Past Questions & Answers
- 15 Marks
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)
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- 15 Marks
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)
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- 15 Marks
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)
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- 20 Marks
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)
(c) Evaluate the benefits of using a professional service firm for the exercise. (3 Marks)
(d) Highlight the format of the due diligence report. (7 Marks)
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- Tags: Business combination, Due diligence, External audit, Financial Viability, Report Formats
- Level: Level 3
- Topic: Assurance Engagements
- 20 Marks
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)
(c) Prepare the key guidelines to the audit in accordance with ISA 600. (4 Marks)
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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