ICAN 2025 Audit and Assurance | Mixed

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Question 1
ARTECO LIMITED Arteco Limited is principally a mail order company, selling goods over the internet. Your firm has been approached to handle the statutory audit of the e-commerce company for the year ended December 31, 2024. Your discussion with the Managing Director of the company and further enquiry have revealed that the: (i) company has been in business for about 5 years; (ii) accounting system operates on an online system with micro computers located throughout the organisation; (iii) company also applies electronic data interchange (EDI) system. This allows electronic transmission of business documents like purchase orders and invoices; (iv) previous auditors left because of disagreement about some disclosures in the financial statements for the previous year; and (v) audited financial statements are needed in the next 3 months by the company’s bankers. The brother-in-law of the Engagement Partner, Mr. Godspower, has just been appointed a Director of Arteco Limited.
Requirements
(a)
Explain FIVE audit risks the microcomputer system may pose to the auditor.
(b)
Explain TWO benefits the online computer-based information system offers Arteco Limited.
(c)
Highlight FOUR controls that should be in place to minimise the risks that may arise from the use of the online processing system.
(d)
Explain TWO risks the electronic data interchange (EDI) system may create for the auditor and TWO controls expected to be in place to mitigate the risks.
(e)
Explain THREE ethical matters your firm would consider and the attendant engagement procedures to be carried out before accepting the appointment.
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Question 2
Demurin Supplies Limited operates a chain of supermarkets in Lagos. The external auditors, in the course of the current audit assignment, discovered cash misappropriation by some officers of the company. On enquiry, the officers concerned claimed that they borrowed the amounts (although without due approval). Further tests revealed that appropriate transactional recording process was not done for the misappropriated cash.
Requirements
(a)
Explain TWO types of fraud relating to fraudulent financial reporting, and TWO other types of fraud relating to misappropriation of assets according to ISA 240: The auditor’s responsibilities relating to fraud in the audit of the financial statements.
(b)
Explain the responsibility of the external auditor regarding the cash misappropriation in Demurin Supplies Limited.
(c)
Discuss the procedure the external auditor is expected to perform in identifying risks due to fraud.
(d)
Discuss SIX fraud risk factors that can increase the likelihood of fraud happening in an organisation.
(e)
Explain the management function that can control the risk of cash misappropriation as the organisation gets bigger.
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Question 3
The auditor usually focuses much of his work on the major transaction cycles that cover most of the day-to-day transactions of a company. The payroll is one of the transaction cycles. During the audit of Prima Limited, a major player in the construction industry, the Partner-in-charge has assigned the responsibility of performing test of controls to you to get evidence that the systems and controls are operating effectively.
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Question 4
The draft financial statements of Veritas Hope Limited as at December 31, 2024 revealed: (i) bank overdraft balance of N12,000,000; (ii) cash balance of N30,000; (iii) long term borrowings of N25,000,000; and (iv) motor vehicles having a carrying value of N28,000,000.
Requirements
(a)
Explain the THREE documents that would prove with reasonable certainty that Veritas Hope Limited had a bank overdraft of N12,000,000 as at December 31 2024.
(b)
Rank these THREE documents in (a) above in order of reliability, and give reasons for the ranking.
(c)
Explain what procedures you would carry out with the THREE documents to prove with reasonable certainty that Veritas Hope Limited had a bank overdraft of N12,000,000.
(d)
Describe the audit procedures to prove the existence of the cash balance of N30,000 in the company’s safe as at December 31, 2024.
(e)
Explain the initial audit procedures and further tests to be carried out in relation to the carrying value on the schedule of motor vehicles.
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Question 5
One principle of good corporate governance agrees that the internal audit function should be independent, reporting only to the audit committee or the Chief Executive Officer. This has informed some entities’ decision to outsource their internal audit function.
Requirements
(a)
Explain TWO other reasons for outsourcing the internal audit function.
(b)
Explain SIX advantages of outsourcing the internal audit function.
(c)
Explain FIVE problems of outsourcing the internal audit function.
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Question 6
You led the audit team to attend the year-end physical inventory count at the client’s premises. Your observations on the process include the facts that: (i) all the staff involved in the physical count were drawn from the stores department; (ii) prenumbered count sheets issued to the staff during the count showed the inventory ledger balances for cross-checking against the physical counts; (iii) physical counts were recorded on the count sheets in pencil for easy amendments; (iv) inventories not previously recorded on the count sheets were recorded separately on different count sheets numbered only by the counting staff; (v) the physical inventories were counted without due regard to damaged and obsolete inventories; (vi) all inventories, including those belonging to third parties, were counted and recorded along with the entity’s inventories; (vii) at the end of the inventory count exercise, the sequence of the sheets were not checked nor the recapitulation done; and (viii) the count sheets were not duly signed by the responsible officers.
Requirements
(a)
Identify FIVE weaknesses in the client’s control system for the inventory count.
(b)
Give the reasons to prove that each of the identified items in (a) above is a weakness.
(c)
Explain how each of the FIVE identified weaknesses could be addressed.
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Question 7
Real Favour Limited is a client of Adodo Lafe & Co (Chartered Accountants). The Audit Manager has just completed his review of the audit file. His review points include: (i) confirming ownership of motor vehicles used for distribution of goods; (ii) confirming the amounts owed by customers; (iii) testing the procedure of payment of wages to daily paid and casual workers; (iv) testing the correctness of salary amounts credited to staff bank accounts; (v) confirming the authorisation for the purchase of plant and machinery; (vi) ascertaining that inventories belonging to the relevant periods have been accounted for during the inventory stock count; (vii) checking the periodic trend in the performance of the company as reflected in the financial statements; (viii) confirming the existence of land and building at the branch office; (ix) understanding the nature of one-off and unusual payments recorded in the financial records; and (x) confirming from management that all liabilities have been provided for.
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