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  • 15 Marks

AAA – May 2022 – L3 – Q7 – Risk Management in Audits

Evaluate key risk areas for auditors in consolidating Nigerian and UK company accounts, considering transfer pricing and related party transactions.

BARCHI International Limited is a company with corporate registrations in both the United Kingdom (U.K.) and Nigeria. The Chairman of the company is based in Nigeria and from time to time travels to the U.K. to oversee the office there and order for the purchase of some of the articles for sale. To ensure steady supply of the products, some of the products are also ordered from China. The purchases from the U.K. are charged to the Nigerian entity in pound sterling, while the purchases from China are charged to the Nigerian company in American dollars.

In September 2020, the Chairman embarked on a trip to Dubai for two weeks where he spent part of his annual holiday. During this period, he hosted a couple of friends with the costs that were paid for by the company as the costs were above his approved annual holiday expenses. He subsequently traveled to the U.K. and was quarantined for two weeks due to COVID-19 before moving to the usual business lodge that he uses. Despite using that period to oversee the U.K. company, all the costs incurred were borne by the Nigerian company.

The products bought in the U.K. and sent to Nigeria were charged at cost plus 25%, while the Nigerian company was responsible for insurance and freight. The goods purchased from China were forwarded to Nigeria at the cost of landing in Nigeria plus 30%. The China-made products are less expensive and therefore give better profits despite the cost of the long-distance freight.

Money was transferred to the Chairman’s account for the company’s purchases in the U.K., the purchases made in China, and the Chairman’s personal expenses. An agent in China bought the goods which were paid for by the Chairman.

The U.K. company staff handled the documentation of all the transactions of the Chairman while there and transferred them to Nigeria subject to the approval of the Chairman.

Separate records were not maintained for the Chairman’s expenses in the U.K. However, his comparison of the results of the two units showed that for the immediate past financial year, the Nigerian company had performed sub-optimally and way below the targeted profit in relation to the U.K. company. The Chairman is very unhappy about this as he expects that his personal visit to the U.K. would reduce the purchasing and associated costs.

It is usual for the Chairman to account for the cost of purchases based on his personal expenses attributable to each purchase together with the actual cost of purchases. The U.K. component is elated about this costing method which favors it and would wish that this arrangement continues.

The two units prepare separate financial statements which are audited by separate accounting firms before the two financial statements are consolidated in Nigeria for the Chairman’s evaluation.

Required:

Evaluate, with appropriate justifications, from the scenario above, the areas of risk which the auditor needs to consider. (15 Marks)

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  • 15 Marks

AAA – May 2022 – L3 – Q6 – Ethical Issues in Auditing

Prepare a manual on external auditor eligibility and discuss auditor objectives under ISA 200.

The accountancy profession earns confidence and public respect partly as a result of its self-regulatory mechanism, application of legal principles, and professional standards.

This issue became a subject of discussion when a group of business owners who just incorporated their companies were deliberating on who should carry out an audit and what are the guiding principles for determining the performance of such responsibility.

Required:

a. Prepare a manual to enable the discussants to understand this professional member’s eligibility to act as an external auditor. (9 Marks)

b. Discuss the objectives of an auditor in accordance with ISA 200: Overall objectives of the independent auditor and the conduct of an auditor in accordance with International Standards on Auditing. (6 Marks)

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  • 15 Marks

AAA – May 2022 – L3 – Q5 – Regulatory Framework and Professional Standards

Discuss arguments for and against audit exemption for small companies and evaluate considerations for auditing small entities.

The Companies and Allied Matters Act, 2020 has classifications and responsibilities for various types of companies incorporated under it. A particular class that has received more attention in recent times and in the Act is small companies.

Your audit team has been approached by a few of these small companies for guidance on the issue and your team has been assigned this responsibility. Part of the concerns of your firm is whether or not those small companies merit the concerns of regulatory authorities and the accounting firms that have to be responsible for their audit.

Your team has a number of young assistants who are yet to understand the differences and therefore need enlightenment on this as part of the training programs.

Required:

a. Discuss the arguments for and against the exemption of small companies from audit. (10 Marks)

b. On the basis that an audit may be conducted for a small entity, evaluate the points the auditors would consider. (5 Marks)

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  • 20 Marks

AAA – May 2022 – L3 – Q4 – Ethical Issues in Auditing

Discuss correspondence with previous auditors, reasons for change in appointments, and client identification under AML regulations.

The idea to incorporate Peters & Shamsudeen Haulages Limited was mooted in London and it was incorporated on the return of Alhaji Shamsudeen to Nigeria. He met Peters during his stay in the UK. They had a good relationship which started in a coffee shop. As they met regularly in this shop, what to do on Alhaji Shamsudeen’s return to Nigeria became the subject of discussion. Based on their experiences, the idea of Peters & Shamsudeen Haulages Limited was birthed. Alhaji Shamsudeen subsequently returned to Nigeria, incorporated the company, obtained the appropriate expatriate quota, and Mr. Peters came in and started running the company.

On commencement, Sejumade Uzoma & Co was appointed the company’s external auditors. Whilst Mr. Peters was around, there was a good working relationship between the company and the audit firm.

After about nine years, Mr. Peters returned to the UK, leaving the company in the hands of Alhaji Shamsudeen. Subsequently, Sejumade Uzoma & Co started receiving complaints from Alhaji Shamsudeen and his key accounting staff. These complaints were rife even before the ninth month of the current year that Sejumade Uzoma & Co. decided not to continue with the engagement. The audit fee for the previous year had about thirty percent outstanding at this stage.

This was the position when Alhaji Shamsudeen approached your partner at Musa, Edewo & Co. (Chartered Accountants). Their discussion was fruitful for your firm, hence it was agreed by the partners that full professional procedures would be applied as normal. Part of the information available on interaction is that the year is almost ending, and there was uncertainty about the firm that will do the audit before the engagement of your firm. You have the responsibility of assisting your partner in ensuring that proper documentations would be done without any compromise.

Required:

a. According to professional requirements, discuss the issues your firm is expected to address in her correspondence with Sejumade Uzoma & Co. (10 Marks)

b. Evaluate the various circumstances that would lead to change in professional appointment. (5 Marks)

c. In consideration of the client, analyze the procedures necessary for proper client identification in accordance with anti-money laundering requirements. (5 Marks)

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  • 20 Marks

AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

Tijara Nigeria Limited has a credit facility of N6 million with Godiya Bank. The facility was due to expire on December 31, 2021. The overdraft in the recently audited statement of financial position as at September 30, 2021 is N5.5 million. The directors of Tijara have started negotiations with their bankers for a renewal of the facility and to increase the amount to N9 million. To support this request, the bank has asked Tijara to provide a business plan for the coming twelve months consisting of a cash flow forecast supported by a forecast income statement and statement of financial position.

The management of Tijara has produced a cash flow forecast for the period October 1, 2021, to September 30, 2022, and, at the request of the bank, has asked an auditor to examine and report on it.

The Audit Manager, who has recently completed Tijara’s audit, has been asked to make a preliminary examination of the cash flow forecast and supporting materials. The manager has made the following observations:

  1. The cash flows from sales are based on the assumption of an overall increase in sales of 24% compared to the previous financial year. Analysis shows that this is based on an increase in selling price of 5% and an increase in the volume of sales of 18%. Just over a quarter of all Tijara sales are made to foreign customers.
  2. The cost of sales in the recently audited comprehensive income to September 30, 2021, was 80% of sales revenue, giving a gross profit of 20%. In the forecast income statement for the year to September 30, 2022, the cost of sales has fallen to 72%, giving a gross profit of 28%. Manufacturing costs are made up of equal proportions of materials, labor, and production overheads.
  3. The trade receivables collection period used in the cash flow forecast to September 30, 2022, is 61 days. In the year to September 30, 2021, this period averaged 93 days. Management has stated that it is its intention to inform all customers of a new standard 60-day credit period. In addition, an early settlement discount of 1% will apply to customers who settle their accounts within 30 days of the statement. Conversely, the credit period for trade payables has been extended from an average of 45 days in the current year to 90 days in the forecast.
  4. The cash flow forecast showed that the maximum credit required during the period would rise to nearly N9 million in August 2022.

Required:

a. Describe the general approach to the assurance work an auditor should consider before accepting the engagement of a reporting accountant on Prospective Financial Information (PFI) under ISAE 3400: The Examination of Prospective Financial Information. (8 Marks)

b. Detail the procedures applicable to the cash flow forecast of Tijara for the year to September 30, 2022. (7 Marks)

c. Prepare a summarized presentation of what the reporting accountant should consider in forming an opinion on prospective financial information (PFI). (5 Marks)

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  • 20 Marks

AAA – May 2022 – L3 – Q2 – Assurance Engagements

Discuss due diligence processes and provide IFRS 16 guidance on lease recognition, measurement, and disclosure.

Pegrace Nigeria Limited (PNL), your audit client, is a national hotel group with substantial cash resources. Its accounting functions are well managed and the group’s accounting policies are rigorously applied. The company’s financial year-end is December 31.

The company has been seeking to acquire a construction company for some time in order to bring in-house the building and refurbishment of hotels and related leisure facilities, like swimming pools, volleyball courts, and restaurants. The management has recently identified Robin Construction Company Limited (RCCL) as a potential target and has urgently requested that you undertake a limited due diligence review.

Further to the preliminary talks between the management of RCCL and PNL, you were provided with the following brief on Robin Construction Company Limited:

  1. The Chief Executive, Managing Director, and Finance Director are all family members and major shareholders. The company has an established reputation for quality constructions.
  2. Due to a recession in the building business, the company has been operating at its overdraft limit for the last 18 months and has been close to breaching debt obligations on several occasions.
  3. Robin’s accounting policies are generally less prudent than those of Pegrace (assets are depreciated over longer estimated useful lives).
  4. Contract revenue is recognized on the percentage of completion method, measured by reference to costs incurred to date. Provisions are made for loss-making contracts.
  5. The company’s management team includes a qualified and experienced quantity surveyor, whose main responsibilities are:
    • Supervising quarterly physical counts at major construction sites;
    • Comparing costs to date against quarterly rolling budgets; and
    • Determining profits or losses, by contract, at each financial year-end.
  6. Labour force is provided under subcontracts. During construction, the regulatory body visited the site and discovered non-compliance with site health and safety regulations.

In February 2021, Robin received a claim that a site on which it built a housing development in Banana Estate was not properly drained and is now sinking. Residents are demanding rectification and asking for payment or damages. Robin has referred the matter to its legal counsel and denied all liability, as the site preparation was subcontracted to Sahara Services Company Limited. No provisions have been made in respect of the claims, nor has any disclosure been made.

The auditor’s report on Robin’s financial statements for the year ended December 31, 2020, was signed, without modification, in March 2021.

Required:

a. Prepare a document to give the explanatory meaning of the term ‘due diligence’ and subsequently discuss items to investigate in a due diligence exercise. (12 Marks)

b. Advise on how to recognize, measure, present, and disclose leases as required by IFRS 16. (8 Marks)

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  • 30 Marks

AAA – May 2022 – L3 – Q1 – Quality Control in Audit Firms

Discuss ISQC 1 quality control requirements for leadership, ethics, engagements, human resources, monitoring, and documentation.

A firm of Chartered Accountants has 25 partners and 100 audit staff. The firm provides a range of audit, assurance, tax and advisory/consultancy services. The firm has offices around the country and clients ranging from sole traders to limited liability companies.

The quality control partner has recently resigned. He has not yet been replaced as the Board of Partners of the firm has not been able to find a suitable replacement. Before his departure, the quality control partner was in the process of implementing a system of ethical compliance for assurance staff. Based on the foregoing, staff would be required to confirm in writing their compliance with the Code of Ethics, hence, implementation of this system is incomplete.

Oshodi Plc is one of the firm’s largest clients for which the firm provides audit, tax, and other advisory services. A new engagement partner has been assigned to the audit, as the previous partner in charge was the one who resigned. The fee for the audit work and other services has been set at the same level as the previous year in spite of the fact that additional work will need to be performed because Oshodi Plc has introduced a new computerized system. The starting date of the audit has been delayed due to problems with the new system. The management of Oshodi Plc was very insistent that the fee should not be increased as a result of this.

Required:

Discuss the requirements of ISQC 1: International Standard on Quality Control on overall audit firm level, which address each of the following:

a. Leadership responsibilities for quality (3 Marks)
b. Ethical requirements (5 Marks)
c. Acceptance and continuance of engagements (5 Marks)
d. Human resources (5 Marks)
e. Engagement performance (5 Marks)
f. Monitoring (4 Marks)
g. Documentation (3 Marks)

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  • 15 Marks

FM – May 2022 – L3 – Q7 – Dividend Policy

Brief on various dividend concepts, including residual theory, clientele effect, and signaling.

You are required to provide a briefing on the following dividend concepts:
a. Residual theory of dividends (3 Marks)
b. Clientele effect (3 Marks)
c. Asymmetric information (2 Marks)
d. Signaling properties of dividends (3 Marks)
e. The ‘bird-in-the-hand’ argument (4 Marks)

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  • 3 Marks

FM – May 2022 – L3 – Q6b – Financial Risk Management

Calculate the number of put options needed to delta-hedge a short position.

In your personal investment portfolio, you have gone short (i.e., you have sold) 110,000 units of Big Bank plc. Call and put options exist on the bank’s shares. You decide to hedge your position using put options on the bank’s shares. For the relevant option, you know that:
N(d1) = 0.45

You are required to calculate how many put options you will need to buy or sell to delta-hedge. Be specific.

 

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  • 12 Marks

FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management

Evaluate hedging methods for a UK supplier payment of £5 million in three months.

a. You have worked with a major oil servicing company in Nigeria, with headquarters in the USA, for the past six years. Recently you completed your ICAN examinations, and you have been asked to join the international treasury department in New York City for a two-year attachment. The company is due to pay a UK supplier the sum of ₤5million in three months’ time. Your team is considering alternative methods of hedging the expected payment against adverse movements in exchange rate.

You are required to advise the company which of the following hedging strategies should be adopted for the payment due to be made in three months. Show all workings:
i. Forward contract (2 Marks)
ii. Currency futures (5 Marks)
iii. Currency options (5 Marks)

 

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  • 10 Marks

CR – May 2023 – L3 – Q4a – Revenue Recognition (IFRS 15)

Discuss the criteria for a contract to fall under IFRS 15 for revenue recognition.

There has been significant divergence in practice over the recognition of revenue, mainly because International Financial Reporting Standards (IFRSs) contain limited guidance in certain areas. The International Accounting Standards Board (IASB), as a result of its joint project with the US Financial Accounting Standards Board (FASB), has issued IFRS 15 – Revenue from Contracts with Customers.

IFRS 15 sets out a five-step model, which applies to revenue earned from a contract with a customer with limited exceptions, regardless of the type of revenue transaction or the industry. Step one in the five-step model requires the identification of the contract with the customer and is critical for the purpose of applying the standard. The remaining four steps in the standard’s revenue recognition model are irrelevant if the contract does not fall within the scope of IFRS 15.

Required:

Discuss the criteria which must be met for a contract with a customer to fall within the scope of IFRS 15. (10 Marks)

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  • 20 Marks

CR – May 2023 – L3 – Q3 – Employee Benefits (IAS 19)

Discuss accounting treatments for investment properties and pension plans, including calculations and financial statement impacts.

You are the Financial Controller of Gongon Group. On January 2, 2021, you are busy preparing the financial statements for the year ended December 31, 2020. You are under a lot of pressure as you have been asked to present the draft financial statements to the Board of Directors in two days’ time.

The first draft of the financial statements for each of the three companies has been prepared and is now on your table. You have also compiled a list of outstanding issues that you need to consider before presenting the financial statements to the Board.

Outstanding Issues:

Here’s the rewritten version of the First Issue:

First Issue: Investment Properties and Changes in Use

Gongon Group holds three investment properties in its financial statements. These properties are measured at fair value in line with IAS 40 – Investment Properties, while owner-occupied properties are measured at cost less accumulated depreciation and impairment losses. Currently, the properties are presented at their 2019 year-end valuations, with no adjustments for 2020.

Details of the Properties

  1. Property A (Commercial Warehouse):
    • Location: Apapa
    • Use Change: Reassigned as office space for the company during 2020. Tenants vacated on May 1, 2020.
    • Valuations:
      • January 1, 2020: ₦8,000,000
      • May 1, 2020: ₦7,600,000
      • December 31, 2020: ₦7,400,000
    • Depreciation Policy: The company applies a 2% annual depreciation rate, calculated monthly for owner-occupied properties.
  2. Property B:
    • Acquisition Year: 2014
    • Valuations:
      • January 1, 2020: ₦9,000,000
      • December 31, 2020: ₦8,800,000
    • Planned Disposal:
      • Property was vacant from September 2020 and put on the market in October 2020 with an asking price of ₦8,800,000.
      • Estimated disposal costs: ₦600,000.
      • No firm offers had been made by year-end.
  3. Property C:
    • Valuation: Last valued at ₦18,500,000 in December 2018.

Draft Statements of financial position at December 31, 2020

Extract of draft statement of profit or loss and other comprehensive income for the year ended December 31, 2020

Second Issue: Pension Scheme Accounting Treatment

On January 1, 2020, Gongon PLC commenced a defined benefit plan for several head office employees. Under the scheme, Gongon PLC is obligated to provide post-employment benefits to these staff members. The company manages the actuarial and investment risks associated with the pension scheme.

Details of the Pension Scheme

Details ₦’000
Interest Income on Plan Assets 330
Employer’s Contribution to Plan 11,000
Current Service Cost 12,000
Interest on Plan Liability 360
Fair Value of Plan Assets (31/12/2020) 11,600
Present Value of Plan Obligation (31/12/2020) 12,400

Current Accounting Treatment

The Chief Accountant was uncertain about the appropriate accounting standard to apply for the pension scheme. The only adjustment made for 2020 was:

  • Expensing the Employer’s Contribution of ₦11 million in the statement of profit or loss and other comprehensive income.
  • Crediting the corresponding cash account.

The current treatment does not comply with the requirements of IAS 19 – Employee Benefits, which mandates more comprehensive reporting for defined benefit plans.

Required:
(a) Discuss and analyze the required accounting treatment of the first issue, showing relevant calculations and the impact on Gongon PLC’s financial statements as of December 31, 2020. (12 Marks)

(b) Review the accounting treatment of the second issue (pension plan) and make necessary disclosures in accordance with the relevant accounting standard. (8 Marks)

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  • 6 Marks

CR – May 2023 – L3 – Q2b – Consolidated Financial Statements (IFRS 10)

Discuss the advantages of using consolidated financial statements and enumerate the contents of an environmental report in an annual report.

(b) The annual reports of the group also contain separate financial statements of the parent company (Octopus Petroleum Plc). Some companies also include social and environmental reports as part of their financial statements.

Required:
i. Explain why it is better to use the consolidated financial statements for financial analysis rather than the parent’s separate financial statements. (4 Marks)
ii. Enumerate the possible contents of an environmental report included in the annual report of companies. (2 Marks)

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  • 14 Marks

CR – May 2023 – L3 – Q2a – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)

Analyze Octopus Petroleum’s performance and ability to finance future oil spill costs

Octopus Petroleum PLC is a multinational oil and gas group operating in the Niger Delta areas of Nigeria. The company has been highly profitable over the years. The group explores and extracts natural resources, holds reserves, and has recently become involved in the downstream sector by opening various commercial retail outlets for the sale of petrol to motorists.

In June 2020, the company was involved in an ecological disaster in the Ogoni area of Niger Delta as a result of massive oil spillage due to some technical faults, thereby resulting in spilling oil into the surrounding ocean and damaging wildlife and local communities.

Investors are concerned about the future prospects of Octopus Petroleum PLC and whether it represents a safe investment since the company normally operates in the lucrative oil and gas sector.

Octopus Petroleum Group annual report for the year 2020 and its comparative figures are shown below:

Octopus Petroleum Group Consolidated Statement of Profit or Loss for the Year Ended December 31

Octopus Petroleum Group Consolidated Statement of Financial Position as at December 31

Additional Information:

  1. The N3,700 million provision for the Ogoni oil spill is an estimated cost net of relevant tax.
  2. Calculating the financial cost of the oil spill in Ogoni land has been slightly problematic. However, N530 million had been expended by year-end, while the future costs of clean-up and compensation are undetermined.
  3. One uncertain cost is fines payable to the Federal Government of Nigeria. Past fines have exceeded N2,500 million.
  4. Octopus Petroleum Group vertically integrated in 2020 by acquiring and rebranding petrol stations.
  5. Oil reserves were at record-high levels in 2020.
  6. Oil prices increased by approximately 5% during 2020.
  7. The company values inventory on a last-in-first-out (LIFO) basis, which contravenes IAS 2.
  8. Dividend payments remained at N625 million for both 2020 and 2019.
  9. Investors typically evaluate companies using these ratios:
    • Profitability Ratios:
      • Return on Capital Employed (ROCE)
      • Return on Equity (ROE)
      • Gross Profit Percentage
      • Operating Profit Percentage
    • Liquidity Ratios:
      • Current Ratio
      • Acid Test Ratio
    • Resource Utilization and Financial Position Ratios:
      • Inventory Turnover
      • Asset Turnover
      • Interest Cover
      • Gearing Ratio

Required:

(a) Analyze the performance of Octopus Petroleum Group over the two-year period. Your analysis should also consider the group’s ability to finance the cost of the oil spill in Ogoni land in the coming years. (14 Marks)

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  • 8 Marks

CR – May 2023 – L3 – Q1b – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Discuss IFRS 9 rules on derecognition of financial assets, apply these rules to factoring, and analyze ethical implications of falsifying a land sale.

The directors of Omi PLC reviewed the group statement of financial position as of November 30, 2020. Concerned about meeting future loan agreements, they proposed the following actions to improve liquidity:

  1. Factoring of Receivables:
    • Factoring N400 million of receivables.
    • 80% cash is received immediately (N320 million), and the factoring company charges N32 million.
    • The balance will be paid 30 days later.
  2. Adjusting Financial Statements:
    • The executive director suggested falsifying financial statements to show that land located in Ikoyi was sold before year-end to improve liquidity.

Required:

  • Discuss the rules of IFRS 9 – Financial Instrument on derecognition of financial assets.
  • Apply these rules to factoring in part (1).
  • Discuss the ethical implications of falsifying the sale of land in part (2).

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  • 22 Marks

CR – May 2023 – L3 – Q1a – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Omi PLC and subsidiaries.

The draft statement of financial position of Omi PLC, Ruwa Limited, and Mmili Limited as of November 30, 2020, are as follows:

Additional Information for Consolidated Financial Statements Preparation:

  1. Acquisition of Ruwa Limited:
    • Omi PLC acquired 80% of Ruwa Limited’s ordinary share capital on December 1, 2017.
    • Retained earnings of Ruwa Limited at acquisition: N400 million.
    • Fair value of Ruwa Limited’s net assets: N2,840 million.
    • Any fair value adjustment pertains to net current assets, which had been realized by November 30, 2020.
    • No new issue of shares occurred in the group since the establishment of the current structure.
  2. Acquisition of Mmili Limited:
    • On December 1, 2018, Omi PLC acquired 40% and Ruwa Limited acquired 25% of Mmili Limited’s ordinary share capital.
    • Retained earnings of Mmili Limited at acquisition: N200 million.
    • Retained earnings of Ruwa Limited at acquisition: N600 million.
    • No revaluation surplus existed in Mmili Limited’s books at acquisition, and the fair value of Mmili Limited’s net assets was consistent with their carrying amount.
  3. Development Costs:
    • Significant expenditure incurred on developing internet products. These were initially written off but later reinstated as development inventories upon commercial use.
    • Costs do not meet the recognition criteria of IAS 38 – Intangible Assets.
    • Ruwa Limited included N80 million of these costs in its inventory, of which N20 million relates to expenses from periods before December 1, 2017.
    • The group wishes to ensure compliance with IFRS for this treatment.
  4. Internet Equipment:
    • Ruwa Limited purchased new internet equipment for N200 million, excluding a trade discount of N24 million.
    • The discount was recorded in the income statement.
    • Depreciation is calculated using the straight-line method over six years.
  5. Property, Plant, and Equipment Policy:
    • The group transitioned from the revaluation model to the cost model under IAS 16 – Property, Plant, and Equipment in 2020.
    • Mmili Limited’s assets were revalued on December 1, 2019, creating a revaluation surplus of N280 million.
    • Mmili Limited’s property was originally purchased in December 2018 for N1,200 million, with depreciation over six years.
    • The group does not transfer excess depreciation from revaluation reserves to retained earnings.
  6. Valuation of Non-controlling Interests:
    • The group values non-controlling interests at acquisition using their proportionate share of the subsidiary’s identifiable net assets.
  7. Defined Benefit Pension Scheme:
    • Omi PLC established a defined benefit pension scheme, contributing N400 million to it.
    • Details as of November 30, 2020:
      • Present value of obligation: N520 million.
      • Fair value of plan assets: N500 million.
      • Current service cost: N440 million.
      • Interest cost (scheme liabilities): N80 million.
      • Expected return on pension assets: N40 million.
      • Actuarial gain: N60 million.
    • The only recorded entry was the cash contribution, included in Omi PLC’s trade receivables.
    • Directors propose recognizing actuarial gain immediately in the statement of profit or loss.

Required:
Prepare the consolidated statement of financial position of Omi Group for the year ended November 30, 2020, in accordance with relevant IFRS.

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  • 15 Marks

AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information

Evaluate considerations before accepting PFI engagements and procedures for reviewing profit forecasts under ISAE 3400.

Allhope Publications Limited is an old established publishing company owned by two brothers. Over the years, the company had made consistent progress both in sales and profitability.

Due to the quality of their work, the patronage of the company has grown to the extent that its working capital cannot accommodate the work on hand.

The Directors have approached their bankers, Owopo Bank Plc for a facility of N500m to procure essentially modern machinery and printing materials and also for running expenses, particularly salaries.

In support of its application for the bank facility, the company has prepared a profit forecast which is being presented to your firm for review.

Required:

As contained in ISAE 3400: “The Examination of Prospective Financial Information (PFI)”:

a. What will you take into consideration before accepting this assurance engagement? (5 Marks)
b. Enumerate the procedures to be adopted after you have agreed to take up the engagement:
i. As regards PFI assurance engagements generally.
ii. On the Profit forecast. (10 Marks)

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  • 15 Marks

AAA – Nov 2016 – L3 – Q5 – Regulatory Framework and Professional Standards

Identify steps and procedural actions auditors take under ISA 250 to ensure compliance with laws and regulations.

In compliance with ISA 250 “Consideration of Laws and Regulations in an Audit of Financial Statements,” the auditor shall conduct the audit in a manner that gives them confidence that the client has met all legal requirements of the country in which it operates.

As the Audit Partner in charge of APB Manufacturing Plc, you are required to:

a. Identify and clarify SIX steps that ISA 250 requires of you in ascertaining that the company complies with all applicable laws and regulations. (9 Marks)
b. State and explain FOUR procedural actions you will take in the event that the company failed to comply, in material areas, with applicable laws and regulations. (6 Marks)

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  • 5 Marks

AAA – Nov 2016 – L3 – Q4b – Audit of IT Systems and Data Analytics

Identify solutions to address the loss of an audit trail in computer-assisted or manual testing.

The availability of Computer-Assisted Audit Techniques should be considered by the Auditor when planning the nature, extent, and timing of tests in an audit. The Auditor must determine their testing strategies, which will depend on their choice of either using a Manual Testing Method or a Computer-Assisted Method.

Required:
Identify FIVE solutions to the loss of an audit trail. (5 Marks)

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