Professional Body: ICA (Nigeria)

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  • 6 Marks

CR – Nov 2024 – L3 – Q5a – Financial Analysis and Investment Evaluation

Compute financial ratios for Nsawkaw PLC to evaluate its financial performance for investment recommendation.

Nsawkaw PLC (NK), a gold processing and trading company, has been identified by Djaraye Private Equity Fund (DPEF) as a target for long-term equity investment. As a financial consultant of DPEF, you have been tasked to evaluate the integrated financial condition of NK and make an investment recommendation.

Below are the summarised versions of NK’s Consolidated Financial Statements for the year ended June 30, 2024 (together with its comparative period):

Summarised Consolidated Statement of Profit or Loss for the year ended 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Revenue 2,538,000 2,125,000
Operational expenses (1,909,100) (1,592,900)
Interest costs (186,700) (157,250)
Taxation (234,000) (198,500)
Profit after tax 208,200 176,350
Other comprehensive income 17,900 10,550
Total comprehensive income 226,100 186,900

Summarised Consolidated Statement of Changes in Equity for the year ended 30 June 2024

Equity Holders of the Parent (GH¢000) Non-controlling Interests’ Equity (GH¢000) Total Equity (GH¢000)
2024
Balances b/d 457,200 65,600 522,800
Total comprehensive income 190,800 35,300 226,100
Dividends (110,000) (8,700) (118,700)
Balances c/d 538,000 92,200 630,200
2023
Balances b/d 355,000 46,650 401,650
Total comprehensive income 160,500 26,400 186,900
Dividends (58,300) (7,450) (65,750)
Balances c/d 457,200 65,600 522,800

Summarised Statement of Financial Position as at 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Non-current assets
Property, plant, and equipment 718,000 657,000
Others 156,000 99,000
Total Non-current assets 874,000 756,000
Current assets
Trade receivables 140,000 121,000
Others 236,500 123,050
Total Current assets 376,500 244,050
Total Assets 1,250,500 1,000,050
Total Equity and Liability 1,250,500 1,000,050

Additional information:

  1. The total number of equity shares outstanding was 1.2 million and 1.4 million at 30 June 2023 and 30 June 2024 respectively.
  2. Other comprehensive income attributable to non-controlling interests for the years ended 30 June 2023 and 2024 amounted to GH¢8.05 million and GH¢9.6 million respectively.
  3. Non-current liabilities at 30 June 2023 and 30 June 2024 amounted to GH¢250,800 and GH¢308,510 respectively.
  4. The following metrics have been gleaned from NK’s published sustainability reports across the two years:
Metric 2024 2023
Scope 1 & 2 carbon emissions (tonnes of CO2) 650 780
Scope 3 carbon emissions (tonnes of CO2) 2,400 2,380
Women in senior management (%) 21 16
Total recordable injury frequency rate (TRIFR) per 100 full-time workers 3.3 4.1

The scope and definitions of the above sustainability measures have remained materially unchanged across the two years.

Required:

Compute the following ratios for the years ended 2024 & 2023:

  1. Operating profit margin
  2. Return on parent’s equity
  3. Earnings per share
  4. Current ratio
  5. Trade receivables days
  6. Total liabilities to total assets %

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  • 15 Marks

CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

ONDO TELECOMS LIMITED

Ondo Telecoms Limited is one of the biggest telecoms companies in Abuja. One month after the year-end, the Chief Finance Officer (CFO), while reviewing the company’s activities came up with the following issues for the year ended 30 September, 2014:

(a) The Board of Directors is not impressed with the performance of the Home Broadband operating segment which posted a loss of N1.7 billion in 2014 financial year following another loss of N0.8 billion in the 2013 financial year.

(b) The carrying amount of the assets in the segment is N4.3 billion as at 30 September, 2014 and N4.5 billion as at 30 September, 2013. Professional valuers were engaged and they came up with a fair value of N4.2 billion as at 30 September, 2013.

(c) The Board of Directors made the final decision in June 2014 to sell off the assets in this segment and concentrate on other business lines. Since the beginning of September, four serious bidders have been negotiating with Ondo. The board anticipates the sale to be concluded by the end of May 2015 with the transaction cost of N0.3 million.

(d) On 1 November 2013, Ondo Telecoms Limited acquired a block of flats with an estimated useful life of 50 years at a total cost of N225 million. The blocks of flats are to be rented out to its employees and engineers at market prices. The decision to acquire the block of flats was made by the board due to the need to have the engineers close to the head office to attend to technical issues immediately they arise.

(e) Professional valuers were engaged to value the flats as at 30 September, 2014 and a fair value of N232 million was determined.

(f) International Telecom Limited, which acquired Edo Communications Limited during the year, has just published its results. Edo Communications Limited was a direct competitor to Ondo Telecoms Limited and does similar business. The CFO noted that International Telecom Ltd. shows an asset of N110 million arising from Edo Communication Limited customer lists’. This made the CFO realize how valuable the customer details are and has engaged a professional valuer who valued them at N98 million.

(g) Over the years, Ondo Telecoms Limited’s main business has been the provision of mobile and fixed landlines services as well as broadband services. In July 2013, Ondo Telecoms Limited bid for the award of a subscription television license from the government.

(h) Ondo Telecoms Limited won the bid and paid N560 million for a five-year license beginning 1 October 2013. The license is transferred and at the time of winning the bid, the fair value of the license was estimated at N580 million. Due to the slow uptake of the television business, the license was revalued at N420 million as at 30 September, 2014 by a professional valuer.

Required:
Advise, with suitable computations, how the above transactions should be accounted for in the financial statements of Ondo Telecoms Limited under IFRS for the year ended 30 September, 2014.

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  • 15 Marks

CR – May 2015 – L3 – Q6 – Ethical Issues in Corporate Reporting

Analyze the financial reporting needs and efficiency challenges of not-for-profit organizations, including asset valuation at cost vs. fair value.

NICE & DICE

NICE & DICE is a large charity located in Abuja and set up to provide support and assistance to disadvantaged people in major cities. Most of the charity’s income comes from members of the public through direct cash collections and regular monthly payments from donors. The other source of funding comes from government bodies who give grants to support specific projects that are recognized as being beneficial to the public good.

The charity publishes a detailed annual report. Performance is described largely in terms of an analysis of income received and the manner in which it has been spent. The trustees are concerned that this type of analysis does not really reflect the performance of the charity. They would like to report performance in terms of the work done rather than in terms of cash inflows and outflows. They want donors to appreciate how efficient the charity is.

The statement of financial position of the charity is a typical one for a large organization. NICE & DICE owns numerous properties in Abuja, some of which have been owned for many years. These are shown at historical cost less depreciation. The trustees do not wish to revalue the properties because this will create the impression that the charity is wealthy and that it does not require further financial support.

Required:
(a) Prepare a report to the trustees of Nice & Dice advising them on the reasons why specialized entities are required to publish detailed information about their activities. (5 Marks)
(b) Analyze the problems of quantifying and reporting the efficiency of not-for-profit organizations such as Nice & Dice. (5 Marks)
(c) Discuss the decision of the trustees to value its properties at cost less depreciation rather than at fair value. (5 Marks)

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  • 15 Marks

CR – May 2015 – L3 – Q5 – Introduction to Corporate Reporting

Discuss the need for IFRS for SMEs and evaluate simplified recognition principles for reducing reporting burdens on Jossy Limited.

International Financial Reporting Standards (IFRS) for Small and Medium-Sized Entities (SMEs)

International Financial Reporting Standards (IFRS) for small and medium size entities (SMEs) was mandatorily adopted in Nigeria as at January 1, 2014. Entities that do not meet the IFRS for SME criteria shall report using Small and Medium Size Entities Guidelines on Accounting (SMEGA).

Jossy Limited has total costs excluding land of two-hundred million naira. Being a family business, the labor force totaled 150 workers with an annual turnover of N18 million. The management of this company sought your advice to have better understanding of some of the recognition and measurement principles of SMEs.

Required:
(a) Justify the need for IFRS for SMEs financial statements. (6 Marks)
(b) Assess the circumstances of Jossy Limited and advise on the principal recognition and measurement principles that will reduce the company’s reporting burden. (9 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Discuss implications of changes in accounting policy for intangible assets and demonstrate retrospective application in financial statements.

LIKELY EFFECT LIMITED

Likely Effect Limited has shown a sincere intention to be IFRS compliant. Among a number of events and transactions, there is the need to change the accounting policies of the company in trying to comply with a few other standards. As the Consultant of the company, your attention was drawn to the fact that prior to 2013, the company had capitalized training costs.

According to IAS 38, training cost is regarded as an internally generated intangible asset and cannot be capitalized. Therefore, there is the need for a change of accounting policy which must be applied retrospectively.

The training costs capitalized in 2012 was N6m while the total for periods before 2012 was N12m.
Training costs incurred in 2013 is N4.5m. Retained earnings were N600m and N649m at the beginning and end of 2012 respectively. The corporate income tax rate is 30% for the relevant periods. Additional information available is given below:

2013 (N’M) 2012 (N’M)
Income tax expense 24 21
Profit after tax 56 49
Share capital 50 50

Required:

(a) Advise the directors on the implication of the change in accounting standard relating to treatment of intangible assets and tax effect on the company. (5 Marks)

(b) Prepare statements of profit or loss and other comprehensive income and changes in equity showing a retrospective application of the change in policy. (7 Marks)

(c) Analyze the effects of the change in accounting policy on periods before 2013. (8 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q3 – Emerging Trends in Corporate Reporting

Analyze financial statements of two companies and discuss limitations of ratio analysis.

Real Expansion Plc is a large group that seeks to grow by acquisition. The directors have identified two potential entities and obtained copies of their financial statements. The accountant of the company computed key ratios to evaluate the performance of these companies relating to:

  • Profitability and returns;
  • Efficiency in the use of assets;
  • Corporate leverage; and
  • Investor-based decisions.

The computation generated hot arguments among the directors, and they decided to engage a Consultant to provide expert advice on which company to acquire.

Extracts from these financial statements are given below:

Required:

(a) As the Consultant to the company, carry out a financial analysis on the financial statements and advise the company appropriately. (15 Marks)

(b) State the major limitations of ratio analysis for performance evaluation. (5 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

The following transactions relate to Alilerimba Limited:

  1. Convertible Bonds
    • On July 1, 2011, Alilerimba Limited issued 400,000 convertible bonds with a 3-year tenure and a total fair value of N4 million, which is also the par value.
    • The bonds carried an interest rate of 16% per annum, payable annually in arrears, while similar bonds without the conversion option carried an interest rate of 19% per annum on the same date.
    • The company incurred 10% issue costs. If the investors did not convert to shares, the bonds would have been redeemed at par.
    • At maturity (June 30, 2014), all bonds were converted into 1 million ordinary shares with a nominal value of N4 per share. No conversions were allowed before maturity.
    • The directors are uncertain how to account for the bonds up to the date of conversion. They were informed that the effective interest rate, considering issue costs, was 24%.
  2. Revenue Recognition for Handsets
    • Alilerimba purchases handsets at N120,000 each and sells them to customers at N90,000, provided the customers also purchase prepaid credit cards.
    • Prepaid credit cards are sold for N12,600 each and expire after six months. The average unused credit per card at expiry is N1,800.
    • Selling costs for the handsets are estimated at N600 per unit.
    • Alilerimba also sells handsets to dealers for N50,000 each, invoicing them for this amount. Dealers are allowed to return the handsets until a service contract is signed by a customer. When a service contract is signed, the handset is given to the customer free of charge.
    • Dealers receive a commission of N168,000 per customer connection. Net of the handset cost (N90,000), Alilerimba pays N78,000 to dealers for each customer connection.
    • Handsets cannot be sold separately by dealers, and the service contract has a 12-month duration. Dealers do not sell prepaid phones, and Alilerimba earns monthly revenue from the service contracts.
    • The Chief Operating Officer, a non-accountant, has requested an explanation of the accounting principles and practices to apply for handset purchases and revenue recognition.
  3. Preference Shares
    • Alilerimba Limited issued 8% preference shares with a redemption feature that entitles holders to receive cash.

Required:

Advise the directors of Alilerimba Limited on:
(a) The accounting treatment for the convertible bonds. (12 Marks)
(b) The accounting principles and practices to apply for the purchase of handsets and recognition of revenue from customers and dealers. (6 Marks)
(c) The provisions of IAS 32 regarding the presentation in financial statements of financial instruments entitling holders to receive cash with a redemption feature. (2 Marks)

(Total: 20 Marks)

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  • 30 Marks

CR – May 2015 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013, considering acquisitions and adjustments.

Barewa Plc has two subsidiary companies and one associate. Since the adoption of International Financial Reporting Standards (IFRS) by companies listed on the Nigeria Stock Exchange, Barewa has been preparing its consolidated financial statements in accordance with the provisions of International Financial Reporting Standards (IFRSs).

The draft Statements of Financial Position of Barewa and its two subsidiaries as at 31 May, 2013 are as follows:

Assets Barewa (N’m) Megida (N’m) Mindara (N’m)
Non-current assets
Plant 2,650 2,300 1,610
Investments – Megida 3,000
Investments – Mindara 1,280
Associate (Calamari) 200
Available for sale 510 60 50
Total Non-current assets 7,640 2,360 1,660
Current assets
Inventory 1,350 550 730
Trade receivables 910 450 320
Cash and cash equivalent 1,020 1,000 80
Total Current assets 3,280 2,000 1,130
Total Assets 10,920 4,360 2,790
Equity and Liabilities
Share capital 5,200 2,200 1,000
Retained earnings 2,400 1,500 800
Other components of equity 120 40 70
Total equity 7,720 3,740 1,870
Non-current liabilities
Long-term loans 1,200 150 50
Deferred tax 250 90 30
Total non-current liabilities 1,450 240 80
Current liabilities
Trade payables 1,150 300 600
Current tax payables 600 80 240
Total current liabilities 1,750 380 840
Total Equity and Liabilities 10,920 4,360 2,790

The following information is relevant to the preparation of the group financial statements:

  • Acquisition of Megida Plc
    • Date of Acquisition: 1 June 2012
    • Barewa acquired 80% of the equity interest in Megida Plc.
    • At the date of acquisition, Megida’s retained earnings were N1.36 billion, and other components of equity amounted to N40 million.
    • There had been no new issuance of share capital by Megida since the acquisition date.
    • The consideration for the acquisition was N3 billion in cash.
    • The fair value of Megida’s identifiable net assets at acquisition was N4 billion, with the excess attributed to an increase in the value of non-depreciable land.
    • An independent valuation determined that the fair value of the non-controlling interest (NCI) in Megida on 1 June 2012 was N860 million.
    • Barewa’s policy is to measure NCI based on their proportionate share in the identifiable net assets of the subsidiary, not at fair value (full goodwill method).
  • Acquisition of Mindara Plc
    • Date of Acquisition: 1 June 2012
    • Barewa acquired 70% of the ordinary shares of Mindara Plc.
    • The consideration for the acquisition included:
      • An upfront payment of N1.28 billion.
      • A contingent consideration requiring Barewa to pay the former shareholders 30% of Mindara’s profits on 31 May 2014 for each of the financial years ending 31 May 2013 and 31 May 2014. This arrangement was valued at N120 million as of 1 June 2012 and remains unchanged. It has not been included in the financial statements.
    • The fair value of the identifiable net assets at acquisition was N1.76 billion. This included retained earnings of N550 million and other components of equity of N70 million.
    • There had been no new issuance of share capital by Mindara since the acquisition date.
    • The excess fair value of the net assets was due to an increase in property, plant, and equipment (PPE), which is depreciated on a straight-line basis over seven years.
    • The fair value of the non-controlling interest (NCI) in Mindara was N530 million on the acquisition date.
  • Investment in Calamari Plc
    • On 1 June 2011, Barewa acquired a 10% interest in Calamari Plc for N80 million. This was classified as an available-for-sale investment.
    • As of 31 May 2012, the value of this investment had increased to N90 million.
    • On 1 June 2012, Barewa acquired an additional 15% interest in Calamari for N110 million, achieving significant influence.
    • Calamari recorded profits after dividends of N60 million and N100 million for the financial years ending 31 May 2012 and 31 May 2013, respectively.
  • Equity Instrument Purchase
    • On 1 June 2012, Barewa purchased an equity instrument valued at 100 million pesos, classified as available-for-sale.
    • Relevant exchange rates:
      • 31 May 2012: N5.1 to 1 peso.
      • 31 May 2013: N5.0 to 1 peso.
    • The fair value of the instrument as of 31 May 2013 was 90 million pesos, reflecting an impairment that Barewa has not recorded.
  • Loan to a Director
    • A loan of N10 million to a director has been included in cash and cash equivalents.
    • The loan is repayable on demand with no specific repayment date.
    • The directors believe that this treatment complies with International Financial Reporting Standards (IFRS), as no IFRS explicitly prohibits showing the loan as cash.
  • Goodwill Impairment
    • There is no impairment of goodwill arising from the acquisitions.

Required

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013.

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  • 15 Marks

AAA – May 2016 – L3 – Q6 – Audit Reporting

Discuss audit work and written representation letter for legal claims, outstanding balances, and investments.

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 N1 million 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:

For 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.

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  • 15 Marks

AAA – May 2016 – L3 – Q5 – Ethical Issues in Auditing

Identify and discuss fraud and error in the audit of Badagry Yachting and Marina.

Badagry Yachting 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) 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’.
(ii) 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 N50 million.
(iii) 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 N100 million 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)
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)

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  • 20 Marks

CR – May 2017 – L3 – Q2 – Emerging Trends in Corporate Reporting

Analyze and compare the performance of Lanke Plc and its group for 2014 and 2015 using selected financial ratios.

The following figures have been extracted from the financial statements of Lanke Plc and its subsidiaries for the years ended December 31, 2014, and December 31, 2015:

The directors of Lanke Plc would like to know how the individual performance of the company and that of the group compares with each other and over the two years. In particular, they are interested in performance measures around profitability, long-term solvency, and asset utilization using only the ratios indicated below. They would also want a brief explanation of why the analysis of the performance of a single company may differ from that of a group company.

Required:

Prepare a performance report that addresses the needs of the directors of Lanke Plc for the two-year period 2014 and 2015.

Note: Limit your ratio computation to the following:

  • Return on Capital Employed (ROCE)
  • Profit Margin
  • Asset Turnover
  • Gearing
  • Interest Cover
    (Show all workings)

(Total: 20 Marks)

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  • 30 Marks

CR – May 2017 – L3 – Q1 – Foreign Currency Transactions and Translation (IAS 21)

Assess functional currency and prepare a consolidated statement of financial position under IFRS.

Rapuya Plc. is a Nigerian public limited company operating in the mining industry. The draft Statements of Financial Position of Rapuya Plc., and its two subsidiaries, Puta Limited and Soma Limited as at April 30, 2017, are as follows:

The following information is relevant to the preparation of the group financial statements:

(i) On May 1, 2016, Rapuya acquired 52% of the ordinary shares of Soma Limited, a foreign subsidiary. The retained earnings of Soma Limited on this date were 220 million defas. The fair value of the identifiable net assets of Soma Limited on May 1, 2016, was 990 million defas. The excess of the fair value over the net assets of Soma Limited is due to an increase in the value of non-depreciable land.

Rapuya Plc. wishes to use the ‘full goodwill’ method to consolidate the financial statements of Soma. The fair value of the non-controlling interest in Soma Limited at May 1, 2016, was 500 million defas.

Soma Limited is located in Tome, a small country in West Africa, and operates a mine. The income of Soma Limited is denominated and settled in defas. The output of the mine is routinely traded in defas, and its price is determined initially by local supply and demand. Soma Limited pays 30% of its costs and expenses in naira, with the remainder being incurred locally and settled in defas. Soma’s management has a considerable degree of authority and autonomy in carrying out the operations of Soma Limited and is not dependent upon group companies for financial support. The Finance Controller is not certain from the above whether the defas or naira should be taken as the functional currency of Soma Limited.

There have been no issues of ordinary shares and no impairment of goodwill since acquisition.

(ii) Also on May 1, 2016, Rapuya Plc. had acquired 70% of the equity interests of Puta Limited. The purchase consideration amounted to N226 million, which Rapuya Plc. paid through bank transfer in compliance with the cashless policy of the Federal Government of Nigeria. The fair value of the identifiable net assets recognized by Puta Limited was N240 million, excluding the patent below. The identifiable net assets of Puta Limited at May 1, 2016, included a brand with a fair value of N8 million. This had not been recognized in the financial statements of Puta Limited. The brand is estimated to have a useful life of four years. The retained earnings of Puta Limited were N98 million, and other components of equity were N6 million at the date of acquisition. The remaining excess of the fair value of the net assets is due to an increase in the value of non-depreciable land.

Rapuya Plc. wishes to use the ‘full goodwill’ method in consolidating the financial statements of this subsidiary. The fair value of the non-controlling interest in Puta Limited was N92 million on May 1, 2016. There have been no issues of ordinary shares since acquisition, and goodwill on acquisition is not impaired.

(iii) The following exchange rates are relevant for the preparation of the group financial statements:

Defas to Naira Exchange Rate
May 1, 2016 3:1
April 30, 2017 2.5:1
Average for year to April 30, 2017 2.9:1

Required:

(a) Advise the Finance Controller on what currency should be taken as the functional currency of Soma Limited, applying the principles set out in IAS 21 – The Effects of Changes in Foreign Exchange Rates. (5 Marks)

(b) Prepare a consolidated statement of financial position of the Rapuya Group as at April 30, 2017, in accordance with International Financial Reporting Standards (IFRS). (Show all workings) (25 Marks)

(Total: 30 Marks)

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  • 15 Marks

AAA – May 2019 – L3 – Q7 – Group Audits

Explain joint audit, its benefits, and challenges in the context of an automotive company’s acquisition.

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 southwest zone of Nigeria.

Required:
a. Explain the concept of joint audit. (5 Marks)
b. Discuss the reasons why joint audit is considered desirable. (5 Marks)
c. Explain possible setbacks for engagement in joint audits. (5 Marks)

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  • 15 Marks

AAA – May 2019 – L3 – Q6 – Audit Reporting

Assess the impact of lost audit journals, actions required under ISA 570, and communication duties of auditors.

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 the board of directors’ quarterly meetings and finalizing 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 finalize the accounts. This resulted in 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 the operations of the company and may lead to a reduction in both operation and staff engagement.

Required:
a. 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)
b. In accordance with ISA 570, evaluate the actions required of the auditors in relation to the observed misstatement. (5 Marks)
c. 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)

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  • 15 Marks

AAA – May 2019 – L3 – Q5 – Risk Management in Audits

Assess inherent risks and identify specific audit risks related to auditing the financial statements of Insurgency Relief Providers (IRP).

Insurgency Relief Providers (IRP) is a non-governmental organization 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 trustees sits occasionally to formalize major decisions. Initially, the sum of ₦50,000,000 was provided by the philanthropist, and fundraising was organized to raise an 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 northeastern region of the country. These activities include food and material 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 trustees has made appeals to some foreign-friendly associates to be involved in his organization’s activities by providing financial support. A number of these organizations 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)

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  • 20 Marks

AAA – May 2019 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Analyze the auditor's objectives, implications of going concern assumptions, directors' responsibilities, and risk assessment for going concern status.

Itanforiti Publishers Limited has been in the 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 a high-profile team of personnel and in-house printing of its published books.

The board of directors comprises 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 longer 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 organization started resigning in turn.

In 2016, the financial reports of the company revealed its inability to pay creditors, and the supply of raw materials became irregular. In addition, the level of receivables became too high with a significant 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. (3 Marks)
d. Evaluate the risk assessment procedures to be performed by the auditor on the going concern status of the entity. (ISA 570). (7 Marks)

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  • 20 Marks

AAA – May 2019 – L3 – Q3 – Audit of IT Systems and Data Analytics

Explain COBIT as an IT governance tool, its purpose, and six specific components of the framework.

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.

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)

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  • 20 Marks

AAA – May 2019 – L3 – Q2 – Assurance Engagements

Explain due diligence, discuss its components, benefits of using auditors, and ISRE 2400 principles and objectives.

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)

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  • 30 Marks

AAA – May 2019 – L3 – Q1 – Forensic Auditing

Analyze forensic accounting, discuss ethical principles, and outline procedures for Ayeniromo Microfinance Bank forensic investigation.

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:

  1. Investigate whether fraud has actually occurred and if so, to obtain evidence to support that assertion in a court of law.
  2. 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.
  3. 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)
c. Explain the procedures to be followed in a forensic investigation engagement for Ayeniromo Microfinance Bank Limited. (10 Marks)

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  • 20 Marks

FM – May 2019 – L3 – Q7 – Working Capital Management

Evaluate the financial viability of accepting a new customer order and provide considerations for granting credit.

V Plc. manufactures engineering equipment. The company has received an order from a new customer for five machines at N5,000,000 each. V Plc.’s terms of sale are 10 percent of the sales value payable with the order. The deposit has been received from the new customer. The balance is payable 12 months after acceptance of the order by V Plc.

V Plc.’s past experience has been that only 60 percent of similar customers pay within 12 months. Customers who do not pay within 12 months are referred to a debt collection agency to pursue the debt. The agency has in the past had a 50 percent success rate of obtaining immediate payment once they became involved. When they are unsuccessful, the debt is written off by V Plc. The agency’s fee is N500,000 per order, payable by V Plc. with the request for service. This fee is not refundable if the debt is not recovered.

As an accountant in V Plc.’s credit control department, and based on the company’s past experience and on discussions with the sales and credit managers, you do not expect the pattern of payment and collection to change.

Incremental costs associated with the new customer’s order are expected to be N3,600,000 per machine, 70 percent of these costs are for materials and are incurred shortly after the order has been accepted. The remaining 30 percent is for all other costs, which you can assume are paid shortly before delivery, i.e., in 12 months’ time. The company is not at present operating at full production capacity.

A credit bureau has offered to provide error-free credit information about the new customer if the price is right.

V Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

a. Evaluate, from a purely financial point of view, if V Plc. should accept the order from the new customer based on the above information. (12 Marks)

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 Marks)

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