Professional Body: ICA (Nigeria)

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CR – May 2021 – L3 – Q4 – Business Combinations (IFRS 3)

Evaluate the impact of restructuring plans on individual and group accounts for Tanimo PLC and its subsidiaries.

Question

Emili PLC and Wagbo PLC are both public limited companies wholly owned by Tanimo PLC, also a public limited company. Tanimo group PLC operates in the agro-allied industry; but the directors felt that the current structure does not serve their intended purpose and are therefore considering two different restructuring plans for the group.

The statements of financial position of Tanimo PLC and its subsidiaries Emili PLC and Wagbo PLC as at May 31, 2021, are as follows:

Statements of Financial Position as at May 31, 2021

Item	Tanimo PLC (Nm)	Emili PLC (Nm)	Wagbo PLC (Nm)
Property, Plant, and Equipment	600	200	45
Cost of Investment in Emili PLC	60	–	–
Cost of Investment in Wagbo PLC	70	–	–
Net Current Assets	160	100	20
Total Assets	890	300	65
Equity & Liabilities:
Share Capital (Ordinary Shares of N1 each)	120	60	40
Retained Earnings	770	240	25
Total Equity & Liabilities	890	300	65

Tanimo PLC acquired the investment in Wagbo PLC on June 1, 2015, when the company’s retained earnings balance was N20 million. The fair value of the net assets of Wagbo PLC on June 1, 2015, was N60 million.

Emili PLC was incorporated by Tanimo PLC on June 1, 2015, and has always been a wholly owned subsidiary. The fair value of the net assets of Emili PLC as at May 31, 2021, was N310 million, and of Wagbo PLC, it was N80 million. The fair values of the net current assets of both Emili PLC and Wagbo PLC are approximately the same as their carrying amounts.

The directors are not certain what effects the following plans would have on the individual accounts of the companies and the group accounts. Local companies’ legislation requires that the amount at which share capital is recorded is dictated by the nominal value of the shares issued, and if the value of the consideration received exceeds that amount, the excess is recorded in the share premium account. Shares cannot be issued at a discount. In the case of a share-for-share exchange, the value of the consideration can be deemed to be the carrying amount of the investment exchanged.

It is the group’s policy to value non-controlling interests at its proportionate share of the fair value of the subsidiary’s identifiable net assets.

The two different plans to restructure the group are as follows:

Plan 1
- Emili PLC is to purchase the whole of Tanimo’s PLC investment in Wagbo PLC.
- The directors are undecided as to whether the purchase consideration should be 50 million N1 ordinary shares of Emili PLC or a cash amount of N75 million.
Plan 2
- The assets and trade of Wagbo PLC are to be transferred to Emili PLC at their carrying amount.
- Wagbo PLC would initially become a non-trading company.
- The consideration for the transfer will be N60 million, which will be left outstanding on the intercompany account between Emili PLC and Wagbo PLC.

Required:

Discuss the key considerations and the accounting implications of the above plans for the Tanimo PLC group. Your answer should show the potential impact on the individual accounts of Tanimo PLC, Emili PLC, and Wagbo PLC and the group accounts after each plan has been implemented.

Answer

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Tags: Consolidation, Goodwill, Group Restructuring, Intercompany Balances, Non-Controlling Interests, Share Exchange
Level: Level 3

Topic: Business Combinations (IFRS 3)

CR – Dec 2020 – L3 – Q3 – Regulatory Environment for Corporate Reporting

Discuss SEC risk management provisions and analyse components of effective risk reports and their benefits to financial institutions.

Question

Exposure to a variety of risks may affect the ability to achieve corporate objectives, thereby making risk management a corporate governance issue. Risk reports enable stakeholders to evaluate the importance attached to risk management and the company’s effectiveness in managing identified risks. Therefore, risk reports boost shareholders’ confidence that the company has adopted a responsible attitude towards risk.

As part of the regulatory framework to manage risk, the Securities and Exchange Commission (SEC) provided several guidelines for rules and content of effective risk reports.

Required:

a. Discuss the regulatory risk management provisions by SEC in Nigeria. (10 Marks)

b. Analyse the components of effective risk reports and state the benefits of their application to financial institutions in Nigeria. (10 Marks)

Answer

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Tags: Corporate Governance, Financial Institutions, Risk Management, Risk Reports, SEC Guidelines
Level: Level 3

Topic: Regulatory Environment for Corporate Reporting

CR – Dec 2020 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Assess the performance of two companies using financial ratios and draft a report for investment decisions.

Question

Heritage Limited and Legacy Limited are two competitors in the merchandising and retailing sector of the economy. At a time when the sector is faced with escalating fuel prices and economic recession, both companies have shown resilience and adaptability. The financial statements of the companies for the year ended December 31, 2020, are as follows:

Statements of Profit or Loss for the Year Ended December 31, 2020:

Item	Heritage Limited (N’000)	Legacy Limited (N’000)
Revenue	150,000	700,000
Cost of Sales	(60,000)	(210,000)
Gross Profit	90,000	490,000
Interest	500	12,000
Distribution Costs	13,000	72,000
Administrative Expenses	15,000	35,000
Total Expenses	28,500	119,000
Profit Before Tax	61,500	371,000
Income Tax Expense	(16,605)	(100,170)
Profit for the Year	44,895	270,830

Statements of Financial Position as at December 31, 2020:

Item	Heritage Limited (N’000)	Legacy Limited (N’000)
Assets:
Non-Current Assets:
Property	–	500,000
Plant and Equipment	190,000	280,000
Total Non-Current Assets	190,000	780,000
Current Assets:
Inventories	12,000	26,250
Trade Receivables	37,500	105,000
Bank	500	22,000
Total Current Assets	50,000	153,250
Total Assets	240,000	933,250
Equity & Liabilities:
Equity:
Share Capital	156,000	174,750
Retained Earnings	51,395	390,830
Total Equity	207,395	565,580
Non-Current Liabilities:
Long-Term Debt	10,000	250,000
Current Liabilities:
Trade Payables	22,605	117,670
Total Liabilities	32,605	367,670
Total Equity & Liabilities	240,000	933,250

The Board of Directors of Patrimony Investments PLC is considering a proposal to buy into one of the companies to enhance the reported profit and stability of the company after the investment.

Required:

a. Assess the relative performance of the two companies for the year ended December 31, 2020, with three suitable ratios each for:

Profitability and efficiency
Liquidity and solvency
(8 Marks)

b. Draft a report on the computed ratios for the consideration of the Board of Directors of Patrimony Investments PLC to appropriately guide the Board in deciding on the proposal to buy into any one of the companies.
(12 Marks)

Answer

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Tags: Efficiency Analysis, Investment decision-making, Liquidity Ratios, Profitability Ratios, Solvency Ratios
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)

CR – May 2022 – L3 – Q1 – Leases (IFRS 16)

Adjust lease accounting for right-of-use asset and lease liability in compliance with IFRS 16.

Question

The draft financial statements of Gbola Limited group and its investee companies Tanko Limited and Eze Limited at December 31, 2018 are shown below:

Draft Statements of Profit or Loss for the Year Ended December 31, 2018

Item	Gbola Limited (N’000)	Tanko Limited (N’000)	Eze Limited (N’000)
Revenue	17,070	7,320	2,235
Cost of Sales	(8,640)	(3,210)	(885)
Gross Profit	8,430	4,110	1,350
Other Operating Expenses	(2,070)	(810)	(600)
Profit from Operations	6,360	3,300	750
Interest Expense	(570)	(660)	(210)
Profit Before Tax	5,790	2,640	540
Income Tax Expense	(810)	(360)	(90)
Profit for the Year	4,980	2,280	450

Draft Statements of Financial Position as at December 31, 2018

Additional Information

On January 1, 2014, Gbola Limited acquired 9,000,000 ordinary shares in Tanko Limited for N23,250,000 when the reserves of Tanko Limited were N3,000,000.
A new asset with a fair value of N1,500,000 was acquired during the year under a lease agreement by Gbola Limited. A clause in the lease agreement stipulated that N300,000 payments must be paid on December 31, each year for six years, starting from December 31, 2018. The interest rate implicit in the lease is 5.47%. Gbola Limited treated this as an operating expense; because the only accounting entry that the company believes must be made in relation to this asset is the N300,000 payment it has made.
Gbola Limited had an intangible asset of N750,000 for software in its statement of financial position. The directors of Gbola Limited believed that the software will have no recoverable value at the date of acquisition, and Tanko Limited wrote it off shortly after its acquisition.
At the date of acquisition of Tanko Limited, the carrying amount of its property, plant, and equipment, considered to have a remaining life of 10 years, was N5,625,000 lower than its fair value.
On January 1, 2017, Gbola Limited acquired 2,250,000 ordinary shares in Eze Limited for N6,000,000 when the reserves of Eze Limited were N1,350,000. The carrying amount of assets of Eze Limited was the same as their fair values at that date. Depreciation should be treated as an operating expense.
A component used by both Tanko Limited and Eze Limited is produced by Gbola Limited, and it sells this component at a margin of 25%. Goods worth N780,000 were sold to Tanko Limited during the year. None of these goods had been sold by Tanko Limited at December 31, 2018. Gbola Limited also sold goods worth N1,200,000 to Eze Limited, and Eze Limited sold all of these goods as at December 31, 2018.
N900,000 in respect of amounts owed by Tanko Limited and N525,000 in respect of amounts owed by Eze Limited were included in the receivables of Gbola Limited. The corresponding balances in Tanko Limited and Eze Limited payables were N600,000 and N525,000, respectively. On December 31, 2018, Tanko Limited sent a cheque of N300,000 to Gbola Limited.
There has been no impairment for Eze Limited. However, the impairment test conducted on Tanko Limited’s goodwill showed that goodwill is being impaired by 10% per annum on a straight-line basis.
Gbola Limited’s cash and cash equivalents included a Director’s loan of N1,500,000. The Directors are of the view that the inclusion does not contravene any International Financial Reporting Standard.
The goodwill arising on the acquisition of Tanko Limited is being amortized over a 10-year period, though this practice contravenes IAS 36, which prohibits goodwill amortization and instead requires annual impairment tests.

a. Prepare the necessary adjustments to account for the lease contract based on additional information provided in (ii) above in accordance with IFRS 16. (5 Marks)
b. Prepare the consolidated statement of profit or loss and other comprehensive income for the group for the year ended December 31, 2018. (8 Marks)
c. Prepare the consolidated statement of financial position of Gbola Limited group as at December 31, 2018. (12 Marks)
d. Discuss the ethical implication of the Director’s action in note (ix) above. (5 Marks)

Answer

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Tags: Depreciation, IFRS 16 Adjustments, Interest expense, Lease Liability, Right-of-Use Asset
Level: Level 3

Topic: Leases (IFRS 16)

AAA – May 2023 – L3 – Q7 – Forensic Auditing

Discuss ethical principles for fraud investigation, advise on evidence gathering procedures, and recommend laws and agencies for legal action.

Question

At the annual general meeting of Aggressive Bank Limited for the year 2020, shareholders raised concerns over increasing cases of customer complaints about fraud. Shareholders emphasized that drastic actions were required to avoid brand damage and reputational issues.

In performing their oversight functions, the audit committee commissioned the internal audit unit to investigate fraud issues and likely causes. The internal audit report highlighted the following issues:

Hacking of Accounts: Unauthorized transfers due to poor information security systems.
Forgery: Forged cheques, signatures, and withdrawal slips used in collusion with bank staff.
Fictitious Accounts: Opening and operating fake accounts to facilitate illegal transfers due to incomplete KYC.
Loans to Fictitious Borrowers: Fictitious loans issued via fake accounts.
False Overtime Claims: Junior staff claiming overtime for hours not worked.
Suppression of Cash/Cheques: Diversion of customer deposits and loan repayments into fictitious accounts.
Alteration of Programs: Unauthorized access to systems to manipulate account balances.

Likely Causes:

Weak internal controls and supervision.
Non-compliance with KYC rules.
Poor IT and database management.
Negligence, inadequate training, and poor working conditions.
Fear of reporting fraud to regulators due to reputational concerns.

The audit committee mandated management to engage a forensic expert to investigate and report on the matter within four weeks. Your firm has been appointed for this engagement.

Required:

(a) Discuss the ethical principles applicable to this situation. (5 Marks)

(b) Advise on the procedures to gather evidence for an acceptable report to management. (5 Marks)

(c) Recommend the agencies and relevant laws management should use to tackle these problems, where legal actions might be required. (5 Marks)

Answer

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Tags: Ethical Principles, Evidence Gathering, Forensic Audit, Fraud investigation, Regulatory Compliance
Level: Level 3

Topic: Forensic Auditing

AAA – May 2023 – L3 – Q6 – Regulatory Framework and Professional Standards

Evaluate the principles of the Nigerian Data Protection Regulation and discuss its requirements in an audit context.

Question

The audit of one of your firm’s new clients is ongoing. Review and compliance procedures were being carried out by the audit team. There were unsatisfactory issues with some of the data generated for use in the testing process. These issues were escalated, and it became necessary to bring in the firm’s IT specialists for confirmation purposes. With your competence in this area, you were asked to provide the necessary guidance and assurance needed by the audit team.

Required:

(a) Evaluate the components of the governing principles of the Nigerian Data Protection Regulation, 2019, as applicable in the circumstance. (6 Marks)

(b) Discuss the requirements of the data protection framework. (9 Marks)

Answer

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Tags: Audit Compliance, Data protection, IT Assurance, Nigerian Data Protection Regulation
Level: Level 3

Topic: Regulatory Framework and Professional Standards

AAA – May 2023 – L3 – Q5 – Audit Completion and Final Review

Discuss reasons for reviewing predecessor auditor’s work, audit procedures for sufficient evidence, and actions for insufficient audit evidence.

Question

Vigo Microfinance Bank Limited was incorporated on July 1, 2014, as a public limited company under the Companies and Allied Matters Act. The bank obtained a Microfinance banking license from the Central Bank on August 5, 2015, to operate on a nationwide basis and commenced business operation on September 5, 2015. The bank’s principal business is to provide microfinance banking and related services to the poor and underserved segment of society to alleviate poverty under the Microfinance Institutions Ordinance.

In 2019, the bank decided to convert to a commercial bank and commenced business operations on August 10, 2019, after final approval from the regulator. As of December 31, 2019, the bank had five branches (2016: 24) in the Federal Capital and four other major geopolitical zones in the country.

With the new commercial banking license, the bank employed the services of F.K. George Professional Services to audit its financial statements. As part of the activities to be carried out on the initial engagement, the external auditors began a review of the books of account of the predecessor auditor, and the following issues emerged:

Some property, plant, and equipment in the books of account and prior year financial statements had negative net carrying amounts.
The basis for impairment included in prior year financial statements regarding loans and advances could not be established from the working papers.
A material amount of pre-operating expenses included in receivables schedules could not be satisfactorily explained.
Audit work performed on interest income in the prior year was not supported by sufficient appropriate audit evidence.
Details of outstanding tax liabilities could not be provided, as the amount in the financial statements was the figure supplied by the tax consultant, and not reviewed by the former external auditor.
There was no satisfactory explanation for nil balances in prior year financial statements on contingent liabilities, as no evidence existed that requests for confirmation were made from solicitors of the bank.
Details of contraventions included in the examiner’s report were not considered for disclosures in the financial statements.

The Central Bank is requesting the financial statements of the bank, and management is worried about delays in releasing the financial statements by the new external auditors despite several notifications and reminders.

The Chief Finance Officer of the bank complained to you, as a member of the engagement team, about the delay in concluding the audit. He argued that your firm should not be concerned about prior period financial statement issues, as your firm did not express an opinion on them. Furthermore, the responsibility for the financial statements lies with the board of directors.

Required:

(a) Discuss why your firm needs to carry out the above exercise. (3 Marks)

(b) Analyze the nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence. (8 Marks)

(c) Evaluate what your firm might likely do in case of inability to obtain sufficient appropriate audit evidence from the exercise. (4 Marks)

Answer

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Tags: Audit evidence, Audit Procedures, Financial Statement Review, Initial Engagements, Predecessor Auditor
Level: Level 3

Topic: Audit Completion and Final Review

AAA – May 2023 – L3 – Q4 – Assurance Engagements

Differentiate between due diligence and audit reports, discuss key items for due diligence, evaluate professional firm benefits, and highlight the due diligence report format.

Question

Piton Drilling and Engineering Services Limited was established in 2001 by Andrew and Cole. The company provides consultancy, engineering, and training services in borehole drilling, power generation, and environmental engineering services under drilling, training, and laboratories divisions. The largest division is drilling, contributing more than 60% of income, while training and laboratory services contribute over 30%.

Piton Drilling & Engineering Services Limited saw an opportunity to combine business operations with Valemu Limited, a small engineering company with three members. Valemu Limited has a strong presence in the riverine areas and commenced operations about two years ago.

The issue of the business combination was brought to the attention of Peter, the Engagement Partner for the audit of Piton Drilling and Engineering Services Limited. He suggested that Andrew and Cole should perform due diligence on the operations of Valemu Limited, regardless of the fact that they are in similar business operations. He explained that this exercise would reduce the risk of failure of the merged entity, as both quantitative and qualitative information would be available about the operations of the entity before deciding on signing the agreement.

The due diligence should cover financial viability and long-term sustainability of the merged entity. Peter made reference to a situation where a large department store was forced to wind down its operations after a business combination when it was discovered that the merged entity was highly indebted to the bank, and most of its assets had been pledged as collateral for loans.

Some staff of your firm have already been assigned to the audit engagement. You informed them that the audit would be delayed because a due diligence exercise is being carried out on the operations of the entity Piton Drilling and Engineering Services Limited intends to merge with. One of the inquisitive staff, who is tired of staying in the office, came up to you with a question: why couldn’t the audit and the due diligence review serve the same purpose?

Required:

(a) Differentiate between due diligence report and external audit report. (3 Marks)

(b) Discuss the items you feel should be investigated or reported on in the due diligence exercise to make it of value to Piton Drilling and Engineering Services Limited. (7 Marks)

(d) Highlight the format of the due diligence report. (7 Marks)

Answer

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Tags: Business combination, Due diligence, External audit, Financial Viability, Report Formats
Level: Level 3

Topic: Assurance Engagements

AAA – May 2023 – L3 – Q3 – Risk Management in Audits

Evaluate risks in PK Industries' scenario, discuss related party risk assessment per ISA 550, and provide audit guidelines based on ISA 600.

Question

Messrs PK Industries Limited was incorporated and operates its business in Nigeria. The company has existed over the years. During most of this period, it imported some major components from China. Imports usually take some time to arrive after necessary forms have been completed and submitted to the bank.

Two of the directors have two other companies that supply fuel and other local resources needed by the company. The company’s directors are aware of this but prefer to do their business rather than patronize other suppliers.

In the last few years, the turnover of the company fluctuated between ₦500 million and ₦1 billion. The two other companies owned by the two directors are currently trading on loans granted by the company.

Following what was considered to be an increasingly harsh economic environment and high cost of power supply, the company registered a subsidiary company with a production outfit in Ghana while still maintaining its head office operations in Nigeria. Part of the raw materials needed in Ghana are procured in Nigeria and transported to Ghana through hired trailers. This process is being used until a suitable supplier is found in Ghana.

The company decided to hold the next Annual General Meeting (AGM) in the company’s premises in Ghana, with all the directors/shareholders traveling to Ghana on a direct flight from Abuja to Accra at the company’s expense. It was decided that this was an opportunity to evaluate the Ghanaian environment for further business decisions.

The audit of the Nigerian company and its Ghanaian company were done by different firms.

Required:

(a) Evaluate the risks involved in the scenario above. (5 Marks)

(b) Discuss the risk assessment procedures that the auditor of Messrs PK Industries Limited needs to adopt as required by ISA 550. (11 Marks)

Answer

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Tags: Audit risks, Group Audits, ISA 550, ISA 600, Related Party Transactions, Risk Assessment
Level: Level 3

Topic: Risk Management in Audits

AAA – May 2023 – L3 – Q2 – Audit of IT Systems and Data Analytics

Discuss challenges and solutions for e-commerce assurance, ethical principles for forensic investigation, and assurance engagement reporting requirements.

Question

There is an indication of increasing application of technology in the business and commercial world. Many activities are now carried out on a real-time basis, and payment systems are gradually reducing the use of cheques.

Your new audit client is one of the companies that has recently enhanced its business settings with respect to receipts and payments. The previous auditor has little depth in information and communication technology despite the growing trend. The client’s management also thinks that its performance in the past has been inadequately reported due to the complicity of the key accounting staff and inadequacies of the previous auditor. The client is therefore considering its options in the circumstances.

Required:

(a) Discuss the challenges encountered in the provision of assurance engagements on e-commerce systems and the approach to address these challenges. (8 Marks)

(b) Evaluate the ethical principles that will be relevant in the conduct of forensic investigation of this client and the considerations the accountant needs to bear in mind in such an assignment. (7 Marks)

Answer

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Tags: Assurance engagements, E-commerce Systems, Ethical Principles, Forensic Investigation, Reporting Standards
Level: Level 3

Topic: Audit of IT Systems and Data Analytics, Forensic Auditing

CR – May 2021 – L3 – Q4 – Business Combinations (IFRS 3)

Evaluate the impact of restructuring plans on individual and group accounts for Tanimo PLC and its subsidiaries.

Question

The statements of financial position of Tanimo PLC and its subsidiaries Emili PLC and Wagbo PLC as at May 31, 2021, are as follows:

Statements of Financial Position as at May 31, 2021

Item	Tanimo PLC (Nm)	Emili PLC (Nm)	Wagbo PLC (Nm)
Property, Plant, and Equipment	600	200	45
Cost of Investment in Emili PLC	60	–	–
Cost of Investment in Wagbo PLC	70	–	–
Net Current Assets	160	100	20
Total Assets	890	300	65
Equity & Liabilities:
Share Capital (Ordinary Shares of N1 each)	120	60	40
Retained Earnings	770	240	25
Total Equity & Liabilities	890	300	65

It is the group’s policy to value non-controlling interests at its proportionate share of the fair value of the subsidiary’s identifiable net assets.

The two different plans to restructure the group are as follows:

Plan 1
- Emili PLC is to purchase the whole of Tanimo’s PLC investment in Wagbo PLC.
- The directors are undecided as to whether the purchase consideration should be 50 million N1 ordinary shares of Emili PLC or a cash amount of N75 million.
Plan 2
- The assets and trade of Wagbo PLC are to be transferred to Emili PLC at their carrying amount.
- Wagbo PLC would initially become a non-trading company.
- The consideration for the transfer will be N60 million, which will be left outstanding on the intercompany account between Emili PLC and Wagbo PLC.

Required:

Answer

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Tags: Consolidation, Goodwill, Group Restructuring, Intercompany Balances, Non-Controlling Interests, Share Exchange
Level: Level 3

Topic: Business Combinations (IFRS 3)

CR – Dec 2020 – L3 – Q3 – Regulatory Environment for Corporate Reporting

Discuss SEC risk management provisions and analyse components of effective risk reports and their benefits to financial institutions.

Question

As part of the regulatory framework to manage risk, the Securities and Exchange Commission (SEC) provided several guidelines for rules and content of effective risk reports.

Required:

a. Discuss the regulatory risk management provisions by SEC in Nigeria. (10 Marks)

b. Analyse the components of effective risk reports and state the benefits of their application to financial institutions in Nigeria. (10 Marks)

Answer

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Tags: Corporate Governance, Financial Institutions, Risk Management, Risk Reports, SEC Guidelines
Level: Level 3

Topic: Regulatory Environment for Corporate Reporting

CR – Dec 2020 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Assess the performance of two companies using financial ratios and draft a report for investment decisions.

Question

Statements of Profit or Loss for the Year Ended December 31, 2020:

Item	Heritage Limited (N’000)	Legacy Limited (N’000)
Revenue	150,000	700,000
Cost of Sales	(60,000)	(210,000)
Gross Profit	90,000	490,000
Interest	500	12,000
Distribution Costs	13,000	72,000
Administrative Expenses	15,000	35,000
Total Expenses	28,500	119,000
Profit Before Tax	61,500	371,000
Income Tax Expense	(16,605)	(100,170)
Profit for the Year	44,895	270,830

Statements of Financial Position as at December 31, 2020:

Item	Heritage Limited (N’000)	Legacy Limited (N’000)
Assets:
Non-Current Assets:
Property	–	500,000
Plant and Equipment	190,000	280,000
Total Non-Current Assets	190,000	780,000
Current Assets:
Inventories	12,000	26,250
Trade Receivables	37,500	105,000
Bank	500	22,000
Total Current Assets	50,000	153,250
Total Assets	240,000	933,250
Equity & Liabilities:
Equity:
Share Capital	156,000	174,750
Retained Earnings	51,395	390,830
Total Equity	207,395	565,580
Non-Current Liabilities:
Long-Term Debt	10,000	250,000
Current Liabilities:
Trade Payables	22,605	117,670
Total Liabilities	32,605	367,670
Total Equity & Liabilities	240,000	933,250

The Board of Directors of Patrimony Investments PLC is considering a proposal to buy into one of the companies to enhance the reported profit and stability of the company after the investment.

Required:

a. Assess the relative performance of the two companies for the year ended December 31, 2020, with three suitable ratios each for:

Profitability and efficiency
Liquidity and solvency
(8 Marks)

Answer

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Tags: Efficiency Analysis, Investment decision-making, Liquidity Ratios, Profitability Ratios, Solvency Ratios
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)

CR – May 2022 – L3 – Q1 – Leases (IFRS 16)

Adjust lease accounting for right-of-use asset and lease liability in compliance with IFRS 16.

Question

The draft financial statements of Gbola Limited group and its investee companies Tanko Limited and Eze Limited at December 31, 2018 are shown below:

Draft Statements of Profit or Loss for the Year Ended December 31, 2018

Item	Gbola Limited (N’000)	Tanko Limited (N’000)	Eze Limited (N’000)
Revenue	17,070	7,320	2,235
Cost of Sales	(8,640)	(3,210)	(885)
Gross Profit	8,430	4,110	1,350
Other Operating Expenses	(2,070)	(810)	(600)
Profit from Operations	6,360	3,300	750
Interest Expense	(570)	(660)	(210)
Profit Before Tax	5,790	2,640	540
Income Tax Expense	(810)	(360)	(90)
Profit for the Year	4,980	2,280	450

Draft Statements of Financial Position as at December 31, 2018

Additional Information

On January 1, 2014, Gbola Limited acquired 9,000,000 ordinary shares in Tanko Limited for N23,250,000 when the reserves of Tanko Limited were N3,000,000.
A new asset with a fair value of N1,500,000 was acquired during the year under a lease agreement by Gbola Limited. A clause in the lease agreement stipulated that N300,000 payments must be paid on December 31, each year for six years, starting from December 31, 2018. The interest rate implicit in the lease is 5.47%. Gbola Limited treated this as an operating expense; because the only accounting entry that the company believes must be made in relation to this asset is the N300,000 payment it has made.
Gbola Limited had an intangible asset of N750,000 for software in its statement of financial position. The directors of Gbola Limited believed that the software will have no recoverable value at the date of acquisition, and Tanko Limited wrote it off shortly after its acquisition.
At the date of acquisition of Tanko Limited, the carrying amount of its property, plant, and equipment, considered to have a remaining life of 10 years, was N5,625,000 lower than its fair value.
On January 1, 2017, Gbola Limited acquired 2,250,000 ordinary shares in Eze Limited for N6,000,000 when the reserves of Eze Limited were N1,350,000. The carrying amount of assets of Eze Limited was the same as their fair values at that date. Depreciation should be treated as an operating expense.
A component used by both Tanko Limited and Eze Limited is produced by Gbola Limited, and it sells this component at a margin of 25%. Goods worth N780,000 were sold to Tanko Limited during the year. None of these goods had been sold by Tanko Limited at December 31, 2018. Gbola Limited also sold goods worth N1,200,000 to Eze Limited, and Eze Limited sold all of these goods as at December 31, 2018.
N900,000 in respect of amounts owed by Tanko Limited and N525,000 in respect of amounts owed by Eze Limited were included in the receivables of Gbola Limited. The corresponding balances in Tanko Limited and Eze Limited payables were N600,000 and N525,000, respectively. On December 31, 2018, Tanko Limited sent a cheque of N300,000 to Gbola Limited.
There has been no impairment for Eze Limited. However, the impairment test conducted on Tanko Limited’s goodwill showed that goodwill is being impaired by 10% per annum on a straight-line basis.
Gbola Limited’s cash and cash equivalents included a Director’s loan of N1,500,000. The Directors are of the view that the inclusion does not contravene any International Financial Reporting Standard.
The goodwill arising on the acquisition of Tanko Limited is being amortized over a 10-year period, though this practice contravenes IAS 36, which prohibits goodwill amortization and instead requires annual impairment tests.

Answer

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Tags: Depreciation, IFRS 16 Adjustments, Interest expense, Lease Liability, Right-of-Use Asset
Level: Level 3

Topic: Leases (IFRS 16)

AAA – May 2023 – L3 – Q7 – Forensic Auditing

Discuss ethical principles for fraud investigation, advise on evidence gathering procedures, and recommend laws and agencies for legal action.

Question

Hacking of Accounts: Unauthorized transfers due to poor information security systems.
Forgery: Forged cheques, signatures, and withdrawal slips used in collusion with bank staff.
Fictitious Accounts: Opening and operating fake accounts to facilitate illegal transfers due to incomplete KYC.
Loans to Fictitious Borrowers: Fictitious loans issued via fake accounts.
False Overtime Claims: Junior staff claiming overtime for hours not worked.
Suppression of Cash/Cheques: Diversion of customer deposits and loan repayments into fictitious accounts.
Alteration of Programs: Unauthorized access to systems to manipulate account balances.

Likely Causes:

Weak internal controls and supervision.
Non-compliance with KYC rules.
Poor IT and database management.
Negligence, inadequate training, and poor working conditions.
Fear of reporting fraud to regulators due to reputational concerns.

The audit committee mandated management to engage a forensic expert to investigate and report on the matter within four weeks. Your firm has been appointed for this engagement.

Required:

(a) Discuss the ethical principles applicable to this situation. (5 Marks)

(b) Advise on the procedures to gather evidence for an acceptable report to management. (5 Marks)

(c) Recommend the agencies and relevant laws management should use to tackle these problems, where legal actions might be required. (5 Marks)

Answer

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Tags: Ethical Principles, Evidence Gathering, Forensic Audit, Fraud investigation, Regulatory Compliance
Level: Level 3

Topic: Forensic Auditing

AAA – May 2023 – L3 – Q6 – Regulatory Framework and Professional Standards

Evaluate the principles of the Nigerian Data Protection Regulation and discuss its requirements in an audit context.

Question

Required:

(a) Evaluate the components of the governing principles of the Nigerian Data Protection Regulation, 2019, as applicable in the circumstance. (6 Marks)

(b) Discuss the requirements of the data protection framework. (9 Marks)

Answer

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Tags: Audit Compliance, Data protection, IT Assurance, Nigerian Data Protection Regulation
Level: Level 3

Topic: Regulatory Framework and Professional Standards

AAA – May 2023 – L3 – Q5 – Audit Completion and Final Review

Discuss reasons for reviewing predecessor auditor’s work, audit procedures for sufficient evidence, and actions for insufficient audit evidence.

Question

Some property, plant, and equipment in the books of account and prior year financial statements had negative net carrying amounts.
The basis for impairment included in prior year financial statements regarding loans and advances could not be established from the working papers.
A material amount of pre-operating expenses included in receivables schedules could not be satisfactorily explained.
Audit work performed on interest income in the prior year was not supported by sufficient appropriate audit evidence.
Details of outstanding tax liabilities could not be provided, as the amount in the financial statements was the figure supplied by the tax consultant, and not reviewed by the former external auditor.
There was no satisfactory explanation for nil balances in prior year financial statements on contingent liabilities, as no evidence existed that requests for confirmation were made from solicitors of the bank.
Details of contraventions included in the examiner’s report were not considered for disclosures in the financial statements.

Required:

(a) Discuss why your firm needs to carry out the above exercise. (3 Marks)

(b) Analyze the nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence. (8 Marks)

(c) Evaluate what your firm might likely do in case of inability to obtain sufficient appropriate audit evidence from the exercise. (4 Marks)

Answer

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Tags: Audit evidence, Audit Procedures, Financial Statement Review, Initial Engagements, Predecessor Auditor
Level: Level 3

Topic: Audit Completion and Final Review

AAA – May 2023 – L3 – Q4 – Assurance Engagements

Differentiate between due diligence and audit reports, discuss key items for due diligence, evaluate professional firm benefits, and highlight the due diligence report format.

Question

Required:

(a) Differentiate between due diligence report and external audit report. (3 Marks)

(b) Discuss the items you feel should be investigated or reported on in the due diligence exercise to make it of value to Piton Drilling and Engineering Services Limited. (7 Marks)

(d) Highlight the format of the due diligence report. (7 Marks)

Answer

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Tags: Business combination, Due diligence, External audit, Financial Viability, Report Formats
Level: Level 3

Topic: Assurance Engagements

AAA – May 2023 – L3 – Q3 – Risk Management in Audits

Evaluate risks in PK Industries' scenario, discuss related party risk assessment per ISA 550, and provide audit guidelines based on ISA 600.

Question

The audit of the Nigerian company and its Ghanaian company were done by different firms.

Required:

(a) Evaluate the risks involved in the scenario above. (5 Marks)

(b) Discuss the risk assessment procedures that the auditor of Messrs PK Industries Limited needs to adopt as required by ISA 550. (11 Marks)

Answer

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Tags: Audit risks, Group Audits, ISA 550, ISA 600, Related Party Transactions, Risk Assessment
Level: Level 3

Topic: Risk Management in Audits

AAA – May 2023 – L3 – Q2 – Audit of IT Systems and Data Analytics

Discuss challenges and solutions for e-commerce assurance, ethical principles for forensic investigation, and assurance engagement reporting requirements.

Question

Required:

(a) Discuss the challenges encountered in the provision of assurance engagements on e-commerce systems and the approach to address these challenges. (8 Marks)

Answer

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Tags: Assurance engagements, E-commerce Systems, Ethical Principles, Forensic Investigation, Reporting Standards
Level: Level 3

Topic: Audit of IT Systems and Data Analytics, Forensic Auditing

Professional Body: ICA (Nigeria)

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CR – May 2021 – L3 – Q4 – Business Combinations (IFRS 3)

Evaluate the impact of restructuring plans on individual and group accounts for Tanimo PLC and its subsidiaries.

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CR – Dec 2020 – L3 – Q3 – Regulatory Environment for Corporate Reporting

Discuss SEC risk management provisions and analyse components of effective risk reports and their benefits to financial institutions.

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CR – Dec 2020 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Assess the performance of two companies using financial ratios and draft a report for investment decisions.

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CR – May 2022 – L3 – Q1 – Leases (IFRS 16)

Adjust lease accounting for right-of-use asset and lease liability in compliance with IFRS 16.

Additional Information

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AAA – May 2023 – L3 – Q7 – Forensic Auditing

Discuss ethical principles for fraud investigation, advise on evidence gathering procedures, and recommend laws and agencies for legal action.

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AAA – May 2023 – L3 – Q6 – Regulatory Framework and Professional Standards

Evaluate the principles of the Nigerian Data Protection Regulation and discuss its requirements in an audit context.

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AAA – May 2023 – L3 – Q5 – Audit Completion and Final Review

Discuss reasons for reviewing predecessor auditor’s work, audit procedures for sufficient evidence, and actions for insufficient audit evidence.

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AAA – May 2023 – L3 – Q4 – Assurance Engagements

Differentiate between due diligence and audit reports, discuss key items for due diligence, evaluate professional firm benefits, and highlight the due diligence report format.

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AAA – May 2023 – L3 – Q3 – Risk Management in Audits

Evaluate risks in PK Industries' scenario, discuss related party risk assessment per ISA 550, and provide audit guidelines based on ISA 600.

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AAA – May 2023 – L3 – Q2 – Audit of IT Systems and Data Analytics

Discuss challenges and solutions for e-commerce assurance, ethical principles for forensic investigation, and assurance engagement reporting requirements.

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CR – May 2021 – L3 – Q4 – Business Combinations (IFRS 3)

Evaluate the impact of restructuring plans on individual and group accounts for Tanimo PLC and its subsidiaries.

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CR – Dec 2020 – L3 – Q3 – Regulatory Environment for Corporate Reporting

Discuss SEC risk management provisions and analyse components of effective risk reports and their benefits to financial institutions.

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CR – Dec 2020 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Assess the performance of two companies using financial ratios and draft a report for investment decisions.

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CR – May 2022 – L3 – Q1 – Leases (IFRS 16)

Adjust lease accounting for right-of-use asset and lease liability in compliance with IFRS 16.

Additional Information

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AAA – May 2023 – L3 – Q7 – Forensic Auditing

Discuss ethical principles for fraud investigation, advise on evidence gathering procedures, and recommend laws and agencies for legal action.

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AAA – May 2023 – L3 – Q6 – Regulatory Framework and Professional Standards

Evaluate the principles of the Nigerian Data Protection Regulation and discuss its requirements in an audit context.

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AAA – May 2023 – L3 – Q5 – Audit Completion and Final Review

Discuss reasons for reviewing predecessor auditor’s work, audit procedures for sufficient evidence, and actions for insufficient audit evidence.

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AAA – May 2023 – L3 – Q4 – Assurance Engagements

Differentiate between due diligence and audit reports, discuss key items for due diligence, evaluate professional firm benefits, and highlight the due diligence report format.

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AAA – May 2023 – L3 – Q3 – Risk Management in Audits

Evaluate risks in PK Industries' scenario, discuss related party risk assessment per ISA 550, and provide audit guidelines based on ISA 600.

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AAA – May 2023 – L3 – Q2 – Audit of IT Systems and Data Analytics

Discuss challenges and solutions for e-commerce assurance, ethical principles for forensic investigation, and assurance engagement reporting requirements.

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