer discounts, and
(iii) must not make comparison with the fees of other service providers.
ICAN‘s Professional Code of Conduct and Guide for Members states that if a
Chartered Accountant in public practice is in doubt whether a proposed form
of advertising or marketing is appropriate, they should consult through the
Registrar/Chief Executive of ICAN.
b. Tendering
Tendering is a commercial process widely-used by companies (especially
larger companies) when they wish to change auditors. Tendering involves two
or more audit firms being invited by an entity/prospective client to submit a
proposal for its audit work.
The invitation may or may not include the existing auditor.
This section describes the commercial tender process used by prospective
clients to select new auditors. There are the specific legal and ethical
mechanism associated with actually changing the auditor in Nigeria.
The tendering process should be broken down into the following stages
(assuming that a firm is submitting a tender for the audit of a new client):
(i) Collect background information about the possible new client. (This is
necessary when evaluating any new client, whether the fee is to be set
by tender or by any other method.)
(ii) Establish the precise scope of the work to be performed and the specific
requirements of the prospective client.
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(iii) Carry out a preliminary audit risk assessment and prepare a preliminary
plan for the audit. The plan must cover the staffing requirements and the
time requirements for the work.
(iv) Estimate a fee.
(v) Prepare a submission document for the potential client. The contents of
this document will typically include:
 an outline of the key characteristics of the firm;
 clarification of the nature of the audit work or other non-audit work to
be performed;
 a statement of the requirements of the client and how the firm will
comply with them;
 an outline of how the work will be performed;
 the proposed fee and the basis of its calculation;
 the range of other services which the firm could offer to the client.
 If required, prepare and give a presentation to the potential client.
Evaluating the tender
In evaluating the tender, the client (company) is likely to consider the
following issues:
 Fees
 The services that the firm is able to provide
 Geographical locations and coverage of the firm‘s offices
 Expertise of the firm and its staff
 Reputation of the firm
 Whether the senior management of the prospective client think that they
will be able to work well (on a personal level) with the potential
engagement partner and key audit staff
 The formal presentation itself by the audit firm
 The extent to which the company wants to change its audit firm, and its
dissatisfaction with the current audit firm.
Low balling
Low balling is the practice of tendering for the audit work at a very low fee,
with the objective of winning the audit. If it is successful in obtaining the
audit, the firm will hope that:
 it will be able to raise the audit fee in future years, or
 it will be able to recover losses on the audit fee by providing other, more
lucrative non-audit services.
Although there is no evidence that low balling leads to a poor-quality audit,
the fact that it exists does nothing to improve the reputation of the auditing
profession. The existence of low fees may suggest to the business community
and to the general public that audit work is of a low quality. All fees should
be sufficiently adequate to compensate a firm for the work that it carries
out.
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Examiner’s report
The question tests candidates‘ knowledge of the requirements of the Institute‘s
Code of Conduct on advertising and publicity, and the tendering process.
Over 90% of the candidates attempted the question and the performance was above
average.
The common pitfall was the candidates‘ poor understanding of the contents of the
Code of Conduct for members.
Candidates are advised to read thoroughly the Institute‘s Study Texts and
Pathfinders.
Marking guide
5 a)
b)
1 mark for any 5 points
1 mark each for any 4 points on Tendering
1 mark each for any 4 points on Evaluating the Tender
1 mark each for the 2 points on Low bailing
Total
Marks
5
4
4
2
15
SOLUTION 6
a.
Application controls
It is also necessary for the auditor to identify and assess the application
controls in each specific computer-based application such as the inventory,
receivables and payroll system. The auditor must be satisfied that the
application controls for a particular system are affective.
Application controls are specific controls over each specific computerised
accounting application or system. The purpose of application controls is to
provide assurance that:
(i) processed transactions have been properly authorised, and
(ii)
the processing of data is complete, accurate and timely.
In a manual processing system, internal controls vary according to the
application. For example, internal controls over inventory are different from
the controls over payroll processing. Similarly, application controls in a
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computer-based information system will vary depending on the nature of the
application.
However, application controls for different computer applications share a
number of common features, regardless of the particular application involved.
In particular, the auditor will place a high degree of emphasis on controls over
input. For application controls to be effective, it is essential that input must be
complete and accurate. If the input is not correct, the output from the
application cannot be expected to be correct.
Application controls that will be focused on in computerized system entities
are:
Control area
Controls
Input
Authorisation
 Data for input should be authorised before input
 Data is input only by authorised personnel
Completeness
There should be checks to ensure that all data has been
processed. Checks might consist of:
(i) Document counts (for example, counting the number of
invoices)
(ii)Control totals
(iii)
Checking output to input
(iv) Review of output against expected values (for example,
is the total payroll cost broadly in line with expectations)
Accuracy
There should be some checks within the computer software in
the validity of input data items (data validation checks).
These may include:
 Checks digits for key code items, such as supplier codes,
customers codes and employee identification numbers
 Range checks(= a check on whether a particular value or
figure is feasible and within a realistic range of values)
 Existence checks (= a check on whether a particular code
exists)
 Revenue and reconciliation of output
 Use of control totals
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Processing
There should be checks that all inputs have been processed
and that processing is complete. Checks might include:
 Control totals
 Batch totals (where the computer counts the number of
transactions in a processed batch and this is checked
against a manual record of the number of items in the
batch)
 Manual review
 On-screen warning that processing is not complete
Master files
and standing
data
 Management review of master files and standing data
 Regular updates of master files
 Record counts
The auditor should review the application controls for each application, to establish
whether they are effective ‗on paper‘. He should then carry out tests of controls to
establish whether the application controls are operating effectively in practice.
b.
Audit strategy in accordance with ISA 300, Planning an audit of financial
statements
The auditor‘s work on planning is regulated primarily by ISA 300 Planning an
audit of financial statements, which requires the auditor to plan the audit so
that the audit work will be performed in an effective manner. An overall audit
plan should be developed, detailing the expected scope of the audit and how
the audit should be conducted.
ISA 300 states that:
i. an audit should be planned so that it is performed effectively
ii. the auditor should establish an overall audit strategy, and
iii. the audit plan should include measures for the direction, supervision and
review of audit work.
Audit strategy memorandum
Most auditors prepare an audit strategy memorandum. This is a document setting
out the main points involved in the planning process and the key planning
decisions that have been taken.
The memorandum will cover the following areas:
 The assignment objectives and reports to be issued.
 The audit timetable, to meet the required reporting deadlines for the auditor's
report.
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 Changes in the client‘s organisation or business, or external (‗environmental‘)
changes affecting the client‘s business, since the previous audit.
 A summary of key financial ratios and other ratios from previous years.
 Planning decisions for the audit.
 The use that will be made of the client‘s staff in the audit (for example,
internal auditors) and the use that will be made of external experts.
 Possible problem areas in the audit and the approach to be adopted to deal
with them.
 Staffing requirements for the audit, the planned allocation of the work
between members of the audit team, time budgets and records from previous
audits.
 Attendance locations (if the client has more than one location).
 Proposed methods of communication with the client (for example,
meeting/reports).
The memorandum should be reviewed and approved by the engagement
partner.
Examiner’s report
The question tests candidates‘ knowledge of the controls in computerised systems
and audit strategy in accordance with ISA 300: Planning the Audit of Financial
Statements.
About 60% of the candidates attempted the question and they showed good
understanding of the second part of which appeared to be the attraction.
The commonest pitfall was the shallow understanding of the computerised
environment and the components of ISA 300.
Candidates are advised to read the Institute‘s Study Texts and Pathfinders.
Marking guide
Marks
6 a)
b)
1 mark each for 7 points subject to:
4 points from Input
2 points from Processing
1 point from Master files and Standing data
1 mark each for any 8 points
Total
4
2
1
Marks
7
8
15
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SOLUTION 7
a.
ISA 315 identifies five components which together make up an internal control
system. These are:
i. the control environment
ii. the entity‘s risk assessment process
iii. the information system
iv. Control activities (internal control)
v. The review and monitoring of controls
The control environment has been defined by the Institute of Internal Auditors
as follows: ―the attitude and actions of the board [of directors] and
management regarding the significance of control within the organisation.
The control environment provides the discipline and structure for the
achievement of the primary objectives of the system of internal control. The
control environment includes the following elements:






Integrity and ethical values
Management‘s philosophy and operating style
Organisational structure
Assignment of authority and responsibility
Human resource policies and practice and
Competence of personnel.
A strong control environment is typically one where management shows a high
level of commitment to establishing and operating sound controls.
The existence of a strong control environment cannot guarantee that controls are
operating effectively, but it is seen as positive factor in the auditor‘s risk assessment
process. Without a strong control environment, the control system as a whole is
likely to be weak.
b.
Control activities are the practices and procedures, other than the control
environment, used to ensure that the entity‘s objectives are achieved. They are
the application of internal controls.
Control activities are the specific procedures designed.
i. to prevent errors that may arise in processing information, or
ii. to detect and correct errors that may arise in processing information
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The control activities that will require attention are evaluated below:

Authorisation controls: These require that all significant transactions
must be authorised by a manager at an appropriate level in the
organisation.

Physical controls over assets: These are controls for safeguarding
assets from unauthorised use, or from theft or damage. An example is
limiting access to inventory areas to a restricted number of authorised
personnel.

Arithmetic controls: These are checks on the arithmetical accuracy of
processing. An example is checking invoices from suppliers, to make sure
that the amount payable has been calculated correctly.

Accounting controls: These are controls that are provided within
accounting procedures to ensure the accuracy or completeness of
records.

Management controls. These are controls applied by management. They
include supervision by management of the work of subordinates,
management review of performance and control reporting (including
management accounting techniques such as standards setting, variance
analysis, budgeting and budgetary control).

Segregation of duties
Segregation of duties means dividing the work to be done between two
or more individuals, so that the work done by one individual acts as a
check on the work of the others. This reduces the risk of error or fraud.
 If several individuals are involved in the completion of an overall task,
this increases the likelihood that errors will be detected when they are
made. Individuals can often spot mistakes of other people more easily
than they can identify their own mistakes.
 It is more difficult for a person to commit fraud, because a colleague
may identify suspicious transactions by a colleague who is trying to
commit a fraud.
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Examiner’s report
This question tests the candidates‘ knowledge of the control environment in
accordance with the requirements of ISA 315 and the control activities that require
auditor‘s attention.
About 60% percent of the candidates attempted the question but the performance
was below average.
The commonest pitfall was the candidates‘ inability to discuss the control
environment focusing on the requirements of ISA 315.
Candidates are advised to familiarise themselves with ISAs, the Institute‘s Study
Texts and Pathfinders to improve their performance in future.
Marking guide
7 a)
b)
Marks
9
6
15
1 mark each for any 9 points
1 mark each for any 6 points
Total
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
MAY 2022 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
and
Examiner’s Reports
NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – MAY 2022
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF THE SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
A firm of Chartered Accountants has 25 partners and 100 audit staff. The firm
provides a range of audit, assurance, tax and advisory/consultancy services. The firm
has offices around the country and clients ranging from sole traders to limited
liability companies.
The quality control partner has recently resigned. He has not yet been replaced as
the Board of Partners of the firm has not been able to find a suitable replacement.
Before his departure, the quality control partner was in the process of implementing
a system of ethical compliance for assurance staff. Based on the foregoing, staff
would be required to confirm in writing their compliance with the Code of Ethics,
hence, implementation of this system is incomplete.
Oshodi Plc is one of the firm's largest clients for which the firm provides audit, tax
and other advisory services. A new engagement partner has been assigned to the
audit, as the previous partner in charge was the one who resigned. The fee for the
audit work and other services has been set at the same level as the previous year in
spite of the fact that additional work will need to be performed because Oshodi Plc
has introduced a new computerised system. The starting date of the audit has been
delayed due to problems with the new system. The management of Oshodi Plc was
very insistent that the fee should not be increased as a result of this.
Required:
Discuss the requirements of ISQC 1: International Standard on quality control on
overall audit firm level, which address each of the following:
a.
b.
c.
d.
e.
f.
g.
Leadership responsibilities for quality
Ethical requirements
Acceptance and continuance of engagements
Human resources
Engagement performance
Monitoring
Documentation
(3 Marks)
(5 Marks)
(5 Marks)
(5 Marks)
(5 Marks)
(4 Marks)
(3 Marks)
(Total 30 Marks)
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SECTION B:
OPEN-ENDED QUESTIONS
(40 MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION
QUESTION 2
Pegrace Nigeria Limited (PNL), your audit client, is a national hotel group with
substantial cash resources. Its accounting functions are well managed and the
group’s accounting policies are rigorously applied. The company's financial year end
is December 31.
The company has been seeking to acquire a construction company for some time in
order to bring in-house the building and refurbishment of hotels and related leisure
facilities, like swimming pools, volley ball court and restaurants. The management
has recently identified Robin Construction Company Limited (RCCL), as a potential
target and has urgently requested that you undertake a limited due diligence review.
Further to the preliminary talks between the management of RCCL and PNL, you were
provided with the following brief on Robin Construction Company Limited:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
The Chief Executive, Managing Director and Finance Director are all family
members and major shareholders. The company has an established reputation
for quality constructions;
Due to a recession in the building business, the company has been operating
at its overdraft limit for the last 18 months and has been close to breaching
debt obligation on several occasions;
Robin's accounting policies are generally less prudent than those of Pegrace
(assets are depreciated over longer estimated useful lives);
Contract revenue is recognised on the percentage of completion method,
measured by reference to costs incurred to date. Provisions are made for lossmaking contracts;
The company's management team includes a qualified and experienced
quantity surveyor, whose main responsibilities are:
•
Supervising quarterly physical counts at major construction sites;
•
Comparing costs to date against quarterly rolling budgets; and
•
Determining profits or losses, by contract, at each financial year end; and
Labour force is provided under subcontracts. During construction, the
regulatory body visited the site and discovered non compliance with site
health and safety regulations.
In February 2021, Robin received a claim that a site on which it built a housing
development in Banana Estate was not properly drained and is now sinking.
Residents are demanding rectification and asking for payment or damages. Robin
has referred the matter to its legal counsel and denied all liability, as the site
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preparation was subcontracted to Sahara Services Company Limited. No provisions
have been made in respect of the claims, nor has any disclosures been made.
The auditor's report on Robin's financial statements for the year ended December 31,
2020 was signed, without modification, in March 2021.
Required
With reference to the above scenario:
a.
Prepare a document to give the explanatory meaning of the term 'due
diligence' and subsequently discuss items to investigate in a due diligence
exercise.
(12 Marks)
b.
Advise on how to recognize, measure, present and disclose leases as required
by IFRS 1
(8 Marks)
(Total 20 Marks)
QUESTION 3
Tijara Nigeria Limited has a credit facility of N6 million with Godiya Bank. The facility
was due to expire on December 31, 2021. The overdraft in the recently audited
statement of financial position as at September 30, 2021 is N5.5 million. The directors
of Tijara have started negotiations with their bankers for a renewal of the facility and
to increase the amount to N9 million. To support this request, the bank has asked
Tijara to provide a business plan for the coming twelve months consisting of a cash
flow forecast supported by a forecast income statement and statement of financial
position.
The management of Tijara has produced a cash flow forecast for the period October
1, 2021 to September 30, 2022 and, at the request of the bank, has asked an auditor
to examine and report on it.
The Audit Manager, who has recently completed Tijara audit, has been asked to make
a preliminary examination of the cash flow forecast and supporting materials. The
manager has made the following observations:
(i)
The cash flows from sales are based on the assumption of an overall increase
in sales of 24% compared to the previous financial year. Analysis shows that
this is based on an increase in selling price of 5% and an increase in the volume
of sales of 18%. Just over a quarter of all Tijara sales are made to foreign
customers;
(ii)
The cost of sales in the recently audited comprehensive income to September
30, 2021 was 80% of sales revenue, giving a gross profit of 20%. In the forecast
income statement for the year to September 30, 2022 the cost of sales has
fallen to 72%, giving a gross profit of 28%. Manufacturing costs are made up
of equal proportion of materials, labour and production overheads;
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(iii)
The trade receivables collection period used in the cash flow forecast to
September 30, 2022 is 61 days. In the year to September 30, 2021, this period
averaged 93 days. Management has stated that it is its intention to inform all
customers of a new standard 60-day credit period. In addition, an early
settlement discount of 1% will apply to customers who settle their accounts
within 30 days of the statement. Conversely, the credit period for trade
payables has been extended from an average of 45 days in the current year to
90 days in the forecast; and
(iv)
The cash flow forecast showed that the maximum credit required during the
period would rise to nearly N9 million in August 2022.
Required:
a.
Describe the general approach to the assurance work an auditor should
consider before accepting the engagement of a reporting accountant on
Prospective Financial Information (PFI) ISAE 3400: The examination of
prospective Financial Information.
(8 Marks)
b.
Detail the procedures applicable to cash flow forecast of Tijara for the year to
September 30, 2022.
(7 Marks)
c.
Prepare a summarised presentation of what the reporting accountant should
consider in forming an opinion on pospective financial information (PFI).
(5 Marks)
(Total 20 Marks)
QUESTION 4
The idea to incorporate Peters & Shamsudeen Haulages Limited was mooted in
London and it was incorporated on the return of Alhaji Shamsudeen to Nigeria. He
met Peters during his stay in the UK. They had good relationship which started in a
coffee shop. As they met regularly in this shop, what to do on Alhaji Shamsudeen’s
return to Nigeria became the subject of discussion. Based on their experiences, the
idea of Peters & Shamsudeen Haulages Limited was birthed. Alhaji Shamsudeen
subsequently returned to Nigeria, incorporated the company, obtained the
appropriate expatriate quota and Mr. Peters came in and started running the
company. On commencement, Sejumade Uzoma & Co was appointed the company’s
external auditors. Whilst Mr. Peters was around, there was a good working
relationship between the company and the audit firm.
After about nine years, Mr. Peters returned to UK leaving the company in the hands
of Alhaji Shamsudeen. Subsequently, Sejumade Uzoma & Co started receiving
complaints from Alhaji Shamsudeen and his key accounting staff. These complaints
were rife even before the ninth month of the current year that Sejumade Uzoma &
Co. decided not to continue with the engagement. The audit fee for the previous year
had about thirty percent outstanding at this stage.
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This was the position when Alhaji Shamsudeen approached your partner at Musa,
Edewo & Co. (Chartered Accountants). Their discussion was fruitful for your firm,
hence it was agreed by the partners that full professional procedures would be
applied as normal. Part of the information available on interaction is that the year is
almost ending and there was uncertainty about the firm that will do the audit before
the engagement of your firm. You have the responsibility of assisting your partner in
ensuring that proper documentations would be done without any compromise.
Required:
a.
According to professional requirements, discuss the issues your firm is expected
to address in her correspondence with Sejumade Uzoma & Co.
(10 Marks)
b.
Evaluate the various circumstances that would lead to change in professional
appointment.
(5 Marks)
c.
In consideration of the client, analyse the procedures necessary for proper client
identification in accordance with anti-money laundering requirements.
(5 Marks)
(Total 20 Marks)
SECTION C:
OPEN-ENDED QUESTIONS
(30 MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION
QUESTION 5
The Companies and Allied Matters Act, 2020 has classifications and responsibilities
for various types of companies incorporated under it. A particular class that has
received more attention in recent times and in the Act is small companies.
Your audit team has been approached by a few of these small companies for
guidance on the issue and your team has been assigned this responsibility. Part of
the concerns of your firm is whether or not those small companies merit the concerns
of regulatory authorities and the accounting firms that have to be responsible for
their audit.
Your team has a number of young assistants who are yet to understand the
differences and therefore need enlightment on this as part of the training
programmes.
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Required:
a.
b.
Discuss the arguments for and against the exemption of small companies from
audit.
(10 Marks)
On the basis that an audit may be conducted for a small entity, evaluate the
points the auditors would consider.
(5 Marks)
(Total 15 Marks)
QUESTION 6
The accountancy profession earns confidence and public respect partly as a result of
its self regulatory mechanism, application of legal principles and professional
standards.
This issue became a subject of discussion when a group of business owners who just
incorporated their companies were deliberating on who should carry out an audit and
what are the guiding principles for determining the performance of such
responsibility.
Required:
a.
b.
Prepare a manual to enable the discussants understand this professional
members eligibility to act as an external auditor.
(9 Marks
Discuss the objectives of an auditor in accordance with ISA 200: Overall
objectives of the independent auditor and the conduct of an auditor in
accordance with International Standards on Auditing.
(6 Marks)
(Total 15 Marks)
QUESTION 7
BARCHI International Limited is a company with corporate registrations in both
United Kingdom (U.K.) and Nigeria. The Chairman of the company is based in
Nigeria and from time to time, travels to the U. K. to oversee the office there and
order for the purchase of some of the articles for sale. To ensure steady supply of the
products, some of the products are also ordered from China. The purchases from U.K.
are charged to the Nigerian entity in pound sterling, while the purchases from China
are charged to the Nigerian company in American dollars.
In September, 2020 the Chairman embarked on a trip to Dubai for two weeks where
he spent part of his annual holiday. During this period, he hosted a couple of friends
with the costs that were paid for by the company as the costs were above his
approved annual holiday expenses. He subsequently traveled to UK and was
quarantined for two weeks due to COVID-19 before moving to the usual business
lodge that he uses. Despite using that period to oversee the UK company, all the costs
incurred were borne by the Nigerian company.
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The products bought in UK and sent to Nigeria were charged at cost plus 25%, while
the Nigerian company was responsible for insurance and freight. The goods
purchased from China were forwarded to Nigeria at cost of landing in Nigeria plus
30%. The China-made products are less expensive and therefore give better profits
despite the cost of the long distance freight.
Money was transferred to the Chairman’s account for the company’s purchases in UK,
the purchases made in China and the chairman’s personal expenses. An agent in
China bought the goods which were paid for by the Chairman.
The UK company staff handled the documentation of all the transactions of the
Chairman while there and transferred them to Nigeria subject to the approval of the
Chairman.
Separate records were not maintained for the Chairman’s expenses in the UK.
However, his comparison of the results of the two units showed that for the
immediate past financial year, the Nigerian company had performed sub-optimally
and way below the targeted profit in relation to the UK company. The Chairman is
very unhappy about this as he expects that his personal visit to UK would reduce the
purchasing and associated costs. It is usual for the Chairman to account for the cost
of purchases based on his personal expenses attributable to each purchase together
with the actual cost of purchases. The UK component is elated about this costing
method which favours it and would wish that this arrangement continues. The two
units prepare separate financial statements which are audited by separate
accounting firms before the two financial statements are consolidated in Nigeria for
the Chairman’s evaluation.
Required:
Evaluate, with appropriate justifications, from the scenario above, the areas of risk
which the auditor needs to consider.
(15 Marks)
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SECTION A
SOLUTION 1
The quality control procedures that are applied within audit firms will reflect the
nature and size of the audit practice. However, personnel within the firm who are
responsible for establishing and maintaining quality control procedures must have
an understanding of the entire text of ISCQ 1. As the firm must meet the requirements
of ISQC 1, it should have a system in place which addresses each of the following
elements:
•
Leadership responsibilities for quality;
•
Ethical requirements;
•
Acceptance and continuance of engagements;
•
Human resources;
•
Engagement performance;
•
Monitoring; and
•
Documentation.
The requirements of ISQC 1 in each of these areas are considered below:
(a)
Leadership responsibilities for quality
i.
ii.
iii.
(b)
ISQC 1 requires a firm to establish policies and procedures designed
to promote an internal culture recognizing that quality is essential;
Ultimate responsibility for quality control policies and procedures
should rest with the firm’s CEO (or equivalent) or Board of Partners (or
equivalent); and
Any person who has operational responsibility for quality control
Should have appropriate experience, ability and the necessary
authority.
Ethical requirements
i.
ii.
ISQC 1 requires a firm to establish policies and procedures to comply
with relevant ethical requirements thus:
•
Communicate its independence requirements to staff, and
•
Identify and evaluate circumstances and relationships that
create threats to independence, assessing the impact of such
threats and applying safeguards or withdrawing from the
engagement if appropriate.
ISQC 1 requires a firm to maintain independence where required to do
so by the following requirements:
•
Staff to notify the firm of circumstances and relationships that
might create a threat to independence;
•
Staff to notify the firm of any breaches of independence of
which they have become aware;
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•
•
(c)
The firm to communicate such breaches to the engagement
partner and other relevant staff; and
The engagement partner to advise the firm of action to be
taken.
Acceptance and continuance of engagements
ISQC 1 requires the firm to establish policies and procedures to provide it with
reasonable assurance that the firm will only take on or continue work where
the firm:
i.
Is competent to perform the engagement;
ii.
Has the capabilities (including the necessary resources) to do so;
iii. Can comply with the relevant ethical requirements; and
iv. Has considered the integrity of the client and does not have information
which would lead it to conclude that the client lacks integrity.
The policies and procedures should require the firm to:
i.
ii.
iii.
Obtain sufficient information to make such decisions (for new or existing
engagements);
Consider potential conflicts of interest and therefore, decide whether or
not it should accept the engagement; and
Document all identified issues and how they were resolved.
Before the start of the audit each year, the engagement partner for the audit
should:
i.
ii.
(d)
Ensure that all members of the audit team are independent of the client
and there are no conflicts of interest; and
Be satisfied with the ethical integrity of the client entity and its
management.
Human resources
ISQC 1 requires the firm to ensure that:
i.
ii.
iii.
iv.
It has sufficient personnel with the competence, capabilities and
commitment to ethical principles to meet its overall quality control
objectives;
For each engagement an appropriate engagement partner and team are
assigned;
Policies should therefore exist for the recruitment, training and
development of staff. The firm should ensure compliance with ISAs and
audit staff should have a good knowledge of accounting standards and
local/national statutory accounting regulations;
The firm’s technical auditing procedures should be set out in a manual
and reinforced by training. Newsletters and/or meetings could be used as
a means of ensuring that professional staff are kept up-to-date on current
developments;
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v.
vi.
(e)
Work should be assigned to staff that are competent to perform that work;
and
There should be procedures for ensuring that an audit team collectively
has the appropriate level of technical knowledge for the audit
engagement and includes individuals with experience of audits of a
similar complexity, and an ability to apply professional judgment.
Engagement performance
Policies and procedures are required to include:
i. Those to promote consistent quality engagement performance;
ii. Supervisory responsibilities;
iii. Review responsibilities (on the basis that more experienced team
members review the work of less experienced team members);
iv. Guidance on consultation to ensure that:
• Appropriate consultation takes place on difficult or contentious
matters;
• Sufficient resources are available for such consultation;
• The nature, scope and conclusions of the consultation are documented
(by both parties); and
• Conclusions arising from the consultation are implemented.
v. Guidance on engagement quality control reviews to ensure that:
• An engagement quality control review is required for audits of all listed
entity clients;
• Criteria are established to determine which other engagements should
be subject to an engagement quality control review;
• The review covers certain procedures (the same as set out in ISA 220);
• Engagement quality control reviewers are eligible to carry out such
reviews via technical qualifications, experience, authority and
objectivity from the engagement; and
• Engagement quality control reviews are properly documented.
vi.
Procedures for dealing with any differences of opinion between the
engagement team and those consulted or between the engagement
partner and the engagement quality control reviewer; and
vii.
Procedures in respect of completion of the final audit files on a timely
basis and the confidentiality and safe custody of such documentation for
an appropriate period.
(f)
Monitoring of quality control
This procedure should ensure that:
i.
The firm is required to establish a monitoring process designed to
provide it with reasonable assurance that its quality control system is
relevant, adequate and operating effectively. This process should
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ii.
iii.
iv.
v.
vi.
vii.
(g)
include inspecting, on a cyclical basis, at least one completed
engagement for each engagement partner;
Responsibility for the monitoring process should be given to a partner
or other appropriate person with sufficient experience and authority.
When monitoring reviews (also referred to as ‘cold reviews’) are carried
out they should not be performed by those involved with the
engagement or the engagement quality control review;
The firm should evaluate the effect of any deficiencies found to
determine if they do indicate a failing in the firm’s quality control
system;
The firm should communicate such deficiencies to relevant personnel,
together with appropriate remedial action such as:
• Action in relation to individual engagements or employees;
• Communication of findings to those responsible for training and
professional development;
• Changes to the firm’s quality control system; and
• Disciplinary action, especially against repeat offenders.
If the results of monitoring procedures indicate that an inappropriate
report may have been issued, or procedures were omitted during the
engagement, the firm should determine what further action is needed.
This might include obtaining legal advice;
The firm should produce an annual report for partners setting out:
• The monitoring procedures performed;
• The conclusions drawn; and
• Any systematic deficiencies found and remedial action taken.
The monitoring system should include procedures for dealing with
complaints and allegations against the firm. These should include
establishing channels through which employees can come forward
without fear of reprisals.
Documentation of quality control procedures
The following matters are required to be documented:
i.
Evidence of the operation of each element of the system of quality
control;
ii.
Complaints and allegations made against the firm and how these were
resolved; and
iii.
Documentation must be retained for a sufficient period of time, as a
minimum to comply with relevant laws and regulations.
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Examiner’s report
The question tests candidates’ knowledge on ISQC 1: Quality control for firms that
perform audits and reviews of financial statements and other assurance and related
service engagements.
This being a compulsory question, about 95% of the candidates attempted it but the
performance was below average despite the fact that some components of the same
ISQC 1 was tested about two diets ago.
The commonest pitfalls of the candidates were their lack of essential knowledge of
the components of quality control and their application in relation to the audit of
financial statements.
Candidates are advised to familiarize themselves with the relevant aspects of the
ingredients required in the review of financial statements as contained in
appropriate standards. They should also study the Institute’s Study Text and
Pathfinders.
Marking guide
a.
b.
c.
d.
e.
Leadership responsibility for quality
(i) Requirement for policies and procedures
(ii) Requirement for quality control
(iii) Operational responsibility
Ethical requirements:
- Requirements to establish policies and procedures
(1 mark each subject to a maximum of 2 points)
- Requirement to maintain independence
(1 mark each subject to a maximum of 3 points)
Acceptance and continuance of engagement
- Policies and procedures to provide reasonable
assurance.
(2 points out of 4 @ 1mark each)
- Policy requirements of the firm
(2 points out of 3 @ 1 mark each)
- Responsibility of Exchange Partner
(1 mark each for any 1 point)
Human resources
(1 mark each subject to a maximum of 5 points)
Engagement performance
Discussion of these policies and procedures:
First three policies
(1 mark for each point)
Other policies
(1 mark each for any 2 points)
Marks
Marks
1
1
1
3
2
3
5
2
2
1
5
5
3
2
5
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Monitoring of quality control procedures
Discussion on these procedures
(1 mark each subject to a maximum of 4 points)
Documentation of quality control procedures
Discussion on the procedure
(1 mark each subject to a maximum of 3 points)
Total
f.
g.
4
3
30
SOLUTION 2
(a)
Due diligence:
(i)
Refers to any engagement where the practitioner is engaged to make
inquiries into the accounts, organization or activities of an entity;
(ii)
Involves obtaining information about the target company, prior to the
takeover (or merger). The objective should be to find out everything that
may be relevant about the target company’s operations, financial
performance, financial position and future prospects. In addition,
information should also be gathered about the business environment in
which the target company operates;
(iii) Implies that the practitioner will also interview the senior management
of the target company, other key employees and possibly external third
parties. Due diligence work does not involve tests of controls (unless the
client specifically asks for this), nor does it involve substantive testing.
Due diligence work is not a form of audit work;
(iv) Main objective is often to provide information that will allow the client
to decide whether a takeover or merger is actually desirable, and if so,
whether the proposed cost of the acquisition is reasonable; and
(v)
On presentation of an adverse or critical report may, therefore, result in:
(i)
(ii)
Abandoning a proposed takeover or merger, or
Reducing the offer price for the acquisition.
Items to investigate in a due diligence exercise include:
(i)
Financial performance and financial position.
The practitioner will look at the available historical financial information
about the target company, such as its financial statements for the past
few years. Ratio analysis will often be used to make an assessment. The
practitioner will also look at the target company’s management
accounts, budgets and profit/cash flow forecasts, and any current
business plan.
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(ii)
Operational issues
The practitioner should also look for any operational issues in the target
company that may raise questions about its value. For example, the
target company might have important contracts with major customers,
and the practitioner should try to find out when these contracts reach
their termination dates and the probability that the contracts will be
renewed. Other operational problems may be discovered, such as a high
rate of labor turnover, or high costs incurred in meeting warranties or
guarantees to customers.
(iii) Management representations
Management of the takeover target may have provided representations
to the potential buyer. For example, they might have given a written
assurance that the target company is not subject to any tax investigation
or potential litigation. Due diligence work should seek to establish that
these representations appear to be correct.
(iv) Identification of assets.
A takeover usually results in purchased goodwill in the consolidated
accounts. However, the takeover target may have several intangible
assets that do not appear in its statement of financial position (because
they were internally-generated assets) but which should be recognized
for the purpose of consolidation. Examples are internally-generated
patent rights, customer lists and databases and brand names.
These should be identified and valued, for inclusion in the consolidated
statement of financial position after the acquisition. It is also useful for
the management of the potential buyer to be aware of the nature and
estimated value of the intangible assets that they would be acquiring.
(v)
Benefits and costs of a takeover
Due diligence may also include an attempt to estimate the future benefits
of the takeover, such as cost savings from synergies and economies of
scale. Any ‘one off’ expenses, such as redundancy costs and
reorganization costs will have to be estimated by the potential buyer if
not by the due diligence process.
Advice on how to recognize, measure, present and disclose leases as required
by IFRS 16:
i.
Recognition of lease
IFRS 16 “leases”, requires that a lessee (a customer) should recognise a
right-of-use asset and lease liability in every lease contract. However,
IFRS 16 permits the lessee to expense short term lease and low value
lease in the statement of profit or loss.
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ii.
Measurement
• IFRS 16 requires that the right-of use asset should be initially
measured at cost. The cost of the right-of use asset is the present
value of the lease payments plus directly attributable costs incurred
by the lessee. After the initial recognition, IFRS 16 requires that the
right-of use asset should be measured, using the cost model of IAS 16
“Property, Plant and Equipment” at cost less accumulated
depreciation and accumulated impairments.
•
•
•
•
•
iii
The lease liability should be initially measured at the present value
of lease payment and subsequently measured using the amortized
cost method of IFRS 9 “Financial Instruments”.
The entity must demonstrate that the application of the Standard to
a portfolio is done on the basis of a reasonable expectation that the
effects of so doing would not differ materially from the application
of the rules to individual leases. This will require the entity to
construct representative samples and evaluation for them to support
their assertion. Has the auditor examined these, perhaps forming
their own samples, in order to conclude whether the materiality of
any difference is acceptable?
Are those previous determinations of “arrangements” (contracts) that
whilst not legally a lease, are nevertheless in substance, a lease, still
applicable under IFRS 16?
There is a preference for discounting, using the interest rate implicit
in the lease, but as an alternative, if the interest rate implicit is not
determinable, then the lessee’s incremental borrowing rate is used.
Has any such rate taken into account not just an observable current
interest rate, but also adjusted for factors unique to the lease (e.g. the
lessee’s credit standing, the amount being borrowed, the term of the
borrowing, the quality of any collateral etc.)? and
Are the portfolio groupings of leases that share similar characteristic
appropriate?
Presentation and disclosure requirements include:
• The description of the lease arrangement;
• The amount of depreciation charge on the right-of use asset;
• The amount of interest expense on the lease liability;
• The amount expense relating to short term lease and low; value lease
during the year; and
• The additions of right-of use asset during the year.
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Examiner’s report
The question tests the candidates’ knowledge of the meaning of due diligence, and
the items to investigate in a due diligence exercise. Candidates are also required to
recognise, measure, present and disclose leases as required by IFRS 16.
About 70% of the candidates attempted the question and the performance was
average.
The commonest pitfall of the candidates was their lack of adequate knowledge of
standards and the specific ingredients required of leases.
Candidates are advised to review relevant standards that are essential for
professional practice and appraise themselves with the Institute’s provided study
materials.
Marking guide
Marks
Explanatory meaning of due diligence
(1 mark each subject to a maximum of 4 points)
Items to investigate in a due diligence exercise
(Identification of any 4 points @ 1 mark each)
Discussion of each of the 4 points identified
(1 mark each for any point)
Recognition, measurement, presentation disclosure
of leases by IFRS 16
i. Recognition of lease
ii. Measurement
(2 marks each subject to a maximum of 2 points)
iii. Presentation and disclosure requirements
(1 mark each subject to a maximum of 2 points)
Total
a.
b.
Marks
4
4
4
12
2
4
2
8
20
SOLUTION 3
(a)
The general approach to the assurance work should be similar to the approach
for audit work or other assurance work, but with some modifications to allow
for the specific nature of the work.
Procedures will include the following:
i.
Where the audit firm has no previous knowledge of the entity, it
should obtain sufficient knowledge of the entity and its environment;
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ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
(b)
If best estimate assumptions have been used in preparing the
prospective financial information (PFI) (a forecast), the auditor should
seek evidence to support these estimates;
If hypothetical assumptions have been used to prepare a projection,
the auditor should assess whether they are realistic and sensible, and
whether the full implications of the hypothetical assumptions have
been properly reflected in the PFI;
The auditor should assess whether the PFI contains all the relevant
material items and that nothing of significance has been omitted;
If part of the ‘future period’ in the forecast or projection has already
passed, the auditor should review the actual results for that part of the
period, and compare actual results with the forecast or projection. The
differences will help the auditor to assess the reliability of the forecast
or accuracy of the projection;
The auditor should also check the arithmetical accuracy and
consistency of the projected financial information that has been
prepared;
The auditor should obtain representations from management on:
• Management’s acceptance of responsibility for the information
• The intended use of the information
• The completeness of the assumptions that we were made to prepare
the PFI;
Many of the points relevant to deciding whether to accept any audit or
assurance engagement will apply to accepting a PFI assurance
engagement;
Issues to consider will include, for example:
• The availability of resources and staff with the necessary expertise;
• The time scale for the completion of the engagement; and
• Agreeing a fee for the work with the client;
The accountant should also establish with the client the form that the
assurance report should take. It is particularly important that the
client should understand that in a review of forward-looking
information, only negative assurance can be provided;
The client should also be informed that the audit firm will comply with
the requirements of ISAE 3400 when reviewing the prospective
financial information; and
An engagement letter should be agreed and signed by both parties
before the work is actually started.
Procedures in a PFI engagement of Tijara
There are several specific points that might apply to PFI engagements:
i.
Understanding the nature of the information to be examined;
ii.
Establishing the intended use of the information (and the intended
recipients of the final report);
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iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
(c)
Establishing whether the information will be for general distribution or
limited distribution to a small number of users;
Evaluating the nature of the assumptions that have been made by
management (whether they are best estimate assumptions for a
forecast, or hypothetical assumptions for the purpose of making a
projection);
Determining the time period covered by this information. When
deciding the nature, timing and extent of the procedures required to
complete a PFI assurance engagement, the auditor should consider the
following issues;
Ascertaining the likelihood of material misstatement in the forecast or
projection;
Applying the knowledge that the auditor has obtained during any
previous similar engagements;
Evaluating the competence of the client’s management with regard to
the preparation of PFI;
Determining the extent to which the PFI is affected by management’s
judgment (in other words, to what extent does the PFI depend on
judgment about best estimates or hypotheses); and
Assessing the adequacy and reliability of the underlying data and
assumptions that have been used as the basis for preparing the
prospective financial information.
The summarized presentation of what the reporting accountant should
consider in forming an opinion on PFI are:
i.
A reference to the ISAE;
ii.
A statement that management is responsible for the PFI, including the
assumptions on which it is based;
iii.
A reference to the purpose of the PFI and/or the restricted;
distribution of the report (and the PFI) to a limited number of users;
iv.
A statement of negative assurance as to whether the assumptions
that management have made provide a reasonable basis for the
PFI; and
v.
An opinion as to whether the PFI is properly prepared on the basis of
these assumptions, and whether the PFI is presented in accordance with
the relevant financial reporting framework.
Examiner’s report
The question tests candidates’ knowledge on the approach the auditor should take
in accepting engagements of a reporting accountant on prospective financial
information (PFI), procedures applicable in cash flow forecast and what to consider
in the presentation of an opinion on PFI.
About 50% of the candidates attempted the question and the performance was
average.
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The commonest pitfall of the candidates was their lack of understanding of relevant
standards, guidelines on acceptance and performance of assurance engagements
and the reporting procedure of such engagements.
Candidates are advised to endeavour to read widely, study the relevant standards
and guidelines for practice. They should study the Institute’s study text and
Pathfinders.
Marking guide
a.
b.
c.
Marks
Procedures to the PFI
Description of the general approaches to assurance work
(1 mark each subject to a maximum of 8 procedures)
Procedures in a PFI assurance engagement
(1 mark each subject to a maximum of 7 points)
Summarised presentation on forming opinion
(1 mark each subject to a maximum of 5 points)
Total
8
7
5
20
SOLUTION 4
(a)
Musa, Edewo & Co (the prospective firm) should communicate with the current
auditors (Sejumade Uzoma & Co) to establish if there are matters that they
should be aware of when deciding whether or not to accept the appointment.
This is in line with the professional requirements. The issues that will be
addressed in the correspondence will include the following:
i.
ii.
iii.
iv.
v.
(b)
Professional clearance from the current auditors before accepting the
audit engagement;
Any known problem or anticipated problem areas concerning the audit
from the current auditor;
Any disputed issue concerning outstanding audit fee;
Request for previous audit working papers of the past audit exercise
concerning the client; and
Request for cooperation from the current auditor regarding access to
necessary information and explanation on the past audited financial
statements.
Practicing professional accountant member may be asked to accept a new
audit appointment in a situation where the previous auditor (old auditor) will
not be reappointed. This may be for any of the following reasons:
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i.
ii.
iii.
iv.
v.
vi.
(b)
The current firm is too small to cope with the demands of an expanding
client (who now operates from multiple locations, in different towns or
countries);
There may be change in the composition of the company’s board of
directors, and the new directors wish to appoint an auditor of their own
choice;
There may be a perceived lack of independence, possibly one that has
just arisen;
There may have been a disagreement between the directors and the
‘old’ audit firm (for example, over the accounting treatment of an item
in the financial statements);
Where there is a regulatory restriction on the current auditor not to
continue in office;
There may have been a loss of confidence in the ‘old’ audit firm;
In order to comply with anti-money laundering regulations, the audit firm
should carry out client identification procedures. The purpose of these
procedures is to confirm that the client ‘is who he says he is’, and that there
are no grounds for suspicion in the case of a company.
The procedures include:
i.
ii.
iii.
iv.
v.
If the client is a company or other business entity, documentary
evidence of the identity of the entity should be obtained – for example,
a certificate of incorporation in the case of a company;
Evidence should be obtained to confirm the address of the entity, such
as letterhead;
In the case of officials of the client, evidence of identity can be obtained
from a passport or driving license, and evidence of address (possibly)
from a recent utility bill;
The audit firm should consider whether the business of the potential
new client ‘makes commercial sense’. It would not make sense for a
very large company to be engaged in operating a number of dry
cleaning shops, because the size of the company would most probably
be too large for the nature of its business operation. When this happens,
the client’s declared business may simply be a front or cover for hidden
illegal activities; and
In most cases, the client identification procedure should be a formality,
but the client may be surprised that they are necessary. The audit firm
should explain the regulatory purpose of client identification, to remove
any doubts or concerns that the new may have.
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Examiner’s report
The part (a) of the question tests candidates’ knowledge of the issues to discuss in
correspondence with previous auditors; while (b) tests issues that would lead to
changes in professional appointment. The part (c) requires the candidates to explain
test procedures for proper client identification in accordance with anti-money
laundering requirements.
Almost 85% of the candidates attempted the question and the performance was good.
The commonest pitfall of the candidates was the lack of detailed knowledge of new
client engagement procedures and the anti-money laundering regulations.
Candidates are advised to devote time to their studies and to go through ICAN Study
Texts and Pathfinders.
Marking guide
Communication with previous auditor
Explanation of points to establish
The requirements to be addressed in the correspondence
(2 marks each subject to a maximum of 4 requirements)
Basis for change of appointment
(1mark each for any point)
Client identification in accordance with anti-money
laundering requirements
(1mark each subject to a maximum of 5 points)
Total
a.
b.
c.
Marks
Marks
2
8
10
5
5
20
SOLUTION 5
(a)
Arguments for audit exemption for small entities
There are various arguments in favour of the view that small companies
should be exempted from statutory external audits. These include:
i.
ii.
iii.
Audit costs are high: the resources could be spent by smaller entities to
obtain more useful financial services;
Providers of loan finance (for example, banks) will normally attach their
own specific conditions to borrowings. These conditions are often
independent of the content of the borrower’s financial statements; and
Many countries allow smaller companies to publish ‘abbreviated’
financial statements. Consequently, only a limited amount of audited
information is available to users of the statements.
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Arguments against audit exemption for small entities
There are also various arguments against the view that small companies
should have an exemption from statutory external audits. Some of these
arguments emphasize the potential benefits of annual audits. The argument
are:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
(b)
An audit provides some assurance that this provide a true financial
statements and fair view and do not contain material misstatements;
The audit is valuable, especially to user groups other than the
shareholders (such as trade suppliers, tax authorities), by giving them
some reassurance about the financial statements of small entities;
Shareholders, especially minority shareholders, should be entitled to
receive financial statements from the entity that have been
independently audited;
The external audit imposes a level of discipline on companies, in
matters relating to accounting and internal control. The auditors can
advise management on ways of improving internal control;
The audit may identify areas, where efficiency and cost savings can be
made by the entity. These savings would have the effect of reducing the
overall cost of the audit;
If a small company expects to approach its bank to ask for loan finance,
the bank may demand to see audited financial statements (for the
purpose of assessing the loan application);
The tax authorities accept audited financial statements as a valid basis
for computing the company’s tax liability. However, in Nigeria, none of
submission of financial statements would lead to the use of ‘Best of
judgement’ assessment to determine the tax liability of a taxpayer; and
If the small company expects to grow, it will become large enough at
some time in the future to require a statutory annual audit. If there are
material errors in its financial statements, the cost of its first statutory
audit could be high.
Evaluation of points the auditor would consider
Standard audit practice requires the auditor to gain an understanding of the
business and its environment in developing an audit strategy. Applying this
principle to the audit of smaller entities will allow the auditor to focus
attention on the main features of the client, which will affect the audit
approach.
The points the auditors will consider include:
i.
ii.
Segregation of duties which is likely to be weak, due to the restricted
numbers of staff employed by smaller entities;
Proprietors or senior management are likely to dominate all major
aspects of the business activities. This is useful as a form of supervisory
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iii.
iv.
control, but the internal controls over management themselves are
likely to be very weak and ineffective;
In an expanding business, senior management may be closely involved
in developing the business, leaving them with little time for supervisory
controls or for implementing and monitoring other controls; and
Record keeping and documentation of system and controls may be
informal and inadequate. This further weakness the internal control
system.
Examiner’s report
The question test candidates’ knowledge of the requirements of CAMA 2020
concerning the audit of small entities.
More than 80% of the candidates attempted the question but the performance was
just below average.
The commonest pitfall of the candidates was their inability to identify the points an
auditor will consider to gain an understanding of the business and its environment
in developing an audit strategy.
Candidates are advised to carry out a thorough preparation and acquaint themselves
with new laws and regulations, paying attention to the study materials provided by
the Institute.
Marking guide
a.
b.
Marks
Arguments for and against audit exemption for small
activities
Argument for
(1 mark each for any point)
Arguments against
(1 mark each subject to a maximum of 7 points)
Evaluation of the points the auditor would consider for the
conduct of an audit
Introductory statement
Other points
(1 mark each subject to a maximum of 3 marks)
Total
Marks
3
7
10
2
3
5
15
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SOLUTION 6
(a)
Eligibility to act as an external auditor is considered from different
regulations.
(i)
Self-regulation by the audit profession
Eligibility to act as an external auditor is usually determined by
membership of an appropriate ‘regulatory body’, such as ICAN.
The role of such regulatory bodies normally includes the following:
•
•
Offering professional qualifications for auditors, to
provide
evidence that auditors possess a minimum level of technical
competence; and
Establishing procedures to ensure that the professional
competence of auditors is maintained. This includes matters, such
as:
▪
Ensuring that audits are performed only by ‘fit and
proper’ persons, who act with professional integrity;
▪
Requiring that the members carry out their audit work in
▪
▪
▪
ii)
accordance with appropriate technical standards (for
example, in accordance with International Standards on
Auditing, known as ISAs);
Ensuring that auditors remain technically competent and
up to date with modern auditing practice (for example, by
following a programme of continuing professional
development);
Providing procedures for monitoring and enforcing
compliance by its members with the rules of the
regulatory body. This includes rules and procedures for
the investigation of complaints against members and the
implementation of disciplinary procedures where
appropriate; and
Maintaining a list of ‘registered auditors’, which is made
available to the public. Such a system is referred to as a
system of self-regulation. In such a system, the regulation
of auditors is carried out by their own professional bodies.
Regulation by government
The government may appoint a public body with similar
responsibilities to a self-regulating professional body, such as the
Financial Reporting Council of Nigeria (FRCN). The public body may,
therefore, establish rules and procedures:
•
•
For approving/authorising individuals to perform audit work;
For ensuring that authorized auditors have the necessary
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•
minimum skills and knowledge to carry out their audit work to a
proper standard; and
For handling complaints and taking disciplinary measures
against auditors, where appropriate. In addition, it is usual for
statute law to establish that certain individuals are ineligible to
act as an external auditor in the context of a given company,
even if they are a member of an appropriate regulatory body.
These exclusions are designed to help to establish the
independence of the auditor.
Based on section 403 of CAMA 2020, the following individuals are
prohibited by Nigerian law from acting as an auditor of a company:
•
•
•
•
(b)
An officer or servant of the company;
A person who is a partner of or in the employment of an officer
or servant of the company; or
A body corporate;
A person does not qualify for appointment as an auditor of a
company if he is:
▪
A debtor to the company or its subsidiaries in an amount
exceeding ₦500,000;
▪
A shareholder and his spouses;
▪
A person who has an interest in the keeping of the
register of holders of debentures of the company; and
▪
An employee of or consultant to the company who has
been engaged for more than one year in the maintenance
or preparation of any of its financial statements/records.
ISA 200: Overall objectives of the independent auditor and the conduct of an
audit in accordance with International Standards on Auditing
The objectives of the auditor, per ISA 200 are:
i.
To obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud
or error. This allows the auditor to give an opinion on whether or not
the financial statements have been prepared in accordance with the
applicable financial reporting framework; and
ii.
To report on the financial statements, and communicate as required by
the ISAs, in accordance with the auditor’s findings.
Where the auditor is unable to obtain reasonable assurance and a
qualified opinion is insufficient, the auditor must disclaim an opinion
or resign.
ISA 200 requires the auditor to:
(i)
Comply with all ISAs relevant to the audit;
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(ii)
(iii)
(iv)
(v)
Comply with relevant ethical requirements;
Plan and perform an audit with professional skepticism;
Exercise professional judgement in planning and performing an
audit; and
Obtain sufficient and appropriate audit evidence to allow him to
obtain reasonable assurance.
Examiner’s report
The question (a) tests candidates’ knowledge on the eligibility to practice as an
external auditor based on legal and ethical requirements while (b) tests the overall
objectives of an independent auditor in accordance with ISA 200.
About 60% of the candidates attempted the question and the performance was
average.
The commonest pitfall of the candidates was their inability to evaluate the eligibility
to practice from both the professional and governmental regulations, and the
requirements of the relevant standards.
Candidates are advised to go through ICAN Study Text and other relevant reading
materials when preparing for future examinations.
Marking guide
a.
b.
Eligibility to act as external auditor
Self regulation by the audit profession
- Membership of appropriate regulatory body
- The role of regulatory bodies
(1mark each subject to a maximum of 4 points)
Regulation by government:
- Regulatory body such as FRCN
- Different points from the procedure, section 403 of
CAMA 2020
(1mark each for any 3 points)
Overall objectives of the independent auditor by ISA
200
Objectives
- Reasonable assurance
- Report on financial statements
- Opinion on inability to obtain reasonable
assurance
- Activities on the requirements of ISA 200
- (1mark for any point)
Total
Marks
Marks
1
4
1
3
9
1
1
2
1
6
15
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SOLUTION 7
Areas of risk to consider by an auditor in the given scenario include:
a. Foreign exchange risk
The purchases from UK are charged to the Nigerian entity in pound sterling while
the purchases from China are charged to the Nigerian company in American
dollars. There seems to be no measures in place to manage the risk of foreign
exchange conversion. The treatment of forex gains or losses in the financial
statements may result in material misstatements depending on the volume of
transactions;
b. Internal control risk
Lack of segregation of functions. Activities are over-concentrated on the
Chairman. All activities are either undertaken by the chairman personally or
solely approved by him;
c. Financial statement risk (over/under statements)
Balances such as bank and accounts payable are likely to be misstated as
substantial parts of the company’s banking transactions and trade payables were
routed through the Chairman’s personal bank account rather than the company’s
records. Proper bank reconciliation exercise cannot be conducted under the
circumstance;
d. Risk of overstatement of Nigeria operating expenses
The costs during the period the chairman spent to oversee the UK company are
all borne by the Nigerian company. UK procurement expenses being channeled
to the Nigerian company will result in the overstatement of the Nigerian company
expenses;
e. Risk of understatement of UK expenses
There is the risk of understatement of UK expenses especially as it relates to bank
charges on foreign procurements as those charges will mostly reflect in the
Chairman’s personal account. The UK expenses charged to the Nigerian company
will understate UK expenses;
f. Risk of understatement of Nigeria expenses
Expenses especially as it relates to bank charges on foreign procurements as those
charges will mostly reflect in the Chairman’s personal account rather than the
company’s records;
g. Lack of adherence to entity concepts
The entity concept is not adhered to. The company is not being treated as an
entity that is separate from its owner. Money being transferred to the Chairman’s
account for the UK company’s purchases, the Chinese purchases and the
chairman’s personal expenses could lead to overstatements of expenses.
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Separate records were not maintained for the chairman’s expense while he
traveled abroad;
h. Possible money laundering activities by the Chairman
Money is transferred to the Chairman’s account for the UK company’s purchases,
the Chinese purchases and the chairman’s personal expenses. These could lead
to possible money laundering activities;
i. Corporate governance risk
There is a risk that good corporate governance practices are not followed which
may lead to the failure of the organization. There is absolute power and authority
vested in the Chairman. There is no mention of the existence of Internal Audit
function to vet or review the transactions undertaken by the chairman;
j. Risk of understatement of UK company’s activities
Incomplete records of the UK company’s transactions will result in the
understatement of the UK company’s liabilities and purchases as procurements
and accounts payable transactions are charged to the Nigerian company;
k. Risk of misallocation of costs
There is wrong costing method resulting from the allocation of costs. This method
favors the UK company to the detriment of its Nigerian counterpart;
l. Exchange translation risk
Sub optimal results due to the arbitrary determination of costing method and
estimates such as the charging of the UK procurements to the Nigerian company
at cost plus 25% while the purchases from China are transferred to the Nigerian
company at expected cost of landing in Nigeria plus 30%;
m. Incomplete recording
Audit risk arising from Incomplete and inaccurate recording of transactions and
poor audit trail. Sufficient appropriate audit evidence is lacking in this
environment, which increases audit risk as the auditors are likely to express
inappropriate opinion due to the fact that the financial statements may be
materially misstated in either or both companies;
n. Risk of increased cost from COVID-19
The effect of COVID-19 creates additional costs and risks which impact on
measurement of operational activities. Costs are incurred and benefits were not
derived. Choosing to travel at that times when there were travel challenges
creates a business risk;
o. Different reporting requirements
Because the two companies are operated under different reporting requirements,
the combination for proper comparison would present a financial statement risk.
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The Nigerian audit firm that is putting together the financial statements would
be relying on the objectivity of the UK audit firm; and
p. Risk of different basis of measurement
Proper business valuation for the purpose of ascertaining net worth could be
impaired due to the different measurement scenarios in the conduct of business
and measurement of the different units. This portends a financial statement risk.
Examiner’s report
The question tests the candidates’ ability to evaluate business risks from a scenario.
About 60% of the candidates attempted the question and the performance was above
average.
The commonest pitfall was the candidates’ inability to identify issues that portend
risk to a business.
Candidates are advised to go through ICAN Study Text and other relevant reading
materials to enhance their performance in future.
Marking guide
Identification of areas of risk in the business scenario:
Identification of 10 risks
(½ mark each subject to a maximum of 10 points)
Discussion of each of the 10 points identified
( 1 mark each subject to a maximum of 10 points)
Total
Marks
5
10
15
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THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
NOVEMBER 2022 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Examiner‟s Reports
and
Marking Guides
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2022
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF THE SEVEN
QUESTIONS IN THIS PAPER
SECTION A:
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
1.
Mr. Johnson is the Senior Partner of Johnson, Odewole, Thomas & Co.,
Chartered Accountants. During the last audit of Mandarin Manufacturing Plc,
which the firm did with Messrs Ark Professional Services (APS) for the year
ended 30 September, 2020, Mr. Johnson expressed displeasure on some of
the conclusions reached by APS on some of the audit areas. In putting the
work together, Mr. Johnson‟s manager in charge of the audit had drawn his
attention to matters which had been marked “For Partner‟s Attention”. His
discussions on the treatment of these matters with the corresponding partner
of APS was considered unsatisfactory.
The view of Mr. Johnson was significantly different from that of the
corresponding partner of APS. It was agreed to proceed to the board meeting
where these disputed positions would be presented and discussed with the
directors before final position would be reached. Of significance to the issues
is the acquisition of a property from a former staff for the opening of a new
branch warehouse. The acquisition process was hurriedly done and with an
amount in excess of the capital expenditure provisions for the period. The
view of Mr. Johnson‟s team is that the acquisition is a fraud on the company
while APS aligns with the director of finance that it is a normal transaction.
At the board meeting to discuss the financial statements, members were
divided on the sides of the two firms and the chairman asked for a
rescheduling of the meeting to enable him to be furnished with additional
information on the basis of the positions of both parties and for both parties
to harmonise their positions prior to a subsequent meeting the following
day.
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Required:
a.
b.
Evaluate the justification or otherwise of an entity having joint auditors.
(8 Marks)
Following the concerns of Johnson, Odewole, Thomas & Co., present the
options available to the firm.
(5 Marks)
c.
Discuss the points on which the Chairman needs to base his decision,
according to standard acquisition procedures.
(7 Marks)
d.
If the Chairman agrees with the position of Johnson, Odewole, Thomas &
Co, determine the reporting requirement and draft an appropriate report
for inclusion in the auditors‟ report.
(6 Marks)
e.
Discuss the composition of items that could be marked “For Partner‟s
Attention” during the conclusion of an audit process.
(4 Marks)
(Total 30 Marks)
SECTION B:
OPEN-ENDED QUESTIONS
(40 MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION
QUESTION 2
The Financial Controller (FC) of Poki Limited made an observation on the draft
engagement letter sent by the external auditors to the company, an extract of
which is as stated below.
“The responsibility for safeguarding the assets of the company and for the
prevention and detection of fraud, error and non-compliance with laws or
regulations rests with the company‟s directors. In accordance with auditing
standards, we shall endeavour to plan our audit so that we have a reasonable
expectation of detecting material misstatements in the financial statements or
accounting records (including any material misstatements resulting from fraud,
error or non-compliance with laws or regulations). However, because any internal
control structure, no matter how effective, cannot eliminate the possibility that
errors or irregularities may occur and remain undetected and because we use
selective testing in our audit, we cannot guarantee that errors or irregularities, if
present, will be detected. Accordingly, our audit should not be relied upon to
disclose all such material misstatements or frauds, errors or instances of noncompliance as may exist. The best safeguard against irregularities and fraud is a
sound system of internal control.
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We will report to you from time to time on any significant weaknesses in controls
which come to our notice and which ought to be brought to your attention. The
matters raised in any report to you are not necessarily a comprehensive statement
of all weaknesses that exist or of all improvements that should be made”.
The FC accused the auditors of running away from their responsibilities of exposing
to the owners of the company fraudulent financial reporting and misappropriation
of assets. To him, what is the purpose of audit when fraud and errors could not be
discovered. He has threatened to discuss with the Board of Directors and insists
that the engagement letter will not be signed until those sections are removed. You
are a senior member of the audit team.
Required:
a.
Outline the objectives of auditors in relation to fraud.
b.
Explain fraudulent financial reporting and misappropriation of assets.
(7 Marks)
State the procedures auditors should perform to identify the risks of material
misstatement due to fraud.
(7 Marks)
(Total 20 Marks)
c.
(6 Marks)
QUESTION 3
During the audit of Kofo Plc in 2018, it was observed that there was an omission of
liability to the tune of N2 billion. Upon investigation, it was discovered that the
error was as a result of unrecorded liability relating to unremitted statutory taxes to
the government in prior years. A compensating error was noticed in
unsubstantiated investment and receivables balances schedule provided by the
management.
The explanation provided by management for this error was that having noted this
disparity, the internal audit team was commissioned to reconcile the ledger
balances to establish the actual payment to be made to government. The result of
that exercise led to an initial adjustment of N500 million. However, upon further
review by the Internal Audit and Risk Management team, the total disparity noted
was N5 billion as opposed to the N2 billion initially noted. The reason being that
the report with which the Internal Audit Team carried out the reconciliation was
understated. Some liability balances were excluded from the report as a result of
the approach used to set-up the Information System (I.T) System. Therefore, the
general command entered into the system to spool the report did not capture the
entire transactions. To gain comfort, the audit team:
(i)
Reviewed the reconciliation memo to have an understanding of
management‟s thought process;
(ii)
Requested for the updated spool of ledger balances from the I. T system;
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(iii)
Asked the Information Technology team to perform walkthrough test of the
transaction spool;
(iv)
Requested for the breakdown of the excluded balances and traced them to
the supporting documents to which they relate; and
(v)
Checked to see that there were no unusual remittances from the bank
statements.
You are a member of the audit team which reviewed Kofo Plc‟s compliance with
International Standards on Auditing (ISA 250) on Non-Compliance with Laws and
Regulations (NOCLAR).
Required:
a.
Outline the audit procedures to be performed to help identify instances of
non-compliance with laws and regulations.
(5 Marks)
b.
State what the auditor should do when he becomes aware of issue of noncompliance with laws and regulations.
(5 Marks)
c.
State the types of policies and procedures the entity may implement to assist
in the prevention and detection of non-compliance with laws and
regulations.
(4 Marks)
Discuss what auditor should do under the following situations:
d.
i.
ii.
Reporting non-compliance to those charged with governance
(2 Marks)
Reporting non-compliance in the audit report
(2 Marks)
iii.
Reporting non-compliance to the authorities
(2 Marks)
(Total 20 Marks)
QUESTION 4
Two accountancy students from a University have been asked to write a term paper
on “the reasons why external auditors resort to sampling when conducting the
audit of a large entity”. The students are of the opinion that they do not understand
why this should be the case, if auditors focus on their work.
They believe statistical sampling is not always good for auditing especially when a
population consists of a small number of large items. It may be appropriate to
apply audit tests to the entire population as all the items in the population may not
share common characteristics. Added to this, they do not agree that samples could
be representatives of the population and also reflect the characteristics of the
population. There is therefore the risk that the auditors may not reach a correct
decision as against when the entire population is tested.
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Furthermore, they said that they were confused on how the auditors will work on
samples in such a way that all items in the population will be given equal chance
of being selected and the key decision that needs be to made for effective sample
design.
As an ICAN Professional examination‟s candidate who have just finished reading
Audit Sampling (ISA 530), you now saw it as an opportunity to recall and explain
what you have read. You are excited to explain the above to the students.
Required:
a.
Highlight key decisions to be made to influence the sample size.
(4 Marks)
b.
Outline the advantages and disadvantages of using statistical sampling.
(8 Marks)
c.
Explain the sample selection methods that will give equal chance to all the
items in the population.
(3 Marks)
d.
Illustrate what the auditors should do when performing procedures on the
samples.
(5 Marks)
(Total 20 Marks)
SECTION C:
OPEN-ENDED QUESTIONS
(30 MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION
QUESTION 5
At the weekly meeting of an audit firm, it was reported that a new audit client
(Salisa Limited), has just been won. An implementation team has been constituted
with a manager as the head. At the meeting of the implementation team, the
manager stated that there is the need for the team to work on the audit planning
strategy; the contents of which will form the audit planning memorandum that will
be presented to the audit committee. He stated further that a professional
clearance has to be sent to the former auditor after which, background check will
be performed on the directors and other principal officers of the company. It is also
believed that for proper risk assessment, there is the need to understand the
business operations of the company. He stated further that the audit will be
structured into both interim and final audits.
An experienced member of the team also mentioned the need for the auditor to
adopt attitude of professional skepticism, hence the planning should be done in
such a way that the audit can be executed in an effective manner. He stated further
that „planning the audit will involve the whole engagement team to establish an
understanding of the terms of the engagement as required by ISA 210 and this will
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help to establish an overall strategy for the audit. The development of the audit
plan will include the nature, timing and extent of planned risk assessment
procedures. This will enhance further audit procedures and documentation of the
overall audit strategy.‟
As an experienced auditor in the firm, you have been approached by some junior
staff at the meeting to explain further to them on the discussion held with the
manager.
Required:
a.
Explain professional skepticism.
(2 Marks)
b.
State how adequate planning can benefit the audit team.
(3 Marks)
c.
Explain and illustrate what the establishment of the overall audit strategy
involves.
(3 Marks)
Discuss the elements of interim and final audits.
(7 Marks)
(Total 15 Marks)
d.
QUESTION 6
The Internal Audit Unit of Oluvia Bank Limited has been accused of collusion with
staff in committing monumental fraud. The following types of fraud were found to
be common - cheque suppression, fraudulent bookkeeping to overstate income and
inflation of the worth of the company's assets, intercepting replaced customers‟
cards, fraudsters impersonating Senior Managers or Chief executive officer, online
banking fraud, such as phishing, malware attacks and clone websites,
impersonating owner of an account or using fake document to open account under
someone else name (no proper Know Your Customer conducted). The bank
examiners came and were surprised at the level of fraud in the bank and requested
management to do something about it urgently.
After the supervisory visit, the board of directors discussed the issue with the
bank‟s external auditors who suggested that the bank can outsource the internal
audit functions. The Board of Directors looked at the suggestion as being better,
and mandated the Managing Director to act fast and give them details of this at the
next board meeting. The Managing Director has requested your firm to write a
report to enable him forward the issue to the Board of Directors.
Required:
a.
Discuss the main reasons for outsourcing internal audit functions. (3 Marks)
b.
Outline the advantages and disadvantages of outsourcing.
(10 Marks)
c.
Discuss which part of internal audit function that cannot be outsourced.
(2 Marks)
(Total 15 Marks)
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QUESTION 7
The audit plan and scope was presented to the Audit Committee of Deinde Limited
for the year ended December 31, 2020. The external auditors of the company stated
“we would estimate materiality using profit before tax for the full year. We would
estimate our preliminary materiality based on expected results for the full year. We
will perform a materiality re-assessment at year end to confirm adequacy or
otherwise of our preliminary materiality. We will report to the Audit Committee on
all unadjusted misstatements greater than our established threshold unless they
are qualitatively immaterial”.
Your uncle who is a member of the Audit Committee discussed with you and
requested that you explain further on the issue.
Required:
a.
Explain the concepts of materiality and performance materiality in an audit
of financial statements.
(3 Marks)
b.
Explain the benchmark for determining materiality.
c.
Discuss the factors that may affect the identification of an appropriate
benchmark.
(7 Marks)
(Total 15 Marks)
(5 Marks)
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SOLUTION 1
a.
The justification or otherwise of an entity having joint auditors is revealed in
the advantages and disadvantages of joint audit.
Advantages
The reasons why joint auditors might be appointed are as follows:
i.
ii.
iii.
iv.
v.
The client company may be so large that it requires the services of
more than one firm of auditors;
After the acquisition of a large subsidiary, using joint auditors may
help the transition process while the group auditors become familiar
with the new subsidiary. The “old” auditors should be familiar with
the business of the subsidiary and should pass those knowledge over
to the parent company‟s auditors. For the parent company auditors,
this should accelerate the process of getting to know the business of
the subsidiary;
Joint auditors may provide a higher level of technical expertise than
either audit firm could provide individually;
It has been suggested that medium-sized accountancy firms might
join forces and tender for the audit of a company for which the
auditors would normally be one of the “Big 4” accountancy firms. This
is possibly a way in which medium-sized firms might try to „break the
monopoly‟of the Big 4 on large companies‟ audits; and
In a group situation, improved geographical coverage may be
obtained for the audit, where each of the joint auditors on its own
does not have offices that cover all the geographical locations of the
component companies in the group.
Disadvantages
Possible disadvantages of joint audits include the following:
i.
ii.
iii.
iv.
v.
The extra cost to the client. It is likely to cost more to use two
accountancy firms than to use one;
Possible inconsistencies between the two joint auditors in the audit
methods that they use. If so, there may be problems in reaching
agreement on whose audit method to use;
The possible difficulty the two firms may have in agreeing the
division of work;
Additional problems that will arise in monitoring and controlling the
audit work of two different firms;
The two firms may find it difficult to work well together, and each firm
may try to become the leading firm in the joint audit. If there is a
claim against the auditors for negligence in the conduct of the audit,
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vi.
vii.
viii.
b.
The options available to Johnson, Odewole, Thomas & Co. (the leading
auditor) are as follows:
i.
ii.
iii.
iv.
v.
vi.
vii.
c.
there may be some difficulty in identifying which of the joint auditors
is potentially liable;
Experience and quality of audit personnel: Personnel presented by
each firm may possess different experience and quality especially
between small and large firms acting as joint auditors therefore
makes it difficult for them to work together;
Exposure to liability: Each of the two firms is potentially liable for the
negligence of the other; and
Independence of each auditor: It may be difficult at times to maintain
a reasonable level of objectivity if one of the firms is highly dependent
on the client.
Submit the details of their position to the Chairman for
consideration at the reconvened board of directors meeting;
Compile the basis of the faulty decision of the component auditor with
appropriate explanations of the weaknesses contained in the
respective positions;
Consider appropriate modifications of the auditors‟ opinion on the
financial statements;
Draft notes on the subject for inclusion in the “Notes to the Financial
Statements” for explanation of the action taken by management;
Have critical meeting with the partners of Ark Professional Services on
the issues raised;
Consider disengaging from the audit of the client if attempts to ensure
a proper reflection of the true state of affairs of the client‟s financial
statements fails; and
Review the issues with the directors of Mandarin Manufacturing Plc.
The procedures for proper acquisition to guide the Chairman are as
follows:
i.
ii.
iii.
iv.
v.
vi.
vii.
Ascertain the need for the additional property;
A request is raised and considered by the management team and
approved for inclusion in the budget;
The building is subsequently included in the budget;
Provision for capital expenditure is made and cash for purchase set
aside to avoid disrupting the operational activities by the purchase;
Procurement bid or tender is advertised with specifications and details
necessary;
Interested suppliers/contractors submit their bids to the tender‟s board
or procurement committee;
The committee evaluates the bids taking cognisance of the
specifications and offer prices;
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viii.
ix.
x.
xi.
d.
The best in the specification and cost is selected to supply and a local
purchase order (LPO) is issued to the supplier;
The supply is made with appropriate documents;
The building is delivered with appropriate inspection by the
purchasing committee; and
The payment is approved when the property is released, and relevant
receipts are documented by the accounts department.
This is an item in the subsection of the financial statements. The
consideration to take is based on the materiality of the item relative to the
financial statements as a whole. Materiality would have also been the basis
of disagreement by the firms.
Considering that the item of the building acquired is material to buildings,
an emphasis of matter paragraph would be included in financial statements
as follows:
Auditors’ Report
Emphasis of Matter:
“Without modifying our opinion, we draw attention to Note X to the financial
statements on non-current assets which indicates that the cost of building
acquired during the year was not in line with standard practice and
company procurement practices. The effect of the cost of the building on
non-current assets of building is ₦………..”
e.
The composition of items which could be included in “Matters for Partner‟s
Attention” include:
i.
ii.
iii.
iv.
v.
vi.
vii.
Contingent items for which further evaluation needs to be made;
Matters of recurring nature which needs discussion at senior
management levels;
Risk items which appear in the previous domestic report or
management letter without adequate attention by the client;
Matters of policy on which some expenditure has been incurred but
the details were yet to be incorporated into the financial statements;
Auditing and reporting issues which need to affect the nature of
opinion based on the classification of the issues concerned;
Items of test for which further materials need to be provided at the
conclusion of the audit exercise;
Items in the letter of representation for which decisions or opinions
need to be made on their evaluation at the reporting stage;
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viii.
ix.
x.
xi.
xii.
xiii.
Issues relating to non-compliance with rules and regulations: these
issues may demand for partner‟s attention especially where it affects
the financial statements;
Matters relating to money laundering: Such issues need to be reported
to the appropriate authority and as such needs partner‟s attention;
Suspicion of directors‟ involvement in fraudulent activities: A situation
where directors of an entity are involved in fraudulent activities needs
to be discussed by the partners;
Issues relating to non adoption of relevant accounting standards:
Non-compliance with the accounting standards in the preparation of
the financial statements is a serious issue that warrants serious
attention by the partners;
Material transactions that were not backed up with proper
documentation; and
Material misstatement in the financial statements that may be due to
fraud or error. Discovery of material misstatement will call for
partner‟s attention.
Examiner’s report
This question tests the candidates‟ knowledge of joint audit activities, the
problems associated with working on joint audit engagements, and the
treatment of complex issues by audit staff which could be referred to higher
audit level personnel for resolution.
This being a compulsory question, all the candidates attempted it, but the
performance was poor.
The commonest pitfall of the candidates was their lack of understanding of
the ways of conducting joint audits, resolving issues and conflicts that arise
in joint audit process.
Candidates are advised to farmiliarise themselves with the practical aspects
of audit engagements and also read the Institute‟s Study Text and
Pathfinders when preparing for future examination.
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Marking guide
a.
Justification or otherwise of having more than one firm to
work on the audit of an entity at a particular time
1 mark each for any 4 advantages
1 mark each for any 4 disadvantages
Stating the options available for the firm
1 mark each for any 5 options
b.
c.
Marks
Marks
4
4
8
5
Stating the points on which the Chairman needs to base
his decision according to standard acquisition procedures
1 mark each for any 7 points
d.
Determining the reporting requirement and drafting an
appropriate report for inclusion in the auditors‟ report
2 marks for appropriate report
2 marks each for any of 2 key features
e.
Discussion of the composition of items that could be
marked for “For Partner‟s Attention”
1 mark each for any 4 points
Total
7
2
4
6
4
30
SOLUTION 2
a.
The objective of external auditors in relation to fraud prevention and detection
should be considered as secondary. However, ISA 240 requires the external
auditor to design and perform procedures that will help to detect material
misstatements in the financial statements that may occur as a result of fraud.
The objective of the auditor as regards fraud is to detect material
misstatements that will affect the financial statements due to the occurrence
of fraud. This implies that external auditors are not primarily responsible for
the prevention and detection of fraud that may exist in the client‟s financial
statement but should:
i.
ii.
iii.
iv.
Plan the audit and carry out a proper fraud risk assessment;
Apply professional skepticism and remain alert to the possibility of
material misstatements due to fraud;
Act on those material frauds discovered during the performance of
normal audit procedures that affect the financial statements;
Discuss with the engagement team, the susceptibility of the client‟s
financial statements to material misstatements due to fraud; and
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v.
b.
Fraudulent financial reporting involves:
i.
ii.
iii.
iv.
(ii)
Management override of controls;
Falsification of records or documents;
Misrepresenting or intentionally omitting transactions from the financial
statements; and
Intentionally misapplying accounting policies.
Misappropriation of assets involves:
i.
ii.
iii.
iv.
c.
Enquire of the client‟s management, those charged with governance and
their internal auditor on whether they are aware of any actual or
suspected cases of fraud in the organisation.
Embezzling receipts (for example, diverting them to personal bank
accounts);
Stealing physical assets (such as inventory) or intellectual property (for
example, by selling “trade secrets” to a competitor);
Causing an entity to pay for goods and services not received (for
example, by the creation of fictitious suppliers); and
Using an entity‟s assets for personal use.
Procedures the auditor should perform to identify the risks of material
misstatement due to fraud include:
i.


Making enquiries of management in respect of:
their assessment of the risk of material fraud;
the process in place for identifying and responding to the risks
of fraud;

any specific risks of fraud identified or likely to exist; and
any communications within the entity in respect of fraud
(including to employees regarding management‟s views on
business practices and ethical behaviour).
Making inquiries of management and others within the entity as to
whether they have any knowledge of any actual, suspected or alleged
frauds and to obtain views about the risks of fraud;
Evaluating any unusual or unexpected relationships identified in
performing analytical procedures, which might indicate a risk of
material fraud; and
Evaluating information obtained from other risk assessment
procedures to see if any fraud risk factors are present.

ii.
iii.
iv.
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Examiner’s report
This question tests the candidates‟ knowledge of objectives of an auditor in
relation to fraud and misstatements in the financial statements.
The question was attempted by about 80% of the candidates and the overall
performance was above average.
The commonest pitfall was their lack of understanding of the detailed aspects
of the responsibility of various parties in relation to the financial statements.
Candidates are advised to pay close attention to the requirements of the
question and understand responsibilities of various parties to the financial
statements. In addition, they should also read the Institute‟s Study Text and
Pathfinders when preparing for future examination.
Marking guide
a)
b) i.
ii.
C)
Stating the objectives of auditors in relation to fraud
1 mark for stating the primary objective in relation to
fraud prevention and detection
1 mark each for steps the auditor should take to defect
material misstatements to prevent fraud, subject to a
maximum of 5 points
Explanation of fraudulent financial reporting
1 mark each for any 3 points
Explanation of misappropriation of assets
1 mark each for any 4 points
Stating the procedures auditors should perform to
identify the risk of material misstatement due to fraud
(1 mark each for any 7 points)
Total
Marks
Marks
1
5
6
3
4
7
7
20
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SOLUTION 3
a.
Audit procedures for the identification of non - compliance with laws and
regulations by companies include:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
b.
Identifying all relevant laws and regulations and discuss with
management to understand those laws and regulations that may have
fundamental effect on their operations;
Enquiring from both management and client compliance officer on
whether all cases of non- compliance have been identified;
Enquiring from their solicitor on any known case of non- compliance;
Reviewing the client‟s bank statement and cash book for evidence of
penalties paid;
Circularising the industries regulator for evidence of any incidence of
non-compliance;
Reviewing correspondence with industry regulator and solicitorReview registers of complaint;
Obtaining written representation from management or where
appropriate those charged with governance that all known instances
of non-compliance or suspected non-compliance have been disclosed
to the auditor;
Enquiring of management and, where appropriate, those charged
with governance, as to whether the entity is in compliance with such
laws and regulations;
Reviewing correspondence, if any, with the relevant or regulatory
authorities; and
Ensuring disclosure on any contravention or non-compliance on the
opinion page as required by the Central Bank of Nigeria (if a bank).
If the auditor identifies material areas of non-compliance by the company,
the following procedures are required:
i.
ii.
iii.
iv.
v.
vi.
Obtain an understanding of the nature of the act and the
circumstances under which it has occurred;
Evaluate the possible effects of the non-compliance on the financial
statements;
Discuss the matter with management for subjected non-compliance. If
compliance is not demonstrated, take legal advice;
Consider the impact on the audit report (this would constitute a
“limitation on scope” of work), if there is insufficient evidence of a
suspected non-compliance;
Consider whether or not the non-compliance impacts on other areas of
the audit (for example, on the overall risk assessment); and
Consider how to report the non-compliance to those charged with
governance and/or to members and/or to the authorities.
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c.
Policies and procedures that an entity may implement to assist in the
prevention and detection of non-compliance with rules and
regulations, include:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
d.
i.
Designing operating procedures to ensure compliance with rules and
regulations;
Establishing a register and record of complaints;
Undertaking constant monitoring of the regulatory environment to
identify new laws and regulations and any changes to the existing
ones;
Engaging a solicitor to help in environmental scanning and review;
Ensuring regular training of management and staff on the need to be
compliance conscious;
Establishing and maintain a comprehensive register of all relevant
laws and regulations which impact on the company‟s operations;
Instituting, develop, publicise and operate appropriate system of
internal control; and
Monitoring compliance with the code of conduct and act appropriately
to discipline employees who fail to comply with it.
Reporting non-compliance to those charged with governance. The
auditor should:



ii.
Communicate these matters to those charged with governance
unless all of those charged with governance are also involved
in management of the entity and are therefore already aware
of these matters;
Communicate as soon as practicable if the non-compliance is
intentional and material; and
Communicate to the committee. If the auditor suspects that
those charged with governance are involved in the noncompliance. If no audit committee exists, the auditor must
consider taking legal advice.
Reporting non–compliance in the audit report
If the auditor concludes that the non-compliance has a material effect
on the financial statements and has not been adequately reflected in
them, then he must give a modified or adverse opinion.
If the scope of the auditor‟s work is restricted by management such
that he cannot reach an opinion, then he must give a modified opinion
or disclaim his opinion.
If the auditor cannot decide whether non-compliance has occurred
due to the nature of the circumstances, rather than because of any
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restriction imposed on him by management, he must consider the
impact on his audit report.
iii.
Reporting non-compliance to the authorities

Where management refuses to make the necessary amendments
to the financial statements due to non-compliance with rules and
regulations, the auditor should report to the appropriate
authorities.

Due to change made by IESBA in July 2017, professional
accountants are no longer required to seek legal advice before
reporting NOCLAR to the appropriate authorities.
Examiner’s report
This question tests the candidates‟ knowledge of concept of non-compliance
with laws and regulations as in ISA 210 and reporting it to various parties.
The question was attempted by less than 50% of the candidates and
performance was less than average.
The commonest pitfall was the candidates‟ inability to explain the
requirements of ISA 210.
Candidates are advised to pay close attention to the provisions of ISAs in
their preparations for subsequent examinations.
Marking guide
a.
b.
c.
Stating the audit procedures to be performed to help
identify instances of non-compliance with laws and
regulations
1 mark each for any 5 audit procedures outlined
Marks Marks
5
Stating what the auditor should do when he becomes
aware of issue of non-compliance with laws and
regulations
1 mark each for any 5 actions the auditor should take
5
Stating the types of policies and procedures the entity
may implement to assist in the prevention and detection
of non-compliance with laws and regulations
1 mark each for any 4 types of policies and procedure
listed
4
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d.
Discussion on what an auditor should do in the
following situations
i. In reporting non-compliance to those charged with
governance
ii. Reporting non-compliance in the audit report
iii. Reporting non-compliance to the authorities
Total
2
2
2
6
20
SOLUTION 4
a.
Key decisions to be made to influence the sample size
If an audit sampling exercise is to be effective and if sampling risk is to be
reduced and therefore, detection risk reduced, the sample must be designed
in an appropriate way.
When designing a sample, the auditor is required by ISA 530 to:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
b.
Consider the purpose of the audit procedure and the population from
which the sample will be drawn;
Determine a sample size sufficient to reduce sampling risk to an
acceptably low level;
Select items for the sample in such a way that each sampling unit in
the population has an equal chance of selection;
Determine the sampling approach to be used (statistical or nonstatistical);
Assess/evaluate the characteristics of the population from which the
sample is to be drawn;
Decide the sample selection method;
Evaluate what constitutes a misstatement or deviation;
Determine the „tolerable‟ misstatement or rate of deviation; and
Determine the „expected‟ misstatement or rate of deviation.
The advantages of using statistical sampling techniques are as follows:
i.
Statistical sampling provides an objective, mathematically precise
basis for the sampling process;
ii.
There may be circumstances where statistical sampling is the only
means of auditing efficiently (for example, in the case of very large
„populations‟ of items);
iii.
The cost will be lower if data is collected for a sample of population
which is a big advantage. Sampling is therefore economical in respect
of resources; Study of samples involves less space and equipment;
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iv.
The process of sampling makes it possible to arrive at generalisations
by studying the variables within a relatively small proportion of the
population. The required sample size can be calculated precisely
(using statistical probability techniques); and
v.
Where limited resources exist, use of sampling is an appropriate
strategy. Manageable samples permit the auditor to establish
adequate rapport with the client.
The disadvantages of statistical sampling techniques are as follows:
(c)
i.
A degree of training and technical expertise is required if auditors are
to use statistical sampling techniques effectively. If the auditor lacks
specialised knowledge in sampling, he may commit serious mistakes.
Consequently, the results of the sample picked will be misleading;
ii.
In population that are heterogeneous and requiring a very high
standard of accuracy, the sampling method may be unsuitable. This
requires an investment in the necessary training for audit staff;
iii.
Sample sizes may be larger than under a judgemental approach, thus
increasing the time (and the cost) involved in the audit;
iv.
Selection is of a complex nature. Some auditors take the view that it is
preferable to rely on the skill, experience and judgement of the
auditor, rather than on mathematical/statistical models; and
v.
Bias arises when the method of selection of sample employed is faulty.
A number of sample selection methods which are available to the auditor
include:
i.
Random sampling: All items in the population have an equal chance
of selection. This is typically achieved by the use of random numbers
to select items for testing;
ii.
Systematic sampling: With systematic sampling, a random starting
point is chosen from the population and then items are selected with
a standard gap between them (for example, every 10th item). For
example, suppose that a sample will be 10% of the items in a
population and the items in the population can be arranged in a
sequence, such as listed in invoice number order, or account number
order or date order. A systematic sample would be to select one of the
first 10 items in the list at random, and then to select every 10 th item
in the list for testing in order to obtain the 10% sample; and
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iii.
(d)
Haphazard sampling: The auditor selects the sample on an arbitrary
basis, for example, choosing any 100 invoices from a file. This is not a
scientifically valid method and the resulting sample may contain a
degree of bias. It is therefore not recommended for use with statistical
sampling techniques.
When performing procedures on a sample, the auditor is required to:
i.
ii.
iii.
iv.
v.
Perform appropriate audit procedures on each item selected;
Perform the procedure on a replacement item if the audit procedure is
not applicable to the selected item. For example, the auditor might
select a sample of cheques to test for evidence of authorisation. One of
these might be a cheque which has been cancelled. Provided the
cheque has been legitimately and properly cancelled then the auditor
may choose another cheque number to test in its place;
If the auditor is unable to apply the procedure (or a suitable
alterative) to the selected item (for example, because a document has
been lost), that item must be treated as a deviation;
Investigate the nature and cause of any misstatements/deviations and
evaluate their possible effects; and
Obtain a high degree of certainty about this and perform additional
audit procedures to obtain sufficient evidence that the deviation does
not affect the rest of the population, if the auditor considers the
misstatement or deviation to be an anomaly.
Investigation of the nature and cause of the deviations may lead the
auditor to conclude that the problem lies within one time period, type
of transaction, or location (for example, perhaps when a temporary
member of staff was being employed). In this case, he might decide
to extend audit procedures performed on that time-period/type of
transaction/location.
Examiner’s report
This question tests the candidates‟ knowledge on how to use sampling
methods to select materials for testing in auditing and the related issues of
selecting appropriate samples to ensure fair representation of the
population.
The question was attempted by about 80% of the candidates and the
performance was average.
The commonest pitfall was the candidates‟ inability to explain audit
sampling techniques.
Candidates are advised to pay close attention to the requirement of a
question before attempting it so as to earn more marks.
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Marking guide
a. Highlighting the key decisions to make to influence
the sample
1 mark each for any 4 points listed
b. Outlining the advantages and disadvantages of
statistical sampling
1 mark each for any 4 advantages and
1 mark each for any 4 disadvantages listed
c. Explanation of the sample selection methods that will
give equal chance for all items in the population
1 mark each for three sample selection methods
d. Illustrating what the auditor should do when
performing procedures on the samples
1 mark each for any 5 points listed in accordance
with the requirements of ISA 530
Total
Marks
Marks
4
4
4
8
3
5
20
SOLUTION 5
a.
Professional skepticism: “An attitude that includes a questioning mind, being
alert to conditions which may indicate possible misstatement due to error or
fraud, and a critical assessment of audit evidence”
Professional skepticism includes the following:
i.
ii.
iii.
iv.
b.
Audit evidence that contradicts other audit evidence obtained;
Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence;
Conditions that may indicate possible fraud or irregularities; and
Circumstances that suggest the need for audit procedures in addition
to those required by the ISAs.
Adequate planning benefits the audit team in various ways, such as:
i.
Helping the auditor to devote appropriate attention to important areas
of the audit;
ii.
Helping the auditor to identify and resolve potential problems on a
timely basis;
iii.
Helping the auditor to properly organise and manage the audit
engagement so that it is performed in an effective and efficient
manner;
iv.
Assisting in the selection of engagement team members with
appropriate levels of experience capabilities and competence to
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respond to anticipated risks, and the proper assignment of work to
them;
c.
v.
Facilitating the direction and supervision of engagement team
members and the review of their work; and
vi.
Assisting, where applicable, in the coordination of work done by
experts and components.
The establishment of the overall audit strategy involves the following:
i.
Determining the characteristics of the engagement that define its
scope, such as:
The financial reporting framework to be used;
Any industry specific reporting requirements; and
The location of the components of the entity (for example, there
might be overseas branches);
Ascertaining the reporting objectives of the engagement, such as
reporting deadlines and the nature of communication required;
Considering important factors which will determine the focus of the
audit team‟s efforts, such as:

Materiality thresholds;

High risk areas of the audit e.g key audit matters;

The audit approach;

The auditors evaluation of the entity‟s‟ internal control; and

Any recent developments in relation to the entity, the industry
environment or financial reporting requirements.


ii.
iii.
iv.
The nature, extent and timing of resources needed to perform the
engagement. In particular, the auditor should consider:





d
Where experienced members of staff may be needed (for
example, on high risk areas);
The number of staff to be allocated to specific areas (for
example, extra staff may be needed for attendance at the yearend inventory count);
Attendance locations (if the client has more than one location).
When the resources are needed (for example, are more staff
needed at the final audit than at the interim audit?); and
How such resources are to be managed, directed and
supervised (for example, the timing of team briefing meetings
and manager and partner reviews of work performed by other
members of the audit team).
Interim audit
An interim audit involves preliminary audit work that is conducted prior to
the fiscal year-end of a client. The interim audit tasks are conducted in order
to compress the period needed to complete the final audit. In simple terms,
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interim audits are done on interim periods, such as monthly, quarterly, biannual or any period in between the starting accounting period and the end
of the accounting period.
Interim audit includes:
i.
ii.
iii.
iv.
Understanding the entity, assessing inherent risk and identifying
significant matters which will be reflected in the subsequent audit
strategy and audit plan;
Considering going concern;
Recording, evaluating the design and testing the entity‟s system of
internal control; and
Performing substantive testing to ensure the books and records are a
sound basis for performing the year end audit e.g. on loans and
advances, receivables, etc.
Final audit
Audit done at the year end is known as final audit. Final Audit is also known
as annual audit or periodical audit balance sheet audit. A final audit is one
which is started at the end of a financial year when financial statements are
prepared and is carried out until completion.
Final auditing includes:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
Substantive testing: Note that where substantive testing was
performed at the interim phase, auditors typically test the subsequent
period between interim audit and period end;
Tests to ensure conclusions formed at interim audit remain valid;
Obtaining third party confirmations, such as bank letters and trade
receivables confirmations;
Analytical review;
Subsequent events review;
Obtaining written representations;
Agreeing the financial statements to the accounting records;
Examining adjustments made during the course of preparing the
financial statements;
Procedures to respond to a risk that, at the period end, the entity may
have entered into improper sales contracts or transactions may not
have been finalised;
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x.
xi.
Contingent liabilities; and
Reporting on the engagement
Examiner’s report
This question tests the candidates‟ knowledge of the expectations of an
auditor on professional skepticism, planning of audit, and the development
of appropriate strategy for audit.
The question was attempted by about 60% of the candidates but the
performance was average.
The commonest pitfall was the candidates‟ inability to adequately explain
professional practice management, Institute‟s Code of Ethics, and
professional conduct.
Candidates are advised to read thoroughly and understand the Institute‟s
Professional Code of Ethics when preparing for future examination.
Marking guide
a. Explanation of professional skepticism
1 mark for correct explanation of professional scepticism
1 mark for any illustration
b. Stating how adequate planning can benefit the audit
team
1 mark each for any 3 benefits of adequate planning by
audit staff
c. Explanation of what the establishment of the overall
audit strategy involves
1 mark each for any 3 points explained
d. Discussion of the elements of:
Interim audit procedure
1 mark each for any three points
Final audit procedure
1 mark each for any 4 points
Total
Marks
Marks
1
1
2
3
3
3
4
7
15
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SOLUTION 6
a.
Reasons for outsourcing internet audit functions
Some entities outsource the work of the internal audit function. When this
happens, the service provider is often the accountancy firm that provides the
entity with its external audit services. The reasons for this are:
b.
i.
The accounting firm may be sued for breach of contract or for
negligent work and should have professional indemnity insurance to
meet claims for losses due to negligent work;
ii.
Professional codes of conduct and standards of behaviour will
regulate the accounting firm. This might not be the case with an inhouse internal audit department;
iii.
The accounting firm may have access to more highly trained specialist
employees;
iv.
The accounting firm will have greater number of employees available
for any urgent internal audit assignments; and
v.
The accounting firm must have a greater level of independence than
the entity‟s own internal audit staff. If external audit firm is not
properly independent from the executive management of the entity, it
should not be given any internal audit work.
Advantages and disadvantages of outsourcing:
i.
Advantages
These include:

Cost savings: It may be cheaper to outsource work to an
external service provider than to do the work in-house;

The skills of the external agency or service provider: An
external service provider may have skills and expertise for doing
the work that the entity itself does not have „in house‟;

Access to the most up-to-date techniques and technology might
not be readily available within the entity, but the external
agency may have them; and

The management of the entity is able to focus its time and
efforts on “core activities”, and do not have to spend as much
time monitoring the outsourced activities.
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ii.
c.
Disadvantages
These include:

The management of the entity needs to make sure that the
service provider understands the requirements of the entity in
respect of the service that it is providing. If the work is not
properly specified, the service provider may fail to do everything
that the entity requires it to do;

The entity relies on the service provider to do its work on time
and have it ready at the time that the entity requires it. This is
particularly important, for example, when payroll operations are
outsourced;

There may be problems with negotiating an appropriate fee for
the work with the service provider; and

Management needs to ensure that the service provider gives the
organisation an appropriate level of priority and ‟customer care‟.
This means that management must carry out regular reviews of
the service level and service quality provided;
Part of internal audit function that cannot be outsourced
The oversight and responsibility for the internal audit function should not
be outsourced. The board, through the audit committee or those charged
with governance, is ultimately responsible for oversight of internal audit.
Their oversight responsibility cannot be outsourced.
Consequently, there is a need for more formal documentation and channels
of reporting and approval when a large part of the internal audit function
is outsourced.
Examiner’s report
This question tests candidates‟ knowledge of reasons for outsourcing of
internal audit functions by entities and the associated advantages and
disadvantages.
About 80% of the candidates attempted the question but the performance
was average.
The commonest pitfall was the candidates‟ inability to explain the concept of
outsourcing.
Candidates are advised to read the Institute‟s Study Text and Pathfinders to
enhance better performance in future.
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Marking guide
a.
b.
c.
Main reasons for outsourcing: Internal audit functions
1 mark each for any 3 reasons listed
Advantages and disadvantages of outsourcing
2 marks each for any 3 advantages
2 marks each for any 2 disadvantages identified correctly
Explaining part of internal audit function that cannot be
outsourced
1 mark each for any 2 parts of internal audit function that
cannot be outsourced
Total
Marks
Marks
3
6
4
10
2
15
SOLUTION 7
a.
Materiality and performance materiality
Information is considered material if its misstatement or omission could
influence the economic decisions of users taken on the basis of the financial
statements.
At the planning stage, the auditor must determine materiality for the
financial statements as a whole. This is often set as materiality thresholds. If
lower thresholds are required for some areas, these must also be set at this
stage.
Performance materiality recognises the fact that if all areas of the audit are
carried out to detect all errors/omissions under the (overall) materiality level,
that objective could be achieved, but when all the individual immaterial
errors/omissions are added together, overall materiality could in fact be
breached. Performance materiality is a way of taking this risk into account
and will be set at a lower figure than overall materiality.
b.
The benchmark for determining materiality
The materiality benchmark refers to the threshold used to obtain reasonable
assurance that an audit does not detect any material misstatement that can
significantly impact the usability of financial statements.
Determining materiality involves the exercise of professional judgment. A
percentage is often applied to a chosen benchmark as a starting point in
determining materiality for the financial statements as a whole.
Examples of benchmarks that may be appropriate, depending on the
circumstances of the entity, include categories of reported income such as
profit before tax, total revenue, gross profit and total expenses and total
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equity or net asset value. Profit before tax from continuing operations is
often used for profit-oriented entities. When profit before tax from
continuing operations is volatile, other benchmarks may be more
appropriate, such as gross profit or total revenues.
Materiality thresholds vary from one firm to another, but will typically fall
within the following ranges:.
i.
ii.
iii.
Revenue: 1% – 2%
An item of revenue is material if it is between 1% and 2% of annual
sales revenue.
Pre-tax profit: 5% – 10%
An item is material if it is between 5% and 10% of reported pre-tax
profit.
Total assets 1% – 2%
A balance is material if it represents between 1% and 2% of total
assets.
The revised ISA makes it clear that materiality depends on the size and
nature of an item judged in the surrounding circumstances. There are
guidelines on materiality – but no rules.
c.
Factors an auditor should consider in the identification of an appropriate
benchmark include:
i.
ii.
iii.
iv.
The nature of the item involved – The valuations and presentations of
some items in the financial statements are more subjective than
others, and depend on estimation. The more subjective the item, the
more flexible the auditor should be in assessing the materiality of
possible misstatements. The auditor will have to take a very different
view on materiality when considering a warranty provision (which is a
subjective estimate), compared with the approach taken when
auditing share capital, which is capable of precise measurement;
The value of the item – The value of the item determines its relative
significance in the financial statements;
The significance of the item – Some items may be insignificant in
terms of their monetary amount, but may nevertheless be of particular
interest to the users of the financial statements. An example might be
bonus payments to directors; and
The impact of the item on the view presented by the financial
statements. A small and apparently insignificant error or omission
may be material if, by correcting it:
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

A reported profit is converted into a reported loss; or
The correction significantly alters the trend of profits (growth
rate in profits over the past few financial years).
Examiner’s report
This question tests the candidates‟ knowledge of the concept of materiality
in the audit of financial statements.
About 50% of the candidates attempted the question but the performance
was below average.
The commonest pitfall was the candidates‟ inability to explain materiality at
various stages.
The candidates are advised to read the Institute‟s Study Texts and
Pathfinders in their preparations for future examinations.
Marking guide
a.
b.
c.
Explanation of materiality
Explanation of materiality
Stating explanation of materiality at planning
Performance materiality
Explanation of the benchmark for determining
materials
Any 3 benchmarks at 1 mark each
Any 2 thresholds at 1 mark each
Discussion of the factors that may affect the
identification of an appropriate benchmark
Stating 3 factors at 1 mark each
Discussion on factors stated at 1 mark each
More than 1 discussed point on any of the 3 factors
Total
Marks
Marks
1
1
1
3
3
2
5
3
3
1
7
15
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ICAN/231/V/C2
Examination No...........................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – MAY 2023
ADVANCED AUDIT AND ASSURANCE
EXAMINATION INSTRUCTIONS
PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER
1. Check your pockets, purse, mathematical set, etc. to ensure that you do not have
prohibited items such as telephone handset, electronic storage device,
programmable devices, wristwatches or any form of written material on you in
the examination hall. You will be stopped from continuing with the examination
and liable to further disciplinary actions including cancellation of examination
result if caught.
2. Write your EXAMINATION NUMBER in the space provided above.
3. Do NOT write anything on your question paper EXCEPT your examination
number.
4. Do NOT write anything on your docket.
5. Read all instructions in each section of the question paper carefully before
answering the questions.
6. Do NOT answer more than the number of questions required in each section,
otherwise, you will be penalised.
7. All solutions should be written in BLUE or BLACK INK. Any solution written in
PENCIL or RED INK will not be marked.
WEDNESDAY, MAY 17, 2023
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – MAY 2023
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF THE SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
Romeo and Juliet Plc is an indigenous company incorporated on March 5, 2012.
The entity operates in the oil sector of the economy which has experienced severe
income decline over the past years. The global oil prices hit a record low of about
$28 per barrel in 2019 and 2020, hence, this has further plunged the company and
the industry into downward slide, in income generation. The company is also
affected by foreign exchange difficulties faced by most companies in the country
resulting from the increased regulation of foreign exchange. Regular cases of oil
theft, pipeline vandalism and insecurity have also affected the operations of major
international oil companies which are the entity‟s major customers. As a result of
the above, the company recorded the following in her books of account:
i)
Financial losses - the company has made consistent losses from the financial
year ended December 31, 2017 to date;
ii)
Current liability position - the Company‟s current liabilities exceeded its
current assets; and
iii)
Negative net operating cash position - the Company has maintained a
negative net operating cash position from December 31, 2017 to date.
Furthermore, the company‟s performance has worsened as a result of decrease in
sales and increase in expenses.
The largest proportion of the current liabilities is the intercompany borrowings,
which accounted for 62% (2020 - 45%) of the total current liability balance. The
borrowings stood at N1.5billion, N1.6billion and N2billion for the financial years
ended 31 December, 2019, 2020 and 2021 respectively. The finance costs in
relation to the borrowings stood at N230million in the year ended December 31,
2021 (2020- N214 million).
The company has currently defaulted on a number of its contractual obligations
with its directors and there was no Directors‟ remuneration in the current year due
to its continuous loss making position.
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At the pre-audit meeting with management of Romeo and Juliet Plc, your firm (the
auditors) were informed that, in the year, the company was involved in a business
combination with another oil company and to pay for the cost of acquisition, an
additional intercompany loan was obtained because of the poor financial position
of the company. In addition, the company‟s major investment in an associated
company was disposed. The business acquisition proposal has all necessary
regulatory approvals. It was approved at the meeting of the directors, annual
general meeting of the company in the previous year and disclosed in the
company‟s prior year financial statements as business matters.
After the meeting with management, you have started the preparation for the yearend audit and in compliance with regulatory requirements and the auditing
standards, a key Audit Matter should be inserted on the opinion page.
Required:
a.
Evaluate the criteria that will help the engagement team to determine what
qualifies as a matter requiring significant auditor‟s attention and can be
classified as a Key Audit Matter.
(8 Marks)
b.
Discuss the factors that will determine matters of most significance to be
communicated to those charged with governance.
(10 Marks)
c.
Discuss the criteria for what must be included in the description of Key Audit
Matter on the audit opinion.
(6 Marks)
d.
Evaluate what should be done assuming that you have determined that
there are no Key Audit Matter to be reported in the above scenario. (6 Marks)
(Total 30 Marks)
SECTION B: OPEN-ENDED QUESTIONS
INSTRUCTION:
(40 MARKS)
YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION
QUESTION 2
There is an indication of increasing application of technology in the business
and commercial world. A lot of activities are now carried out on a real time
basis and payment systems are gradually reducing the use of cheques.
Your new audit client is one of the companies that has recently enhanced
their business settings with respect to receipts and payments. The previous
auditor has little depth in information and communication technology
despite the growing trend. The client‟s management also thinks that its
performance in the past has been inadequately reported due to the
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complicity of the key accounting staff and inadequacies of the previous
auditor. The client is therefore considering its options in the circumstances.
Required:
a.
Discuss the challenges encountered in the provision of assurance
engagements on e-commerce systems and the approach to address
these challenges.
(8 Marks)
b.
Evaluate the ethical principles that will be relevant in the conduct of
forensic investigation of this client and the considerations the
accountant needs to bear in mind in such an assignment.
(7 Marks)
c.
For proper conclusion of the exercise, set out the reporting
requirements of an assurance engagement.
(5 Marks)
(Total 20 Marks)
QUESTION 3
Messrs PK Industries Limited was incorporated and operates its business in Nigeria.
The company has existed over the years. During most of this period, it imported
some major components from China. Imports usually take some time to arrive after
necessary forms have been completed and submitted to the bank.
Two of the directors have two other companies that supply fuel and other local
resources needed by the company. The company‟s directors are aware of this but
prefer to do their business rather than patronise other suppliers.
In the last few years, the turnover of the company fluctuated between ₦500 million
and ₦1billion. The two other companies owned by the two directors are currently
trading on loans granted by the company.
Following what was considered to be an increasing harsh economic environment
and high cost of power supply, the company registered a subsidiary company with
a production outfit in Ghana while still maintaining its head office operations in
Nigeria. Part of the raw materials needed in Ghana are procured in Nigeria and
transported to Ghana through hired trailers. This process is being used until a
suitable supplier is found in Ghana.
The company decided to hold the next Annual General Meeting (AGM) in the
company‟s premises in Ghana with all the directors/shareholders traveling to Ghana
on a direct flight from Abuja to Accra at the company‟s expense. It was decided that
this was an opportunity to evaluate the Ghanaian environment for further business
decisions.
The audit of the Nigerian company and its Ghanaian company were done by
different firms.
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Required:
a.
Evaluate the risks involved in the scenario above.
(5 Marks)
b.
Discuss the risk assessment procedures that the auditor of Messrs PK
Industries Limited need to adopt as required by ISA 550.
(11 Marks)
c.
Prepare the key guidelines to the audit in accordance with ISA 600. (4 Marks)
(Total 20 Marks)
QUESTION 4
Piton Drilling and Engineering Services Limited was established in 2001 by Andrew
and Cole. The company provides consultancy, engineering and training services in
borehole drilling, power generation, environmental engineering services under
drilling, training, and laboratories divisions. The largest division is drilling of which
contributes income of more than 60%, while training and laboratory services
contribute only over 30% of total income. Piton Drilling & Engineering Services
Limited saw opportunity in combining business operation with Valemu Limited, a
small engineering company with three members. Valemu Limited has strong
presence in the riverine areas and commenced operations about two years ago.
The issue of the business combination was brought to the attention of Peter who is
the Engagement Partner for the audit of Piton Drilling and Engineering Services
Limited. He suggested that Andrew and Cole should perform due diligence on the
operations of Valemu Limited, regardless of the fact that they are in similar
business operations. He explained that the exercise will be necessary to reduce risk
of failure of the merged entity, as both quantitative and qualitative information
will be available about the operations of the entity before going on to decide on
signing the agreement. It was explained that the due diligence should cover
financial viability and long-term sustainability of the merged entity. He made
reference to a situation where a large department store was forced to wind down
its operations after business combination when it was discovered that the entity
merged with was highly indebted to the bank and most of the assets have been
pledged as collateral for loans with banks.
Some staff of your firm have already been assigned to the audit engagement and
you told them that the audit will be delayed because a due diligence is being
carried out on the operations of the entity Piton Drilling and Engineering Services
Limited wants to merge with. One of the inquisitive staff, who is tired of staying in
the office, came up to you with a lot of questions among which is why the audit and
the due diligence review could not serve the same purpose.
Required:
a.
b.
Differentiate between due diligence report and external audit report.
(3 Marks)
Discuss the items you feel should be investigated or reported on in the due
diligence exercise to make it of value to Piton Engineering Services Limited.
(7 Marks)
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c.
d.
Evaluate the benefits of using a professional service firm for the exercise.
(3 Marks)
Highlight the format of the due diligence report.
(7 Marks)
(Total 20 Marks)
SECTION C:
OPEN-ENDED QUESTIONS
(30 MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION
QUESTION 5
Vigo Microfinance Bank Limited was incorporated on July 1, 2014, as a public
limited company under the Companies and Allied Matters Act. The bank obtained
Microfinance banking licence from the Central Bank on August 5, 2015 to operate
on a nationwide basis and commenced business operation on September 5, 2015.
The bank‟s principal business is to provide microfinance banking and related
services to the poor and underserved segment of the society with a view to
alleviating poverty under the Microfinance Institutions Ordinance. In 2019, the
bank decided to convert to a commercial bank and commenced business operation
on August 10, 2019 after final approval from the regulator. As at December 31,
2019, the bank had five branches (2016:24) at the Federal Capital and other four
major geo-political zones in the country.
With the new commercial banking licence, the bank employed the services of F.K.
George Professional Services to audit its financial statements. As part of the
activities to be carried out on the initial engagement, the external auditors began a
review of the books of account of the predecessor auditor and the following issues
emanated, among others:
i.
Some property, plant and equipment in the books of account and in prior
year financial statements had negative net carrying amounts;
ii.
The basis for impairment included in prior year financial statements
regarding loans and advances could not be established from the working
papers;
iii.
There was a material amount of pre-operating expenses that was included in
receivables schedules of which could not be satisfactorily provided;
iv.
The audit work performed on interest income in the prior year was not
supported by sufficient appropriate audit evidence;
v.
Details of outstanding tax liabilities could not be provided as the amount in
the financial statements was the figure supplied to the external auditor by
the tax consultant. It was discovered that the figures were not subjected to
review by the former external auditor;
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vi.
vii.
There was no satisfactory explanation on nil balances included in prior year
financial statements on contingent liabilities as there were no evidence that
request for confirmation were made from all solicitors of the bank; and
Details of contraventions included in the examiner‟s report were not
considered for disclosures in the financial statements.
The Central Bank is requesting for the financial statements of the bank and
management is worried that there is a delay in the release of the financial
statements by the new external auditors despite several notifications and
reminders.
The Chief Finance Officer of the bank complained to you as a member of the
engagement team about the delay in concluding the audit. He could not see the
reason why your firm should be concerned about prior period financial statements
issues when your firm was not the one that expressed opinion on it. Added to this,
the responsibility for the financial statements rest on the board of directors.
Required:
a.
Discuss why your firm needs to carry out the above exercise.
(3 Marks)
b.
Analyse the nature and extent of audit procedures necessary to obtain
sufficient appropriate audit evidence.
(8 Marks)
c.
Evaluate what your firm might likely do in case of inability to obtain
sufficient appropriate audit evidence from the exercise.
(4 Marks)
(Total 15 Marks)
QUESTION 6
The audit of one of your firm‟s new clients is ongoing. Review and compliance
procedures were being carried out by the audit team. There were unsatisfactory
issues with some of the data generated for use in the testing process. These issues
were escalated and there was therefore the need to bring in the firm‟s IT specialists
for confirmation purposes. With your competence in this area, you were asked to
provide the necessary guide and assurance needed by the audit team.
Required:
a.
Evaluate the components of the governing principles of the Nigerian Data
Protection Regulation, 2019 as applicable in the circumstance.
(6 Marks)
b.
Discuss the requirements of the data protection framework.
(9 Marks)
(Total 15 Marks)
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QUESTION 7
At the annual general meeting of Aggressive Bank Limited for the year 2020 the
shareholders complained about increasing cases of customers complaints about
fraud. It was believed that if drastic actions are not taken to reduce this, it could
lead to brand damage and reputational issues. In performing their oversight
functions, the audit committee of the bank commissioned the internal audit unit to
identify issues of fraud and likely causes. From the internal audit report, the
following issues were noted:
i.
Due to poor information security system, some unscrupulous
individuals hacked into customers current/savings deposits accounts and
made unauthorised transfers to their bank accounts;
ii.
There were cases of forged cheques with forged signatures, cards, and
withdrawal slips which were used to withdraw money from bank accounts.
These acts were perpetrated through collusion with staff of the bank;
iii.
Cases of opening and operating fictitious bank accounts where illegal
transfers were made. The problem is compounded with incomplete know your
customer (KYC) activities carried out by the bank‟s personnel;
iv.
Granting of loans to fictitious borrowers through fictitious accounts opened in
branches of the bank;
v.
Some junior staff making claims of overtime for hours not worked;
vi.
Suppression of cash/cheques that were supposed to reflect on customers‟
deposits and loan repayments. The cash/cheques were diverted to the
fictitious accounts in operation in the bank; and
vii. Cases of alteration of programmes, or application packages and gaining
access to unauthorised domains or accounts to give credit to accounts for
which the funds were not intended.
The following were identified as likely causes:








Weak accounting and internal control system;
Negligence and poor supervision of subordinates;
Inadequate follow up or disregard for “know your customers (KYC)” rule;
Poor information technology and data base management;
Poor salaries and conditions of service;
Failure to perform regular end of day call-over;
Non implementation of sanctions on employees who failed to comply with
standard operating procedures;
Notwithstanding details of fraud and forgeries to regulators as required
due to fear of negative publicity or image;
 Lack of experience and inadequate training; and
 Inadequate infrastructure in the bank as manifested in constant power
failure, congested office space and non-completion of expected daily task
before closing.
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The audit committee having gone through this internal audit report, decided to act
swiftly by mandating the management to engage a forensic expert to report
forensic report from on this. Your firm has been appointed to submit a report on
this issue in the next four weeks.
Required:
a.
b.
c.
Discuss the ethical principles you believe will be applicable in this situation.
(5 Marks)
Assess and advise on the procedures you will take to gather evidence for an
acceptable report to management.
(5 Marks)
Evaluate the agencies and relevant laws you will recommend to management
to tackle these problems, where legal actions might be required.
(5 Marks)
Total 15 Marks)
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SOLUTION 1
a.
The matters that in the auditor‟s professional judgement were of most
significance, in the audit of the financial statements of the current period, and
can be classified as Key Audit Matters include:
i.
Areas of higher assessed risks of material misstatements or significant
risks;
ii. Significant auditor judgements relating to areas in the financial
statements that included significant management judgement, including
accounting estimates that have been identified as having high
estimation uncertainty;
iii.
Significant events or transactions that had a significant effect on the
financial statements or the audit;
iv.
Other matters that require significant auditor attention which may /may
not be disclosed in the financial statements like the implementation of
a new IT system;
v.
Matters that are likely to jeopardise the going concern of the entity such
as the persistent decline in revenue as well as business loss;
vi.
Matters relating to the auditor‟s judgement such as determining
materiality and materiality threshold;
vii. Matters relating to changes in the business structure such as the
business combination with another oil company as well as the major
investment disposal;
viii. The financing of the business from intercompany loans as well as the
default in contractual obligations to the directors; and
ix.
b.
Generally, issues relating to significant fraud risks.
Factors that would be considered in determining which matters are of most
significance to be communicated to those charged with governance includes:
i. Significance of interactions between the auditor, management and the
audit committee;
ii.
The importance of the matters to the understanding of the financial
statements as a whole;
iii. The materiality of the matters;
iv. Corrected and uncorrected misstatements relating to the matters and their
nature;
v,
Complexities relating to the accounting policy, for example subjectivity in
selecting the accounting policy or difference in the policy compared to
industry norms;
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vi.
The nature and extent of audit function to address the matter, for
example use of experts;
vii. Difficulties in performing audit procedures and obtaining sufficient audit
evidence;
viii. Severe internal control deficiencies;
ix.
Inter-relatedness with other matters, for example long-term contracts
which affect revenue recognition;
x.
Significant matters which require auditor‟s attention in performing the
audit;
xi. Areas of higher assessed risk of material misstatements or significant risks
identified;
xii. Significant matters which required auditor‟s judgment that also involve
significant management judgment, including accounting estimates; and
xiii. Accounting estimates that have been identified as having high
estimation uncertainty.
c.
The description of the Key Audit Matters in the auditor‟s report include the
following:
i.
ii.
iii.
iv.
d.
Reference to the related disclosure(s) in the financial statements (if any);
Explanation of why the matter was considered to be one of most
significance;
Audit evidence obtained; and
Audit conclusion reached.
If the auditor determines that there are no Key Audit Matters to communicate
in the auditor‟s report, the auditor should:
i.
Discuss this conclusion with the engagement quality control reviewer;
ii. Communicate this conclusion with those charged with governance; and
iii. Explain in the auditor‟s report that this section of the auditor‟s report is
intended to describe the matters communicated with those charged with
governance based on the auditor‟s professional judgment.
Examiner’s report
The question tests the candidates‟ knowledge of the requirements of issues to be
classified as Key Audit Matters, matters to be communicated to those charged with
governance and also tests responses to such issues as they arise.
This is a compulsory question and almost all the candidates attempted it but the
performance was poor.
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The commonest pitfall of the candidates was their inability to apply the issues
presented to answer a specific scenario.
Candidates are advised to study the Institute‟s Study Text and Pathfinders which
are freely available on the Institute‟s website.
Marking guide
Criteria for determining methods that require auditors
attention which can be classified as KAM
(1 mark for introduction)
(1 mark each for any 7 points)
Factors the auditor would consider to determine matters to
be communicated to those charged with governance
(1 mark each for any 10 points)
Content of KAM for the auditor’s report
(1½ marks for any 4 points)
Reporting obligations of an auditor where there is not KAM
to communicate in the report
(2 marks for each point subject to maximum of 3 points)
Total
a.
b.
c.
d.
Marks
Marks
1
7
8
10
6
6
30
SOLUTION 2
a.
Performing an assurance engagement on e-commerce systems provides
additional challenges for auditors. These include:
i.
The need for specialist knowledge about e-commerce systems;
ii.
Problems that may arise when some aspects of the e-commerce system
(such as the electronic payments system) are outsourced by the client to
another entity;
iii.
The role of the client‟s internal auditors in monitoring the integrity of the
e-commerce system;
iv.
The need for specialist controls (general and application controls) for the
system;
v.
Possible problems of independence and conflicts of interest, if the audit
firm was involved in designing or setting up the e-commerce system that
is now subject to „audit‟;
v.
Loss of transaction integrity;
vi.
The use of inappropriate accounting policies (for example in respect of
capitalisation of website development costs; and
viii. Legal and regulatory risks.
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The audit approach to an e-commerce system should include the following
elements:
b.
i.
The audit firm should decide whether the engagement should be
accepted as in any professional engagement;
ii.
The firm should then plan the engagement and make available audit
staff with appropriate expertise in e-commerce systems;
iii.
The firm should obtain a detailed knowledge of the client‟s business;
iv.
It should consider liaison with the internal auditors of the client and
ascertain if there have been internal audit investigations into the
client‟s e-commerce transactions or system;
v.
The firm should identify and evaluate the risks in the system;
vi.
It should ascertain and evaluate the control environment and the
specific internal controls that are in operation; and
vii.
It may also be appropriate to perform a going concern review,
particularly in the case of entities that rely mainly on e-commerce
activities for their income.
The ethical principles applicable to accountants carrying out forensic
investigation of the client include:
i.
Integrity: In legal disputes and criminal investigations, individuals may
be dishonest and tell lies. However, the forensic accountant must act with
integrity and honesty at all times;
ii.
Objectivity: The forensic accountant is paid by a client to carry out an
investigation, and the client will presumably be hoping for a particular
outcome to the investigation. For example, in a fraud investigation, the
criminal investigators who use a forensic accountant may be hoping for
evidence of guilt. However, the forensic accountant must remain
independent (in spite of the advocacy threat) and should seek to obtain
evidence to reach a fair opinion;
iii.
Professional competence and due care: Forensic accounting is a
Specialised area of work, and individuals should be sufficiently
competent to do the work;
iv.
Confidentiality: The normal ethical rule is that accountants should
maintain client confidentiality and should not disclose information
without the client‟s consent. An exception is that the duty of
confidentiality is overridden by the requirement to provide evidence
when requested in a court of law. Legal requirements for disclosure
override the rules of client‟s confidentiality; and
v.
Professional behaviour: Forensic accountants often appear as witnesses in
court, and in the public eye, they should display professional behaviour
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and act in a way that is not detrimental to the image of the accounting
profession.
There are some particular considerations that an accountant will have to bear
in mind when carrying out forensic investigation, these include:
i.
ii.
iii.
iv.
To whom a duty of confidentiality is owed (particularly when acting as
an expert witness in relation to both sides of a legal claim);
Duties to the court;
Acting in the public interest; and
Legal privilege in the context of money laundering.
This last area is a particularly important one for forensic accountants. Most
accountancy work, for example, auditing or accounts preparation, gives rise to
the duties to report suspicions of money laundering.
However, when an accountant is working in a legal capacity, it may be that
information obtained during the course of that work is subject to legal
privilege. If so, the accountant would be wrong to make a report of suspicion
of money laundering. Whether or not legal privilege applies in a particular
situation is a complicated question, and the accountant should take legal
advice on his position.
c.
The report prepared by accountants at the end of an assurance engagement
will include the following elements:
i.
A title, indicating that the report is an independent assurance report;
ii.
An addressee (the person or body to which the report is addressed);
iii.
Identification of the level of assurance obtained;
iv.
Subject matter of the report, including any relevant information relating
to the subject matter reviewed, such as the time period for which the
information was gathered;
v.
Suitable criteria that have been selected for assessment;
vi.
Any inherent limitations in performing the work;
vii. Where appropriate, a statement that the use of the report must be
restricted to certain specified users, or that the use of the report should
be restricted to a specific purpose for which it was prepared;
viii. A statement to identify the responsible party and the measurer and to
describe their and the practitioner‟s responsibilities;
ix.
A statement that the engagement was carried out in accordance with
ISAEs, ISQC 1 and independence and ethical requirements;
x.
A summary of the work performed;
xi.
The practitioner's conclusion; and
xii.
The date, name and address of the practitioner.
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Examiner’s report
The question tests the candidates‟ knowledge of the challenges encountered in ecommerce, the ethical principles in forensic investigation and reporting on forensic
exercises.
The question was attempted by about 80% of the candidates but the performance
was below average.
The commonest pitfall of the candidates was their lack of understanding of
e-commerce despite its growing trend.
Candidates are advised to familiarise themselves with practical aspects of
engagement and also the Institute‟s Study Text and Pathfinders.
a.
b.
c.
Marking guide
Challenges of providing assurance engagement on
an e-commerce systems and the approach to address
the challenges
(1 mark each for any 3 challenges,) and
(1 mark each for any 5 audit approaches)
Ethical principles relevant in the conduct of forensic
investigation and what the accountant should
consider
(1½ marks for any 4 ethical principles,) and
(1 mark for any consideration)
Reporting requirements for an assurance
engagement
(½ mark for any 10 requirements)
Marks
Marks
3
5
8
6
1
7
5
20
SOLUTION 3
a.
The risks to be identified from the scenario presented in the case could be
divided into business risks and financial statement risks.
Business risks:
These include:
i.
Setting up new business in a foreign country requires commitment to set
up and grow the business. This may be beyond the capacity of the
company;
ii. Establishing business will also require huge initial financial set up. This
will involve huge capital commitment;
iii. The cost of moving shareholders and directors to Ghana for AGM is likely
to have a drain on the resources of the company and may be unjustified
by the proposed business development evaluation;
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iv.
Granting loans to directors‟ other businesses would likely be at an
interest below the market rate and would be a drain on the resources of
the company due to improper application of resource;
v.
Damages and possible loss of goods and resources that are freighted to
the foreign component;
vi. Revenue earning fluctuation of the business between N500m and
N1Billion;
vii. Control risk within the organisation;
viii. Poor corporate governance; and
ix. Risks associated with unknown scenarios of Ghanaian business
environment
Financial statement risks:
These include:
i.
ii.
iii.
iv.
b.
The need to engage an international audit firm or different firms in the
two countries will involve huge costs;
The challenges in the proper currency conversion of the transactions of
the subsidiary company;
Risk of material misstatement of all related parties‟ activities to ensure
that the financial statements reflect a true state of affairs of the
company; and
Risk of financial misappropriation.
Risk assessment procedures
The Related Party transactions are covered in ISA 550. The risk assessment
procedures relate to ISAs 240 and 315.
As part of the risk assessment procedures required by ISAs 240 and 315, the
auditor is required to perform the following procedures:
i)
ii)
iii)
Consider the risk of material misstatement due to fraud or error arising
from related party relationships and transactions;
Make inquiries of management in respect of;
• The identity of related parties;
• The nature of relationships with those related parties; and
• The nature of any transactions entered into with those parties during
the period; and
Obtain an understanding of the internal controls in operation over:
• The identification of, accounting for and disclosure of related party
relationships and transactions
• The authorisation and approval of significant related party
transactions; and
 The authorisation and approval of significant transactions outside the
normal course of Business.
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c.
ISA 600: special considerations – audits of group financial statements
(including the work of component auditors)
The revised ISA introduced a number of new requirements where other
auditors audit group components, increasing the group auditor‟s involvement
in the work of component auditors. New requirements include:
i) Deciding whether to accept or continue an appointment as group auditor,
considering whether the group engagement team will be able to be
involved in the work of component auditors to the extent necessary to
obtain sufficient appropriate audit evidence;
ii) Obtaining an understanding of the group, its components and their
environment and assessing the risk of material misstatement of the group
financial statements (which can be mitigated by strong group-wide
controls);
iii) Obtaining an understanding of component auditors, including their
professional competence and whether they will comply with ethical
requirements which apply to the group audit; and
iv) Determining a materiality level for the group as a whole and for each
components where competent auditors will perform an audit or a review
for the purposes of the group audit; and
v) Responding to assessed risks, including:

Requiring an audit of the financial information (using component
materiality) of any component which is of individual financial
significance;

Requiring an audit of the financial information, or an audit of
specific areas or specified audit procedures for any component
which is significant because it is likely to include group level
significant risks;

Requiring analytical procedures at group level for non-significant
components; and

Determining the level of involvement of the group engagement
team in the work performed by component auditors (for significant
components, the group engagement team must be involved in the
component auditor‟s risk assessment in order to identify the risks of
material misstatement).
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Examiner’s report
The question tests the candidates‟ knowledge of the concept of risk and its
assessment procedures in related party transactions with respect to ISA 550:
Related Parties, and the audit guidelines in accordance with ISA 600: Special
Considerations in Audit of Group Financial Statement.
The question was attempted by about 70% of the candidates but the
performance was poor.
The commonest pitfall of the candidates was their inability to discuss the risk
assessment procedures as required by ISA 550.
Candidates are advised to pay close attention to the technicalities involved
in audit guidelines and other technical documents.
a.
b.
Marking guide
Identification of risks from the scenario and classifying business
risk and financial statement risks.
Business Risk
(1 mark for any 3 points)
Financial Statement Risks
(1 mark each for any 2 points)
Discuss the Risk assessment procedure in line with ISA 550
(1 mark for the introduction, and)
(2 marks each for any 5 points)
Preparation of key guidelines to audit in accordance with ISA 600.
(1 mark each for any 4 points)
Marks
Marks
3
2
1
10
5
11
4
20
SOLUTION 4
a.
The differences between due diligence report and external audit report
include:
i)
Due diligence report is mostly not regulated by law while external audit
report is usually regulated by law and standards;
ii)
Due diligence report focuses on future information such as management
account, profit forecast, etc; but external audit report is focused on
historical financial information;
iii)
Due diligence report involves enquiries, analytical procedures and
inspection of documents while external audit involves substantive testing
of transactions and account balances;
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b.
iv)
Due diligence report reviews both financial and non-financial
information such as the company structure, credibility of owners,
directors, management, etc. of the future earning potential of the
business to be acquired or merged with, risk assessment and other
information necessary to decide on the viability of the merger or
acquisition. While an external audit report focuses on financial data as
well as past activities of the business. It also provides a high level of
assurance to the users of the financial statements;
v)
A due diligence report is used for making decisions regarding mergers
and acquisitions and provides the client with necessary information
required to determine whether or not to merge or acquire the proposed
company and to decide what price to offer for the merger or acquisition.
While external audit report provides assurance on the truth and fairness
of the financial statements of the company and is required by law to be
carried out and submitted to the audit committee; and
vi)
Audit reports only on the truth and fairness of the financial results, while
a due diligence review will investigate reasons for the trends observed in
operational results of the company over a relevant time period in terms
of relevancy for the proposed transaction.
The items to be investigated or reported on in the due diligence exercise of
Valemu Limited to make if of value to Piton Engineering Services Limited
includes:
i)
Financial performance and financial position: The practitioner should
look at the available historical financial information about the target
company, such as its financial statements for the past few years. Ratio
analysis will often be used to make an assessment. The practitioner will
also look at the target company‟s management accounts, budgets and
profit/cash flow forecasts, and at any current business plan;
ii)
Operational issues: The practitioner should also look for any operational
issues in the target company that may raise questions about its value.
For example, the target company might have important contracts with
major customers, and the practitioner should try to find out when these
contracts reach their termination date and the probability that the
contracts will be renewed. Other operational problems may be
discovered, such as a high rate of labour turnover, or high costs incurred
in meeting warranties or guarantees to customers;
iii)
Management representations: Management of the takeover target may
have provided representations to the potential buyer. For example, they
might have given a written assurance that the target company is not
subject to any tax investigation or potential litigation. Due diligence
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work should seek to establish that these representations appear to be
correct and/or are correct;
iv)
Identification of assets: A takeover usually results in purchased goodwill
in the consolidated accounts. However, the takeover target may have
several intangible assets that do not appear in its statement of financial
position (because they were internally-generated assets) but which
should be recognised for the purpose of consolidation. Examples are
internally-generated patent rights, customer lists and databases and
brand names. These should be identified and valued for inclusion in the
consolidated statement of financial position after the acquisition. It is
also useful for the management of the potential buyer to be aware of the
nature and estimated value of the intangible assets that they would be
acquiring; and
v)
Benefits and costs of a takeover: Due diligence may also include an
attempt to estimate the future benefits of the takeover, such as cost
savings from synergies such as economies of scale. Any „one off‟
expenses such as redundancy costs and reorganisation costs will have to
be estimated – by the potential buyer if not by the due diligence process.
Other items include:
i)
Contingent assets and liabilities;
c.
ii)
Environmental due diligence;
iii)
Any outstanding investigation by government authorities; and
iv)
Contract with third parties (terms and conditions).
Benefits of using a professional firm for a due diligence exercise include:
i)
Hiring a professional service firm to do the work saves management time
for the potential buyer;
ii)
The practitioners assigned to the due diligence work should have
suitable experience on this type of work;
iii)
For large takeover, the amount of time and resources required to carry
out proper due diligence can be substantial for a large take-over; and
iv)
Using a professional firm to do due diligence may help to reassure
shareholders of the potential buyer (or investors who will be asked to
provide loan finance for the takeover) that the acquisition has been
properly evaluated.
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d.
Format of the due diligence report.
A due diligence report is expected to be presented in the format below as
prescribed by ISQE 2400:
i)
Introduction/executive summary: This section provides a brief summary
of the target company to the client and highlights areas of concern;
ii)
Main section of report: The contents and order of this section will be
agreed with the client in advance and could include areas such as:









iii)
Analysis of audited financial statements going back several years;
Any audit issues in the past;
Legal issues, such as potential litigation;
Corporate governance analysis;
SWOT analysis;
Any financial obligations, such as loans or leases;
Details of key suppliers and customers;
Key employees; and
Details of key employment matters such as pensions, redundancy
obligations; and
Appendices: It will contain the detailed documentation used to compile
the main section of report, for example, copies of financial statements,
copies of lease contracts or loan terms.
Examiner’s report
The question tests the candidates‟ knowledge of the distinction between due
diligence and external audit exercises as well as the benefits of using a
professional service firm in carrying out a review engagement.
The question was attractive to candidates as about 90% of them attempted it
but the performance was on the average.
The commonest pitfall was the candidates‟ inability to explain the
requirements of the different types of assurance engagements.
Candidates are advised to pay close attention to review engagements and
study the Institute‟s Study Text and Pathfinders, for success in the future
examinations.
a.
b.
Marking guide
Identifying the difference between due diligence report
and external audit report
(1 mark each for any 3 points of difference)
Discussion of Items to be investigated or reported in a
due diligence exercise
(1 mark each for any 7 points)
Marks
Marks
3
7
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c.
d.
Evaluation of benefits of using a professional service firm
(1 mark each for any 3 points)
Presenting the format of due diligence report
(1 mark each for any 7 points)
Total
3
7
20
SOLUTION 5
a.
The exercise is necessary to determine:
i)
Whether the prior period‟s closing balances have been correctly brought
forward to the current period or, when appropriate, have been restated;
ii) Whether the current financial year balances reflect consistent application
of appropriate accounting policies as in previous years; and
iii) If there is consistency of classification and disclosure between the
current financial year and prior years.
b.
The following audit procedures are required to obtain sufficient appropriate
audit evidence:
i)
ii)
iii)
iv)
Read the most recent financial statements and audit report, if any, for
information relevant to opening balances;
Check that the prior period‟s closing balances have been correctly
brought forward;
Check that opening balances reflect appropriate accounting policies;
Carry out the following procedures:

Where the prior financial statements were audited, review the
predecessor auditors‟ working papers to obtain evidence with
reference to balances;

Consider whether audit procedures carried out in the current period
provide related evidence on some of the opening balances. For
example, cash received from customers in the current period gives
evidence of the existence of a receivable at the opening date.
v)
If evidence is found that opening balances could contain material
misstatements affecting the current period‟s financial statements,
perform appropriate additional procedures to assess the effect;
vi)
If misstatements do exist, communicate this to those charged with
governance in accordance with ISA 450; and
vii) Check that the accounting policies reflected in the opening balances
have been consistently applied in the current period (or a change of
accounting policy has been properly approved and disclosed).
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c.
What the firm is likely to do in event of inability to obtain sufficient
appropriate audit evidence include:
i)
Discuss with management and those charged with governance on our
inability to obtain sufficient appropriate audit evidence required to reach
a conclusion, explaining to them the implications of this;
ii)
Determine whether it is possible to resign from the audit engagement (if
permitted by law), where it is not possible, seek legal counsel on
necessary actions to take; and
iii)
Issue a modified audit report detailing the reasons for this. Where it is
material but not pervasive, then a qualified opinion will be given but
where it is material and pervasive, then a disclaimer of opinion will be
issued stating that there was a limitation in the ability to obtain
sufficient appropriate audit evidence.
Examiner’s report
The question tests the candidates‟ knowledge of the requirements of audit evidence
and the procedure of obtaining audit evidence in various assurance engagements.
Over 60% of the candidates attempted the question, and the performance was
above average.
The commonest pitfall was the candidates‟ inability to explain the procedures of
evidence gathering and reporting requirements.
Candidates are advised to read thoroughly the Institute‟s Study Text and Pathfinder
before sitting for subsequent examinations.
a.
b.
c.
Marking guide
Discussion of reasons for the audit procedure for the
exercise
(1 mark for each for 3 points)
Analysis of the nature and extent of audit procedure
(2 marks each for any 4 points)
Evaluation of the Auditor‟s response in case of inability
to obtain sufficient appropriate audit evidence
(2 marks each for any 2 points)
Marks
Marks
3
8
4
15
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SOLUTION 6
a.
The National Information Technology Development Agency (NITDA) issued
the Nigerian Data Protection Regulation (NDPR) in 2019, pursuant to its
enabling power under the NITDA Act 2007. Without prejudice to other
procedures in the regulation or any instrument for the time being in force,
the regulation has the governing principles (Principle 2.1) of data processing
to the effect that:
i.
Personal data shall be:
• Collected and processed in accordance, with specific, legitimate
and lawful purpose consented to by the data subject; provided
that:
 A further processing may be done only for archiving, scientific
research, historical research or statistical purposes for public
interest; and
 Any person or entity carrying out or purporting to carry out
data processing under the provisions of this paragraph shall
not transfer any personal data to any person;
Adequate, accurate and without prejudice to the dignity
of human person;

Stored only for the period within which it is reasonably
needed; and

Secured against all foreseeable hazards and breaches
such as theft,
cyber attack, viral attack, dissemination, manipulations of any kind,
damage by rain, fire or exposure to other natural elements;

b.
ii.
Anyone who is entrusted with personal data of a data subject or who is
in possession of the personal data of a data subject owes a duty of care
to the said data subject; and
iii.
Anyone who is entrusted with personal data of a data subject or who is
in possession of the personal data of a data subject shall be accountable
for his acts and omissions in respect of data processing, and in
accordance with the principles contained in this regulation.”
The requirements of the data protection framework include the following:
i.
Consent: Data controllers and processors must first seek the consent of
the data subject without undue influence, fraud, and coercion. usually,
consent is obtained through clear data privacy policies to which the data
subject has consented; and
ii.
Data protection audit: The NDPR mandates all organisations that process
the personal data of more than 1000 data subjects in a period of 6
months and 2000 data subjects in a period of 12 months to submit a
data protection audit report to NITDA not later than March 15, every
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year. This involves the organisation's audit of its data privacy and
protection practices. Audits are meant to show that the data controller or
processor complies with the law.
The audit should state the following:
i.
The data the organisation collects on its employees and members of
the public;
ii.
The purpose for which such data is collected;
iii.
Notice given to individuals regarding the collection and use of their
personal information;
iv.
The access given to individuals to review, amend, correct,
supplement, or delete such data;
v.
Whether or not the consent of these individuals was obtained before
collecting, using, transferring, or disclosing these data; and the
methods employed to obtain consent;
vi.
The policies and practices of the organisation for the proper use
and security of these data;
vii. Organisation‟s policies and procedures for privacy and data
protection; and
viii. The policies and procedures of the organisation for assessing the
impact of technologies on the stated privacy and security policies.
Examiner’s report
The question tests the candidates‟ knowledge of components of data
protection regulation framework in accordance with the Nigerian Data
Protection Regulation, 2019.
About 70% of the candidates attempted the question and the performance
was above average.
The commonest pitfall of the candidates was their inability to explain the
computerised setting and data handling as well as the requirements for the
regulation on data.
Candidates are advised to study the Institute‟s Study Text and Pathfinders.
Marking guide
a. Evaluation of the components of the governing principle of
the Nigeria Data Protection Regulation
(1 mark for introduction)
(1 mark each for any 5 points)
Marks
Marks
1
5
6
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b. Discussion of this requirements of the Data Protection
Framework
(2 marks for any 2 points)
Consent and Data Protection Audit: audit requirements
(1 mark each for any 5 points)
4
5
9
15
SOLUTION 7
a.
Ethical principles applicable in this situation include:
i)
Integrity: In legal disputes and criminal investigations, individuals may
be dishonest and tell lies. However the forensic accountant must act with
integrity and honesty at all times;
ii) Objectivity: The forensic accountant is paid by a client to carry out an
investigation, and the client will presumably be hoping for a particular
outcome to the investigation. For example, in a fraud investigation, the
criminal investigators who use a forensic accountant may be hoping for
evidence of guilt. However the forensic accountant must remain
independent (in spite of the advocacy threat) and should seek to obtain
evidence to reach a fair opinion;
iii) Professional competence and due care: Forensic accounting is a
specialised area of work, and individuals should be sufficiently
competent to do the work;
iv) Confidentiality: The normal ethical rule is that accountants should
maintain client confidentiality and should not disclose information
without
the client‟s consent. An exception is that the duty of confidentiality is
overridden by the requirement to provide evidence when requested to a
court of law. Legal requirements for disclosure override the rules of client
confidentiality; and
v)
b.
Professional behavior: Forensic accountants often appear as witnesses in
court, and in the public eye they should display professional behaviour
and act in a way that is not detrimental to the image of the accounting
profession.
The procedures to be carried out to gather evidence for an acceptable
report to management include:
i)
Establishing the objectives of the investigation.
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c.
ii)
Planning the investigation with a view to achieving the objectives. For
example in an investigation into suspected fraud, the auditor should
plan how to establish whether fraud has occurred, how it could have
happened, how long has it been going on as well as who has committed
the fraud and how much has been lost;
iii)
Planning in a way that will provide sufficient appropriate evidence to
achieve the objectives of the investigation. The evidence should be
strong enough to „stand up‟ to scrutiny in court, if required. In fraud
cases, evidence should therefore try to establish a motive for the alleged
fraudster, identify the opportunity that the fraudster had to commit the
fraud and also any evidence of measures by the fraudster to conceal his
crime;
iv)
Noting that evidence may be gathered in various ways – similar to the
methods used in a normal audit. This includes interviewing individuals
(including individuals suspected of fraud);
v)
Using the evidence obtained to reach an opinion. If the evidence is
insufficient, he should try to obtain additional evidence; and
vi)
Preparing a report for the client at the end of the investigation.
The agencies and their enabling Acts include:
i.
Economic and Financial Crimes Commission (EFCC Act) 2004
Part of the duties of the EFCC is to carry out investigation of financial crimes,
including advance fee fraud, money laundering, counterfeiting, illegal
charges, transfers, future market fraud, fraudulent encashment of negotiable
instruments, computer credit card fraud and contract crimes;
ii. Independent Corrupt Practices and Other Related Offences Commission
(ICPC) Act, 2000. Duties of ICPC include receiving and investigating
complaints from members of the public on allegations of corrupt practices
in the public service and in appropriate cases, prosecute the offenders;
iii. Federal Inland Revenue Service (FIRS Act): Part of its duties include
to adopt measures to identify, trace, freeze, confiscate or seize proceeds
derived from tax fraud or evasion;
iv. Money Laundering (Prohibition) Act, 2011 (as amended);
v. Bank and Other Financial Institutions Act (BOFIA) (as amended): This Act
grants to the CBN power to order a special examination or investigation of
the books and affairs of any bank where it is in the public interest to do so.
v. The Nigerian Financial Intelligence (NFLU) Act 2018.
vi. The Nigerian Police Special Fraud Unit (SFU) Section 419 of the Nigeria
Constitution.
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Examiner’s report
The question tests the candidates‟ knowledge of ethical principles involved in the
given scenario, guidelines with respect to evidence from the client and agencies of
government on fraud investigation.
About 90% percent of the candidates attempted the question but the performance
was below average.
The commonest pitfalls were the candidates‟ lack of understanding of what is
required to gather evidence, and the restrictions to the disclosure of evidence.
The candidates are advised to study the Institute‟s Study Text and the Pathfinder
thoroughly before attempting subsequent examination.
a.
b.
c.
Marking guide
Discussion on tax ethical principles applicable in a
situation
(1 mark each for 5 points)
Assessment on tax procedure to gather evidence
(1 mark each for any 5 points)
Listing of the agencies and relevant laws to tackle fraud
and legal actions that might be required.
(1/2 mark each for any 5 agencies mentioned)
(½ mark each for stating the laws of the tax
5 agencies mentioned)
Marks
Marks
5
5
21/2
21/2
5
15
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ICAN/232/V/C2
Examination No......................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2023
ADVANCED AUDIT AND ASSURANCE
EXAMINATION INSTRUCTIONS
PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER
1. Check your pockets, purse, mathematical set, etc. to ensure that you do not have
prohibited items such as telephone handset, electronic storage device,
programmable devices, wristwatches or any form of written material on you in
the examination hall. You will be stopped from continuing with the examination
and liable to further disciplinary actions including cancellation of examination
result if caught.
2. Write your EXAMINATION NUMBER in the space provided above.
3. Do NOT write anything on your question paper EXCEPT your examination
number.
4. Do NOT write anything on your docket.
5. Read all instructions in each section of the question paper carefully before
answering the questions.
6. Do NOT answer more than the number of questions required in each section,
otherwise, you will be penalised.
7. All solutions should be written in BLUE or BLACK INK. Any solution written in
PENCIL or RED INK will not be marked.
WEDNESDAY, NOVEMBER 15, 2023
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2023
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
SECTION A:
MARKS)
YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF THE SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY QUESTION
(30
QUESTION 1
BP Fashion Limited is trading and expanding in the fashion industry. Over the
years, the company has been audited by LMP Professional Services. The company is
considering going to the stock market to raise funds through increase in its issued
share capital for purpose of expansion into new markets.
The summarised two year financial statements and the nine (9) months accounts of
the company are given below:
BP Fashion Limited
Summarised Income Statement For the Years Ended December 31,
Revenue
Cost of sales
Gross profit
Other income
Operating costs:
Employee costs
Occupancy costs
Other operating costs
Earnings before interests, taxes,
depreciation and amortisation (EBITDA)
2019
2020
₦’m
2,952
₦’m
3,510
2021
(9 months)
₦’m
4,139
(1,402)
1,550
15
(1,671)
1,839
21
(1,987)
2,152
25
(390)
(262)
(278)
(460)
(312)
(326)
(538)
(373)
(389)
635
762
877
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Summarised Statement of Financial Position
2019
2020
Property, plant and equipment
Deferred tax
Non-current assets
(A)
₦’m
375
30
405
₦’m
470
35
505
2021
(9 months)
₦’m
470
40
510
Inventories
Trade and other receivables
Cash and equivalents
Current assets
Total assets
425
125
425
(B)
975
(A)+(B) 1,380
525
150
545
1,220
1,725
655
175
780
1,610
2,120
Share capital and reserves
Long term loans
Employees‟ benefits
Deferred tax
Non-current liabilities
Trade and other payables
Tax payable
Current liabilities
Total equity and liabilities
885
125
20
55
200
270
25
295
1,380
1,135
125
35
65
225
335
30
365
1,725
1,430
125
50
70
245
410
35
445
2,120
It has become necessary, and as part of the NGX Exchange Limited‟s requirements,
to appoint another firm of accountants to review the financial statements for some
specified periods. Your firm Stratcom Partners has been approached to carry out the
necessary review.
Required:
a.
Highlight the features of professional engagements as contained in ISRE 2410:
International Standard on Review Engagement and ISRS 4410 (revised):
International standard on Related Services.
(8 Marks)
b.
Detail out the procedures to be carried out in the review of interim financial
information.
(6 Marks)
c.
In view of the changes in inventories in the financial statements given above,
between the last two periods, provide the substantive procedures that would
be carried out to establish a reliable evidence of the change.
(6 Marks)
d.
Prepare the outline of the reporting requirements of a compilation engagement.
(10 Marks)
(Total 30 Marks)
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SECTION B:
OPEN-ENDED QUESTIONS
(40 MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION
QUESTION 2
ABC Limited is owned and controlled by DOBS Plc which is involved in the
manufacture of car fittings and accessories. TRC & Co (Chartered Accountants)
where you work, has been auditing the DOBS Plc in the last five (5) years.
ABC Limited is preparing for its first AGM and at its last board of directors meeting,
a member proposed appointing another firm different from TRC & Co, as its
auditors. The appointment will subsequently be approved at the said AGM. With the
directives from DOBS Plc, the idea was accepted and Tim Brown & Co. (Chartered
Accountants) was appointed for the year under consideration.
There are issues with the marketing of the products of ABC Limited, and there have
been criticisms in the public domain in the last two quarters. The audits of the two
companies are going on concurrently by the two firms.
Required:
a.
Prepare the list of items to be included in the “letter of instruction” TRC & Co.
should send to Tim Brown & Co.
(6 Marks)
b.
For the purpose of ensuring that the financial statements are properly
consolidated, prepare a document outlining the audit procedures TRC & Co.
needs to adopt.
(9 Marks)
c.
Evaluate the nature of the business risk approach to be adopted by TRC & Co.
in the review of ABC Limited during the audit.
(5 Marks)
(Total 20 Marks)
QUESTION 3
Giant Club has been in existence for about 6 years. The club membership comprises
of eminent individuals in the society and has a certificate of registration under the
relevant laws. It has an approximate enrollment of 1,000 members. The club‟s
funding is supported by membership fees, parking fees, rental fees, voluntary
donations, and income from endowment investments.
The club has been named as a beneficiary under the Wills of two deceased
members. Collection on the proceeds of the estate is made subsequent to the
balance sheet date. Collections from the Will receivable in the amount of
N6,200,000 have been recorded based on the available information from the estate
administrators. During 2020 financial year, the club was committed to giving
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scholarships to seven students in various higher institutions. Accordingly, the club
has agreed to pay these individuals a regular pocket money in addition to
providing medical coverage as the need arises. Since it is a non-for-profit
organisation (NFPO), the club has not been conducting an independent statutory
audit of the financial statements since inception. However, the club has been
appointing her officers as at when due every two years.
The new Treasurer, who is a professional accountant, took over the control of the
revealed treasury and his review revealed that:
•
There was no periodic review of inventory items and background check on
vendors/ suppliers;
•
There were calls from vendors stating they haven‟t been paid when records
show payments have been made;
•
There were cases of cash takings not banked;
•
No control over cheque lodgments and reconciliation of bank account;
•
No background check for those who handled money;
•
The computers in use for transactions did not have protective passwords;
•
No evidence that the organisation sent acknowledgements to contributors with
record of such acknowledgements kept on file;
•
When new members were admitted and they made yearly subscription, the
club did not issue pre-numbered tickets, which could then be compared to
funds deposited;
•
When cheques were issued, supporting documentation of expenses and
approvals at the time of signing cheques were not available; and
•
Requests for reimbursement were not checked for arithmetical accuracy and
reasonableness before approval.
The new management of Giant Club has just appointed your firm as the external
auditor and you have been selected as the senior in charge of the audit.
Required:
a.
b.
c.
Discuss the activities you will carry out when performing the audit of the Club.
(10 Marks)
Evaluate the key audit areas that you will focus on to get enough audit
evidence on this type of audit.
(5 Marks)
Determine other factors that should be of concern in this type of audit.
(5 Marks)
(Total 20 Marks)
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QUESTION 4
Phil Plc has been in business of manufacturing textile materials for about twenty
years and has been rendering good returns to shareholders on their investments
until about few years ago, precisely in 2019. The business of the company went
down drastically in 2020 due to measures taken to contain the spread of the COVID
-19 virus which included travel bans, quarantines, social distancing, and closures of
non-essential services. Covid-19 pandemic significantly caused disruptions to
businesses worldwide, resulting in economic slowdown. The problem was
aggravated with the Federal Government of Nigeria enforcing restriction of
movements. All businesses and offices were affected with exception of power
distribution, oil and gas (petroleum) and retail companies.
COVID-19 pandemic impacted on the economy generally and the following were the
impacts on the company:

Increase in cost of raw materials as a result of devaluation of the currency due
to the drop in the price of crude oil;

Shortage in supply of key raw materials sourced from other countries, for
example, China; and

Increase in ocean freight costs and inland transportation.
The impact of the outbreak of COVID-19 directly caused economic losses through
disruptions in supply chains, demand, and financial markets, affecting the business
investment, household consumption, and international trade. The crisis led to a
decline in revenue.
However, despite the challenges, management kept on struggling to ensure
maintenance of an impressive performance for the shareholders. A board member
believed there is unhealthy relationship between management and the board of
directors as she accused management of lack of transparency with the directors and
has threatened to resign as a director of the company. The problem was
compounded after the year-end audit when the auditors reported that the
company‟s internal controls were ineffective and accused management in their
report of fraudulent financial reporting. The external auditors also threatened to do
a restatement on the prior year financial statements as it was believed that there
were misstatements of certain account balances. The Managing Director and some
directors believed that it is their responsibility to prepare financial statements and
that the auditors does not have right to do any restatement on the financial
statements. The Chairman of the audit committee, and few directors were in
support of the auditors and appealed to the Managing Director and his supporters
to allow auditors perform their duties as it is a regulated profession or else they will
do a report to the Financial Reporting Council on the activities of management.
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The external auditors were surprised at the actions of management, especially the
Managing Director and have threatened to resign from the assignment. The
external auditors, during the audit were not comfortable on the following issues:
(i)
The supporting documents from which financial statements were prepared;
(ii)
Review of opening balances revealing omission of some transactions and
significant information in disclosures; and
(iii) Misapplication of accounting principles regarding amounts, classifications,
presentation and disclosures.
Added to the above, the external auditors identified risks which they believed might
likely affect asset valuation and other significant accrued liabilities. Your firm is
envisaging that you may be invited for a discussion with the audit committee. Your
team has been instructed to do a review of certain sections in preparation for the
meeting.
Required:
a.
b.
c.
Evaluate the rights and duties of the auditors in a professional engagement.
(10 Marks)
Enumerate what you consider as the responsibilities of management and those
charged with governance in Phil Plc.
(5 Marks)
Discuss the reason why your firm may resign the appointment as the auditors
of the company.
(5 Marks)
(Total 20 Marks)
SECTION C:
OPEN-ENDED QUESTIONS
(30 MARKS)
INSTRUCTION:
YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION
QUESTION 5
Hillary Professional Services is a medium-sized firm on a retreat having successfully
combined business operations to take advantage of mandatory audit rotation
guidelines. At the retreat it was agreed that a robust software to reduce paperwork
was inevitable. All along, one of the combined firms has an Information
Technology (IT) Unit which has been strengthened with the state of the art
equipment.
All auditors are now encouraged to show more interest in information technology,
most especially those that relate to data analytics, artificial intelligence and
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machine learning. Undoubtedly, understanding the business information system
used by management is necessary as they affect risk assessment involved in the
financial reporting process. It was also concluded that obtaining an understanding
of the field of information technology is a standard audit procedure to be followed,
otherwise it will be difficult to evaluate the adequacy of the expert‟s work as
recommended by International Standards on Auditing. The purpose of the merger
will be defeated if the firm will not be able to win jobs and perform well in a highly
competitive market. The after-effect of COVID-19 pandemic has also revealed that
one could work with flexibility anywhere if there is a robust audit Software in place.
The IT Audit Partner made a presentation on „‟COBIT (Control Objectives for
Information and Related Technologies) - a globally accepted suite of tools that a
client might use in order to ensure IT is working effectively”. He stated that COBIT
is all about doing the right things the right way in order to deliver benefits to the
client.
You are a staff of Hillary Professional Services. Based on the presentation made on
COBIT at the retreat, you have been divided into groups and the groups are to
debrief the main group after one hour.
Required:
a.
State the purposes of COBIT (Control Objectives for Information and Related
Technologies).
(3 Marks)
b.
c.
Identify and explain the specific components of COBIT.
Explain how COBIT will be applied in the business process.
(8 Marks)
(4 Marks)
(Total 15 Marks)
QUESTION 6
Reliable Limited is into wholesale and retail supply and distribution of stationeries
to companies and educational institutions. The company maintains business
relationship with other enterprises that are owned by close friends and relatives.
The books of account of the company were kept manually and in simple excel. The
company had only a staff in the accounts department since it is a small business
operation.
A review of the company‟s operations shows that inventory of stationeries
purchased was not properly valued due to incomplete recording of purchases made.
Although bank statements are obtained, the balances on the bank statements were
not reconciled with the cash book.
Cash from sales made, were not banked intact and expenses relating to cash
takings from till were not all recorded or properly monitored. Added to this, goods
bought from related parties were sometimes overvalued as suppliers made frivolous
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claims which could not be disputed due to poor record keeping. The Managing
Director and owner of the company has been sick for some time and the wife
concentrated more on her own business leaving the operations of the company to a
relation who is not well educated. Available evidence revealed that invoices and
vouchers of the company were approved without management review and the
procedure or selection of suppliers was not transparent.
The company has just won a contract for supply of stationeries in one of the states
in the Federation and it was found that there was inadequate cashflow to execute
the contract. The manager of the company informed the Managing Director‟s wife of
the development and it was agreed that a bank loan would be needed. On
approaching the bank, an updated financial statements of the company was
requested to determine the financial health of the business and ability to repay the
loan when due.
Your firm has been appointed as auditors of the company with stipulated deadline
to complete the audit so that the company could meet the bank‟s conditions. The
firm has conducted a preliminary review of the operations of the company and
some control gaps have been noted.
Required:
a.
Discuss suitable control activities that will be required in the above scenario
and how you will assess the degree of effectiveness of the internal control
systems.
(10 Marks)
b.
Identify and explain what the external auditors are expected to do during the
course of the above audit.
(5 Marks)
(Total 15 Marks)
QUESTION 7
The overseas technical partners of Orlando Professional Services came for a review
of operations and system of internal control of the firm. A number of audit
engagement files regarding financial statements on which the firm had expressed
audit opinion were selected for review. It was believed that the strategic review will
be necessary to determine the appropriate audit approach for a detailed audit plan
in the firm to bring efficiency and enhance good client service delivery. The review
exercise also covers:
i.
ii.
iii.
iv.
v.
The firm‟s basis of risk assessment on audit and assurance engagements;
Determination of staff recruitment, training, reward and evaluation;
Previous audit opinions on financial statements and progress on ongoing jobs;
System of archival and retrieval of documents;
Major risks and other factors such as industry issues;
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vi.
Procedures for engaging and monitoring experts both internal and external;
and
vii. Reports from regulators.
The team interviewed partners, staff and directors of major clients of the firm. It
was believed that the outcome of the review exercise will help to reposition the firm
and upscale strategies to get a fair share of the market in the upcoming mandatory
rotation of auditors.
At the end of the exercise, it was reported that the audit strategy of the firm was not
robust enough, too generic and lacked focus to meet firm‟s need in the next decade.
The team recommended that proactive steps should be taken to evolve a good
strategy that would stand the test of time in the light of the increasing competition
in the audit and assurance market place.
As a staff of the firm, you have been selected as a member of the committee to
develop the new audit strategies for submission in the next two weeks for the
consideration and approval of the executive council of Orlando Professional
Services.
Required:
a.
Outline the approaches to the main audit strategies your firm is expecting to
adopt.
(9 Marks)
b.
Explain the factors that will be considered in the selection of audit strategies.
(4 Marks)
c.
Explain the difference between Audit strategy and Audit Plan.
(2 Marks)
(Total 15 Marks)
SOLUTION 1
a.
ISRE 2410: International Standard on Review Engagements deals with the
review carried out by a company‟s external auditors on the interim financial
statements (mid-year financial statements), where companies are required to
produce interim statements. The interim financial statements are not subject
to a full audit; however, they are subject to a review. On the whole, general
auditing principles apply to this type of review. The auditing firm that reviews
interim financial information (IFI) is normally the external auditor for the endof-year accounts. The audit firm should:
i.
ii.
iii.
iv.
Comply with the same ethical requirements as it does for the main audit;
Implement appropriate quality control procedures;
Plan and perform the review with an attitude of professional skepticism;
Agree the terms of engagement with the client in an engagement letter;
and
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v.
Prepare a documentation sufficient to support the auditor‟s review
conclusions and to provide evidence that the review was conducted in
accordance with ISRE 2410.
ISRS 4410 (revised): Compilation Engagements regulates the conduct of
compilation engagements. The standard was revised in March 2012 following
growth in demand from SMEs for services other than audit. Demand has been
particularly strong in jurisdictions where audit exemptions have either been
introduced or extended.
In a compilation engagement, no assurance is given by the review accountant
about the information that has been compiled. However, the client gains some
assurance from the requirement that the accountant for a compilation
assignment must comply with professional code of conduct. The accountant is
therefore obliged to exercise due care and technical competence in carrying
out the work.
The key points of ISRS 4410 are as follows:
i.
An engagement letter is required to detail the terms of the engagement
which indicate that the:
 Work to be carried out is not an audit and is not a review;
 Engagement cannot be relied upon to disclose error, fraud or other
irregularities;
 Information on which the assignment will be based (for example, its
accuracy and completeness) is the responsibility of the client‟s
management;
 Intended use and distribution of the information that will be provided
at the end of the engagement;
 Applicable financial reporting framework is being applied;
 Responsibilities of the practitioner, including the requirement to
comply with relevant ethical requirements; and
 Expected form and content of the practitioner‟s report would be in
accordance with legal and regulatory requirements.
ii.
Planning and documentation will be required for the engagement;
iii.
The accountant needs to have adequate knowledge of the client‟s
business and its operations. This knowledge must also cover the
accounting system, accounting records and applicable financial
reporting framework;
iv.
If the accountant becomes aware that the information provided is
unsatisfactory (incomplete, inaccurate or otherwise unsatisfactory), he
should ask management to correct or improve the information. If
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management refuses to do this, the accountant should withdraw from the
engagement, and inform the entity accordingly; and
v.
b.
The practitioner must obtain an acknowledgement from management or
those charged with governance that they take responsibility for the final
version of the information.
Procedures for the review of interim financial information (IFI) should include
the following:
i.
The auditor should obtain an understanding of the entity and its
environment, including its internal controls, in order to:


Assess the risk of misstatement in the financial statements; and
Select appropriate „audit‟ procedures for the review.
ii.
The auditor should make inquiries and perform analytical procedures
sufficient to reach a conclusion for the review. This conclusion should be
about whether anything has come to the auditor‟s attention to indicate
that the IFI has not been prepared, in all material respects, in accordance
with the applicable financial reporting framework. (As with ISRE 2400,
the auditor‟s opinion is expressed in negative terms);
iii.
If any critical matters come to the auditor‟s attention, the auditor should
make additional inquiries or perform other procedures in order to obtain
more information;
iv.
The auditor should check that the IFI agrees or reconciles to the
underlying accounting records;
v.
The auditor should discover whether management has:
 Taken subsequent events into account; and
 Made an assessment of the entity‟s ability to continue as a going
concern.
vi.
The auditor should evaluate any uncorrected misstatements in the IFI,
both individually and in aggregate. (This is the same as for the annual
audit);
vii. The auditor should obtain written representations from management
that:
 They acknowledge their responsibility for internal controls;
 The IFI has been prepared and presented in accordance with the
applicable financial reporting framework;
 They believe the effect of any uncorrected misstatements are
immaterial, both individually and in aggregate;
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 There has been full disclosure of all significant facts, risk assessment,
possible or actual non-compliance with laws and regulations, and
subsequent events; and
viii. The auditor should ensure that any other information issued with the IFI
is materially consistent with the IFI.
c.
The substantive procedures for the evidence for the change in the inventories
will include:
i.
Attending inventory count to:
 Observe procedures; and
 Record the inventory counts;
ii.
Recording cut-off information;
iii.
Checking inventory valuation, at lower of cost and net realisable value
(NRV);
iv.
Checking inventory cut-off;
v.
Performing appropriate analytical review procedures;
vi.
Confirming the existence of inventory held at outside locations; and
vii. Checking the treatment of inventory held on client‟s premises but owned
by a third party.
d.
ISRS 4410 (revised): Compilation Engagements requires that the report on a
compilation engagement must be in writing and contain the following:
i.
Title;
ii.
Addressee;
iii.
A statement that the practitioner has compiled the financial information
based on information provided by management;
iv.
A description of the responsibilities of management, or those charged
with governance in relation to the compilation engagement;
v.
Identification of the applicable financial reporting framework;
vi.
Identification of the financial information, including the title of each
element of the financial information (if it comprises more than one
element) and the date of the financial information;
vii. A description of the practitioner's responsibilities in compiling the
financial information, including that the engagement was performed in
accordance with ISRS 4410 (revised) and that the practitioner has
complied with relevant ethical requirements;
viii. A description of what a compilation engagement entails;
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ix.
Explanation that as the compilation engagement is not an assurance
engagement, the practitioner is not required to verify the accuracy or
completeness of the information provided by management for the
compilation;
x.
Explanation that the practitioner does not express an audit opinion or a
review conclusion on whether the financial information is prepared in
accordance with the applicable financial reporting framework;
xi.
If the financial information is prepared using a special purpose
framework, an explanatory paragraph that describes the purpose of the
financial information and the intended users and draws the readers'
attention to the fact that the information may not be suitable for other
purposes;
xii.
Date of the report;
xiii. Practitioner's address; and
xiv. Practitioner's signature.
Examiner’s report
The question tests the candidates‟ knowledge of professional review engagements
based on ISRE 2410: International Standard on Review Engagements and ISRS
4410: International Standard on Related Services. It further tests the candidates‟
understanding of reporting on compilations engagements.
This being a compulsory question, all the candidates attempted it but the
performance was poor.
The common pitfall of the candidates was lack of understanding of the components
of review engagements as distinct from conventional audits.
Candidates are advised to familiarise themselves with the practical aspects of
engagements and also read the Institute‟s Study Text and Pathfinders which are
available on the Institute‟s website.
Marking guide
Marks
a.
The introduction and naming of ISRE: 2410
Listing of the features of ISRE 2410
(½ mark each subject to a maximum of 4 features)
1
The introduction and naming of ISRE 4410
Listing the features of ISRE 4410
(1 mark each for any 4 features)
1
Marks
2
4
8
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b.
c.
d.
The procedures in the review of interim financial
information
(1 mark each subject to a maximum of 6 points)
6
The substantive audit procedures to establish reliable
evidence
(1 mark each subject to a maximum of 6 points)
6
Outline of Reporting requirements of compilation
engagements
(1 mark each subject to a maximum of 10 points)
Total
10
30
SOLUTION 2
a.
The group auditor‟s “letter of instruction” to the component auditor should set
out:
i.
ii.
iii.
The work required;
The use to be made of that work;
The form and content of the component auditor‟s communication with
the group engagement team;
iv. A request for cooperation;
v.
Ethical requirements;
vi. Component materiality;
vii. Identified significant risks; and
viii. A list of known related parties.
b.
The procedures TRC & Co needs to adopt for the purpose of ensuring a proper
consolidation of the financial statements
Topic
Audit procedures
Clerical accuracy
i.
Confirm that figures have been transferred accurately
from the financial statements of the components
(individual companies in the group) to the
consolidation schedule.
ii.
Check the arithmetical accuracy of all consolidation
calculations, such as the consolidation total balances
and total transaction values.
i.
Confirm that the parent company has correctly
classified investments as a subsidiary, associate, joint
venture or simple investment, in accordance with
standard accounting practice.
Status of investments
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Changes in the group
Consolidation
adjustments
ii.
Confirm that the appropriate accounting treatment
has been adopted by each of these classifications of
investments in the group accounts.
i.
For acquisitions: confirm fair values, the calculation of
purchased goodwill and accounting treatment in
accordance with IFRS 3 and any other relevant
standards.
ii.
Where there has been an acquisition during the year
involving deferred consideration as part payment,
check that the amount of the deferred consideration
has been included in the cost of acquisition at
discounted present value, using a current pre-tax cost
of capital as the discount rate. (Note: The cost of
acquisition affects the amount of the purchased
goodwill).
iii.
Where there has been an acquisition during the year
involving a possible contingent consideration as partpayment, checking the reasonableness of the
assumption that the recent value of the contingent
consideration should be included in the cost of
acquisition.
iv.
For disposals, confirm the sale proceeds, and the
calculation of the gain or loss on sale.
v.
Check that the correct accounting treatments of items
are
applied
in
the
consolidated
income
statement/statement of comprehensive income and the
consolidated financial statements. For example, when
a subsidiary has been acquired during the year, check
that the calculation of pre-acquisition and postacquisition profit is correct.
i.
Reconcile the inter-company transactions and
balances (or review the reconciliation of the intercompany transactions and balances that has been
made by client‟s staff).
ii.
Confirm the inter-company balances.
iii.
Check calculations of the adjustments for unrealised
profit.
iv.
Check the calculations
controlling interests.
and
disclosure
of
non-
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Loss making
investments
Related parties
Reporting
c.
v.
Check the accounting treatment of inter-company
dividends and other dividends.
i.
Consider whether any goodwill on acquisition has
suffered impairment.
ii.
Consider whether a write down of the investment in
the book of the parent company is needed.
iii.
If a subsidiary makes losses consistently, its going
concern status may be in question.
iv.
However, the group may take a formal decision to
provide financial support to the subsidiary. This
decision, in effect would protect the going concern
status of the subsidiary, even if it is making losses. In
such a situation, the group auditor will normally
request a „comfort letter‟ (or „support letter‟) to this
effect from the directors of the parent company.
i.
Ensure the provisions of IAS 24 are complied with.
ii.
(Most components of the group will be „related‟ to
most other components).
i.
Reach a conclusion about whether the group financial
statements present a true and fair view.
The business risk approach starts at an earlier stage than the „conventional‟
audit risk model, which is based on inherent risks and control risks (and
detection risks) and it involves the following:
i.
By looking at the nature of the client‟s business, the auditor should
develop an understanding of the events and circumstances that many
affect the entity‟s ability to meet its objectives. By understanding
business risks, the auditor should also develop a better understanding of
the inherent risks and the control risks facing the client;
ii.
The business risk approach is sometimes referred to as a „top down‟
approach to an audit. The approach starts „at the top‟ with the business,
which generates the financial transactions. The approach ends „at the
bottom‟ with the financial statements which record the outcome of the
business transactions. The business „drives‟ the financial statements;
iii.
This is a „high level‟ approach to the audit, and has similarities with
business management strategy. Using this approach to an audit
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successfully depends on having adequate and up-to-date information
about the client‟s business and environment;
iv.
For this reason, the larger auditing practices that use the business risk
approach will often organise their audit teams into specialised industry
groups, or may have industry experts available or may construct
specialised databases for particular industries;
v.
When the auditor takes a business risk approach he needs to be aware
not only of the current position of the client‟s business, but also of
possible future developments that may affect its goals and objectives;
and
vi.
The auditor is interested in business risk not for its own sake but in the
light of its possible impact on the financial statements.
Examiner’s report
The question tests the candidates‟ knowledge of the relationship between the group
auditor, and the component auditor, and the content of the “letter of instruction.”
Candidates are further expected to identify the risks associated with working with
the component auditor.
The question was attempted by about 60% of the candidates, but the performance
was below average.
The commonest pitfall of the candidates was their lack of understanding of the
detailed aspects of the responsibilities of the group and component auditors in
group audit and consolidation arrangements.
Candidates are advised to pay close attention to the requirements of the question
and understand responsibilities of various parties, group audits and consolidation
arrangements. They are also advised to study properly the Institute‟s Study Text
and Pathfinders.
Marking guide
Marks
a.
Items to be included in “letter of instructions”
(1 mark each for any 4 contents of the report)
b.
Document outlining the procedures TRC & Co needs to
adopt for consolidation
(1 mark each subject to a maximum of 6 points)
(½ mark for discussion on each of 6 points)
c.
Marks
6
The nature of business risk approach to adopt
(1 mark each subject to a maximum of 5 points)
Total
6
3
9
5
20
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SOLUTION 3
a.
The auditor should recognise the specific features of the NFPO. However, it is
important to realise that the auditor is still performing an audit, and the
overall- structure of the audit of an NFPO will be similar to the audit of a
commercial organisation. However, the detail of the audit will probably differ.
The main points to bear in mind with the audit of an NFPO are summarised
below. These are general principles. They should be modified as appropriate
to reflect the circumstances of each particular NFPO.
Audit area
Planning
Comments
Consider:
i.
ii.
iii.
iv.
v.
Risk
The objectives and scope of the audit work;
Any local regulations that apply;
The environment in which the organisation operates;
The form and content of the final financial statements and
the audit opinion; and
Key audit areas, including risk.
Carry out an audit risk analysis under the usual headings of
inherent risk, control risk and detection risk:
Internal control
i.
Inherent risk (reflecting the nature of the entity‟s
activities and the environment);
ii.
Control risk (internal controls, and the risk that these may
be inadequate: controls over cash collection and cash
payments may be a key area for a not-for-profit
organisation (NFPO) such as a clubs, because large
amounts of cash may be collected from the public by
volunteers); and
iii.
Detection risk (the risk that the auditor will fail to identify
any material error or misstatement in performing the
audit).
Key areas of internal control in a not-for-profit organisation
(NFPO) might include:
i.
ii.
iii.
iv.
v.
Segregation of duties (although this may be difficult in a
small NFPO with only a few employees);
Authorisation of spending;
Cash controls;
Controls over income (donations, cash collections,
membership fees, grants); and
The use of funds only for authorised purposes.
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Audit evidence
Reporting
These include:
i.
A substantive testing approach (rather than a systems
based approach) is likely to be necessary in a small NFPO,
because of weaknesses in its internal control system;
ii.
Key areas may include the completeness of recording
transactions, assets and liabilities; and the possibility of
misuse of funds;
iii.
Analytical procedures may be used to „make sense‟ of the
reported figures; and
iv.
There should be a review of the final financial statements,
including a review of the appropriateness of the
accounting policies.
i.
If report on NFPO is required by law, the standard
external auditor's report should be used.
ii.
If the audit is performed on a voluntary basis, the report
needs to reflect the agreed objective of the audit.
However, it is good practice for the report to follow the
general structure laid down by ISA 700:









b.
Title;
Addressee;
The auditor's opinion;
Basis for opinion;
Going concern & KAMs (if appropriate);
Responsibility for the financial statements;
Auditor's responsibilities;
Other reporting responsibilities; and
Name, signature, address of auditor and date.
Key audit areas to get enough audit evidence include:
i.
A substantive testing approach (rather than a system based approach) is
likely to be necessary especially in small NFPO, because of weakness in
its internal control system;
ii.
The completeness of recording transactions, including assets and
liabilities and the possibility of fund misuse;
iii.
Analytical procedures may be used to “make sense” of the reported
figures;
iv.
Review of financial statement for the appropriateness of the accounting
policies; and
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v.
Review of club‟s organisational structure.
With respect to the specific findings of the new Treasurer that were
highlighted, substantive audit procedures would be applied to the respective
accounting systems to address them and obtain sufficient appropriate audit
evidence.
c.
Other factors that should be of concern include:
i.
Cash may be significant in clubs (not-for-profit organisations) and
controls are likely to be limited;
ii. Income could be a risk area, particularly where money is donated or
raised informally;
iii. There may be a limitation on the scope of the audit if obtaining audit
evidence is a problem;
iv. There may be a lack of predictable income or identifiable relationship
between expenditure and income which could make analytical review
less appropriate;
v.
Restricted funds may exist where the organisation is only allowed to use
certain funds for specific purposes;
vi. There may be sensitivity to key statistics such as the proportion of
revenue used in administration (particularly for a charity);
vii. The nature of the audit, that is whether it is required by law or on
voluntary basis;
viii. The possibility of fund misuse; and
ix. Completeness of recording transactions, assets and liabilities.
Examiner’s report
The question tests the candidates‟ knowledge of the audit of not-for-profitorganisation (NFPO) and how to generate sufficient appropriate audit evidence in
such audits. Additionally, candidates are required to identify the factors of concern
to the auditor in the audit.
The question was attempted by about 80% of the candidates, but performance was
less than average.
The commonest pitfall was the candidates‟ inability to explain the procedures for
the audit of NFPOs.
Candidates are advised to read the Institute‟s Study Text and Pathfinders to
enhance performance in future.
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Marking guide
a.
b.
c.
Activities to be carried out in performing the audit
(1 mark each subject to a maximum of 2 points from each
of 5 activities)
Key audit arrears to focus on for audit evidence
(½ mark each subject to a maximum of 5 key audit areas)
(½ mark each subject to a maximum of 5 discussions)
Marks
Marks
10
2½
2½
Factors that should be of concern in the audit
(1 mark each subject to a maximum of 5 factors)
Total
5
5
20
SOLUTION 4
a.
The rights of the auditor are as follows:
i.
The right of access to all accounting books and records at all times;
ii.
The right to all information and explanations (from management)
necessary for the proper conduct of the audit;
iii.
The right to receive notice of all meetings of the shareholders (such as
the annual general meeting) and to attend those meetings;
iv.
The right to speak at shareholders‟ meetings on matters affecting the
audit or the auditor. This can be important when the auditors disagree
with the directors of the client entity and are unable to communicate
with the shareholders effectively by any other method; and
v.
The right to receive a copy of all written resolutions if the company uses
written resolutions.
The duties of the external auditor are as stated below:
The primary duty of the external auditor is to:
i.
ii.
Examine the financial statements, and
Issue an auditor‟s report on the financial statements, which is then
presented to the shareholders together with the financial statements.
This auditor‟s report will set out the auditor‟s opinion as to whether (or not)
the financial statements:
i.
Give a true and fair view (or “present fairly”) the financial position and
performance of the company;
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ii.
Have been prepared in accordance with the applicable financial
reporting framework;
iii.
In Nigeria, Section 404 of CAMA 2020, requires the auditor to also form
an opinion on matters stated in schedule VI of the CAMA as provided and
state:

Whether they have obtained all the information and explanations
which to the best of their knowledge and belief were necessary for
the purpose of their audit;

Whether, in their opinion, proper books of account have been kept
by the company, so far as appears from their examination of those
books, and proper returns adequate for the purposes of their audit
have been received from branches not visited by them;

Whether the company's statement of financial position and (unless
it is framed as a consolidated profit and loss account) profit and
loss account dealt with by the report agree with the books of
account and returns; and

Whether, in their opinion and to the best of their information and
according to the explanations given them, the said statements give
the information required by the Act in the manner so required and
give a true and fair view.
In the case of the statement of financial position, of the state of the company‟s
affairs as at the end of its year.
In the case of the income statement account, of the profit and loss for its year;
or as the case may be, give a true and fair view thereof subject to the nondisclosure of any matters (to be indicated in the report) which, by virtue of
Part I of the Second Schedule of the Act, are not requires to be disclosed.
In the case of a holding company submitting group financial statements
whether, in their opinion, the group financial statements have been properly
prepared in accordance with the provisions of the Act so as to give a true and
fair view of the state of affairs and profit or loss of the company and its
subsidiaries and associates. The auditor‟s report must state if any of the
provisions were not met.
The outcome of the statutory audit is an opinion on the truth and fairness of
the financial statements. The word „opinion‟ implies that the auditor has
applied his professional judgement in reaching his conclusion.
This point is arguably one of the limitations of the statutory audit. The audit
report expresses an opinion, not a statement of fact. It is therefore open to
disagreement.
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In carrying out his audit work, the auditor is unlikely to check every
transaction undertaken by the company during the period. There is, therefore,
a risk that the judgement he forms may be inappropriate.
b.
Responsibility of management and those charged with governance
With respect to the audit and contrary to what many members of the public
think, it is the management and those charged with governance who are
responsible for:
i.
Prevention and detection of fraud;
ii.
Preparation of the financial statements;
iii.
Design and implementation of effective internal controls for example
authorising payments above a certain amount, monthly bank
reconciliation and a monthly trade payables control account
reconciliation;
iv.
Providing the auditor with:
 Access to information relevant to the preparation of the financial
statements;
 Additional information relevant to the audit;
 Unrestricted access to persons whom the auditor needs access to in
order to complete the audit; and
 Providing written representations to the auditor at the end of the
audit.
c.
The reasons that may lead to the resignation of auditors include:
i.
A consistent lack of integrity, as demonstrated by management as they
have been accused of lack of transparency, with the directors and
fraudulent financial reporting by a director of the company. This is in
accordance with Section 412 and 413 of CAMA 2020;
ii.
Where the auditor is unable to obtain reasonable assurance and a
qualified opinion is necessary as in this case, or where supporting
documents are lacking and some transactions and significant
information are missing and not disclosed;
iii.
Significant fees remain unpaid;
iv.
The audit firm can no longer maintain its independence (e.g following a
corporate action);
v.
The management team of the Phil Plc is also in disagreement with each
other, making it difficult to properly perform the audit and to form an
opinion. This situation allows for the resignation of the auditor according
to ISA 200;
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vi.
With the dwindling prospects of Phil Plc as a result of COVID-19, the
client may no longer be profitable for our firm; and
vii. All the conditions that warrant resignation by our firm are present in the
engagement with Phil Plc.
Examiner’s report
The question tests the candidates‟ knowledge of the rights and duties of auditors,
the responsibilities of management and those charged with governance. Candidates
are also required to discuss the reasons for the resignation of appointment as
auditors.
The question was attempted by about 90% of the candidates, but the performance
was about average.
The common pitfall was the candidates‟ inability to differentiate between the
responsibilities of those charged with governance and those of the auditors on the
financial statements.
Candidates are advised to be conversant with the duties and responsibilities of the
directors and auditors on the financial statements.
Marking guide
Marks
a. i.
b.
c.
The rights of auditors
(1 mark each subject to a maximum of 3 rights)
3
ii. The duties of auditors
(1 mark each subject to a maximum of 7 duties)
7
Marks
10
The responsibilities of management and those charged
with governance
(1 mark each subject to a maximum of 5 responsibilities)
5
Reasons for resignation of appointment as company‟s
auditors
(1 mark each subject to a maximum of 5 reasons for
resignation of appointment)
Total
5
20
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SOLUTION 5
a.
b.
Purposes of COBIT (Control Objectives
Technologies) include:
for
Information and
Related
i.
COBIT is to provide management and business process owners with an
information technology (IT) governance model that helps in
understanding and managing the risks associated with Information
Technology;
ii.
COBIT helps to bridge the gaps between business risks, control needs and
technical issues;
iii.
It is a control model to meet the needs of Information Technology (IT)
governance and ensure the integrity of information and information
system; and
iv.
COBIT is a framework for the governance and management of enterprise
information and technology aimed at the whole enterprise.
COBIT comprises of six specific components:
i.
Management guidelines
To ensure a successful enterprise, one has to effectively manage the
union
between business processes and information systems. The Management
guidelines for these are composed of:



Maturity models, to help determine the stages and expectation
levels of control and compare them against industry norms;
Critical success factors, to identify the most important actions for
achieving control over the IT processes; and
Key goal indicators, to define target levels of performance; and key
performance indicators, to measure whether an IT control process is
meeting its objective.
These management guidelines will help answer the questions of
immediate concern to all those who have a stake in enterprise success.
ii.
Executive summary
Sound business decisions are based on timely, relevant and concise
information. Specifically designed for time pressed senior executives and
managers, COBIT includes an executive overview which provides
thorough awareness and understanding of COBIT‟s key concepts and
principles.
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Also included is a synopsis of the Framework providing a more detailed
understanding of the concepts and principles, while identifying COBIT‟s
four domains (Planning & Organisation, Acquisition & Implementation,
Delivery and Support, and Monitoring) and 34 Information Technology
processes.
iii.
Framework
A successful organisation is built on a solid framework of data and
information. The Framework explains how IT processes deliver the
information that the business requires to achieve its objectives. This
delivery is controlled through 34 high-level control objectives, one for
each IT process, contained in the four domains.
The Framework identifies which of the seven information criteria
(effectiveness, efficiency, confidentiality, integrity, availability,
compliance and reliability), as well as which IT resources (people,
applications, technology, facilities and data) are important for the IT
processes to fully support the business objective.
iv.
Control Objectives
The key to maintaining profitability in a technologically changing
environment is how well control is maintained. COBIT‟s Control
Objectives provide the critical insight needed to delineate a clear policy
and good practice for Information Technology controls.
Included are the statements of desired results or purposes to be achieved
by implementing the specific and detailed control objectives throughout
the 34 Information Technology processes.
v.
Audit Guidelines
To achieve desired goals and objectives one has to constantly and
consistently audit one‟s procedures. Audit guidelines outline and suggest
actual activities to be performed corresponding to each of the high level
IT control objectives, while substantiating the risk of control objectives
not being met.
Audit guidelines are an invaluable tool for information system auditors in
providing management assurance and/ or advice for improvement.
vi.
Implementation tool set
Implementation tool set contains:
 Management awareness and IT control diagnostics;
 Implementation guide FAQs;
 Case studies from organisations currently using COBIT; and
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
Slide presentations that can be used to introduce COBIT into
organisations.
The tool set is designed to facilitate the implementation of COBIT, relate
lessons learned from organisations that quickly and successfully applied
COBIT in their work environments, and lead management to ask about each
COBIT process:
Is this domain important for our business objectives? Is it well performed?
Who does it and who is accountable? Are the processes and control formalised
objectives for information and related technologies?
c.
The application of (COBIT) in business process include:
i.
COBIT is business process oriented and therefore addresses itself in the
first place to the owners of these processes;
ii.
Generic business model refers to core processes such as procurement,
operations, marketing, sales, etc, as well as support processes (human
resources, administration and information technology);
iii.
COBIT provides the business process owners with a framework which
should enable them to control all the different activities underlying IT
deployment. As a result, they can gain reasonable assurance that IT will
contribute to the achievement of their business objectives;
iv.
COBIT provides the business process owners with a generic
communication framework to facilitate understanding and clarity among
the different parties involved in the delivery of IT services;
v.
The addition to the Management Guidelines of COBIT provides
management with a new set of tools;
vi.
These guidelines allow self-assessment in order to make choices for
control implementation and improvements over IT, measure the
achievement of goals and the proper performance of IT processes; and
vii. The Management Guidelines include maturity models, critical success
factors, key goal indicators and key performance indicators to support
managerial decision making.
Examiner’s report
The question tests the candidates‟ knowledge of the requirements of COBIT (Control
Objectives for Information and Related Technologies).
The question was attempted by about 50% of the candidates but the performance
was just about average.
The commonest pitfall was the candidates‟ inability to explain the specific
components of COBIT.
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Candidates are advised to be abreast of the developments in information
technology to enhance their performance in future examinations.
Marking guide
a.
The purposes of COBIT
(1 mark each subject to a maximum of 3 purposes of COBIT)
b.
i.
Identification of components of COBIT
(½ mark each subject to a maximum of 6 points)
ii. Explanation of the components of COBIT
(½ mark each subject to a maximum of 10 explanation from
the 6 components)
c.
The application of COBIT in business process
(1 mark each subject to a maximum of 4 applications)
Total
Marks
Marks
3
3
5
8
4
15
SOLUTION 6
a.
Suitable control activities and the assessment of its degree of effectiveness
include:
i.
Authorisation controls: These require that all significant transactions
must be authorised by a manager at an appropriate level in the
organisation;
ii.
Physical controls over assets These are controls for safeguarding assets
from unauthorised use, or from theft or damage. An example is limiting
access to inventory areas to a restricted number of authorised personnel;
iii.
Arithmetic controls: These are checks on the arithmetical accuracy of
processing. An example is checking invoices from suppliers, to make sure
that the amount payable has been calculated correctly;
iv.
Accounting controls: These are controls that are provided within
accounting procedures to ensure the accuracy or completeness of
records. An example is the use of control account reconciliations to check
the accuracy of total trade receivables or total trade payables;
v.
Management controls: These are controls applied by management. They
include supervision by management of the work of subordinates,
management review of performance and control reporting (including
management accounting techniques such as standards setting, variance
analysis, budgeting and budgetary control); and
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vi.
Segregation of duties: This means dividing the work to be done between
two or more individuals, so that the work done by one individual acts as
a check on the work of the others. This reduces the risk of error or fraud.
The degree of effectiveness of an internal control system will depend on the
following two factors:
i.
The design of the internal control system and the individual internal
controls. Is the control system able to prevent material misstatements, or
is it able to detect and correct material misstatements if they occur? Do
the internal controls appear to be adequate and effective „on paper‟?;
and
ii.
The proper implementation of the controls. Controls are not effective
unless they are implemented properly. So, are the controls operated
properly by the client‟s management and other employees.
The outcome of this evaluation helps the auditor to assess the control risk
which could lead to the following:
b.
i.
If the auditor assesses the control risk as very high, he will probably take
the view that a systems-based audit approach will not be appropriate. He
will therefore move on to detailed testing of transactions and balances
(and take a substantive testing approach to the audit); and
ii.
Before he can assess the control risk as low, the auditor must be satisfied
that the controls are well-designed and should be effective (in other
words, they seem effective „on paper‟). Even if the controls appear to be
acceptable on paper, the auditor cannot rely on them and perform a
systems-based audit unless he is confident that the controls are actually
working in practice. In this situation, the next stage in the audit process
is to carry out tests of controls.
In the course of the audit, ISA 315 requires the auditors to:
i.
Gain an understanding of the five components of the client‟s internal
control system;
ii.
Document the relevant features of the control systems;
iii.
Note that most controls relevant to the audit are likely to relate to
financial reporting, not all controls that relate to financial reporting are
relevant to the audit;
iv.
Observe that it is a matter of the auditor‟s professional judgement
whether a control, individually or in combination with others, is relevant
to the audit;
v.
Confirm that his understanding of the internal control system is correct
by performing „walk-through‟ procedures on each major type of
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transaction (for example, sales transactions, purchase transactions,
payroll);
vi.
Perform walk-through testing involves the auditor selecting a small
sample of transactions and following them through the various stages in
their processing in order to establish whether his understanding of the
process is correct; and
vii. Assess the effectiveness of the controls that are in place and the extent to
which he can rely on those controls for the purpose of the audit.
Examiner’s report
The question tests the candidates‟ knowledge of internal control, the effectiveness
of internal control procedures, and the expectations from the external auditor in an
engagement.
About 40% of the candidates attempted the question and the performance was
average.
The commonest pitfall of the candidates was the display of lack of understanding of
the concepts of control in an audit.
Candidates are advised to read relevant materials on control processes in an
organisation when preparing for subsequent examinations.
Marking guide
a.
b.
Marks
Control activities required for effectiveness of internal control
(2 marks each subject to a maximum of 5 suitable control
activities)
10
Identification and explanation of the responsibilities of the
external auditor
(1 mark each subject to a maximum of 5 points)
Total
5
15
SOLUTION 7
a.
The main audit strategies are as follows:
i.
Statement of financial position approach
This audit approach concentrates on the statement of financial position
figures using substantive testing, on the argument that if the opening
and closing statements of financial position are accurate, then the profit
or loss for the year must also be stated accurately.
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ii.
Substantive testing approach
This approach focuses on applying substantive tests to a large number of
transactions and account balances recorded in the accounting system of
the client.
This focus on recorded transactions and balances means that understatements may not be detected. (The auditor may ignore transactions
that have not been recorded).
This approach is time-consuming and costly for the audit of large
companies. This approach is appropriate where systems and controls are
weak or not operating. Substantive tests on transactions and balances
are therefore necessary to reach an opinion about the financial
statements.
It is widely used for the audit of smaller entities where controls are likely
to be weak.
There is a danger of spending too much time auditing transactions or
balances that are not material.
There is a risk that misstatements in the financial transactions will not be
detected unless all transactions and balances are tested, not just a
sample.
iii.
Systems-based approach
The audit focus is on the application of tests of control to the systems that
produce the figures in the financial statements, rather than on the
figures themselves.
A systems-based approach is supported by some degree of substantive
testing, because of the unavoidable limitations or weaknesses in internal
control systems. (The amount of substantive testing required will depend
on the auditor‟s judgement about the effectiveness of the internal
controls).
It is also supported by the use of analytical procedures.
It is more cost-effective than a full substantive testing approach, but
there is still a danger of doing too much unnecessary auditing of areas
where controls are operating well.
iv.
Risk-based approach and business risk approach
An assessment is made of the likelihood of material misstatements
existing in each area of the audit.
Areas that are assessed as high-risk are audited extensively (using
substantive tests, a systems based approach and analytical procedures).
Areas assessed as low-risk are given a low level of attention in the audit.
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These auditing methods (applied mainly by large audit practices) focus
on „business risk‟ rather than overall „audit risk‟.
b.
c.
The selection of the audit strategy will depend on a number of factors,
including:
i.
The size of the client‟s business: a business risk approach is best-suited
for large companies, and a statement of financial position approach is
usually the most suitable for small companies;
ii.
The control procedures and control environment in place: A systemsbased approach is most suitable when there is a strong control
environment and internal control system;
iii.
The audit methods and techniques favoured by the audit firm: For
example, larger audit firms may favour a business risk approach; and
iv.
The Nature of the client‟s business: The nature and sector of the client‟s
business plays a major role in selecting an audit strategy. A system
based approach will be more suitable for a client in the e-commerce
sector than a financial position audit approach.
Explanations of the differences between Audit strategy and Audit plan
i.
Audit strategy sets the scope, timing and direction of the audit, and that
guides the development of the audit plan.
ii.
The audit plan is more detailed than the overall audit strategy.
iii.
Planning for audit procedures takes place over the course of the audit as
the audit activities for the engagement develops or events unfold. Audit
Plan refers to the scheme formulated by the auditor that comprises of
strategy or approach, that is followed for carrying out audit.
Examiner’s report
The question tests the candidates‟ knowledge of the approaches to the main audit
strategies, the factors to consider in the selection of strategy, and the difference
between strategy and plan.
About 70% percent of the candidates attempted the question but the performance
was below average.
The commonest pitfall was the candidates‟ inability to properly differentiate
between audit strategy and audit plan.
The candidates are advised to study relevant materials on audit planning.
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Marking guide
a.
b.
c.
The main audit strategies to be adopted in the audit
(½ mark each for the four audit approaches)
(1 mark each subject to a maximum of 7 points not
exceeding 2 points from one audit strategy).
Marks
Marks
2
7
9
Factors to be considered in solution of audit strategies
(1 mark each subject to a maximum of 4 factors in selection
of audit strategy).
4
Explanation of differences between audit strategy and audit
plan
(1 mark each subject to a maximum of 2 differences between
strategy and plan).
Total
2
15
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