Ican 2025 Advanced Audit And Assurance Question 1

The audit of the financial statements of Night Insurance Company Limited for the year 2024 was yet to be completed due to certain issues relating to going concern and liquidity considerations. A review of the draft financial statements revealed a negative shareholders’ fund of N18.7 billion (Audited 2023: negative N14.5 billion). From the recent regulatory examination conducted on the company, the shareholders’ fund is below the minimum regulatory capital required for insurance businesses, an indication that the entity had consistently not met the regulatory threshold for quite some time. To return the entity to a solvent position, the following action plans have been designed by the Board of Directors: (i) a rights issue with expected inflow of N2 billion. The company has assurance from certain shareholders that they will take up their rights which would be concluded before the audit of the year ended December 31, 2024 is completed; (ii) transfer of certain properties of the company in closed branches to investment property to generate rental income in order to improve the liquidity position and also enhance its admissibility in calculating solvency margin. The company had the transfer of the properties in plan but this was not completed due to challenges such as the economic recession, unemployment, and inflation rate; and (iii) the company also has some subsidiaries in aviation and restaurant businesses which it hopes to dispose and realise the assets to boost liquidity. It was further discovered that cashflow projections of the company on how to address the going concern situation have not been reliable from previous years’ experience. Although the company has negative operating cash flow and has been making persistent operational losses, the financial statements have been prepared on the going concern basis of accounting, which assumes that the company will continue in operation for at least the next 12 months and discharge its liabilities and commitments in the normal course of business. During the course of the audit, the audit team noted nonaccrual of some claims, which were yet to be paid amounting to N3.2 billion, which they believe were material to the financial statements, but not pervasive. They were not pervasive because it did not affect all the elements of the financial statements. It was also observed from the examination of the records that due to the poor cashflow situation of the company, the following were outstanding: (i) withholding tax deducted not remitted to relevant tax authority and payment of the company’s income taxes; (ii) pension contributions to respective pension administrators; (iii) an amount of N500 million relating to supply of goods and services for over nine months; and (iv) three months salaries. Some bank account balances have not been reconciled as at the time of the audit. The auditors are preparing for a discussion with management and those charged with governance as the Engagement Partner indicated that the firm is likely to express a modified opinion on the financial statements. As a member of the audit team, you are expected to be part of the meeting.