Subject: AUDIT & ASSURANCE

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  • 3 Marks

ATAX – May 2017 – L3 – Q4c – Tax Administration and Dispute Resolution

State three particulars required in a Notice of Appeal against a tax assessment.

Where a taxpayer receives a Notice of Assessment, he either agrees or disagrees with it. Where he agrees with the assessment, the position of the law is that the tax must be remitted within the statutory time limit. Where he disagrees, he is expected to raise a Notice of Objection.

Required:
State THREE particulars to be specified in a Notice of Appeal against an assessment. (3 Marks)

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  • 15 Marks

PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

Vena Plc. manufactures engineering equipment. The company has received an order from a new customer for 5 machines at N5,000,000 each. Vena Plc.’s terms of sale are 10 percent of the sales value payable with order. The deposit has been received from the new customer. The balance is payable 12 months after acceptance of the order by Vena Plc.

Vena 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 Vena Plc. The agency’s fee is N500,000 per order, payable by Vena Plc. with the request for service. This fee is not refundable if the debt is not recovered.

You are an accountant in Vena Plc.’s credit control department, and based on the company’s past experience and 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 in 12 months’ time. The company is not presently operating at full production capacity.

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

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

Required:

a. Write a report to the Credit Control Manager evaluating, from a purely financial point of view, whether Vena Plc. should accept the order from the new customer based on the information provided. (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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  • 20 Marks

PM – Nov 2024 – L2 – Q4 – Decision-Making Techniques

Determine optimal production mix for maximizing profit using marginal costing and throughput accounting principles.

PK Limited manufactures two models of heavy-duty cooking racks suitable for restaurant kitchens and other commercial environments. Both models utilize the same types of raw materials and machine hours. No inventories are held. The sales budget for next year is as follows:

Model Sales Units Selling Price (N)
A 300,000 1,000
B 140,000 1,400

The following additional information is provided:

  • Cost data:
Model Material Cost (N) Variable Production Conversion Costs (N)
A 400 100
B 500 300
  • Fixed production overheads attributable to the manufacture of both models total N40,500,000.
  • Production is completed in the machining department, where the production rate per hour is:
    • Model A: 12.5 units
    • Model B: 10 units
  • Machine hours are limited to 30,000 hours.

Required:

a. Using marginal costing principles, calculate the optimal mix (units) of each model that will maximize net profit, and indicate the value of the net profit. (5 Marks)

b. Calculate the throughput accounting ratio for each model and briefly discuss when a product is worth producing under throughput accounting principles. Assume that the variable overhead cost, amounting to N24 million for the chosen product mix in part (a), is fixed in the short term. (7 Marks)

c. Using throughput accounting principles, advise management on the quantities of each model to produce for maximizing profit and provide a projected net profit for PK Limited next year. (5 Marks)

d. Explain two ways in which the concept of ‘contribution’ in throughput accounting differs from its use in marginal costing. (3 Marks)

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  • 20 Marks

PM – Nov 2024 – L2 – Q3 – Budgeting and Budgetary Control

Outline key stages in linking long-term objectives to budgetary control, and explain different budgeting types and forecasting methods.

You are the management accountant of a large manufacturing company in Kaduna. A management retreat has been planned for next week to set the agenda for the preparation for next year’s budget.

Required:

a. Outline the key stages in the planning process that link long-term objectives and budgetary control. (8 Marks)

b. Explain the meaning of the terms ‘fixed budget’, ‘rolling budget’, and ‘zero-based budget’, and discuss the circumstances under which each budget might be used. (8 Marks)

c. Discuss whether time series analysis may be preferred to linear regression as a way of forecasting sales volume. (4 Marks)

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  • 20 Marks

PM – Nov 2024 – L2 – Q2 – Cost Management Strategies

Evaluation of Ope-Olu Limited's inventory holding cost and the impact of switching to a JIT production system.

Ope-Olu Limited produces and sells household items. For a particular product, the marketing department has prepared the following quarterly expected demand for next year:

Quarter Expected Demand (Units)
1 400,000
2 440,000
3 760,000
4 560,000

The existing production facility can only produce 540,000 units per quarter under regular time. However, it is possible to increase output by 40% if working overtime is introduced.

It is the policy of the company to manufacture units using a constant level of production system. This means that although the opening and closing levels of inventory for the year are zero units, there are increases and decreases in the quarterly inventory levels. Based on this policy, the unit selling price, variable production costs, and contribution for next year are expected to be as follows:

Additional Information:

  • Overtime is paid at 150% of the normal rate, and the unit variable production overhead cost will increase by 25% for those units produced during overtime.
  • The company incurs a holding cost (based on average inventory) of N25 per unit per quarter for each item that is held in inventory.
  • The company is considering switching to a Just-in-Time (JIT) production system due to fluctuating sales demand.

Required:

a. Discuss generally, the key conditions that are necessary for the successful implementation of a JIT manufacturing system. (7 Marks)

b. Calculate the cost of holding inventory for each of the quarters and the year in total under the current production system. (6 Marks)

c. Calculate the financial impact of changing to a JIT production system. (7 Marks)

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  • 15 Marks

AA – Nov 2023 – L2 – Q7 – Corporate Governance and Audit Committees

Guidance on addressing community concerns over environmental impact of industrial operations.

You witnessed a scene during the audit of Tiwani Cement Limited, an indigenous medium-sized cement manufacturing company.

Indigenes of the host town, situated in the southern part of the country, staged a peaceful protest at the premises of the company. Their concern was the company’s apparent lack of attention toward the poor condition of roads surrounding their factory—ostensibly damaged by the heavy equipment and vehicles the company operated.

The management appeased the protesters, promising immediate consideration of their demands.

The Managing Director has now asked for your advice.

Required:

Advise the Managing Director of Tiwani Cement Limited on what the company could do in this type of situation.
(Total 15 Marks)

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  • 15 Marks

AA – Nov 2023 – L2 – Q6 – Audit of Financial Statements

Assessing development costs under IAS 38 and audit tests for verification.

Your client, Picturescope Limited, intends to produce a motion picture titled “Naija Power”. The development costs before presentation to investors for financing the production is estimated to be N15 million.

Required:

a. As the assurance provider, assess the situation to confirm that the amount spent so far can be recognised as development costs within the provisions of IAS 38 – Intangible Assets.
(6 Marks)

b. Explain the audit tests that you would perform in respect of the development costs expended so far.
(9 Marks)

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  • 15 Marks

AA – Nov 2023 – L2 – Q5 – Emerging Trends in Auditing

Information system audit steps for a business continuity plan and its importance.

The world-wide COVID-19 pandemic disrupted the operations of Divine Hope Limited, like it did to many other business concerns. Sequel to this, the management of Divine Hope Limited has now commissioned the development of a Contingency or Business Continuity Plan to ensure continuity of operations, even if such a pandemic or similar situation should re-occur.

Required:

a. Explain SIX steps to be taken in the information system audit of a Contingency or Business Continuity Plan.
(9 Marks)

b. Explain why the audit of the Contingency or Business Continuity Plan is very necessary.
(6 Marks)

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  • 21 Marks

AA – Nov 2023 – L2 – Q4 – Audit of Public Sector Entities

Identify inherent risks in a non-profit organization and assess control environment weaknesses impacting audit approach.

Greater Tomorrow Foundation (GTF) was established with the aim of providing support to children from disadvantaged backgrounds who wish to participate in sports, such as tennis, athletics, and football. It has benefited the country, with some beneficiaries representing the nation in international competitions.

GTF has a constitution detailing how income can be spent and limits administrative expenditure to one-eighth of its income annually.

GTF’s income comes solely from voluntary donations, including:

  • Cash collected by volunteers from the public.
  • Direct donations from generous individuals.

Certain donations specify that the principal amount cannot be spent, with income generated (interest) allocated to specific activities, like providing sports equipment (e.g., footballs, boots, rackets, sportswear, etc.).

Required:

a. Explain FIVE areas of inherent risk in Greater Tomorrow Foundation (GTF) and explain the effect of each risk on the audit approach. (10 Marks)

b. Explain FIVE reasons why the control environment may be weak in GTF. (10 Marks)

 

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  • 20 Marks

AA – Nov 2023 – L2 – Q3 – Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Evaluate ethical threats due to auditor relationships and actions, and recommend mitigations for compliance.

The following scenarios may threaten compliance with fundamental principles in auditing:

i. The audit supervisor is married to the daughter of the Managing Director of the client company;

ii. The audit firm’s Senior Partner holds shares in the client company;

iii. The assurance firm also provides valuation services, internal audit services, and taxation services to an assurance client;

iv. The assurance firm earns more than 50% of its annual revenue from one assurance client; and

v. The firm obtained motor vehicle financing from a client bank for its staff.

Required:

a. Explain why compliance with fundamental principles in auditing may be threatened in each of the above FIVE circumstances. (10 Marks)

b. Explain FIVE ethical requirements that would reduce or mitigate the threats to compliance with the fundamental principles in the above FIVE circumstances. (10 Marks)

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  • 20 Marks

AA – Nov 2019 – L2 – Q6 – Ethical Issues in Auditing

Explain the concepts of acting in the public interest, professional scepticism, and fundamental ethical principles for accountants.

A whistleblower reported to a regulator a misstatement in the financial statements of Koko Limited on overstated expenses and overvaluation of inventory.

An informed shareholder at the Annual General Meeting, while commenting on the company’s financial statements, stated that the company directors should always act in the public interest.

Required:
Explain:
a. “Acting in the public interest” (6 Marks)
b. Professional scepticism (4 Marks)
c. The fundamental principles a professional accountant should comply with (10 Marks)

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  • 20 Marks

AA – Nov 2019 – L2 – Q5 – Audit Documentation

Discuss the archiving of audit working papers, their purposes, types, contents, and ownership conditions.

Your firm has just recruited some audit trainees. It is the practice of the firm to give orientation to the newly recruited so that they could be familiar with the firm’s operations, especially before the commencement of an audit busy season.

As an audit senior in the firm, you have been directed to facilitate the programme for the newly hired trainees. You were allocated a topic on the archiving and retrieval of audit documents for a current year audit.

Required:
Based on your experience over the years, discuss:
a. Audit working paper archiving (1 Mark)
b. The purposes of audit working papers archiving (6 Marks)
c. The types, contents, and importance of audit working paper files (8 Marks)
d. The owner of audit working paper files and the conditions under which access to them could be granted to a third party (5 Marks)

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  • 20 Marks

AA – Nov 2019 – L2 – Q4 – Internal Control Systems

Justify the effectiveness of internal control systems and discuss their characteristics, types, and components.

During the review of the internal control activities of VIDA Plc., the Chairman of the Audit Committee stated in his concluding remarks that in any organization, we may conclude that an entity has an effective control environment if management is committed to accurate financial reporting with the support of an effective internal control system.

The control process assists the organization to embark on proper data analysis and information management that will enable the business and its employees to function effectively. Control focuses on activities before, during, and after daily operations to ensure safeguards and management of assets to enable the organization to achieve its aims and objectives. An effective and efficient system of internal control will give great returns to shareholders and ensure transparent financial reporting.

Required:
Justify the above statement by identifying and explaining:

  • Characteristics of an effective internal control system (8 Marks)
  • Different types of internal control systems (6 Marks)
  • Main components of internal controls (6 Marks)

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  • 20 Marks

AA – Nov 2019 – L2 – Q3 – Introduction to Auditing

Discuss the parties involved in the audit assurance process, conditions for accepting an assurance engagement, and recognizing reliable evidence.

A financial analyst in his contribution at a seminar stated that audited financial statements show the records of stewardship of a company’s activities and the financial position of a company at the end of a period.

The financial report has input from key stakeholders who must perform their duties well and in an objective manner. In view of this, the report should give confidence to the users of the financial statements and support good corporate governance.

The financial report is used for decision making and is prepared based on management estimates, judgement, assumptions, and reliable evidence.

As a chartered accountant, you have been invited to make a contribution at the seminar in support of the statement of the analyst:

You are required to discuss:

  • Parties to an audit assurance process, stating their duties and rights. (4½ Marks)
  • When a professional should accept an assurance engagement. (8 Marks)
  • How to recognize a reliable evidence in an audit and assurance engagement. (7½ Marks)

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  • 20 Marks

AA – Nov 2019 – L2 – Q2 – Ethical Issues in Auditing

Discuss the concept of expectation gap in auditing and the reasons an auditor may not detect fraud.

The Financial Reporting Council of Kalagi, when performing a review of the financial statements of Yakoyo Plc., detected some errors and disclosure deficiencies which were brought to the attention of the management of the company. The management put the blame on the company’s auditors and accused them of negligence.

You are a chartered accountant and an informed shareholder of the company. You are required to explain:

a. “Expectation gap” in audit (5 Marks)

b. How the expectation gap can be bridged (7½ Marks)

c. Why an auditor may not detect fraud (7½ Marks)

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  • 40 Marks

AA – Nov 2019 – L2 – Q1 – Introduction to Auditing

Discuss the objectives of external audit services, eligibility for external auditors, rights and duties of external auditors, and management responsibilities.

Boniface Bank Limited placed an advert in the national dailies requesting for proposals for external audit services.

You are provided with the following information:

Boniface Bank Limited was licensed as a commercial bank in 2018. The shareholders’ fund is N25 billion and the bank is mainly in the retail business. The bank is a national bank with presence in the state capitals of the six geopolitical zones in Nigeria. The bank is gaining recognition as an institution that finances small and medium scale enterprises in the country.

The policy of the bank is to have an auditor for a 10-year tenure and a partner rotation every five years.

Scope of work

In line with best practices, external auditors are expected to be independent and conduct the audit of the books of the bank in conformity with the International Financial Reporting Standards (IFRS) and the International Standards on Auditing (ISA). They are also expected to provide other services as the need arises that will not compromise their independence.

To be specific, the successful firm will be required to:

  • Conduct an audit and report on the state of affairs and operations of the bank for the year ended December 31, 2018;
  • Advise management on the treatment and disclosures of certain items in the financial statements as the need arises, for example, new and revised standards;
  • Make presentations to shareholders on the state of affairs and operations of the bank at the Annual General Meeting; and
  • Present the management letter on weaknesses identified during the audit.

Qualifications of the firm

The audit firm to be selected should have at least six partners with good quality control processes and robust audit software. In addition, the firm must have subject matter experts in the International Financial Reporting Standards.

The proposal should state the firm’s experience in bank audits, fee quote, the proposed engagement team, the audit approach, and relevant activities for smooth operation of the audit including steps necessary to conduct a hitch-free audit.

Independence

The proposal should indicate how the firm will ensure that it maintains its independence and avoids conflicts of interest throughout the period of appointment as auditors.

Submission

You are expected to submit your proposal not later than 5p.m. on December 13,
2018.
The shortlisted firms shall be invited for presentations as soon as possible and will
be finally contacted for follow up interviews if successful.
(For any further clarification, please contact Olaolu Aki on 0071562534.)
The partners of your firm are interested in the proposal of Boniface Bank Limited.
You have been requested to make input for the proposal as soon as possible.

Required:

Discuss the following:
a. Objectives of the external audit of Boniface Bank Limited. (4 Marks)
b. Eligibility for qualification as external auditor. (10 Marks)
c. Rights and duties of external auditors under the Companies and Allied
Matters Act CAP C20 LFN 2004. (10 Marks)
d. Responsibility of management and those charged with governance.
(10 Marks)
e. Requirements of auditors in relation to International Standards on Auditing
(ISA 200). (6 Marks)

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  • 20 Marks

AA – Nov 2020 – L2 – Q6 – Professional Ethics and Code of Conduct for Auditors

Discuss the ICAN code on acting professionally and in the public interest and differentiate between trade and profession.

The ICAN Professional Code of Conduct and Guide for Members requires every member or student of the Institute to always “act professionally” and in “the public interest” in the discharge of their responsibilities.

Required:
a. Explain “act professionally” in relation to the ICAN code. (1 Mark)
b. Discuss the behavioral attributes that will enable an ICAN student to act professionally. (6 Marks)
c. Discuss briefly “acting in the public interest”. (7 Marks)
d. Differentiate between a trade and a profession. (6 Marks)

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  • 20 Marks

AA – Nov 2020 – L2 – Q5 – Audit Documentation

Review a workpaper, explain audit working paper ownership, and describe sampling risk and considerations for reducing sampling risk.

Below is a workpaper prepared and reviewed by members of an audit engagement team.

Client: [Name not provided]
Subject: Trade Payables
Period End: [Not provided]

Objective: To ensure trade payables is fairly stated

Work performed: Selected a sample of 5 trade payables balances as at 31 March and reconciled the supplier statements to the year-end trade payables ledger. Reconciling items were vouched to source documentation.

Results

Required:
a. Review the above workpaper and comment on the missing items. (8 Marks)
b. An accounts personnel at the client office requested that you give him your audit working papers. Explain the ownership, custody, and confidentiality of audit working papers. (3 Marks)
c. Explain sampling and sampling risk. (3 Marks)
d. In order to reduce sampling risk appropriately, ISA 530 requires the auditor to make certain considerations in designing a sample. Explain these considerations. (2 Marks)
e. Explain the advantages and disadvantages of statistical sampling. (4 Marks)

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  • 20 Marks

AA – Nov 2020 – L2 – Q4 – Internal Audits

Differentiate between internal and external audit, list internal auditors' activities, justify the need for internal audits, and explain measures to protect auditor independence.

Range Nigeria Limited is a large private company, with a financial year end of March 31, 2020, and has been an audit client of your firm for several years. The board of directors has asked your firm if they would be able to provide internal audit services to the company.

Required:
a. Differentiate between internal and external audits. (6 Marks)
b. List the activities of internal auditors. (4 Marks)
c. Justify the need for internal audits. (4 Marks)
d. Explain the measures that can be taken to protect the independence of auditors, given that auditors are expected to be independent, including internal audit. (6 Marks)

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  • 20 Marks

AA – Nov 2020 – L2 – Q3 – Assurance Services

Explain the concept of auditor independence and its importance.

Adetutu Company Limited obtained a loan from a bank in the previous year. The bank has requested an independent review of the company’s compliance with the loan covenants, hence, the Finance Controller has contacted your partner and asked that your firm carry out this assurance engagement.

Required:
a. Discuss the elements of an assurance engagement. (10 Marks)
b. Explain the different levels of assurance. (4 Marks)
c. Explain the categories of threats to the professional ethics of an auditor. (6 Marks)

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