ICAN 2025 Advanced Audit and Assurance | Mixed

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.

Awayewaserere Bakery Limited has been in business for over ten years. It has an internal control system in place, but it is not implemented as designed. The control lapses identified are indications that the company will find it difficult to cope with a rapidly changing business environment. Despite computerisation of its operations, manual processing of transactions are still taking place. The employees have gate passes and tags that they should wear before entering the company premises. However, experience has shown that some of the tags are misplaced or stolen and used by unauthorised people to access the premises. Some of the directors are not committed and hardly do they meet the expected yearly number of times for which they are required to attend Board of directors’ meeting. Added to this, many of them bought goods from the company on credit and in most cases, did not pay back. A background check conducted on two of the Directors revealed that they engaged in unethical business practices, which had a negative impact on the image of the company and its market share. A partner of the company’s auditors is the younger brother of the company’s Chairman. The auditors hardly issue any report on weaknesses identified in the internal control system of the company despite the indications of inclusion of material misstatements in the financial statements. The audit firm does not have capable staff. The Managing Director is very powerful to the extent that he can approve any amount of money or transaction. The supply of flour and other stock items are not subjected to competitive bidding, but by those nominated by the Managing Director and this sometimes led to over invoicing. Inventory count rarely takes place in the company, while impaired tangible assets are not identified. The software available for processing transactions has not been updated since acquisition, and has been assessed unsuitable to support good financial reporting. Most of the staff of the organisation are poorly trained and the few experienced ones are not allowed to go on leave for fear of the inability of the inexperienced staff to perform when they are on vacation. Over-reliance on some staff and care-free attitude of the directors in performing their functions have made fraud to be perpetrated unnoticed. The company’s revenue has dwindled over time and has led to the inability to meet financial obligations as at when due. Some creditors had threatened not to supply goods, except all outstanding debts owed them are paid. There are receivables in the company’s books of account that cannot be substantiated, hence they are as good as bad debts waiting to be written off. Payment of salaries and allowances of staff has become a problem and the relevant tax authority had threatened to prevent the company from operations if all statutory taxes are not paid. Due to the precarious financial situation of the company, a friend of the Chairman, who has been warning him about the business and other risks in the company, has suggested the need to look for a good investor that will inject fresh capital and introduce informed directors who are capable of turning the company around. He has also suggested the need to engage a new audit firm that will adopt a modern audit approach which is ‘risk-based’ that will lead to transparency and confidence in the financial reporting of the company. The Chairman of the company learnt that you work for one of the reputable audit firms in the country and has invited you for a discussion to help him understand the position of his friend on the need to allow new investors into the company.

Sleep Insurance Plc has been making consistent losses with no dividends paid to the shareholders for over five years. Aggrieved shareholders of the company made allegations against the management that there had been certain unusual transactions in the financial statements of the company over the years. The shareholders further considered that management were incompetent and corrupt, therefore, they should resign to give way for efficient and reliable people who will manage the company effectively. The allegations of financial impropriety prompted the Financial Reporting Council (FRC) to conduct a field visit to the company. The on-site visit revealed material internal control weaknesses, such as: (i) improper review and reconciliation of branch expenditures; (ii) premiums collected from the insured, which were not completely remitted by marketing staff who deal directly with those customers; (iii) cash takings by cashiers which were in most cases not banked intact; (iv) expenditures of top management which were not reviewed before payment; (v) related party transactions, which were solely approved by the Managing Director were not subjected to internal audit review; (vi) some transactions, were not supported by invoices and receipts before payments were made; (vii) marketing staff collecting claims for jobs not done, and cases of outright cash suppression, which were common in the company; (viii) certain fraud committed by staff, which were treated as staff loans, to ameliorate the situations in which many staff had been sacked due to this infraction; and (ix) schedules for material account balances, which were not provided for review. Upon receiving the preliminary report of the FRC team, the aggrieved shareholders believed they have been vindicated and were wondering why the external auditors of the company had not been able to detect these infractions over the years and communicate to them for immediate action. They threatened to take the external auditors to court for negligence and to ask for compensation from them for what they had lost over the years. On enquiry by some of the aggrieved shareholders of the company, a partner in a reputable firm was of the opinion that most of the issues identified may not be detected by external auditors except if an investigation is conducted on the company’s financial activities.

The organisation and structure of companies and the related audit environment have been changing very rapidly in recent times, just as the regulatory framework is also changing. These impact significantly on the quality of governance, auditing, standards, and other guiding principles. An auditor is, therefore, expected to be conversant with these and be in a position to anticipate actions and motives of clients. In a discussion with a client, some of the issues manifested. You were able to give some basic hints on the issues that the client raised, and proposed to go home and review some of them for detailed discussion later.

To establish Godman Philip International High School and turn it to a world class institution, the Chief Operating Officer (COO) requires your services as an assurance service provider to report on five projected financial information obtained from professional services firms. Some of the details provided to the professional service firms include: Background Information Godman Philip International High School is a proposed co-educational institution to be set up in one of the oil rich state capitals in the country. It is expected to be a boarding school for boys and girls. The students are expected to resume studies the next academic session, after obtaining approval from the government of the chosen state. Basis for the prospective financial information The financial information will be used to raise capital to finance operations of the school and address other issues. The projection is expected to be part of a long term strategy to establish a world class institution with clear and achievable targets. The report to be obtained should be suitable to help in planning pre-operating budget and assess when the school will become profitable enough to give good returns to investors without compromising quality of education provided to the students, and expected facilities in the school. The financial information should be adequate to convince interested investors and lenders of the likely growth potential of the institution. Minimum content of the prospective financial information Interested professional service firms will be expected to submit for review prospective financial information for the first four (4) years of business on likely: (i) startup expenses; (ii) payroll costs; (iii) revenue forecast; (iv) operating expenses; (v) cash flow statements; (vi) income statements; (vii) statement of financial position; (v) break-even analysis; (vi) financial ratios; (vii) amortisation and depreciation in the business; and (viii) likely risks. Professional services firms The professional firms should be able to do a robust documentation of identified issues and should demonstrate ability to perform any outsourced service, like preparation of books of account or internal audit service (if required) after commencement. The proposal should state expected fee, the profile of the firm and staff complement especially, if services are required for any of the outsourced services. Submission The prospective financial information should be submitted on or before close of work on December 31, 2024. Only shortlisted professional service firm would be invited for presentation and interview. Assurance engagement Your audit and assurance firm has been engaged to provide an assurance service to Godman Philip International, wherein you will report to the Chief Operating Officer (COO) after performing necessary procedures on the submissions of five professional service firms that submitted prospective financial information to the Chief Operating Officer (COO).

As part of the requirements of the International Standards on Auditing (IAS), before commencement of any statutory audit, Cole & Co (Chartered Accountants), the external auditor to Tanke Pharmaceutical has held a pre-audit meeting with the Audit Committee of the company on the scope, timing of the audit and communication of likely significant risks identified by the auditor during the risk assessment process. Tanke Pharmaceuticals has being experiencing theft of finished products in the previous year to the extent that some of its products were sold at cheaper prices outside the company’s premises which created problem for distributors of the products leading to loss of revenue for the company. The marketing teams were also accused of collecting commissions and transport expenses which did not reflect in the sale proceeds achieved by them. There was increase in payables for inventory items purchased, which were in most cases not delivered. Added to the above, there was a huge suspense receivable account balance emanating from information technology update in the books of the company. The members of the Audit Committee believe that if the auditors had done their work as expected, such issues would have been discovered earlier. A member of the Audit Committee doubted whether the new and revised standards issued by the International Auditing and Assurance Standards Board were being applied on the audit of the company or even whether expected audit strategies were followed. A suggestion was made that rather than increasing audit fee in line with inflationary pressure as requested by the auditors, the company should rather reduce audit fee to compensate for the loss due to their (auditors’) negligence. The members of the Audit Committee were supposed to meet at least five times in a year, but they met only three times and when they met, they hardly spent enough time to go through internal audit reports or review management accounts. Only one member of the Audit Committee is financially literate. The directors’ meetings were rarely held, as most of them (directors) went on long overseas vacations, thus leaving the operational activities of the company totally to the discretion of management. The member of the audit committee were of the opinion that the management letter issued by the external auditors should have provided detailed internal control weaknesses which they would have acted upon.

Messrs ABC Pharmaceuticals Limited is a business formed and started by three registered pharmacists who decided to run a chain of pharmaceutical outlets in different towns in the country. Discussions with them indicate that they are considering implementing a system which will be liberal, but still give them the opportunity to the kept informed of the operations at the different locations that the business are located. This involves the implementation of a level of computerisation. At their last physical meeting in Lagos, before two of them departed to their respective locations, it was agreed that the audit firm you work for should be appointed as auditors to enable them get proper guidance on the accounting and IT processes from the early stages to avoid having undue technical hitches. They have also agreed to have another meeting via the Zoom application, which your firm will host because of the information to be presented.