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ATAX – May 2022 – L3 – Q7 – Petroleum Profits Tax (PPT)

Identify allowable expenses under the PIA and explain implications of mergers in upstream petroleum operations.

Question

In the last three years, some major oil producing companies have decided to divest their investments from the Nigerian oil and gas sector. One of the reasons for this might be the new global energy order, which seems to favour the evolution of a “green environment” as against the present use of hydrocarbons with its inherent environmental degradation and pollution.

Similarly, in response to the yearnings of various stakeholders in the oil and gas sector, the Federal Government enacted the Petroleum Industry Act (PIA) 2021. Generally, the Act provides the legal, governance, regulatory, and fiscal framework for the Nigerian petroleum industry, the development of host communities, and for related matters.

Notable commentators and professionals in the sector suggest that the divestment of major oil and gas operators in Nigeria could be beneficial to local investors if funds are sourced and deployed to businesses in the sector. Mergers and acquisitions of indigenously owned oil-producing companies have been noted as one valuable option in this regard.

Required:

a. In respect of the Petroleum Industry Act 2021, identify the expenses allowable in the computation of adjusted profit of a company in upstream petroleum operations. (6 Marks)
b. Identify and explain SIX implications of mergers and acquisitions in respect of a situation where a new company takes over an existing company. (9 Marks)

Answer

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Tags: Acquisitions, Allowable expenses, Mergers, Petroleum Industry Act, Tax implications, Upstream Operations
Level: Level 3

Topic: Petroleum Profits Tax (PPT)

ATAX – May 2022 – L3 – Q6 – Taxation of Non-Resident Companies and Individuals

Discuss the tax implications of an overseas branch and compute the associated tax liabilities.

Question

Maigona Agro Limited is a Nigerian company operating in the agricultural sector. It has a large expanse of land in the Northern part of the country, which is used strictly for the cultivation of cotton seeds. As a result of the collapse of the textile/garment industry, specifically due to the unfavourable business climate in Nigeria, the company in 2015 established a branch, BAM Textile Mills, in the United Kingdom. Part of the cotton produced locally is sold to BAM Textile Mills at a competitive price, for the production of finished product (branded textile clothing).

A tax dispute recently arose between the Management of Maigona Agro Limited and officials of the Federal Inland Revenue Service (FIRS) on the correct assessment of profits made by BAM Textile Mills. The Managing Director is of the opinion that the tax paid by BAM Textile Mills in the United Kingdom should be the final tax since the company is only an overseas branch. He further averred that the provisions of the Companies and Allied Matters Act 2020 (as amended) are only applicable to companies incorporated in Nigeria. The Managing Director was furious when the company received a reminder of notice of assessment from the FIRS and has therefore threatened to approach the Tax Appeal Tribunal for redress.

You have been engaged by the company as its Tax Consultant to provide professional advice on the tax implication of the profit made by BAM Textile Mills, UK and possibly representation at the Tax Appeal Tribunal sittings. The statement of profit or loss for the year ended October 31, 2021 (BAM Textile Mills’ result has been converted to Nigerian Naira at the prevailing exchange rate) and other relevant documents were handed over to you by the Managing Director.

The extracts from the statements of profit or loss of the two corporate entities revealed the following:

	Maigona Agro Ltd (N’000)	BAM Textile Mills (N’000)	Total (N’000)
Gross Turnover	975,100	1,820,500	2,795,600
Less:
Cost of materials/inputs	350,200	672,000	1,022,200
Salaries and Wages	122,530	400,400	522,930
Administrative Expenses	45,700	110,900	156,600
Depreciation	75,600	147,300	222,900
Donation	8,500	0	8,500
Share of Head Office Expenses	33,300	50,000	83,300
Income Tax Paid in the UK	0	72,200	72,200
Total Expenses	635,830	1,452,800	2,088,630
Net Profit	339,270	367,700	706,970

Additional Information:

The capital allowances of Maigona Agro Limited in respect of plant and equipment, farming tools, and other qualifying capital expenditure as agreed with the tax authorities was N45,000,000. The amount of capital allowances of N57,000,000 claimable by BAM Textile Mills on qualifying assets was also certified by the tax authorities.
Included in the donation was N5,000,000 given to victims of the COVID-19 (Omicron variant) pandemic in Nigeria.
The UK tax rate is assumed to be 35%.

Required:

a. Advise the management of Maigona Agro Limited on the tax implications of the overseas branch. (4 Marks)
b. Compute the tax liabilities of the company in line with your submission in (a) above. (11 Marks)

Answer

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Tags: Double Taxation, Overseas Branches, Tax Appeal Tribunal, Tax Compliance, Tax disputes, Tax implications
Level: Level 3

Topic: Taxation of Non-Resident Companies and Individuals

ATAX – May 2022 – L3 – Q5 – Ethical Issues in Tax Practice

Identify ethical issues in a tax engagement and discuss punitive measures for ensuring adherence to ethical and legal standards.

Question

Mr. Barau Olubami completed his first degree in a reputable university in Nigeria seven years ago. After the compulsory youth service, he wrote and passed the professional examination and was subsequently admitted as an associate member of the Institute of Chartered Accountants of Nigeria. He had four-year training in a professional audit firm before he decided to establish his accounting firm. The firm consists of him as the principal partner, two accounting graduates (as Assistant Auditors/Consultants), a secretary, and an office assistant.

Within six months of his professional practice, he was able to get three clients to which he provides services, that include preparation of tax records, computation of end-of-year tax liabilities, filing of tax returns, advisory to clients on tax matters, compliance with tax legislations, and management of tax audit and investigation.

In one of the social events he attended with his father, he was introduced to Mr. Chidi Odamo, his father’s schoolmate in his polytechnic days. Mr. Odamo is the Chief Executive of Odamo Nigeria Limited, a company that manufactures paints. In a private chat they both had, Mr. Odamo complained bitterly that his current tax consultant has not been helping him to pay less amount of tax liability to the relevant tax authorities, unlike what his friends in the same industry are enjoying through the assistance of their tax consultants. Mr. Olubami informed Mr. Odamo that he knew his current tax consultant very well as he was his senior in the university. He also submitted that his (Olubami’s) firm is the tax consultant to another company in the same industry with Odamo Nigeria Limited. He then promised Mr. Odamo that if he is given the tax consultancy/audit work, he knows how to resolve the issue with the tax officials and the company will be the better for it.

The engagement with the current tax consultant was terminated two weeks after Mr. Odamo and Mr. Olubami had a “fruitful” discussion and the latter’s firm was appointed as the company’s new tax consultant after both parties agreed to a clause in the engagement contract that aside from the professional fees, the firm is entitled to 20% of tax saved.

During the review of previous tax returns filed with and tax paid to the tax authority, he observed a significant material error of the sum of N3 million made by the tax authority in favour of his client (Odamo Nigeria Limited). Since this could not be regarded as tax saved by his firm, he decided not to inform the company as this is considered as “by-gone.”

During the course of the year’s tax audit, documents and information received from the company’s accountant were not independently validated. These documents were sent to the two Assistant Auditors to work with. Specifically, sales were grossly understated; the cost of new vehicle and furniture and fittings were understated while some expenses incurred were overstated.

At the completion of the work done by the two Assistant Auditors/Consultants, Mr. Olubami held a meeting with the company’s Managing Director and presented a draft report, which showed that the company’s total tax liability for the year was N12 million. He promised him that with the assistance of his “contact” at the Revenue Service, the tax liability would be reduced to N7 million. The company’s Managing Director advised him to go ahead and file appropriate returns as the matter was fully settled. Self-assessment returns were filed and perhaps with the connivance of unscrupulous tax officials, the company paid N7 million tax liability. However, if a thorough job was done, the company’s tax payable for the year would have been N18.25 million.

Required:

a. Examine TEN ethical issues that arose from the tax engagement. (10 Marks)
b. What are the punitive measures put in place to ensure that accountants in practice adhere to legal and ethical issues when preparing tax returns? (5 Marks)

Answer

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Level: Level 3

Topic: Ethical Issues in Tax Practice

ATAX – May 2022 – L3 – Q4 – Taxation of Specialized Businesses

Compute tax liabilities and discuss incentives for Dutse Mines in mining solid minerals

Question

———————————————————————
Question:

As investors and policymakers adapt to the global energy transition in a bid to offer an effective hedge against swings in oil prices, the Federal Government has recognised that it is beneficial for the country to diversify its economy. The attention of the country is now towards the development of the solid minerals sector. The Nigeria Minerals and Mining Act 2007 (as amended) was enacted to regulate the industry. Incentives for operators in the sector are as provided for in Section 5 of the Act.

One of the earliest investors in the mining sector, Dutse Mines (Nigeria) Limited, was granted a mining title by the Mining Cadastre Office (MCO) for exploitation of limestone in Nkalagu in the south-eastern zone of Nigeria in 2008. In spite of so many challenges the company is facing, it has managed to remain afloat in business.

The company has, of recent, been having tax disputes with the relevant tax authority, and your firm of chartered accountants has been engaged to help resolve them. In the 2022 tax returns filed by the company, the major area of dispute between the company and the tax authority was disparity in the treatment of certified exploration and processing expenditure of ₦60,000,000 incurred during the course of the year.

Your firm is provided with the following extracts (and supporting documents) from the books of the company for the year ended December 31, 2021:

Additional Information:

Sundry income included ₦8,500,000 realised as profit from disposal of the old excavating machine.
Allowance for doubtful debts consisted of:
- Bad debts written off: ₦2,500,000
- General allowance for doubtful debts: ₦10,500,000
- Specific allowance for doubtful debts: ₦8,000,000
- Loan to customer written off: ₦5,000,000
Donation included ₦5,000,000 given to victims of environmental degradation, as part of the company’s social responsibility to the host community.
Legal fees included ₦750,000 paid as a penalty for late filing of tax returns.
The tax written down values of qualifying capital expenditure at the end of 2021 tax year were:
- Motor vehicles (2 years remaining): ₦25,000,000
- Furniture and fittings (utilised for 2 years): ₦22,500,000
- Mining expenditure (6 years remaining): ₦40,000,000

Required:

As the Manager (Tax Matters) assigned to handle this matter, you are to forward the report to your Senior Partner (Tax Matters) showing:

a. Computation of tax liabilities of the company for the relevant assessment year (14 Marks).
b. Comments on tax incentives available to a company in the mining of solid minerals in Nigeria (6 Marks).

Answer

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Tags: Allowable and Disallowable Expenses, Mining Taxation, Tax Incentives, Tax Liability Computation
Level: Level 3

Topic: Taxation of Specialized Businesses

ATAX – May 2022 – L3 – Q3 – Capital Gains Tax (CGT)

Address the principles of disposal under CGT Act, and compute CGT for transactions in Ikeja, Calabar, Abuja, and Kano.

Question

Disposal of assets is an important concept in the determination of capital gains tax payable. Section 6 of the Capital Gains Tax Act 2004 (as amended) specifically provides that a disposal of assets by a person occurs where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition, or any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital sum. In the same vein, Section 2 (4) of the Finance Act 2020 states the period for filing of self-assessment returns and when payment of the tax computed in respect of chargeable assets disposed of is to be made.

Nice-One Nigeria Limited, a manufacturing concern, with head office in Calabar and branches in Ikeja, Kano, and Abuja, has been in business for several years, reporting its accounts to December 31 of every year. The extracts from the books of accounts of the company during the year ended December 31, 2021, revealed the following transactions:

(i) Disposal of an option
On February 1, 2021, the company sold an option on a piece of land in Ikeja for the sum of ₦8,500,000 to Eco-Raheem Limited, which subsequently exercised the right by purchasing the land for ₦32,200,000.

(ii) Acquisition of asset in exchange for debt
On March 15, 2021, one of the company’s debtors in Calabar, Mr. Baba Tee, reached an agreement with the company by exchanging his piece of land, which was valued at ₦15,000,000, for the debt of ₦13,500,000. The company, on May 7, 2021, disposed of the land for ₦18,000,000. Incidental expenses incurred towards the disposal of the land were ₦250,000.

(iii) Disposal of a building
The company has a staff estate, which comprises five buildings in its Abuja branch. In order to source funds to construct a new staff estate in Kano, the company, on August 12, 2021, sold one of its buildings in the Abuja estate for ₦110,000,000. The cost of acquisition of the five buildings in the estate was ₦250,000,000. The cost of acquisition of the building sold was ₦75,000,000, while the remaining buildings unsold were professionally valued at ₦240,000,000. The company also incurred for the purpose of the disposal of the building, ₦400,000 on building repairs and a professional valuer’s fee of ₦1,100,000.

(iv) Disposal of industrial plants
One of the company’s industrial plants in the Kano branch, which cost ₦4,500,000, was disposed of on September 15, 2021, for ₦6,000,000. A new plant was bought for the purpose of the company’s operations the following month for ₦8,000,000. During the installation of the new plant, it was found that the plant could not efficiently satisfy the requirements of the company and it was subsequently sold on December 2, 2021, as “second-hand” for ₦7,300,000. The company incurred the sum of ₦25,000 as disposal expenses.

The Managing Director of the company is of the opinion that issues around the transactions undertaken by the company in the financial year are “technical,” which only competent professional accountants with experience in tax matters can conveniently handle. Accordingly, your firm of accountants was contacted to help provide tax advice on each of the above transactions.

Required:

You have been directed by your firm’s Head (Tax Matters) to take charge of the assignment and submit a report to him by the close of work in three days.

Your report should specifically cover:
(a) The principles of disposal as provided for in Section 6 of the Capital Gains Tax Act 2004 (as amended) (3 Marks).
(b) Computation of capital gains tax payable and when the tax due is to be paid to the relevant tax authority for the following stated transactions:
i. Disposal of an option in Ikeja branch (2 Marks).
ii. Acquisition of asset in exchange for debt in Calabar head office (3 Marks).
iii. Disposal of a building in Abuja branch (4 Marks).
iv. Disposal of industrial plants in Kano branch (8 Marks).

Answer

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Tags: Capital gains tax, CGT Act, Compliance, Disposal of assets
Level: Level 3

Topic: Capital Gains Tax (CGT)

ATAX – May 2022 – L3 – Q2 – Emerging Trends in Taxation

Discuss technology-driven tools, their impact, and challenges in tax practice and administration.

Question

Professional accountants engaged in tax practice or tax administration are often confronted with challenges due to the changing operating environment, particularly disruptive technologies. While clients demand cutting-edge services, many tax administrators in Nigeria still carry out their work manually.

In a seminar organised by ICAN, you highlighted that leveraging information technology could help tax practitioners and administrators enhance their work and remain relevant in today’s dynamic environment.

After the seminar, a principal partner of a traditional accounting firm approached you to organise a two-day in-house training for his staff on “Technological tools, impact, and challenges to tax practice and administration.”

Required:

Prepare a paper focusing on the following areas:
a. Identification and explanation of FOUR technology-driven tools that tax practitioners and administrators could use to enhance their work and reporting (8 Marks).
b. The impact of the identified technology-driven tools on tax practice and administration (8 Marks).
c. Challenges of technology-driven tools to tax practice and administration (4 Marks).

Answer

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Tags: IT in Tax Practice, Tax Administration, Tax Challenges, Tax Tools, Technology in Taxation
Level: Level 3

Topic: Emerging Trends in Taxation

ATAX – May 2022 – L3 – Q1 – Taxation of Companies

Determination of tax liabilities, treatment of donations, and exemptions of dividends based on CIT Act provisions.

Question

Dadinkowa Nigeria Limited has been in business since 2009 as a manufacturer of sugar cubes. The company sources its raw materials, sugar cane, from the Northern part of the country. However, due to local security challenges, the company has faced supply disruptions since 2016.

Additionally, the company has disagreements with tax authorities regarding the treatment of certain items (e.g., donations and dividend income) in their financial statements and returns. High overhead costs, especially energy expenses, have worsened operational challenges.

At a recent board meeting, the directors proposed either a temporary closure or relocating to a neighboring country if conditions do not improve in the next fiscal year. The General Manager shared this with you during your visit as the company’s tax consultant, seeking your advice to address these issues.

A scheduled meeting with the Managing Director requires you to prepare a comprehensive tax report addressing:

Determination of the company’s tax liabilities for the relevant tax year.
Analysis of the treatment of donations and exemptions of dividend income under the Companies Income Tax Act (CITA).

The profit or loss account for the year ended December 31, 2021, is as follows:

Profit or Loss Account:

Extract from the company’s statement of financial position as at December 31, 2021 revealed:

The following additional information was made available:

(v) Interest on loan was paid on a facility obtained from a licensed Nigerian deposit money bank at commercial interest rate.
(vi) General and administrative expenses were made up of:

(vii) Donations and subscriptions
Included in donations was N12,000,000 paid to a fund created by the Federal Government for victims of communal crisis that took place where the company is situated.
(viii) The tax written down values of the qualifying capital expenditure (QCE) items as at December 31, 2020 were:

(ix) Additions to QCEs during the year ended December 31, 2021 were:

(x) Unrelieved capital allowances brought forward were N15,200,000.
(xi) Unabsorbed losses from previous years were:

Required:

As the company’s Tax Consultant, you are to draft a report to the Managing Director for the scheduled meeting expected to hold next week. This is expected to address the following:
a. Determination of the company’s tax liabilities for the relevant tax year. (20 Marks)
b. Comment, in line with the provisions of Companies Income Tax Act Cap C21 LFN 2004 (as amended) on:
i. The treatment of donations made by the company during the year under review (5 Marks)
ii. Exemption of dividends from taxation (5 Marks)

Answer

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Tags: Allowable and Disallowable Expenses, Capital allowances, Dividend Exemptions, Donations, Tax Incentives, Taxation of Companies
Level: Level 3

Topic: Taxation of Companies

CR – May 2021 – L3 – Q7b – Regulatory Environment for Corporate Reporting

Discuss the content required in the Governance Report of corporate entities as mandated by SEC Nigeria.

Question

The Securities and Exchange Commission, Nigeria (SEC) requires that the annual report of all quoted companies should include a corporate governance statement. To this effect, general requirements for the content of the Governance Report are clearly spelt out.

Required:

Discuss the content of the Governance Report of corporate entities. (5 Marks)

Answer

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Tags: Annual Reports, Corporate Governance, Governance Reporting, SEC Nigeria
Level: Level 3

Topic: Regulatory Environment for Corporate Reporting

CR – May 2021 – L3 – Q7a – Ethical Issues in Corporate Reporting

Discuss unethical organizational acts and recommend the actions the Chief Accountant should take in a scenario of misrepresentation in financial reporting.

Question

Femmy PLC operates in a city where a major insurance company has just announced a restructuring that will lay off 4,000 employees. For Femmy PLC, accounts receivable represents one of the major assets of the company. Although the company’s annual uncollectible accounts are not out of line, they are material in size. The company is about to submit its application for a bank loan. Sales and net income have declined in the past year, and some customers are falling behind in settling their accounts.

A steady financial performance is necessary to be able to secure the anticipated bank loan. Therefore, management felt there is the need to underestimate the uncollectible accounts this year to show a small growth in earnings. They believe that future successful years will average out the losses.

More so, since the company has a history of success, the adjustments are seen as mere accounting measures and estimates. The Chief Accountant viewed management’s action as unethical.

Required:
i. Discuss the meaning of unethical acts by organizations. (5 Marks)
ii. What should the Chief Accountant do under this circumstance? (5 Marks)

Answer

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Tags: Earnings Management, Financial Reporting Ethics, Professional Ethics, Unethical Accounting Practices
Level: Level 3

Topic: Ethical Issues in Corporate Reporting

CR – May 2021 – L3 – Q6 – Regulatory Environment for Corporate Reporting

Discuss the rationale for different regulatory frameworks and analyze sources of corporate financial reporting regulations in Nigeria.

Question

International Financial Reporting Standards (IFRS) are sets of accounting standards, and it is unrealistic to assume that these standards could not replace those based around rules. However, where a rule-based system has been in operation, there is likely to be an expansion of ethical challenges for both accountants and auditors involved with financial statements if a principles-based approach is adopted. Therefore, regulatory authorities need to ensure ethical practices to achieve high-quality financial statements. This is drawing attention to the need for closer or greater monitoring. Apart from this fact, corporate financial reporting regulations have been in operation before the advent of IFRS.

Required:

a. Appraise the rationale behind different regulatory frameworks for corporate financial reporting. (8 Marks)

b. Analyze in detail the various sources of regulations for corporate financial reporting in Nigeria. (7 Marks)

Answer

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Tags: Corporate Reporting Regulations, Ethical Challenges, IFRS, Nigeria, Regulatory Frameworks
Level: Level 3

Topic: Regulatory Environment for Corporate Reporting

CR – May 2021 – L3 – Q5 – Regulatory Environment for Corporate Reporting

Discuss the benefits and criticisms of principle-based accounting standards and the consequences of transitioning from rule-based to principle-based standards.

Question

The debate over principle-based and rule-based accounting standards has increased as the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) seek to converge accounting standards for global uniformity. There have been divergent opinions as to whether rule-based standards are superior to principle-based standards and whether principle-based standards pose greater ethical challenges to accountants than rule-based standards.

Required:

a. What are the major benefits and basic criticisms of principle-based accounting standards? (10 Marks)

b. What are the consequences of transiting from rule-based to principle-based accounting standards? (5 Marks)

Answer

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Tags: Accounting Ethics, Accounting Standards Debate, Global Convergence, Principle-Based Standards, Rule-Based Standards
Level: Level 3

Topic: Regulatory Environment for Corporate Reporting

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

Program: PROFESSIONAL PROGRAM

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ATAX – May 2022 – L3 – Q7 – Petroleum Profits Tax (PPT)

Identify allowable expenses under the PIA and explain implications of mergers in upstream petroleum operations.

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ATAX – May 2022 – L3 – Q6 – Taxation of Non-Resident Companies and Individuals

Discuss the tax implications of an overseas branch and compute the associated tax liabilities.

The extracts from the statements of profit or loss of the two corporate entities revealed the following:

Additional Information:

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ATAX – May 2022 – L3 – Q5 – Ethical Issues in Tax Practice

Identify ethical issues in a tax engagement and discuss punitive measures for ensuring adherence to ethical and legal standards.

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ATAX – May 2022 – L3 – Q4 – Taxation of Specialized Businesses

Compute tax liabilities and discuss incentives for Dutse Mines in mining solid minerals

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ATAX – May 2022 – L3 – Q3 – Capital Gains Tax (CGT)

Address the principles of disposal under CGT Act, and compute CGT for transactions in Ikeja, Calabar, Abuja, and Kano.

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ATAX – May 2022 – L3 – Q2 – Emerging Trends in Taxation

Discuss technology-driven tools, their impact, and challenges in tax practice and administration.

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ATAX – May 2022 – L3 – Q1 – Taxation of Companies

Determination of tax liabilities, treatment of donations, and exemptions of dividends based on CIT Act provisions.

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CR – May 2021 – L3 – Q7b – Regulatory Environment for Corporate Reporting

Discuss the content required in the Governance Report of corporate entities as mandated by SEC Nigeria.

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CR – May 2021 – L3 – Q7a – Ethical Issues in Corporate Reporting

Discuss unethical organizational acts and recommend the actions the Chief Accountant should take in a scenario of misrepresentation in financial reporting.

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CR – May 2021 – L3 – Q6 – Regulatory Environment for Corporate Reporting

Discuss the rationale for different regulatory frameworks and analyze sources of corporate financial reporting regulations in Nigeria.

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CR – May 2021 – L3 – Q5 – Regulatory Environment for Corporate Reporting

Discuss the benefits and criticisms of principle-based accounting standards and the consequences of transitioning from rule-based to principle-based standards.

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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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