Series: NOV 2017

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AAA – Nov 2017 – L3 – Q7 – Audit of IT Systems and Data Analytics

Assess key controls for an online trading business, evaluate associated risks with electronic data interchange, and suggest effective risk mitigation controls.

Young Entrepreneur Trading (YET) is an online trading business established by Yemisi Tumfere. YET sources household goods from various local and international manufacturers, placing orders online with suppliers. Customers also place online orders, and invoices are processed and sent to stores for dispatch through a network of delivery centers across the country.

YET, dissatisfied with its previous auditors, has approached your firm for the audit engagement, with professional clearance obtained. As the audit manager, you are responsible for the engagement, with several new trainees under your supervision who are unfamiliar with controls for online businesses.

Requirements:
a. Discuss FIVE controls an auditor should focus on to assess the effectiveness of controls in an online system like YET. (5 Marks)
b. Evaluate FOUR risks associated with YET’s use of electronic data interchange in an online business and recommend FOUR effective controls to minimize these risks. (10 Marks)

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AAA – Nov 2017 – L3 – Q6 – Audit Reporting

Discuss audit report modifications, draft modified report on grant treatment, and analyze auditor’s responsibilities regarding asset valuation.

During the audit of fixed assets for Next Engineering Plc as of December 31, 2016, two issues were encountered:

  1. The cost calculations for direct labor on assets under construction were destroyed, with the direct labor cost totaling ₦20,000,000.
  2. A government grant of ₦50,000,000, received for plant and equipment purchased during the year, was fully credited to the income statement as an exceptional item, though the plant and equipment have a 10-year useful life.

Requirements:
a. Discuss the general forms of modifications available to auditors in drafting their report and specify circumstances for each form.

(6 Marks)
b. Assuming a modified audit report is necessary regarding the government grant treatment, draft the relevant section (entire report not required).

(5 Marks)
c. Analyze the auditor’s general responsibility concerning the directors’ report on land and building valuation.

(4 Marks)

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AAA – Nov 2017 – L3 – Q5 – Audit Evidence

Evaluate XYZ Bank’s provision for litigation, discuss audit procedures per ISA 501, and prepare litigation disclosure for financial statements.

You are the audit manager for XYZ Bank Limited for the year ended December 31, 2016. The Bank’s Board noted a litigation issue involving a lawsuit from BBB Limited, where the Bank was found liable for a cheque conversion worth ₦2.1 billion. The high court imposed a penalty on the Bank for this amount, which BBB Limited is now claiming.

The Bank has objected to the judgment, appealing to the Court of Appeal, with legal counsel advising that a favorable outcome is expected. The Bank’s litigation-related financial information is as follows:

  • Provision for litigation (recognized in financial statements): ₦96 million
  • Litigation cases as defendant: 50
  • Litigation cases as plaintiff: 10
  • Claims in favor of the Bank: ₦2.7 billion
  • Claims against the Bank (including the ₦2.1 billion case): ₦3.2 billion

Requirements:
a. Discuss FOUR specific considerations under ISA 501 for obtaining audit evidence on litigation provisions.

(5 Marks)
b. Evaluate the adequacy of the litigation provision recognized in the financial statements as at December 31, 2016.

(5 Marks)
c. Prepare a summary disclosure of the litigation status for inclusion in the financial statement notes as at December 31, 2016.

(5 Marks)

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AAA – Nov 2017 – L3 – Q4 – Risk Management in Audits

Assess audit risks in taking on Pony Bank Plc, recommend management and audit firm actions to address financial statement risks, and draft a management letter.

The management of Pony Bank Plc and its wholly owned subsidiary, Ponte Micro Finance Bank Limited, engaged in fraudulent activities involving the arrangement of bogus loans amounting to ₦5.5 billion in worthless assets, which were undetected by the previous auditors. The former auditors attributed the oversight to a well-organized group within Pony Bank that actively deceived and obstructed the audit process to conceal their actions.

Your firm, Vic Viv & Co, has recently taken on the audit of Pony Bank Plc.

Requirements:
a. Advise the engagement partner on the risks involved in taking up the audit.

(4 Marks)
b. Recommend appropriate actions for management and your firm to address financial statement risks.

(8 Marks)
c. Prepare a management letter with two matters suitable for submission to the directors.

(8 Marks)

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AAA – Nov 2017 – L3 – Q3 – Audit Reporting

Assess material and pervasive effects on financial statements, audit procedures, and draft audit report opinion paragraphs for Tophem Bank’s foreign associate investment.

Tophem Bank Nigeria Plc has been operational for 20 years, with your firm auditing the company for the past five years. During the year, Tophem acquired an investment in Accra Insurance Limited, a foreign associate, which is accounted for using the equity method and listed at ₦575 million on the Statement of Financial Position as of December 31, 2016. Tophem’s income for the year includes its share of Accra’s net income. However, the audit team was denied access to Accra’s management, auditors, and financial data.

Following a review of the audit file for the year ended December 31, 2016, your partner has recommended a modified opinion for the audit report, providing a draft outline and requesting your input to complete it.

Requirements:
a. Evaluate the circumstances under which a matter could be both material and pervasive in its effect on the financial statements.

(4 Marks)
b. Explain EIGHT appropriate procedures to follow in the audit assignment before finalizing the audit opinion.

(8 Marks)
c. Draft an appropriate basis of opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)
d. Draft an appropriate opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)

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AAA – Nov 2017 – L3 – Q2 – Group Audits

Assess business risks for Chuks Zaka Limited post-acquisition, evaluate financial statement risks, and outline audit considerations.

Chuks Roberts Plc (CRP) operates as an auto-parts manufacturing company in Nigeria with headquarters in Lagos. CRP plans to manufacture drones for parcel distribution across Africa and has acquired Zaka Roberts Limited (ZRL), a South African company based in Johannesburg, to bring this plan to fruition.

Zaka previously specialized in manufacturing computer-controlled equipment for laboratories and other industries in Africa and the Middle East. The company was owned by five directors/shareholders who accepted CRP’s offer on February 1, 2016, to purchase Zaka’s manufacturing equipment, technology (patent-protected), Cape Town factory, and Johannesburg head office for US$450 million, representing 75% of Zaka’s value.

Effective March 31, 2016, Zaka ceased manufacturing, making most employees redundant except for a select few in marketing, accounts, and administration, with one month’s notice. The restructured entity, now named Chuks Zaka Limited (CZL), will operate as a marketing arm selling CRP’s drones in the South African region, with CRP holding a 55% stake.

Your firm has been CRP’s external auditor and is now engaged to audit CZL.

Required:
a. Analyse and evaluate the business risks that would be assessed by the management of CZL. (6 Marks)
b. Analyse and evaluate the business risks that would be assessed by the directors of CRP.

(6 Marks)
c. Assess and advise on the financial statements’ risks to be considered in planning the audit of CZL for the year ended December 31, 2016.

(8 Marks)

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AAA – Nov 2017 – L3 – Q1 – Quality Control in Audit Firms

Evaluate audit quality issues and procedures in response to a regulatory review of NigerKap Plc.

Bode, Ugo, Musa and Company is a firm of Chartered Accountants that has existed for over 20 years and achieved a strong reputation for quality audit work. The firm has expanded significantly over the past ten years – doubling its client base across different sectors of the Nigerian economy. The firm currently audits two banks, five listed entities, and over seventy other companies. It has also increased its audit staff base and grown the number of its partners from two to seven over the same period.

However, in the last two years, the firm has had a series of regulatory reviews due to several instances of errors noted in some financial statements audited by the firm. One of the clients, the shareholders of NigerKap Plc, petitioned the regulator over a misstatement in the value of their investment property. This resulted in an overstatement of profit and overpayment of taxes by the company based on the financial statements for the year ended December 31, 2015. The shareholders also threatened to take legal action against the firm.

The Managing Partner (MP) of the firm is very concerned about this situation and has commenced internal procedures to evaluate the quality of audits performed by the firm, especially for the NigerKap audit of 2015. A committee has been set up…

Required:
Discuss the internal procedures that Bode, Ugo, Musa and Company should implement to improve audit quality and prevent further regulatory issues.

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FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

a. In the context of the selection and holding of investments, discuss each of the following scenarios:

i. An investor holding only one security needs to be concerned with the unsystematic risk of that security. (3 Marks)

ii. However, an investor who holds a number of securities should take account of total risk. (3 Marks)

iii. An investor should never add to a portfolio an investment that yields a return less than the market rate of return. (3 Marks)

b. The equity beta of KT Plc. is 1.2 and the equity alpha is 1.4. Explain the meaning and significance of these values to the company. (6 Marks)

(Total 15 Marks)

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FM – Nov 2017 – L3 – Q6 – Ethical Issues in Financial Management

Explore ethical considerations in capital investment and apply the Black-Scholes model in company valuation.

You have recently taken up employment with Large Plc., a Nigerian company with manufacturing subsidiaries in many countries across Africa. As the Financial Analyst, you report directly to the Managing Director who currently requires briefings on the following areas:

(i) Ethical issues and capital investment decisions,
(ii) Options and company valuation

Required:

a. Explain, with examples, ethical issues that might affect capital investment decisions and discuss the importance of such issues for Strategic Financial Management. (8 Marks)

b. Explain the circumstances in which the Black-Scholes Option Pricing (BSOP) model could be used to assess the value of a company, including the data required for the variables used in the model. (7 Marks)

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FM – Nov 2017 – L3 – Q5 – Corporate Governance and Financial Strategy

Identify stakeholder financial objectives and discuss methods to incentivize directors to maximize shareholder wealth.

Private sector companies have multiple stakeholders who are likely to have divergent interests.

Required:

(a) Identify FIVE stakeholder groups and discuss briefly their financial objectives.
(10 Marks)

(b) Explain ways in which companies’ directors can be encouraged to achieve the objective of maximisation of shareholders’ wealth.
(5 Marks)

(Total 15 Marks)

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AAA – Nov 2017 – L3 – Q7 – Audit of IT Systems and Data Analytics

Assess key controls for an online trading business, evaluate associated risks with electronic data interchange, and suggest effective risk mitigation controls.

Young Entrepreneur Trading (YET) is an online trading business established by Yemisi Tumfere. YET sources household goods from various local and international manufacturers, placing orders online with suppliers. Customers also place online orders, and invoices are processed and sent to stores for dispatch through a network of delivery centers across the country.

YET, dissatisfied with its previous auditors, has approached your firm for the audit engagement, with professional clearance obtained. As the audit manager, you are responsible for the engagement, with several new trainees under your supervision who are unfamiliar with controls for online businesses.

Requirements:
a. Discuss FIVE controls an auditor should focus on to assess the effectiveness of controls in an online system like YET. (5 Marks)
b. Evaluate FOUR risks associated with YET’s use of electronic data interchange in an online business and recommend FOUR effective controls to minimize these risks. (10 Marks)

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AAA – Nov 2017 – L3 – Q6 – Audit Reporting

Discuss audit report modifications, draft modified report on grant treatment, and analyze auditor’s responsibilities regarding asset valuation.

During the audit of fixed assets for Next Engineering Plc as of December 31, 2016, two issues were encountered:

  1. The cost calculations for direct labor on assets under construction were destroyed, with the direct labor cost totaling ₦20,000,000.
  2. A government grant of ₦50,000,000, received for plant and equipment purchased during the year, was fully credited to the income statement as an exceptional item, though the plant and equipment have a 10-year useful life.

Requirements:
a. Discuss the general forms of modifications available to auditors in drafting their report and specify circumstances for each form.

(6 Marks)
b. Assuming a modified audit report is necessary regarding the government grant treatment, draft the relevant section (entire report not required).

(5 Marks)
c. Analyze the auditor’s general responsibility concerning the directors’ report on land and building valuation.

(4 Marks)

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AAA – Nov 2017 – L3 – Q5 – Audit Evidence

Evaluate XYZ Bank’s provision for litigation, discuss audit procedures per ISA 501, and prepare litigation disclosure for financial statements.

You are the audit manager for XYZ Bank Limited for the year ended December 31, 2016. The Bank’s Board noted a litigation issue involving a lawsuit from BBB Limited, where the Bank was found liable for a cheque conversion worth ₦2.1 billion. The high court imposed a penalty on the Bank for this amount, which BBB Limited is now claiming.

The Bank has objected to the judgment, appealing to the Court of Appeal, with legal counsel advising that a favorable outcome is expected. The Bank’s litigation-related financial information is as follows:

  • Provision for litigation (recognized in financial statements): ₦96 million
  • Litigation cases as defendant: 50
  • Litigation cases as plaintiff: 10
  • Claims in favor of the Bank: ₦2.7 billion
  • Claims against the Bank (including the ₦2.1 billion case): ₦3.2 billion

Requirements:
a. Discuss FOUR specific considerations under ISA 501 for obtaining audit evidence on litigation provisions.

(5 Marks)
b. Evaluate the adequacy of the litigation provision recognized in the financial statements as at December 31, 2016.

(5 Marks)
c. Prepare a summary disclosure of the litigation status for inclusion in the financial statement notes as at December 31, 2016.

(5 Marks)

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AAA – Nov 2017 – L3 – Q4 – Risk Management in Audits

Assess audit risks in taking on Pony Bank Plc, recommend management and audit firm actions to address financial statement risks, and draft a management letter.

The management of Pony Bank Plc and its wholly owned subsidiary, Ponte Micro Finance Bank Limited, engaged in fraudulent activities involving the arrangement of bogus loans amounting to ₦5.5 billion in worthless assets, which were undetected by the previous auditors. The former auditors attributed the oversight to a well-organized group within Pony Bank that actively deceived and obstructed the audit process to conceal their actions.

Your firm, Vic Viv & Co, has recently taken on the audit of Pony Bank Plc.

Requirements:
a. Advise the engagement partner on the risks involved in taking up the audit.

(4 Marks)
b. Recommend appropriate actions for management and your firm to address financial statement risks.

(8 Marks)
c. Prepare a management letter with two matters suitable for submission to the directors.

(8 Marks)

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AAA – Nov 2017 – L3 – Q3 – Audit Reporting

Assess material and pervasive effects on financial statements, audit procedures, and draft audit report opinion paragraphs for Tophem Bank’s foreign associate investment.

Tophem Bank Nigeria Plc has been operational for 20 years, with your firm auditing the company for the past five years. During the year, Tophem acquired an investment in Accra Insurance Limited, a foreign associate, which is accounted for using the equity method and listed at ₦575 million on the Statement of Financial Position as of December 31, 2016. Tophem’s income for the year includes its share of Accra’s net income. However, the audit team was denied access to Accra’s management, auditors, and financial data.

Following a review of the audit file for the year ended December 31, 2016, your partner has recommended a modified opinion for the audit report, providing a draft outline and requesting your input to complete it.

Requirements:
a. Evaluate the circumstances under which a matter could be both material and pervasive in its effect on the financial statements.

(4 Marks)
b. Explain EIGHT appropriate procedures to follow in the audit assignment before finalizing the audit opinion.

(8 Marks)
c. Draft an appropriate basis of opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)
d. Draft an appropriate opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)

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AAA – Nov 2017 – L3 – Q2 – Group Audits

Assess business risks for Chuks Zaka Limited post-acquisition, evaluate financial statement risks, and outline audit considerations.

Chuks Roberts Plc (CRP) operates as an auto-parts manufacturing company in Nigeria with headquarters in Lagos. CRP plans to manufacture drones for parcel distribution across Africa and has acquired Zaka Roberts Limited (ZRL), a South African company based in Johannesburg, to bring this plan to fruition.

Zaka previously specialized in manufacturing computer-controlled equipment for laboratories and other industries in Africa and the Middle East. The company was owned by five directors/shareholders who accepted CRP’s offer on February 1, 2016, to purchase Zaka’s manufacturing equipment, technology (patent-protected), Cape Town factory, and Johannesburg head office for US$450 million, representing 75% of Zaka’s value.

Effective March 31, 2016, Zaka ceased manufacturing, making most employees redundant except for a select few in marketing, accounts, and administration, with one month’s notice. The restructured entity, now named Chuks Zaka Limited (CZL), will operate as a marketing arm selling CRP’s drones in the South African region, with CRP holding a 55% stake.

Your firm has been CRP’s external auditor and is now engaged to audit CZL.

Required:
a. Analyse and evaluate the business risks that would be assessed by the management of CZL. (6 Marks)
b. Analyse and evaluate the business risks that would be assessed by the directors of CRP.

(6 Marks)
c. Assess and advise on the financial statements’ risks to be considered in planning the audit of CZL for the year ended December 31, 2016.

(8 Marks)

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AAA – Nov 2017 – L3 – Q1 – Quality Control in Audit Firms

Evaluate audit quality issues and procedures in response to a regulatory review of NigerKap Plc.

Bode, Ugo, Musa and Company is a firm of Chartered Accountants that has existed for over 20 years and achieved a strong reputation for quality audit work. The firm has expanded significantly over the past ten years – doubling its client base across different sectors of the Nigerian economy. The firm currently audits two banks, five listed entities, and over seventy other companies. It has also increased its audit staff base and grown the number of its partners from two to seven over the same period.

However, in the last two years, the firm has had a series of regulatory reviews due to several instances of errors noted in some financial statements audited by the firm. One of the clients, the shareholders of NigerKap Plc, petitioned the regulator over a misstatement in the value of their investment property. This resulted in an overstatement of profit and overpayment of taxes by the company based on the financial statements for the year ended December 31, 2015. The shareholders also threatened to take legal action against the firm.

The Managing Partner (MP) of the firm is very concerned about this situation and has commenced internal procedures to evaluate the quality of audits performed by the firm, especially for the NigerKap audit of 2015. A committee has been set up…

Required:
Discuss the internal procedures that Bode, Ugo, Musa and Company should implement to improve audit quality and prevent further regulatory issues.

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FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

a. In the context of the selection and holding of investments, discuss each of the following scenarios:

i. An investor holding only one security needs to be concerned with the unsystematic risk of that security. (3 Marks)

ii. However, an investor who holds a number of securities should take account of total risk. (3 Marks)

iii. An investor should never add to a portfolio an investment that yields a return less than the market rate of return. (3 Marks)

b. The equity beta of KT Plc. is 1.2 and the equity alpha is 1.4. Explain the meaning and significance of these values to the company. (6 Marks)

(Total 15 Marks)

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FM – Nov 2017 – L3 – Q6 – Ethical Issues in Financial Management

Explore ethical considerations in capital investment and apply the Black-Scholes model in company valuation.

You have recently taken up employment with Large Plc., a Nigerian company with manufacturing subsidiaries in many countries across Africa. As the Financial Analyst, you report directly to the Managing Director who currently requires briefings on the following areas:

(i) Ethical issues and capital investment decisions,
(ii) Options and company valuation

Required:

a. Explain, with examples, ethical issues that might affect capital investment decisions and discuss the importance of such issues for Strategic Financial Management. (8 Marks)

b. Explain the circumstances in which the Black-Scholes Option Pricing (BSOP) model could be used to assess the value of a company, including the data required for the variables used in the model. (7 Marks)

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FM – Nov 2017 – L3 – Q5 – Corporate Governance and Financial Strategy

Identify stakeholder financial objectives and discuss methods to incentivize directors to maximize shareholder wealth.

Private sector companies have multiple stakeholders who are likely to have divergent interests.

Required:

(a) Identify FIVE stakeholder groups and discuss briefly their financial objectives.
(10 Marks)

(b) Explain ways in which companies’ directors can be encouraged to achieve the objective of maximisation of shareholders’ wealth.
(5 Marks)

(Total 15 Marks)

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