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 2014 – L2 – Q4 – Fraud and Error

Describe how internal and external auditors handle fraud and error risks, and evaluate specific fraud risks at Rock Holidays.

Fraud and error present risks to an entity. Both internal and external auditors are required to deal with risks in an entity. However, the responsibilities of internal and external auditors in relation to the risk of fraud and error differ.

Required:

a. Explain how the internal audit function helps an entity with the risk of fraud and error. (7 Marks)

b. Explain the responsibilities of external auditors with respect to the risk of fraud and error in an audit of financial statements. (7 Marks)

c. Rock Holidays is an independent travel agency. It does not package holidays itself. It takes commission on holidays sold to customers through its chain of high street shops. Staff are partly paid on a commission basis. Well-established tour operators run the holidays that Rock Holidays sells. The network reservations system through which holidays are booked and the computerized accounting system are both well-established systems used by many independent travel agencies.

Payments by customers, including deposits, are accepted in cash and by debit and credit cards. Rock Holidays is legally required to pay an amount of money (based on its total sales for the year) into a central fund maintained to compensate customers if the agency should cease operations.

Describe the nature of the risks arising from fraud and error to which Rock Holidays is subject. (6 Marks)

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  • 20 Marks

AA – Nov 2014 – L2 – Q3 – Planning an Audit

Outline the importance of audit planning and develop an audit strategy for Hurricane Ltd.

Hurricane Limited

You are the audit manager in charge of the audit of Hurricane Limited. The company’s year-end is 31 December, and Hurricane Limited has been a client for seven years. The company purchases and resells fittings for ships, including anchors, compasses, rudders, sails, etc. Clients vary in size from small businesses making yachts to large companies maintaining large luxury cruise ships. No manufacturing takes place in Hurricane Limited.

Information on the company’s financial performance is available as follows:

Other Information:

i. The industry in which Hurricane Limited operates has seen moderate growth of 7% over the last year.

ii. Non-current assets mainly relate to company premises for storing inventory. Ten delivery vehicles are owned with a net book value of ₦300,000.

iii. One of the directors purchased a yacht during the year.

iv. Inventory is stored in ten different locations across the country, with your firm again having offices close to seven of those locations.

v. A computerized inventory control system was introduced in August 2013.

vi. Inventory balances are now obtainable directly from the computer system. The client does not intend to count inventory at the year-end but relies instead on the computerized inventory control system.

Required:

a. ISA 300 Planning an Audit of Financial Statements, states that an auditor must plan the audit.
Explain why it is important to plan an audit. (5 Marks)

b. Using the information provided above, prepare the audit strategy for Hurricane Limited for the year ending 31 December 2014. (15 Marks)

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  • 20 Marks

AA – Nov 2014 – L2 – Q2 – Audit Evidence

Discuss factors affecting sufficiency of audit evidence and audit procedures for current liabilities in Radcliffe Co.

Radcliffe Co.

ISA 500 Audit Evidence states that the objective of the auditor is to “design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.”

Required:

a. List and explain the factors which will influence the auditors’ judgment concerning the sufficiency of audit evidence obtained. (4 Marks)

b. You are the audit senior in charge of the audit of Radcliffe Co, a company that has been trading for over 50 years. Radcliffe Co manufactures and sells tables and chairs directly to the public. The company’s year-end is 31 December. Current liabilities are shown on Radcliffe Co’s statement of financial position as follows:

Description 2013 2012
Trade payables 884,824 816,817
Accruals 56,903 51,551
Provision for legal action 60,000 –
Total 1,001,727 868,368

The provision for legal action relates to a claim from a customer who suffered an injury while assembling a chair supplied by Radcliffe Co. The directors of Radcliffe Co dispute the claim, although they are recommending an out-of-court settlement to avoid damaging publicity.

List the substantive audit procedures that you should undertake in the audit of the current liabilities of Radcliffe Co for the year ended 31 December 2013. For each procedure, explain the purpose.

Marks are allocated as follows:

  • Trade payables (9 Marks)
  • Accruals (3 Marks)
  • The provision for legal action (4 Marks)

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  • 30 Marks

AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control

Analyze audit risks and ethical considerations for a new audit engagement with a telecommunication firm.

You are the Principal Partner in charge of a four-partner firm of Chartered Accountants. Your firm has been invited to tender for the audit of Poles Apart Limited for the year ended 31 December 2013.

Poles Apart Limited was established two years ago and provides mobile phone service for individuals and businesses. The system established by the company comprises:

  1. Small portable mobile phones, which allow subscribers to contact or be contacted by any other telephone.
  2. The mobile phones can be used within the range of a local relay station that receives and sends calls to the mobile phone.
  3. The local relay stations are linked to a central computer that connects the calls to other users, often through a computer telephone network.
  4. Currently, the local relay stations cover one large city with a population of about 1,000,000. In the next year, the system will expand to all cities in Nigeria with populations over 250,000. By 2017, it will cover all motorways and cities with populations over 100,000, which will involve substantial capital expenditure and require additional borrowings.
  5. The cost of the relay stations and central computer is capitalized and amortized over six years.
  6. The mobile phones are manufactured by other companies and sold through retailers. Poles Apart Limited pays ₦2,000 to the retailer for each phone sold, which is capitalized and amortized over four years.
  7. Subscribers are invoiced monthly with a fixed line rental and a variable call charge. Charges for calls from other operators are also calculated by the company’s main computer.
  8. All shares are owned by three wealthy individuals who serve as non-executive directors. They receive a fixed allowance and do not plan further investment in the company.
  9. Establishing the network of relay stations and subscribers will result in losses for at least three years, with current borrowings at about 20% of shareholders’ funds. It is expected that the company will be highly geared by 2016.
  10. As the company will not be immediately profitable, executive directors receive a basic salary and a bonus based on the number of subscribers.
  11. The owners plan to float the company on the local Stock Exchange in 2016. The flotation will involve issuing new shares to the public and the three non-executive directors selling some of their shares.
  12. Poles Apart Limited has several large competitors, each with comprehensive coverage of over 90% of the population.

Required:

a. Consider the risks associated with the audit of Poles Apart Limited. (12 Marks)

b. Describe the ethical matters you should consider in deciding whether your audit firm should accept the audit engagement. This should include considering whether your firm has the technical and logistical ability to carry out the audit. (12 Marks)

c. Advise on whether you should accept or decline the audit assignment, giving your principal reasons for coming to this decision. (6 Marks)

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  • 20 Marks

AA – May 2021 – L2 – Q6 – Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Explanation of auditor independence threats, including fees, financial interest, contingent fees, and personal relationships.

Wakaso Nigeria Limited has experienced serious labour turnover which has affected the business of the company in the last twelve months. The most frustrating issue was the resignation of a well-tested Financial Controller of the company close to year-end. Wakaso management is noted for timely financial reporting and rendering of tax returns due to the efficiency and effectiveness of the Financial Controller who was also involved in the preparation of tax computations. The company has been finding it difficult to quickly recruit a new Financial Controller that will match the technical ability of the former accountant. The Managing Director of the company has invited the company’s external auditors to a meeting, intimating them of the plan to employ their services to complete the write-up of the books of accounts and management account pending when they employ a good chartered accountant to handle the financial operations of the company.

The company’s management, in order to ensure timely reporting, has also informed the auditors that to save time and meet cost of operations, the firm’s staff will be accommodated in a five-star hotel with a mouth-watering offer of payment in lieu of feeding as recommended by the audit partner. In addition, the previous year’s audit fee will be doubled and an additional twenty percent payment made if the management accounts and audit work could be completed within three weeks.

The partner of the firm has rejected the offers on the grounds of possible threat to independence. The Managing Director complained to you, as his brother, lamenting that accountants are not good businessmen and uncooperative.

Required:

Discuss the following:

a. Meaning of threats to independence (2 Marks)
b. In relation to independence of auditors:
i. Fees and pricing (4 Marks)
ii. Financial interest (4 Marks)
iii. Contingent fees (2 Marks)
iv. Family and personal relationship (4 Marks)
c. The reasons why the preparation of accounting records and management accounts constitutes a threat to the independence of the auditors. (4 Marks)

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  • 20 Marks

AA – May 2021 – L2 – Q5 – Audit Evidence

Explanation of sufficient and appropriate audit evidence, factors in deciding audit evidence amount, auditor actions on inadequate evidence, and audit documentation rationale.

JAK Professional Services is a member firm of James Candle International in Cayman Islands. The member firm’s practice review exercise has just been concluded. As part of the global firm, practice reviews are done yearly on selected engagement files where member firms review one another. Some of the issues included in the review notes raised on JAK Professional Services audit files are as follows:

i. Lack of sufficient and appropriate audit evidence regarding audit of cash and bank as well as inventory balances. This was partly due to the fact that no evidence existed in the file regarding physical cash and inventory count which were material;

ii. No proper documentation of confirmation replies received from banks, receivables, and solicitors;

iii. No cash flow working documentation to show how the figures on the cash flow statements in the financial statements were arrived at;

iv. Improper documentation of how expected credit loss on financial instruments in the financial statements were arrived at; and

v. Figures in the financial statements could not be traced to the respective working papers.

As an experienced auditor, some of the trainees were not impressed about the report and have approached you for clarification.

You are required to explain:

a. Meaning of ‘sufficient and appropriate audit evidence’ (5 Marks)
b. Factors to be considered when deciding amount of audit evidence needed (4 Marks)
c. What auditors should do in case of inadequate audit evidence (5 Marks)
d. Reasons for sufficient and appropriate audit documentation (6 Marks)

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  • 20 Marks

AA – May 2021 – L2 – Q4 – Internal Control Systems

Examination of methods to document internal controls, control activities, and types of IT controls.

A regulatory review was conducted on SINAPE Microfinance Bank Limited in September 2018. During the course of the review, numerous findings and recommendations were made regarding the bank’s compliance with internal and external regulations, policies, and guidelines.

It was noted in the report that processing systems, internal controls over financial accounting, and financial reporting were inadequate. The review of the bank’s processes and transaction recognition procedures was unsatisfactory. Additionally, there were instances where management overrode controls in financial reporting processes.

The regulator required the bank to appoint a reputable firm of chartered accountants to perform a review of the internal control system and make a comprehensive recommendation. Your firm has been appointed by the bank to perform the internal control reviews, and a brainstorming forum has been arranged. You have been nominated to present at the forum.

Required:

a. Describe the principal methods available to record internal control systems. (6 Marks)

b. Identify and discuss categories of control activities. (6 Marks)

c. Explain general information technology controls and application controls. (8 Marks)

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  • 20 Marks

AA – May 2021 – L2 – Q3 – Regulatory Framework for Auditing

Examination of factors for audit acceptance, stages in auditing, and roles of ICAN and FGN in audit regulation.

The partners of Integrity Professional Services have just obtained their practicing licenses from the Institute. The professional service firm has decided to engage in audit, taxation, and consulting services. The firm has secured the approval of shareholders of some companies to be their auditors.

In view of the development, interested candidates have been invited to submit applications for appointment as audit seniors in the firm. You were shortlisted for an interview:

Required:

a. Explain the factors to be considered before accepting the audit of a company. (4 Marks)

b. Describe the stages in an audit of a company. (6 Marks)

c. Discuss the different roles of the Institute of Chartered Accountants of Nigeria (ICAN) and the Federal Government of Nigeria (FGN) in the regulation of external audit. (10 Marks)

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  • 20 Marks

AA – May 2021 – L2 – Q2 – Risk Assessment and Internal Control

Analysis of substantive procedures, risk assessment purposes, and categories of audit assertions.

Your partner invited you and other colleagues to a pre-audit meeting and informed you that the audit of Why Worry Agro Chemical Company Limited will soon commence. He stated that based on experience, the internal control system is not reliable. Therefore, it will be a transaction-based audit approach involving a high level of substantive testing.

He further informed the engagement team that arrangements will be made for a brainstorming session on risk assessment and how to address the risk, using relevant audit assertions. The internal specialists on information technology and tax were invited to the meeting, and two new audit trainees were attached to you on the audit.

As the proposed audit senior personnel on the audit team:

You are required to explain:

a. Substantive audit procedures (2 Marks)

b. Purpose of risk assessment (6 Marks)

c. Categories of financial statements audit assertions (6 Marks)

d. Examples of substantive testing (6 Marks)

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  • 40 Marks

AA – May 2021 – L2 – Q1 – Regulatory Framework for Auditing

Analysis of audit risks and control objectives in a joint audit and compliance scenario.

Chukwuemeka & Co. (Chartered Accountants) has been auditors to GED Manufacturing Nigeria Plc. There have been some regulatory and compliance issues for which the company was sanctioned and paid penalties to the Financial Reporting Council of Nigeria.

At the board of directors meeting to consider the last annual report audited by the firm, some of the previous problems caused by the auditors were raised and discussed. 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 role 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, Chukwuemeka & Co., and the executive management of GED Manufacturing Nigeria Plc.

After the meeting, your firm was subsequently appointed, and the necessary formalities were properly followed. Your partner has directed that you liaise with Chukwuemeka & Co. to obtain the necessary materials for the preparation of the audit and that you review the prior year working papers to understand the issues. Your assessment of the documents obtained from the other auditor revealed the following, amongst others:

(i) The work done on the process of dispatch of goods and invoicing was not considered sufficient and appropriate.

(ii) The IT operations of the company had weak controls such that it was possible for some staff to override some of the existing controls.

Required:

a. Explain the risks inherent in the dispatch of goods and invoicing. (10 Marks)

b. Discuss the control objectives and principal controls that are relevant to the process of dispatch of goods and invoicing. (10 Marks)

c. Explain the limitations of a joint audit. (5 Marks)

d. Discuss the benefits of audit carried out by an internationally affiliated audit firm. (10 Marks)

e. Explain briefly the importance of audit working papers. (5 Marks)

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