Subject: AUDIT & ASSURANCE

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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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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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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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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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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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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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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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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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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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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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AA – May 2023 – L2 – SA – Q4 – Ethical Issues in Auditing

Identify threats to auditor independence, assess circumstances affecting independence, and suggest safeguards.

Cringe Professional Services has been auditing Kogberegbe Limited for about 20 years. Being a limited liability company, no regulation imposed restriction on the tenure of the auditors.

The firm also provides taxation and valuation services for the company. The company has just adopted International Financial Reporting Standards and has employed the services of Cringe Professional Services for conversion services from local GAAP. The firm experienced a high staff turnover in the year and has no choice but to include the daughter of the Managing Director of the company as part of the engagement team, although as a support staff.

Management has indicated in confidence that the audit fee for the year will not be increased, except the firm can guarantee them that no adverse management letter will be issued and no loss will be made by the company as they are planning to go to the capital market to raise capital for expansion. With poor management letter and loss position, they believe that it will be difficult to achieve this.

At the end of the audit exercise, the company made a huge profit even with unfavorable economic climate, thanks to challenges associated with COVID-19. There was public outcry because it was believed that the financial statements of the company were misstated, and the auditor was accused of negligence. This necessitated the Financial Reporting Council to conduct an investigation on the company. It was found that the company restructured its debt portfolio, which was denominated in foreign currency with attendant foreign exchange risks to Naira.

The company restructured a huge intercompany loan to a 7-year principal payment holiday with principal repayment commencing September 30, 2025. The interest on the loan for the period was not brought into the books of account.

The company accrued for a NGN70.60m benefit from a transaction in 2019 from operating fees. This has been treated as income in the financial statements.

There were identified defaults by the company in relation to the payment of interests and principal on its outstanding loans and borrowings.

There were adverse ratios in the company’s financial performance ratios in the year due to interest on borrowings from financial institutions and related parties.

A revisit of the operating performance for the year revealed the following:

  • The entity made an operating loss of N1.22 billion.
  • It generated negative operating cashflows of N2.15 billion.
  • There was positive working capital as the current assets exceeded the current liabilities by N1.2 billion in the year.
  • The net assets position of the company was in the negative as the total liabilities exceeded the total assets by N9.8 billion.

The Financial Reporting Council concluded that there were threats to the auditors’ independence, hence the professional firm was penalized for that.

A concerned staff of the company asks you of the implications of the issues raised by the Financial Reporting Council.

Required:

a. Identify and explain the threats to independence of the auditor in the above scenario. (7 Marks)

b. Discuss circumstances that could give rise to threats to independence. (7 Marks)

c. Suggest appropriate safeguards which could be put in place to mitigate the identified threats. (6 Marks)

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AA – May 2023 – L2 – SA – Q3 – Planning an Audit

Key preliminary audit activities, confidentiality characteristics, and stages of analytical review.

The following issues emanated from the pre-audit meeting of FIFO Limited:

  1. The operating environment has been affected by the COVID-19 pandemic. Management has responded with policy initiatives to stem negative impacts, resulting in financial contractions in Q2 2020 that affected half-year results and necessitated budget revisions. Effects included GDP shrinkage, lower investment yields, foreign exchange rate growth, and inflation.
  2. Increased accounts receivable due to customers’ repayment issues.
  3. Focus on liquidity to support daily operations.
  4. Volatile profit before tax, requiring alternative materiality benchmarks such as gross profit or total revenue.
  5. Firm’s software calculates materiality based on selected benchmarks, with auditor judgment essential in assessing materiality.
  6. Engagement team declaration of independence and confidentiality of client information.
  7. Completion of preliminary engagement activities on schedule for timely review.
  8. Use of preliminary analytical review as a risk assessment tool to identify unusual transactions, events, and trends that may indicate audit-relevant matters, including fraud risks. This should be handled with care.

Required:

a. State the preliminary activities to be undertaken before the commencement of the audit. (6 Marks)

b. State the characteristics of confidentiality in auditing. (7 Marks)

c. Explain briefly the purposes of analytical review. (4 Marks)

d. State at what stage of the audit an analytical review should be performed. (3 Marks)

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AA – May 2023 – L2 – SA – Q2 – The Role and Responsibilities of Auditors

Outline audit report matters per CAMA, auditor’s rights, and management's financial responsibilities.

Your audit firm was recently appointed as the external auditors of a fast-growing fast-food outlet, Foods Only Limited. The directors are not clear as to their responsibilities and the nature of their relationship with the external auditors. The engagement partner has instructed you to visit the client and explain to the directors some fundamental aspects of the appointment.

Required:

a. Explain the matters to be stated in an audit report according to Companies and Allied Matters Act (CAMA) 2020. (5 Marks)

b. State the auditor’s rights under Companies and Allied Matters Act (CAMA). (5 Marks)

c. State the duties of external auditors under Companies and Allied Matters Act (CAMA). (5 Marks)

d. What are the responsibilities of management and those charged with governance in relation to the accounting function of the company? (5 Marks)

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AA – May 2023 – L2 – SA – Q1 – Audit Evidence

Explaining objectives and steps in obtaining written representation and handling contradictions in audit evidence.

Promise and Treasure are two good childhood friends. After their secondary education, Promise traveled abroad to further his education and obtained his degrees there. Treasure attended a university in Nigeria and graduated with a second-class lower degree. During his time abroad, Promise met some foreign associates and decided to start a company in Nigeria with Treasure.

The company, named Promise and Treasure Company Nigeria Limited, specializes in importing steel products with future plans to set up a local factory. The first-year accounts were prepared as of December 31, 2020. Your firm has been appointed as auditors for the company. Upon completing the audit, you requested a written representation from management. The Managing Director found this request unusual, as he believed all necessary information and documents had already been provided.

Required:

a. Explain to the Managing Director the objectives of the auditor in obtaining a written representation as per ISA 580. (4 Marks)

b. State the steps the auditor should take if a representation by management is contradicted by other audit evidence. (6 Marks)

c. State THREE matters that are required of management in the letter of representation in line with ISA 580, requiring specific representation from management. (3 Marks)

d. Highlight SEVEN aspects of the form and contents of a letter of representation. (14 Marks)

e. State the steps the auditor should take if management refuses to provide the requested written representation. (3 Marks)

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AA – May 2024 – L2 – SA – Q7 – Fraud and Error

This question requires understanding of Key Audit Matters (KAMs) and their implications for Abati Quarries Limited's financial reporting.

Abati Quarries Limited was registered with the Corporate Affairs Commission in 2017 and commenced operations in 2019. The beginning was rough, as the property, plant, and equipment costs were beyond the initial projections, and the company had to make do with fairly used equipment, which kept breaking down along the line.

Products were meant for supply to its parent company, Abati Estates, which is into real estate. Abati Quarries Limited hardly had substantial finished goods (granites) as closing inventory. The Audit Manager later insisted that boulder rocks blasted at the site should be regarded as unfinished inventory or work-in-progress.

In addition, the performance of Abati Quarries Limited was at variance with the performance of competitors in the industry, as the company had been returning losses from inception. The Audit Manager then required that the audit team should intimate the General Manager of the company of the decision to determine the cost of the boulder rocks and include it in the financial statements as closing work-in-progress. The General Manager, however, disagreed.

The Audit Manager therefore instructed you, the Audit Senior, to draft appropriate paragraph(s) on Key Audit Matters (KAMs), suitable for inclusion in the Independent Auditor’s report, to bring this matter to the attention of the company’s shareholders.

Required:

a. Explain “Key Audit Matters” (KAMs) in relation to the Audit Report. (2 Marks)

b. Explain TWO types of audit in which the auditor is required to communicate Key Audit Matters, in accordance with ISA 701. (3 Marks)

c. Draft the “Key Audit Matters” section for inclusion in the auditor’s report of Abati Quarries Limited to capture the “boulders” issue. (6 Marks)

d. Highlight TWO important matters the auditor will consider before determining if a matter is a Key Audit Matter. (4 Marks)

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AA – May 2024 – L2 – SA – Q6 – Assurance Services

This question focuses on assurance engagements, explaining the differences between reasonable and limited assurance, and details the elements of assurance engagements as performed by a practitioner.

Each assurance engagement is classified on two dimensions: It is either a reasonable assurance engagement or a limited assurance engagement, and either it is an attestation engagement or a direct engagement.

Required:

a. Specify the two channels through which assurance can be provided. (2 Marks)

b. Differentiate reasonable assurance from limited assurance. (3 Marks)

c. Explain the five elements of an assurance engagement performed by a practitioner. (10 Marks)

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AA – May 2024 – L2 – SA – Q5 – Introduction to Auditing

This question tests understanding of the objectives and responsibilities of an independent auditor as specified in ISA 200 and explores the roles of auditing standards in the accounting profession.

The International Standards on Auditing 200 (ISA 200) made some important pronouncements on the Independent Auditor.

Required:

a. Explain two objectives of the Independent Auditor as specified in ISA 200. (4 Marks)

b. Explain four tasks ISA 200 requires the Independent Auditor to perform. (8 Marks)

c. Explain the roles of auditing standards in the accounting profession. (3 Marks)

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AA – May 2024 – L2 – SA – Q4 – The Role and Responsibilities of Auditors

This question explores the public interest, ethical concerns, and auditor responsibilities, particularly in the case of reduced maintenance costs at MetroPower Limited.

MetroPower Limited, a major public utility company, was entrusted with providing electricity to millions of residents and businesses. Mr. Mark, the Lead Technician at MetroPower for many years, is responsible for maintaining the electrical grid to ensure reliable electricity supply to the city. MetroPower’s financial statements were subjected to annual audits.

When Mrs. Jennifer assumed her role as the department’s supervisor, she implemented cost-cutting measures aimed at reducing the budget allocated for routine maintenance. This decision raised significant ethical concerns, as Mr. Mark believed it would compromise the safety and reliability of the electrical grid. He knew that such actions could lead to power outages and electrical hazards.

Mr. Mark found himself in a dilemma, torn between his responsibility to make electricity available and the potential consequences of opposing his new supervisor’s cost-cutting measures. Mr. Mark documented his concerns, maintaining detailed records of previous maintenance schedules and their impact on the grid’s reliability.

The auditors came across the evidence of reduced costs of maintenance and inspections in MetroPower.

Required:

a. Describe public interest, using MetroPower as an example. (2 Marks)

b. Identify five matters with which public interest can be associated. (5 Marks)

c. In setting codes of ethics, it is stated that principle-based ethics are better than rule-based ethics. Justify this assertion. (5 Marks)

d. Explain why the concept of due care or reasonable care is important in a contract for the provision of services. (4 Marks)

e. State two likely implications of the auditors’ failing to act on the information they got in relation to reduced costs of maintenance and inspections at MetroPower. (4 Marks)

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AA – Nov 2015 – L2 – Q7 – Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Discussing ethical considerations in providing non-audit services to an audit client and fundamental principles of professional ethics.

Ade, Bala, Chris and Co. are the auditors to Victory Ventures Limited, a chemical manufacturing company. The firm has been carrying out statutory audits for this client for several years. Recently, the company asked the firm to carry out tax planning and compliance advisory services and also perform financial reporting valuation services for the company.

Required:
a. Discuss ethical issues the firm will need to take into consideration in accepting to carry out the new assignments for the client. (5 Marks)
b. Describe the FIVE fundamental ethical principles according to ICAN Professional Code of Conduct and Guide for Members and IFAC Code of Ethics. (5 Marks)
c. Describe the differences between rules-based and principles-based approaches to professional ethics. (5 Marks)

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AA – May 2024 – L2 – SA – Q3 – Audit evidence

This question tests knowledge on reasons for obtaining letters of representation from clients' management, steps to take if representations are contradicted, and drafting a letter of representation.

You are the Audit Senior-in-charge of the audit of Edinburg Nigeria Limited. The management of the company made some representations to you, which include:

  • Inventory worth ₦15 million in its only branch in Niger Republic, which you couldn’t visit because of the ongoing civil unrest in that country;
  • A donation of ₦500,000 was made to a motherless babies home by the Chairman but it was not receipted; and
  • The chairman received medical treatment amounting to ₦600,000 during his official visit to Germany to negotiate with equipment vendors, and he did not come back with any documentary evidence.

You have reported these matters to the partner of your firm, Olumisi Oregun & Co.

Required:

a. Explain two reasons for obtaining letters of representation from clients’ management. (4 Marks)

b. Explain three steps you will take if a representation by management is contradicted by other audit evidence. (6 Marks)

c. Draft a letter of representation, which the management of Edinburg Nigeria Limited will present to your firm. (10 Marks)

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