ICAN 2022 Advanced Audit and Assurance | Mixed

A firm of Chartered Accountants has 25 partners and 100 audit staff. The firm provides a range of audit, assurance, tax and advisory/consultancy services. The firm has offices around the country and clients ranging from sole traders to limited liability companies. The quality control partner has recently resigned. He has not yet been replaced as the Board of Partners of the firm has not been able to find a suitable replacement. Before his departure, the quality control partner was in the process of implementing a system of ethical compliance for assurance staff. Based on the foregoing, staff would be required to confirm in writing their compliance with the Code of Ethics, hence, implementation of this system is incomplete. Oshodi Plc is one of the firm's largest clients for which the firm provides audit, tax and other advisory services. A new engagement partner has been assigned to the audit, as the previous partner in charge was the one who resigned. The fee for the audit work and other services has been set at the same level as the previous year in spite of the fact that additional work will need to be performed because Oshodi Plc has introduced a new computerised system. The starting date of the audit has been delayed due to problems with the new system. The management of Oshodi Plc was very insistent that the fee should not be increased as a result of this.

Pegrace Nigeria Limited (PNL), your audit client, is a national hotel group with substantial cash resources. Its accounting functions are well managed and the group’s accounting policies are rigorously applied. The company's financial year end is December 31. The company has been seeking to acquire a construction company for some time in order to bring in-house the building and refurbishment of hotels and related leisure facilities, like swimming pools, volley ball court and restaurants. The management has recently identified Robin Construction Company Limited (RCCL), as a potential target and has urgently requested that you undertake a limited due diligence review. Further to the preliminary talks between the management of RCCL and PNL, you were provided with the following brief on Robin Construction Company Limited: (i) The Chief Executive, Managing Director and Finance Director are all family members and major shareholders. The company has an established reputation for quality constructions; (ii) Due to a recession in the building business, the company has been operating at its overdraft limit for the last 18 months and has been close to breaching debt obligation on several occasions; (iii) Robin's accounting policies are generally less prudent than those of Pegrace (assets are depreciated over longer estimated useful lives); (iv) Contract revenue is recognised on the percentage of completion method, measured by reference to costs incurred to date. Provisions are made for loss-making contracts; (v) The company's management team includes a qualified and experienced quantity surveyor, whose main responsibilities are: Supervising quarterly physical counts at major construction sites; Comparing costs to date against quarterly rolling budgets; and Determining profits or losses, by contract, at each financial year end; and (vi) Labour force is provided under subcontracts. During construction, the regulatory body visited the site and discovered non compliance with site health and safety regulations. In February 2021, Robin received a claim that a site on which it built a housing development in Banana Estate was not properly drained and is now sinking. Residents are demanding rectification and asking for payment or damages. Robin has referred the matter to its legal counsel and denied all liability, as the site preparation was subcontracted to Sahara Services Company Limited. No provisions have been made in respect of the claims, nor has any disclosures been made. The auditor's report on Robin's financial statements for the year ended December 31, 2020 was signed, without modification, in March 2021.

Tijara Nigeria Limited has a credit facility of N6 million with Godiya Bank. The facility was due to expire on December 31, 2021. The overdraft in the recently audited statement of financial position as at September 30, 2021 is N5.5 million. The directors of Tijara have started negotiations with their bankers for a renewal of the facility and to increase the amount to N9 million. To support this request, the bank has asked Tijara to provide a business plan for the coming twelve months consisting of a cash flow forecast supported by a forecast income statement and statement of financial position. The management of Tijara has produced a cash flow forecast for the period October 1, 2021 to September 30, 2022 and, at the request of the bank, has asked an auditor to examine and report on it. The Audit Manager, who has recently completed Tijara audit, has been asked to make a preliminary examination of the cash flow forecast and supporting materials. The manager has made the following observations: (i) The cash flows from sales are based on the assumption of an overall increase in sales of 24% compared to the previous financial year. Analysis shows that this is based on an increase in selling price of 5% and an increase in the volume of sales of 18%. Just over a quarter of all Tijara sales are made to foreign customers; (ii) The cost of sales in the recently audited comprehensive income to September 30, 2021 was 80% of sales revenue, giving a gross profit of 20%. In the forecast income statement for the year to September 30, 2022 the cost of sales has fallen to 72%, giving a gross profit of 28%. Manufacturing costs are made up of equal proportion of materials, labour and production overheads; (iii) The trade receivables collection period used in the cash flow forecast to September 30, 2022 is 61 days. In the year to September 30, 2021, this period averaged 93 days. Management has stated that it is its intention to inform all customers of a new standard 60-day credit period. In addition, an early settlement discount of 1% will apply to customers who settle their accounts within 30 days of the statement. Conversely, the credit period for trade payables has been extended from an average of 45 days in the current year to 90 days in the forecast; and (iv) The cash flow forecast showed that the maximum credit required during the period would rise to nearly N9 million in August 2022.

The idea to incorporate Peters & Shamsudeen Haulages Limited was mooted in London and it was incorporated on the return of Alhaji Shamsudeen to Nigeria. He met Peters during his stay in the UK. They had good relationship which started in a coffee shop. As they met regularly in this shop, what to do on Alhaji Shamsudeen’s return to Nigeria became the subject of discussion. Based on their experiences, the idea of Peters & Shamsudeen Haulages Limited was birthed. Alhaji Shamsudeen subsequently returned to Nigeria, incorporated the company, obtained the appropriate expatriate quota and Mr. Peters came in and started running the company. On commencement, Sejumade Uzoma & Co was appointed the company’s external auditors. Whilst Mr. Peters was around, there was a good working relationship between the company and the audit firm. After about nine years, Mr. Peters returned to UK leaving the company in the hands of Alhaji Shamsudeen. Subsequently, Sejumade Uzoma & Co started receiving complaints from Alhaji Shamsudeen and his key accounting staff. These complaints were rife even before the ninth month of the current year that Sejumade Uzoma & Co. decided not to continue with the engagement. The audit fee for the previous year had about thirty percent outstanding at this stage. This was the position when Alhaji Shamsudeen approached your partner at Musa, Edewo & Co. (Chartered Accountants). Their discussion was fruitful for your firm, hence it was agreed by the partners that full professional procedures would be applied as normal. Part of the information available on interaction is that the year is almost ending and there was uncertainty about the firm that will do the audit before the engagement of your firm. You have the responsibility of assisting your partner in ensuring that proper documentations would be done without any compromise.

The Companies and Allied Matters Act, 2020 has classifications and responsibilities for various types of companies incorporated under it. A particular class that has received more attention in recent times and in the Act is small companies. Your audit team has been approached by a few of these small companies for guidance on the issue and your team has been assigned this responsibility. Part of the concerns of your firm is whether or not those small companies merit the concerns of regulatory authorities and the accounting firms that have to be responsible for their audit. Your team has a number of young assistants who are yet to understand the differences and therefore need enlightenment on this as part of the training programmes.

The accountancy profession earns confidence and public respect partly as a result of its self regulatory mechanism, application of legal principles and professional standards. This issue became a subject of discussion when a group of business owners who just incorporated their companies were deliberating on who should carry out an audit and what are the guiding principles for determining the performance of such responsibility.

BARCHI International Limited is a company with corporate registrations in both United Kingdom (U.K.) and Nigeria. The Chairman of the company is based in Nigeria and from time to time, travels to the U. K. to oversee the office there and order for the purchase of some of the articles for sale. To ensure steady supply of the products, some of the products are also ordered from China. The purchases from U.K. are charged to the Nigerian entity in pound sterling, while the purchases from China are charged to the Nigerian company in American dollars. In September, 2020 the Chairman embarked on a trip to Dubai for two weeks where he spent part of his annual holiday. During this period, he hosted a couple of friends with the costs that were paid for by the company as the costs were above his approved annual holiday expenses. He subsequently traveled to UK and was quarantined for two weeks due to COVID-19 before moving to the usual business lodge that he uses. Despite using that period to oversee the UK company, all the costs incurred were borne by the Nigerian company. The products bought in UK and sent to Nigeria were charged at cost plus 25%, while the Nigerian company was responsible for insurance and freight. The goods purchased from China were forwarded to Nigeria at cost of landing in Nigeria plus 30%. The China-made products are less expensive and therefore give better profits despite the cost of the long distance freight. Money was transferred to the Chairman’s account for the company’s purchases in UK, the purchases made in China and the chairman’s personal expenses. An agent in China bought the goods which were paid for by the Chairman. The UK company staff handled the documentation of all the transactions of the Chairman while there and transferred them to Nigeria subject to the approval of the Chairman. Separate records were not maintained for the Chairman’s expenses in the UK. However, his comparison of the results of the two units showed that for the immediate past financial year, the Nigerian company had performed sub-optimally and way below the targeted profit in relation to the UK company. The Chairman is very unhappy about this as he expects that his personal visit to UK would reduce the purchasing and associated costs. It is usual for the Chairman to account for the cost of purchases based on his personal expenses attributable to each purchase together with the actual cost of purchases. The UK component is elated about this costing method which favours it and would wish that this arrangement continues. The two units prepare separate financial statements which are audited by separate accounting firms before the two financial statements are consolidated in Nigeria for the Chairman’s evaluation.