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As an Audit Manager in a big audit firm in Nigeria, you were opportuned to attend a conference on Professional Ethics and Anti-Money Laundering in New York. On your return, one of the audit seniors went through the presentations and asked questions on some of the statements she noted in the presentations.
You are required to explain the following statements to her:
a. A good Auditor is an independent auditor. (5 Marks)
b. The Accountant’s normal professional duty of confidentiality to clients is not an adequate defence where money laundering is involved. (5 Marks)
c. Specific obligations for detecting and reporting suspicions of money laundering are placed on professional firms. (5 Marks)
d. A firm might act for two clients that are in direct competition with each other where there are acceptable safeguards. (5 Marks)
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The auditors of Sunsit Manufacturers Limited had disagreements with the company on various issues. This came to a climax with the withholding of a part of the payment of the last audit fees. The auditors had also been disenchanted with the undue pressures of management and have decided that, as a result of this and the withheld fees, they would disengage from the client.
The company’s chairman, in consideration of past issues, has considered the size of the audit firm as being partly responsible for its inability to manage adequately the pressures from the company’s accounting and management team. He has subsequently approached your firm for a change, and the partners have accepted the engagement despite the predecessor auditor’s declaration of the forfeiture of the firm’s outstanding fees and no further involvement with the client and issues relating to the company.
Required:
a. Following the background to the client and the engagement, evaluate the internal and external business risks that need to be considered with respect to the client. (10 Marks)
b. Discuss the pre-engagement activities to be carried on the client. (10 Marks)
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Which ONE of these services may not be appropriate for an audit firm?
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The following scenarios may threaten compliance with fundamental principles in auditing:
i. The audit supervisor is married to the daughter of the Managing Director of the client company;
ii. The audit firm’s Senior Partner holds shares in the client company;
iii. The assurance firm also provides valuation services, internal audit services, and taxation services to an assurance client;
iv. The assurance firm earns more than 50% of its annual revenue from one assurance client; and
v. The firm obtained motor vehicle financing from a client bank for its staff.
Required:
a. Explain why compliance with fundamental principles in auditing may be threatened in each of the above FIVE circumstances. (10 Marks)
b. Explain FIVE ethical requirements that would reduce or mitigate the threats to compliance with the fundamental principles in the above FIVE circumstances. (10 Marks)
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ROC Company Plc. manufactures aluminium (stainless) household equipment. Its plant is located by Alobe river, which is the source of water for the community. The company currently has the largest share of the market on the West African Coast and plans to expand its operations to East African and South African markets.
At the 26th Annual General Meeting (AGM), shareholders approved the appointment of Adeola & Partners as External Auditors to the company. The Managing Partner of Adeola & Partners, Sir Segun Adeola, is a nephew of the Managing Director of ROC Company Plc. The appointment of Adeola & Partners as External Auditors to ROC Company was facilitated by the Managing Director, who did not disclose his relationship with Sir Segun Adeola to the company’s board.
At a recent board meeting, the Managing Director of ROC expressed concern that so much resources were expended towards satisfying the interest of the community at the expense of the company’s shareholders. According to him, shareholders are the primary stakeholders of the company, and their interest should be given the highest priority. He further opined that although other stakeholders are important to the company but only to the extent that ROC needs them. Consequently, the board resolved that henceforth, the company should not spend more than 0.5% of its Profit After Tax (PAT) on other stakeholders.
At the peak of the company’s production cycle, one of its underground waste tanks ruptured, and a large quantity of chemical waste leaked into Alobe river. This led to the destruction of aquatic life and contamination of neighbouring farmlands. This catastrophic event devastated the community as many farmers and fishermen lost their sources of livelihood. The community’s major source of drinking water was also contaminated.
The leadership of Alobe River Community Association approached the management of ROC Company Plc. and requested them to pay huge sums as compensation to the affected people and also to construct ten bore holes for the community. The management, however, informed the community leaders that based on the resolution of their board, expenditure on the issue would be limited to only 0.5% of profit after tax at the end of the year, which was projected to be far less than the amount of compensation demanded by the community. As a result, all discussions with the leadership of the community broke down.
The youths of the community responded with a sit-in protest, leading to a blockade of the company’s gate and disruption of its operations. The board of the company is now seeking immediate and amicable resolution of this problem.
While this was going on, the company suffered a major fire outbreak in its second factory, destroying its main furnace, machines and a large quantity of its finished goods. Some of the workers were severely burnt while attempting to put out the fire at the factory’s major warehouse. This event culminated in production shutdown at the second factory and temporary disengagement of several skilled workers as well as some casual staff. Fortunately, the company is covered by comprehensive fire and workers compensation insurance policies with Nagode Risk and Life Assurance Plc.
Required:
a. As a Strategic Risk Consultant of ROC Company Plc. you are to evaluate the adequacy of the risk management processes, including its information and communication systems. (8 Marks)
b. Evaluate the company’s residual risks in contrast to the management’s risk appetite. (7 Marks)
c. Using the stakeholders theory, evaluate the Managing Director’s position. Are there other stakeholders important to the company? (9 Marks)
d. Identify and discuss the ethical issues involved in the scenario described above. (6 Marks)
Answer:
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The ICAN Professional Code of Conduct and Guide for Members gives a list of threats to auditors’ independence, which may impair integrity, objectivity, or the good reputation of the profession.
Required:
Explain the following threats and give TWO examples each of circumstances that may lead to the threats:
a. Self-Interest (3 Marks)
b. Self-Review (3 Marks)
c. Advocacy (3 Marks)
d. Familiarity (3 Marks)
e. Intimidation (3 Marks)
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Wakaso Nigeria Limited has experienced serious labour turnover which has affected the business of the company in the last twelve months. The most frustrating issue was the resignation of a well-tested Financial Controller of the company close to year-end. Wakaso management is noted for timely financial reporting and rendering of tax returns due to the efficiency and effectiveness of the Financial Controller who was also involved in the preparation of tax computations. The company has been finding it difficult to quickly recruit a new Financial Controller that will match the technical ability of the former accountant. The Managing Director of the company has invited the company’s external auditors to a meeting, intimating them of the plan to employ their services to complete the write-up of the books of accounts and management account pending when they employ a good chartered accountant to handle the financial operations of the company.
The company’s management, in order to ensure timely reporting, has also informed the auditors that to save time and meet cost of operations, the firm’s staff will be accommodated in a five-star hotel with a mouth-watering offer of payment in lieu of feeding as recommended by the audit partner. In addition, the previous year’s audit fee will be doubled and an additional twenty percent payment made if the management accounts and audit work could be completed within three weeks.
The partner of the firm has rejected the offers on the grounds of possible threat to independence. The Managing Director complained to you, as his brother, lamenting that accountants are not good businessmen and uncooperative.
Required:
Discuss the following:
a. Meaning of threats to independence (2 Marks)
b. In relation to independence of auditors:
i. Fees and pricing (4 Marks)
ii. Financial interest (4 Marks)
iii. Contingent fees (2 Marks)
iv. Family and personal relationship (4 Marks)
c. The reasons why the preparation of accounting records and management accounts constitutes a threat to the independence of the auditors. (4 Marks)
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Chukwuemeka & Co. (Chartered Accountants) has been auditors to GED Manufacturing Nigeria Plc. There have been some regulatory and compliance issues for which the company was sanctioned and paid penalties to the Financial Reporting Council of Nigeria.
At the board of directors meeting to consider the last annual report audited by the firm, some of the previous problems caused by the auditors were raised and discussed. Following the reoccurrence of such issues, it was proposed that another audit firm be engaged in addition to the present firm.
To achieve their objective, a bigger firm that has international affiliation was considered to take a leading role in a joint audit arrangement and to ensure appropriate compliance. Your firm has been approached for the appointment. A meeting was scheduled between your firm, Chukwuemeka & Co., and the executive management of GED Manufacturing Nigeria Plc.
After the meeting, your firm was subsequently appointed, and the necessary formalities were properly followed. Your partner has directed that you liaise with Chukwuemeka & Co. to obtain the necessary materials for the preparation of the audit and that you review the prior year working papers to understand the issues. Your assessment of the documents obtained from the other auditor revealed the following, amongst others:
(i) The work done on the process of dispatch of goods and invoicing was not considered sufficient and appropriate.
(ii) The IT operations of the company had weak controls such that it was possible for some staff to override some of the existing controls.
Required:
a. Explain the risks inherent in the dispatch of goods and invoicing. (10 Marks)
b. Discuss the control objectives and principal controls that are relevant to the process of dispatch of goods and invoicing. (10 Marks)
c. Explain the limitations of a joint audit. (5 Marks)
d. Discuss the benefits of audit carried out by an internationally affiliated audit firm. (10 Marks)
e. Explain briefly the importance of audit working papers. (5 Marks)
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Cringe Professional Services has been auditing Kogberegbe Limited for about 20 years. Being a limited liability company, no regulation imposed restriction on the tenure of the auditors.
The firm also provides taxation and valuation services for the company. The company has just adopted International Financial Reporting Standards and has employed the services of Cringe Professional Services for conversion services from local GAAP. The firm experienced a high staff turnover in the year and has no choice but to include the daughter of the Managing Director of the company as part of the engagement team, although as a support staff.
Management has indicated in confidence that the audit fee for the year will not be increased, except the firm can guarantee them that no adverse management letter will be issued and no loss will be made by the company as they are planning to go to the capital market to raise capital for expansion. With poor management letter and loss position, they believe that it will be difficult to achieve this.
At the end of the audit exercise, the company made a huge profit even with unfavorable economic climate, thanks to challenges associated with COVID-19. There was public outcry because it was believed that the financial statements of the company were misstated, and the auditor was accused of negligence. This necessitated the Financial Reporting Council to conduct an investigation on the company. It was found that the company restructured its debt portfolio, which was denominated in foreign currency with attendant foreign exchange risks to Naira.
The company restructured a huge intercompany loan to a 7-year principal payment holiday with principal repayment commencing September 30, 2025. The interest on the loan for the period was not brought into the books of account.
The company accrued for a NGN70.60m benefit from a transaction in 2019 from operating fees. This has been treated as income in the financial statements.
There were identified defaults by the company in relation to the payment of interests and principal on its outstanding loans and borrowings.
There were adverse ratios in the company’s financial performance ratios in the year due to interest on borrowings from financial institutions and related parties.
A revisit of the operating performance for the year revealed the following:
The Financial Reporting Council concluded that there were threats to the auditors’ independence, hence the professional firm was penalized for that.
A concerned staff of the company asks you of the implications of the issues raised by the Financial Reporting Council.
Required:
a. Identify and explain the threats to independence of the auditor in the above scenario. (7 Marks)
b. Discuss circumstances that could give rise to threats to independence. (7 Marks)
c. Suggest appropriate safeguards which could be put in place to mitigate the identified threats. (6 Marks)
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Ade, Bala, Chris and Co. are the auditors to Victory Ventures Limited, a chemical manufacturing company. The firm has been carrying out statutory audits for this client for several years. Recently, the company asked the firm to carry out tax planning and compliance advisory services and also perform financial reporting valuation services for the company.
Required:
a. Discuss ethical issues the firm will need to take into consideration in accepting to carry out the new assignments for the client. (5 Marks)
b. Describe the FIVE fundamental ethical principles according to ICAN Professional Code of Conduct and Guide for Members and IFAC Code of Ethics. (5 Marks)
c. Describe the differences between rules-based and principles-based approaches to professional ethics. (5 Marks)
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In the course of carrying out their assignments, the auditors are usually faced with threats created by a broad range of circumstances.
a. Explain THREE types of threats usually faced by auditors. (6 Marks)
b. Explain the circumstances that may give rise to the threats in (a) above. (6 Marks)
c. Highlight THREE major categories of safeguards which may mitigate or reduce threats to auditors. (3 Marks)
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Joe Adams was the engagement partner to Maikai Airlines Limited from 2012 to 2014. He retired from the firm of the Chartered Accountants and intends to join Maikai Airlines Limited as Finance Director. It is the policy of the firm to pay all partners in full when they disengage.
Required: a. Identify and explain FOUR ethical matters worthy of consideration as Joe Adams joins Maikai Airlines Limited. (8 Marks) b. Discuss the THREE threats that could arise should Joe Adams join Maikai Airlines Limited. (6 Marks) c. Explain THREE matters specified by the Code of Ethics as safeguards in relation to this matter. (6 Marks)
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Your firm audits Sabona Limited, a privately owned company, which is a customer of Oldie Limited, another privately owned client company. The managing director of Oldie Limited has asked your firm to supply Sabona Limited bank transactions for the last six months as they are concerned about their ability to honour their financial obligation.
Required:
a. State whether or not you would supply this information and the reasons for your actions. (5 Marks)
b. Explain briefly FIVE fundamental principles issued by the Institute of Chartered Accountants of Nigeria (ICAN) as guides to accountants. (10 Marks)
c. Describe FIVE matters that could affect the independence and integrity of the auditor. (5 Marks)
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Good Weather Nigeria Plc is a company engaged in the business of manufacturing detergents with an annual turnover of N7 billion. It carries out its operations from six locations: Abuja, Enugu, Benin, Port-Harcourt, and Jos, with its head office in Lagos. The company has an internal audit function with three staff. The Chief Internal Auditor was recruited by the Executive Finance Director to facilitate a good working relationship between the finance and audit functions. All the staff in the unit are graduates and members of the Institute of Chartered Accountants of Nigeria (ICAN). The staff of internal audit have been in the unit for over eight years. The Chief Internal Auditor reports to the Executive Finance Director.
Required:
a. Explain the term “internal audit.”
(2 Marks)
b. Identify and explain the weaknesses in the above scenario.
(8 Marks)
c. Enumerate the differences between the roles of an internal auditor and an external auditor.
(5 Marks)
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b) What are the safeguards to be applied by an auditor in relation to the following?
i) Financial interest in the client.
ii) Loans and Guarantees to or from the client.
iii) Business relationship with the client.
iv) Family and personal relationship with the client.
v) Employment with an Assurance Client. (5 marks)
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You are an audit manager with Kwabotwe & Co, a firm of Chartered Accountants. You have been assigned to handle the firm’s quality control in the first quarter. In your first meeting, you invited staff to raise matters from their experience relating to their compliance with IFAC’s code of ethics. The following issues came up:
i) In its management letter to another audit client, Kwabotwe & Co warned the company that its computer system lacked essential controls. The company subsequently decided to install a totally new system, and Kwabotwe & Co’s management consultancy department was appointed to design the new system.
(5 marks)
ii) Kwabotwe & Co was recently approached by a large company that was not an audit client at the time, for a second opinion on the audit of the financial statements. The company was in dispute with its existing auditors, who were proposing to issue a qualified audit opinion due to disagreement over inventory valuation. Kwabotwe & Co’s technical partner reviewed the evidence provided by the company and advised that its accounting treatment was in order. Shortly afterward, Kwabotwe & Co was invited to accept nomination as auditors. However, the reply to the letter of inquiry to the existing auditors made it clear that the inventory valuation dispute was not as straightforward as the company had made it out to be.
(5 marks)
Required:
Evaluate whether Kwabotwe & Co had complied with IFAC’s Code of Ethics or had acted unprofessionally in any way with respect to each of the above scenarios.
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You work for a firm of accountants and auditors which has eight partners. The audit firm has been invited by the Managing Director (MD) and majority shareholder of Wellbeing Co. to accept appointment as statutory auditor of the company, replacing the current firm of auditors who will not be re-appointed.
The principal activity of Wellbeing Co. is the manufacture and distribution of healthcare products. Your firm has several companies operating in the healthcare sector in its client portfolio.
The MD of Wellbeing has requested that your firm assists with the preparation of the company’s tax computation and provides consultancy services on an ongoing basis in connection with his plans to grow the business.
The MD has also suggested that a partner in your firm joins the board of Wellbeing Co. as a non-executive director.
Required:
a) Identify and explain the threats to independence and objectivity which may arise from the provision of the services requested by the Wellbeing MD, and state how these threats should be resolved.
(8 marks)
b) Describe the matters, other than independence and objectivity, to be considered and the procedures to be performed in order to determine whether it is appropriate for your firm to accept appointment as statutory auditor of Wellbeing Co.
(7 marks)
c) Set out the benefits to audit firms and their clients of having audit and non-audit services provided by the same firm of accountants.
(5 marks)
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The Managing Partner of A & B Partners, Mr. Pumpa, has decided to put measures in place for the survival of the firm immediately after the enactment of the Company Act, 2019 (Act 992), which requires that “An Auditor shall hold office for a term of not more than six years and is eligible for re-appointment after a cooling-off period of not less than six years.”
Mr. Pumpa then had a gentle arrangement with his colleague, also a Managing Partner in C & D Associates, to transfer all clients who have exceeded their mandatory six years with A & B Partners and vice versa.
Required:
Discuss FIVE (5) major threats to the auditor’s independence and objectivity and how these inherent threats could be mitigated in the decision to transfer client C & D Associates.
(5 marks)
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Accounting firms are in an excellent position to provide their clients with non-audit services such as consultancy, financial system design, review services, recruitment and valuation, among others, provided the necessary safeguards are in place. However, the Companies Act, 2019 (Act 992) prohibits the offering of such services to audit clients.
Required:
State FOUR (4) reasons for the prohibition of non-audit services to audit clients under the Companies Act, 2019 (Act 992).
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