ICAN 2023 Advanced Audit and Assurance | Mixed

Romeo and Juliet Plc is an indigenous company incorporated on March 5, 2012. The entity operates in the oil sector of the economy which has experienced severe income decline over the past years. The global oil prices hit a record low of about $28 per barrel in 2019 and 2020, hence, this has further plunged the company and the industry into downward slide, in income generation. The company is also affected by foreign exchange difficulties faced by most companies in the country resulting from the increased regulation of foreign exchange. Regular cases of oil theft, pipeline vandalism and insecurity have also affected the operations of major international oil companies which are the entity's major customers. As a result of the above, the company recorded the following in her books of account: i) Financial losses - the company has made consistent losses from the financial year ended December 31, 2017 to date; ii) Current liability position - the Company’s current liabilities exceeded its current assets; and iii) Negative net operating cash position - the Company has maintained a negative net operating cash position from December 31, 2017 to date. Furthermore, the company’s performance has worsened as a result of decrease in sales and increase in expenses. The largest proportion of the current liabilities is the intercompany borrowings, which accounted for 62% (2020 - 45%) of the total current liability balance. The borrowings stood at N1.5billion, N1.6billion and N2billion for the financial years ended 31 December, 2019, 2020 and 2021 respectively. The finance costs in relation to the borrowings stood at N230million in the year ended December 31, 2021 (2020- N214 million). The company has currently defaulted on a number of its contractual obligations with its directors and there was no Directors’ remuneration in the current year due to its continuous loss making position. At the pre-audit meeting with management of Romeo and Juliet Plc, your firm (the auditors) were informed that, in the year, the company was involved in a business combination with another oil company and to pay for the cost of acquisition, an additional intercompany loan was obtained because of the poor financial position of the company. In addition, the company’s major investment in an associated company was disposed. The business acquisition proposal has all necessary regulatory approvals. It was approved at the meeting of the directors, annual general meeting of the company in the previous year and disclosed in the company’s prior year financial statements as business matters. After the meeting with management, you have started the preparation for the year-end audit and in compliance with regulatory requirements and the auditing standards, a key Audit Matter should be inserted on the opinion page.

There is an indication of increasing application of technology in the business and commercial world. A lot of activities are now carried out on a real time basis and payment systems are gradually reducing the use of cheques. Your new audit client is one of the companies that has recently enhanced their business settings with respect to receipts and payments. The previous auditor has little depth in information and communication technology despite the growing trend. The client’s management also thinks that its performance in the past has been inadequately reported due to the complicity of the key accounting staff and inadequacies of the previous auditor. The client is therefore considering its options in the circumstances.

Messrs PK Industries Limited was incorporated and operates its business in Nigeria. The company has existed over the years. During most of this period, it imported some major components from China. Imports usually take some time to arrive after necessary forms have been completed and submitted to the bank. Two of the directors have two other companies that supply fuel and other local resources needed by the company. The company’s directors are aware of this but prefer to do their business rather than patronise other suppliers. In the last few years, the turnover of the company fluctuated between ₦500 million and ₦1billion. The two other companies owned by the two directors are currently trading on loans granted by the company. Following what was considered to be an increasing harsh economic environment and high cost of power supply, the company registered a subsidiary company with a production outfit in Ghana while still maintaining its head office operations in Nigeria. Part of the raw materials needed in Ghana are procured in Nigeria and transported to Ghana through hired trailers. This process is being used until a suitable supplier is found in Ghana. The company decided to hold the next Annual General Meeting (AGM) in the company’s premises in Ghana with all the directors/shareholders traveling to Ghana on a direct flight from Abuja to Accra at the company’s expense. It was decided that this was an opportunity to evaluate the Ghanaian environment for further business decisions. The audit of the Nigerian company and its Ghanaian company were done by different firms.

Piton Drilling and Engineering Services Limited was established in 2001 by Andrew and Cole. The company provides consultancy, engineering and training services in borehole drilling, power generation, environmental engineering services under drilling, training, and laboratories divisions. The largest division is drilling of which contributes income of more than 60%, while training and laboratory services contribute only over 30% of total income. Piton Drilling & Engineering Services Limited saw opportunity in combining business operation with Valemu Limited, a small engineering company with three members. Valemu Limited has strong presence in the riverine areas and commenced operations about two years ago. The issue of the business combination was brought to the attention of Peter who is the Engagement Partner for the audit of Piton Drilling and Engineering Services Limited. He suggested that Andrew and Cole should perform due diligence on the operations of Valemu Limited, regardless of the fact that they are in similar business operations. He explained that the exercise will be necessary to reduce risk of failure of the merged entity, as both quantitative and qualitative information will be available about the operations of the entity before going on to decide on signing the agreement. It was explained that the due diligence should cover financial viability and long-term sustainability of the merged entity. He made reference to a situation where a large department store was forced to wind down its operations after business combination when it was discovered that the entity merged with was highly indebted to the bank and most of the assets have been pledged as collateral for loans with banks. Some staff of your firm have already been assigned to the audit engagement and you told them that the audit will be delayed because a due diligence is being carried out on the operations of the entity Piton Drilling and Engineering Services Limited wants to merge with. One of the inquisitive staff, who is tired of staying in the office, came up to you with a lot of questions among which is why the audit and the due diligence review could not serve the same purpose.

Vigo Microfinance Bank Limited was incorporated on July 1, 2014, as a public limited company under the Companies and Allied Matters Act. The bank obtained Microfinance banking licence from the Central Bank on August 5, 2015 to operate on a nationwide basis and commenced business operation on September 5, 2015. The bank’s principal business is to provide microfinance banking and related services to the poor and underserved segment of the society with a view to alleviating poverty under the Microfinance Institutions Ordinance. In 2019, the bank decided to convert to a commercial bank and commenced business operation on August 10, 2019 after final approval from the regulator. As at December 31, 2019, the bank had five branches (2016:24) at the Federal Capital and other four major geo-political zones in the country. With the new commercial banking licence, the bank employed the services of F.K. George Professional Services to audit its financial statements. As part of the activities to be carried out on the initial engagement, the external auditors began a review of the books of account of the predecessor auditor and the following issues emanated, among others: i. Some property, plant and equipment in the books of account and in prior year financial statements had negative net carrying amounts; ii. The basis for impairment included in prior year financial statements regarding loans and advances could not be established from the working papers; iii. There was a material amount of pre-operating expenses that was included in receivables schedules of which could not be satisfactorily provided; iv. The audit work performed on interest income in the prior year was not supported by sufficient appropriate audit evidence; v. Details of outstanding tax liabilities could not be provided as the amount in the financial statements was the figure supplied to the external auditor by the tax consultant. It was discovered that the figures were not subjected to review by the former external auditor; vi. There was no satisfactory explanation on nil balances included in prior year financial statements on contingent liabilities as there were no evidence that request for confirmation were made from all solicitors of the bank; and vii. Details of contraventions included in the examiner’s report were not considered for disclosures in the financial statements. The Central Bank is requesting for the financial statements of the bank and management is worried that there is a delay in the release of the financial statements by the new external auditors despite several notifications and reminders. The Chief Finance Officer of the bank complained to you as a member of the engagement team about the delay in concluding the audit. He could not see the reason why your firm should be concerned about prior period financial statements issues when your firm was not the one that expressed opinion on it. Added to this, the responsibility for the financial statements rest on the board of directors.

The audit of one of your firm’s new clients is ongoing. Review and compliance procedures were being carried out by the audit team. There were unsatisfactory issues with some of the data generated for use in the testing process. These issues were escalated and there was therefore the need to bring in the firm’s IT specialists for confirmation purposes. With your competence in this area, you were asked to provide the necessary guide and assurance needed by the audit team.

At the annual general meeting of Aggressive Bank Limited for the year 2020 the shareholders complained about increasing cases of customers complaints about fraud. It was believed that if drastic actions are not taken to reduce this, it could lead to brand damage and reputational issues. In performing their oversight functions, the audit committee of the bank commissioned the internal audit unit to identify issues of fraud and likely causes. From the internal audit report, the following issues were noted: i. Due to poor information security system, some unscrupulous individuals hacked into customers current/savings deposits accounts and made unauthorised transfers to their bank accounts; ii. There were cases of forged cheques with forged signatures, cards, and withdrawal slips which were used to withdraw money from bank accounts. These acts were perpetrated through collusion with staff of the bank; iii. Cases of opening and operating fictitious bank accounts where illegal transfers were made. The problem is compounded with incomplete know your customer (KYC) activities carried out by the bank’s personnel; iv. Granting of loans to fictitious borrowers through fictitious accounts opened in branches of the bank; v. Some junior staff making claims of overtime for hours not worked; vi. Suppression of cash/cheques that were supposed to reflect on customers’ deposits and loan repayments. The cash/cheques were diverted to the fictitious accounts in operation in the bank; and vii. Cases of alteration of programmes, or application packages and gaining access to unauthorised domains or accounts to give credit to accounts for which the funds were not intended. The following were identified as likely causes: Weak accounting and internal control system; Negligence and poor supervision of subordinates; Inadequate follow up or disregard for “know your customers (KYC)” rule; Poor information technology and data base management; Poor salaries and conditions of service; Failure to perform regular end of day call-over; Non implementation of sanctions on employees who failed to comply with standard operating procedures; Notwithstanding details of fraud and forgeries to regulators as required due to fear of negative publicity or image; Lack of experience and inadequate training; and Inadequate infrastructure in the bank as manifested in constant power failure, congested office space and non-completion of expected daily task before closing. The audit committee having gone through this internal audit report, decided to act swiftly by mandating the management to engage a forensic expert to report forensic report from on this. Your firm has been appointed to submit a report on this issue in the next four weeks.