ICAN 2023 Audit and Assurance | Mixed

Promise and Treasure are two good childhood friends. After their secondary education, Promise travelled abroad to further his education. He did his first degree and second degree over there. Treasure had his own education in Nigeria, he attended a university in the Southwest. He came out with a second class lower degree. During his sojourn abroad, Promise met with some foreigners to join hands together to set up a company in Nigeria. Promise invited his childhood friend to join them in the business. They formed a company called Promise and Treasure Company Nigeria Limited. They are into importation of steel products, with the intention of setting up a factory to produce steel products in future. The first year accounts were made up to December 31, 2020. Your firm has been appointed as auditors to the company. At the completion of the audit, you requested for a written representation from the management. This request was strange to the Managing Director of Promise and Treasure Company Nigeria Limited, because according to him, they have given your firm all necessary information and documents needed to carry out the audit.

Your audit firm was recently appointed as the external auditors of a fast growing fast-foods 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.

The following issues emanated from the pre-audit meeting of FIFO Limited: i. The operating environment has been affected by the COVID-19 pandemic. Management has tried to react to it by creating a number of policy initiatives which have been embarked upon to stem the negative impact of the pandemic on the company. As a direct consequence of the slowdown in business, there was some contraction in Q2 2020 financial performance which affected the half year results and led to a revision of the previously approved 2020 budget. The effects of the pandemic on the economy includes a shrink in Gross Domestic Product, reduced yields on investment and government securities, growth in foreign exchange rates and an upward trend in inflation. This has led the company to make loss in the year. The significant drop reflects the negative impacts of the disruption caused by COVID-19 pandemic; ii. There is the likelihood of increase in account receivable balance due to inability of customers to make sales and repay balances; iii. The company focused on ensuring that there was sufficient liquidity to meet daily operations; iv. With the loss position, the engagement team has to look at appropriate benchmarks for materiality. Profit before tax from continuing operations is often used for profit-oriented entities. When profit before tax from continuing operations is volatile, other benchmarks may be more appropriate, such as gross profit or total revenues; v. The firm’s software has formula for calculating materiality, after it has been based on the selection of an appropriate benchmark, The fundamental requirement is for the auditor to exercise professional judgement in assessing materiality; vi. Members of the engagement team should declare their independence and client’s information should be kept confidential; vii. To meet the agreed timelines, all preliminary engagement activities should be completed as scheduled and submitted to the Partner for prompt review; and viii. Preliminary analytical review is a key procedure in helping to assess risk in the planning of an audit. It helps to identify the existence of unusual transactions or events and amounts; ratios and trends that might indicate matters that have audit implications. This may assist the auditor in identifying risks of material misstatements due to fraud. Hence, it should be handled with care. At the end of the pre-audit meeting, an Audit Associate has requested for some explanations from you.

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 than 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 huge profit even with unfavourable 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; and 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 penalised for that. A concerned staff of the company asks you of the implications of the issues raised by the Financial Reporting Council.

The Association of Builders is conducting a selection process for an external audit firm. Your firm has been invited to participate by submitting a proposal to render external audit services. Terms of reference: The terms of reference are intended to provide a scope of work and deliverables for external audit services for an initial period of three financial years, covering March 31, 2021 to March 31, 2023. Further provision for an extension of the initial period by two years, will be subject to approval by the Council of the Association. Background: The Association of Builders is a statutory body, established in 2014 and registered with the Corporate Affairs Commission. It is committed to serving and protecting the public and providing guidance to registered members in the profession. The objective of the association is to regulate the building profession in the country in all aspects pertaining to registration, education and training, professional conduct and ethical behaviour, ensuring continuing professional development, and fostering compliance with building standards. Objectives: The objectives of the audit are that the auditors would conduct the audit assignment as follows: The auditors shall express an independent opinion as to whether the Financial statements give a true and fair view of the financial position, financial performance and cash flows of the association in accordance with the International Financial Reporting Standards (IFRS) and relevant enabling laws; The audit shall be carried out in accordance with the International Standards on Auditing (ISAs), as issued by the International Federation of Accountants (IFAC); and The auditors in their duties, shall comply with all relevant enabling laws including the Financial Reporting Council Act. Scope of work: The appointed service provider will be required to: Perform an audit of annual financial statements in accordance with International Financial Reporting Standards (IFRS) and express an audit opinion; Perform audits in compliance with International Standards on Auditing (ISAs); Work in conjunction with Internal Auditors (where possible) in the provision of assurance to the Council on the effectiveness of the internal control systems; Communicate audit findings to management and ensure they are fully aware of the implications to operations of the association; Review the financial information in the annual report prior to publishing; and Attend and provide input in the Audit and Risk Committee meetings, where necessary. Mandatory requirements: The service provider should meet the following competency requirements: The proposed External Auditor must be registered with a recognised Accounting body and Financial Reporting Council; Must have experience and a comprehensive understanding of the construction industry; and The audit firm must have sufficient in-house capacity to perform external audit for the association. Contents of the proposal: The proposal must include the following: Firm profile and relevant experience; Relevant information about the firm to assess her competence; Proposed methodology and approach to be used in keeping with the scope of works; Description of similar work, including fee per project undertaken in the past 3 years; and Curriculum vitae of proposed project team, stating qualification and experience. Evaluation process: Submission after the deadline will attract disqualification. Your firm has included you as a member of the team to work on the audit proposal to be submitted soonest.

At one of the seminars you attended on legal and regulatory frameworks of financial reporting, it was stated that one of the duties of Financial Reporting Council of Nigeria (FRC) is to provide legal and regulatory frameworks for minimum practice guideline for auditors in Nigeria. To do this, they (FRC) are supposed to ensure that all activities of Registered Auditors, other Assurance Providers and Audit Committee members are regulated, with a view to sustaining best ethical practices capable of promoting quality audit services. It is part of the obligations of the Financial Reporting Council of Nigeria to conduct practice review of registered professionals. You learnt from the seminar that, for the Financial Reporting Council of Nigeria to do this effectively, the Audit Regulation requires external auditors to create audit file for each of the statutory audits carried out and ensure the retention of the working papers and other materials that support the auditor's conclusions in any audit report for a minimum period of seven years. A classmate from the University, who now works in the bank and attended the seminar with you, has asked for further explanation on what is meant by ‘working paper’ and why it is of great importance that a regulator has to be interested in the review when there are other important duties to be carried out.

Indorise Limited has been in business for about 20 years. The company has divisional offices in three locations. The accounting records are kept mainly at the head office, with back up in an adjacent building to the office. The office is not far from a petrol station. An unfortunate incident happened in a certain year, the petrol station got burnt and most offices in the location were engulfed in fire. The company lost most of the properties in the building, including important accounting records. The company has to make another arrangement for an office location on another street. Fortunately, the end of year audit has just been concluded, but most of the accounting records have not been backed up. The tax office, customers and suppliers are disputing balances and some are even putting up claim for litigation since they know the company may not be able to show proof of the balances against them. A decision was made to approach the external auditors of the company if they can help to retrieve some accounting records from the schedules and other information earlier made available to them. The auditors were happy to assist and some of the problems were resolved. The Chief Accountant expressed his appreciation to the firm.