Series: NOV 2022

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  • 15 Marks

AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits

Explain materiality, benchmarks, and factors affecting materiality determination in audits.

The audit plan and scope was presented to the Audit Committee of Deinde Limited for the year ended December 31, 2020. The external auditors of the company stated:

“We would estimate materiality using profit before tax for the full year. We would estimate our preliminary materiality based on expected results for the full year. We will perform a materiality re-assessment at year-end to confirm adequacy or otherwise of our preliminary materiality. We will report to the Audit Committee on all unadjusted misstatements greater than our established threshold unless they are qualitatively immaterial.”

Your uncle, who is a member of the Audit Committee, discussed this matter with you and requested that you explain the issue further.

Required:

a. Explain the concepts of materiality and performance materiality in an audit of financial statements.

(3 Marks)

b. Explain the benchmark for determining materiality. (5 Marks)

c. Discuss the factors that may affect the identification of an appropriate benchmark. (7 Marks)

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  • 15 Marks

AAA – Nov 2022 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discuss reasons for outsourcing internal audit, advantages/disadvantages, and functions that cannot be outsourced.

The Internal Audit Unit of Oluvia Bank Limited has been accused of collusion with staff in committing monumental fraud. The following types of fraud were found to be common:

  • Cheque suppression
  • Fraudulent bookkeeping to overstate income
  • Inflation of the worth of the company’s assets
  • Intercepting replaced customers’ cards
  • Fraudsters impersonating Senior Managers or Chief Executive Officer
  • Online banking fraud, such as phishing, malware attacks, and clone websites
  • Impersonating the owner of an account or using fake documents to open an account under someone else’s name (no proper Know Your Customer conducted)

The bank examiners came and were surprised at the level of fraud in the bank and requested management to address it urgently.

After the supervisory visit, the board of directors discussed the issue with the bank’s external auditors, who suggested that the bank could outsource the internal audit functions. The Board of Directors found this suggestion favorable and mandated the Managing Director to act swiftly and report back with details at the next board meeting.

Required:

a. Discuss the main reasons for outsourcing internal audit functions. (3 Marks)

b. Outline the advantages and disadvantages of outsourcing. (10 Marks)

c. Discuss which part of the internal audit function cannot be outsourced. (2 Marks)

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  • 15 Marks

AAA – Nov 2022 – L3 – SC – Q5 – Audit Planning and Strategy

Discuss professional skepticism, benefits of audit planning, audit strategy, and audit stages.

At the weekly meeting of an audit firm, it was reported that a new audit client (Salisa Limited) has just been won. An implementation team has been constituted with a manager as the head. At the meeting of the implementation team, the manager stated that there is a need for the team to work on the audit planning strategy; the contents of which will form the audit planning memorandum that will be presented to the audit committee. He stated further that a professional clearance has to be sent to the former auditor after which, a background check will be performed on the directors and other principal officers of the company. It is also believed that for proper risk assessment, there is a need to understand the business operations of the company. He stated further that the audit will be structured into both interim and final audits.

An experienced member of the team also mentioned the need for the auditor to adopt an attitude of professional skepticism. He emphasized that planning the audit will involve the whole engagement team to establish an understanding of the terms of the engagement as required by ISA 210, which will help establish an overall strategy for the audit. Developing the audit plan will include the nature, timing, and extent of planned risk assessment procedures, further audit procedures, and documentation of the overall audit strategy.

Required:

a. Explain professional skepticism. (2 Marks)

b. State how adequate planning can benefit the audit team. (3 Marks)

c. Explain and illustrate what the establishment of the overall audit strategy involves. (3 Marks)

d. Discuss the elements of interim and final audits.

(7 Marks)

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  • 20 Marks

AAA – Nov 2022 – L3 – SB – Q4 – Audit Planning and Strategy

Discuss audit sampling rationale, key decisions, advantages, sampling methods, and auditor actions in sample testing.

wo accountancy students from a University have been asked to write a term paper on “the reasons why external auditors resort to sampling when conducting the audit of a large entity.” The students are of the opinion that they do not understand why this should be the case, if auditors focus on their work.

They believe statistical sampling is not always good for auditing, especially when a population consists of a small number of large items. It may be appropriate to apply audit tests to the entire population as all the items in the population may not share common characteristics. Added to this, they do not agree that samples could be representative of the population and also reflect the characteristics of the population. There is therefore the risk that the auditors may not reach a correct decision as against when the entire population is tested.

Furthermore, they said that they were confused on how the auditors will work on samples in such a way that all items in the population will be given equal chance of being selected and the key decisions that need to be made for effective sample design.

As an ICAN Professional examination candidate who has just finished reading Audit Sampling (ISA 530), you now saw it as an opportunity to recall and explain what you have read. You are excited to explain the above to the students.

Required:

a. Highlight key decisions to be made to influence the sample size. (4 Marks)

b. Outline the advantages and disadvantages of using statistical sampling. (8 Marks)

c. Explain the sample selection methods that will give equal chance to all the items in the population. (3 Marks)

d. Illustrate what the auditors should do when performing procedures on the samples. (5 Marks)

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  • 20 Marks

AAA – Nov 2022 – L3 – SB – Q3 – Audit Reporting

Examines joint auditors' roles, options for audit disputes, acquisition processes, and reporting requirements.

During the audit of Kofo Plc in 2018, it was observed that there was an omission of liability to the tune of N2 billion. Upon investigation, it was discovered that the error was as a result of unrecorded liability relating to unremitted statutory taxes to the government in prior years. A compensating error was noticed in unsubstantiated investment and receivables balances schedule provided by the management.

The explanation provided by management for this error was that having noted this disparity, the internal audit team was commissioned to reconcile the ledger balances to establish the actual payment to be made to the government. The result of that exercise led to an initial adjustment of N500 million. However, upon further review by the Internal Audit and Risk Management team, the total disparity noted was N5 billion as opposed to the N2 billion initially noted. The reason being that the report with which the Internal Audit Team carried out the reconciliation was understated. Some liability balances were excluded from the report as a result of the approach used to set up the Information System (I.T) System. Therefore, the general command entered into the system to spool the report did not capture the entire transactions. To gain comfort, the audit team:

(i) Reviewed the reconciliation memo to have an understanding of management’s thought process;
(ii) Requested the updated spool of ledger balances from the I.T system;
(iii) Asked the Information Technology team to perform a walkthrough test of the transaction spool;
(iv) Requested the breakdown of the excluded balances and traced them to the supporting documents to which they relate; and
(v) Checked to see that there were no unusual remittances from the bank statements.

You are a member of the audit team which reviewed Kofo Plc’s compliance with International Standards on Auditing (ISA 250) on Non-Compliance with Laws and Regulations (NOCLAR).

Required:

a. Outline the audit procedures to be performed to help identify instances of non-compliance with laws and regulations. (5 Marks)

b. State what the auditor should do when they become aware of an issue of non-compliance with laws and regulations. (5 Marks)

c. State the types of policies and procedures the entity may implement to assist in the prevention and detection of non-compliance with laws and regulations. (4 Marks)

d. Discuss what the auditor should do under the following situations:

  • i. Reporting non-compliance to those charged with governance (2 Marks)
  • ii. Reporting non-compliance in the audit report (2 Marks)
  • iii. Reporting non-compliance to the authorities (2 Marks)

(Total 20 Marks)

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  • 20 Marks

AAA – Nov 2022 – L3 – SB – Q2 – Audit of Complex Entities

Evaluate auditors' responsibilities in fraud detection, financial misreporting, and appropriate audit procedures to mitigate misstatements.

The Financial Controller (FC) of Poki Limited made an observation on the draft engagement letter sent by the external auditors to the company, an extract of which is as stated below:

“The responsibility for safeguarding the assets of the company and for the prevention and detection of fraud, error, and non-compliance with laws or regulations rests with the company’s directors. In accordance with auditing standards, we shall endeavor to plan our audit so that we have a reasonable expectation of detecting material misstatements in the financial statements or accounting records (including any material misstatements resulting from fraud, error, or non-compliance with laws or regulations). However, because any internal control structure, no matter how effective, cannot eliminate the possibility that errors or irregularities may occur and remain undetected and because we use selective testing in our audit, we cannot guarantee that errors or irregularities, if present, will be detected. Accordingly, our audit should not be relied upon to disclose all such material misstatements or frauds, errors, or instances of non-compliance as may exist. The best safeguard against irregularities and fraud is a sound system of internal control.”

The FC accused the auditors of running away from their responsibilities of exposing to the owners of the company fraudulent financial reporting and misappropriation of assets. To him, what is the purpose of audit when fraud and errors could not be discovered? He has threatened to discuss with the Board of Directors and insists that the engagement letter will not be signed until those sections are removed. You are a senior member of the audit team.

Required:

a. Outline the objectives of auditors in relation to fraud. (6 Marks)

b. Explain fraudulent financial reporting and misappropriation of assets. (7 Marks)

c. State the procedures auditors should perform to identify the risks of material misstatement due to fraud. (7 Marks)

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  • 30 Marks

AAA – Nov 2022 – L3 – SB – Q1 – Group Audits

Evaluate the justification for joint auditors, present options for audit concerns, and prepare an appropriate report for disputed acquisition.

Mr. Johnson is the Senior Partner of Johnson, Odewole, Thomas & Co., Chartered Accountants. During the last audit of Mandarin Manufacturing Plc, which the firm did with Messrs Ark Professional Services (APS) for the year ended 30 September, 2020, Mr. Johnson expressed displeasure on some of the conclusions reached by APS on certain audit areas. The manager in charge of the audit at Johnson, Odewole, Thomas & Co. had drawn Mr. Johnson’s attention to matters marked “For Partner’s Attention.” Discussions with the corresponding partner of APS on these matters were considered unsatisfactory.

Mr. Johnson’s views differed significantly from those of the corresponding partner of APS. It was agreed to proceed to the board meeting where these disputed positions would be presented and discussed with the directors before a final decision was reached. Of significance is the acquisition of a property from a former staff member for the opening of a new branch warehouse. The acquisition process was hurried and exceeded the capital expenditure provisions for the period. Mr. Johnson’s team viewed the acquisition as a potential fraud on the company, while APS aligned with the director of finance, who considered it a normal transaction.

At the board meeting to discuss the financial statements, members were divided between the two audit firms’ views, leading the chairman to reschedule the meeting. He requested additional information on both parties’ positions and asked them to harmonize their views before the next meeting the following day.

Required:

a. Evaluate the justification or otherwise of an entity having joint auditors. (8 Marks)

b. Following the concerns of Johnson, Odewole, Thomas & Co., present the options available to the firm. (5 Marks)

c. Discuss the points on which the Chairman needs to base his decision, according to standard acquisition procedures. (7 Marks)

d. If the Chairman agrees with the position of Johnson, Odewole, Thomas & Co., determine the reporting requirement and draft an appropriate report for inclusion in the auditors’ report. (6 Marks)

e. Discuss the composition of items that could be marked “For Partner’s Attention” during the conclusion of an audit process. (4 Marks)

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  • 15 Marks

FM – Nov 2022 – L3 – Q7 – Corporate Governance and Financial Strategy

Analyze the Chairman's proposals to improve EPS and discuss methods to align stakeholder objectives.

The Chairman of Opeyemi plc, a company listed on the Alternative Investment Market, has circulated a memorandum to the company’s directors and senior managers which contains the following statements:

“Looking to the year ahead, there are a number of measures which I propose to increase the company’s earnings per share (EPS).

Payments to trade creditors should be made as late as possible, even if this means extending our credit beyond the terms allowed by our suppliers. The company currently runs a substantial overdraft, and this measure will cut the level of bank interest and charges.

Relatively high capital expenditure in recent years has resulted in substantial depreciation charges in the profit or loss account. All capital spending, including that on the Oloro II project – designed to reduce toxic emissions from the manufacturing plant – should be postponed except where such spending can be shown to be essential to current operations.

Staff pay should be frozen at this year’s level for the forthcoming year. The company’s sponsorship of the local charity events run by the Staff Social Club should also, regrettably, be ended.

By boosting profits and therefore EPS, these measures will help us to achieve the highest possible stock market capitalisation.”

Required:

a. Prepare a response to the Chairman’s proposals which examines the possible consequences of the proposals for the price of the company’s shares and for the company’s stakeholders. (9 Marks)

b. Discuss FOUR ways that encourage managers to achieve stakeholder objectives. (6 Marks)

(Total 15 Marks)

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  • 15 Marks

FM – Nov 2022 – L3 – Q6 – Dividend Policy

Analyze P/E ratios and calculate dividend cover for companies in the food retail sector.

Companies A, B, and C are in the food retailing sector of the stock market. The following key stock market statistics are provided.

Food Retailers: Ordinary Shares, Key Stock Market Statistics:

Company A B C
Share Price (₦) 2.10 1.80 2.30
Earnings per Share (₦) 0.30 0.25 0.35
Dividend per Share (₦) 0.18 0.15 0.25

Required:

a. Illustrating your answer by using data from the table above, define and explain the term P/E ratio, and comment on the way it may be used by an investor to appraise a possible share purchase. (8 Marks)

b. Using data in the above table, calculate the dividend cover for Companies C and B, and explain the meaning and significance of the measure from the point of view of equity investors. (7 Marks)

(Total 15 Marks)

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  • 15 Marks

FM – Nov 2022 – L3 – Q5 – Business Valuation Techniques

Calculate the equity value of APL using SVA and outline three methods for funding the MBO.

Aderupoko Plc (ADP), a large listed media group, has been the holding company of Adamu Publishers Limited (APL) since 2015. The publishing company (APL) is 100% owned by ADP since inception.

Recently, the directors of APL informed ADP’s board of their readiness to make a management buy-out (MBO) of APL. Accordingly, ADP’s board decided to value APL using the shareholder value analysis method (SVA). ADP’s board estimates that APL has a four-year competitive advantage over its competitors (to 30 September 2024) and the following data regarding APL’s value drivers and additional financial information has been collected:

Year to 30 September 2021 2022 2023 2024 2025+
Sales growth (%) 5% 4% 3% 2% 0%
Operating profit margin 8% 9% 10% 10% 10%
Incremental non-current asset investment (% of sales increase) 5% 6% 3% 2% 0%
Incremental working capital investment (% of sales increase) 6% 5% 4% 4% 0%

Financial Information:

  • Sales for the current year to 30 September 2020: ₦80 million
  • Annual depreciation (equal to annual replacement of non-current asset expenditure): ₦2.0 million
  • Par value of 6% debentures in issue (current market value ₦95.00, nominal value ₦100): ₦10.0 million
  • Short-term investments held: ₦0.8 million
  • Company tax rate: 20%
  • Current WACC: 10%

Required:

a. Calculate the value of APL’s equity using SVA.

(12 Marks)

b. Outline three methods by which APL’s directors might raise the funds necessary for the proposed MBO of the company. (3 Marks)

(Total 15 Marks)

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  • 7 Marks

FR – Nov 2022 – L2 – Q4a – IFRS Issuance Process

Summary: Describe six steps in the issuance process of International Financial Reporting Standards (IFRS).

Describe SIX steps involved in the process of issuing International Financial Reporting Standards (IFRS). (6 Marks)

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  • 5 Marks

FR – Nov 2022 – L2 – Q3b – Bargain Purchase and IFRS 3 Review Requirements

Explanation of a bargain purchase and IFRS 3 items requiring review when gain from bargain purchase arises.

b. A gain from a bargain purchase may arise in the course of a business combination and when this happens, the acquirer must review or reassessthe procedure used to measure certain items at the acquisition date.
Required:
Explain the term “Gain from a bargain purchase” and identify the three
items stipulated in IFRS 3 that must be reviewed.

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  • 15 Marks

FR – Nov 2022 – L2 – Q3a – Consolidated Statement of Financial Position

Preparation of the consolidated statement of financial position for Food Plc and its subsidiary Eba Ltd as of September 30, 2020.

a. Food Plc has a subsidiary, Eba Limited. The statements of financial position of the companies as at September 30, 2020 are presented below:


Additional Information:
(i) Food PLC acquired four hundred and eighty million shares in Eba Limited two years ago when the balances in retained earnings and general
reserves were N60,000,000 and N48,000,000 respectively.
(ii) The fair value of non-controlling interests in Eba limited as at the acquisition date was N158,000,000.
(iii) During the year, goods costing N80,000,000 to Food PLC were transferred to Eba Limited. It is the policy of Food PLC to transfer goods at cost plus 25%. A quarter of these goods have been sold by Eba Limited at year end.
(iv) Part of the bills receivable have been discounted by Food PLC.
(v) The sum of N8,000,000 transferred by Eba Limited to Food PLC as part payment for indebtedness was received after the reporting date.
(vi) An impairment test revealed a loss of N16,000,000 on the goodwill arising on the acquisition of Eba Limited.
(vii) The carrying amount of the net assets of Eba Limited is N20,000,000 more than the fair value at acquisition date. This was due to the loss in value of the company’s machinery occasioned by change in technology. The machinery is depreciated at a flat rate of 15% on cost.
(viii) The nominal value of the ordinary shares of Food PLC are denominated in 50 kobo per share, while those of Eba Limited are 25 kobo each.

Required:
a. Prepare the consolidated statement of financial position of Food group as at September 30, 2020. (15 Marks)

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  • 9 Marks

FR – Nov 2022 – L2 – Q2 – Statement of Cash Flows

Prepare a statement of cash flows using the direct method for Obudu Nigeria Limited based on the given financial statements.

Financial statements and extract from the cashbook of Obudu Nigeria Limited for the year ended December 31, 2020 are summarised below:
Obudu Nigeria Limited Statement of profit or Loss for the year ended December 31, 2020

Obudu Nigeria Limited Statement of financial position as at December 31



Other Information
(i) The 8% loan notes have been partly redeemed. It is expected that the full redemption will be made in five years time.
(ii) A cash payment for insurance of N1million was omitted in the cash book and other records.
(iii) The investments are not easily realisable.
Required:
a. Prepare the statement of cash flows for the year ended December 31, 2020 using the direct method in accordance with IAS 7. (9 Marks)
b. Prepare a statement of reconciliation of the operating profit to cash flow from operations. (5 Marks)
c. Discuss the benefits of statement of cash flows information to users of financial statements.

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  • 30 Marks

FR – Nov 2022 – L2 – Q1 – Financial Performance Ratios

This question asks for the computation of key financial ratios and an analysis of the viability of acquiring controlling interests in two companies.

There has been agitation to stop importation of containers from China, to increase patronage of local industries. The Board of Favour PLC is planning to acquire 75% controlling interests in either Grace Limited or Blessing Limited which produce better and cheaper containers locally. As a trainee working in
Obokun Chartered Accountants, the Managing Partner has requested you to carry out performance score cards of the companies using accounting ratios to assess the viability of the acquisition.

Statement of comprehensive income for the year ended December 31, 2020:



Additional Information:
(i) Inventories as at December 31, 2019 were N60 million, N30 million and N50 Million and the current market prices, 30 kobo, 28 kobo and 10 kobo
for Favour Plc, Grace Limited and Blessing Limited respectively.
(ii) Purchases for cash within 365 days in the year 2020 were 10%, 20% and 40% of cost of sales for Favour Plc, Grace Limited and Blessing Limited
respectively.
Required:
a. Calculate the following ratios for Grace Limited and Blessing Limited.
i. Net profit margin
ii. Quick ratio
iii. Debt equity ratio
iv. Proprietary ratio
v. Earnings yield
vi. Net asset per share

b. Draft a technical report titled “Performance Scorecard‟ of Blessing Limited and Grace Limited and advise Favour Plc in which of the two companies it should acquire 75% controlling interests. (10 Marks)

c. The Chief Financial Officer (CFO) of Favour Plc noted that the records of Blessing Limited and Grace Limited are maintained using block chain technologies.

Required: Discuss the type of records that a company can maintain in blockchain and state TWO benefits of making use of this technology. (10 Marks)

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  • 15 Marks

FR – Nov 2022 – L2 – Q5 – Professional Behaviour and IAS 38 Conditions

Discuss professional behaviour and threats for accountants, and conditions for recognizing development costs.

(a) Explain briefly what is meant by professional behaviour and outline THREE threats that could affect the work of professional accountants. (5 Marks)

(b) IAS 38 prescribes the requirements for reporting intangible assets in the financial statements of an entity.

Required:
i. Explain FIVE conditions under which development costs can be recognised as intangibles in financial statements. (5 Marks)

ii. Highlight FIVE conditions, which should be considered to determine the useful life in the amortisation of intangible assets in the financial statements. (5 Marks)

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  • 3 Marks

FR – Nov 2022 – L2 – Q6a – Potential Ordinary Shares in EPS Calculation

Explain potential ordinary shares with three examples as per IAS 33.

IAS 33 – Earnings Per Share (EPS) requires entities to calculate basic and diluted earnings per share. However, diluted EPS and basic EPS will usually differ when there are potential ordinary shares in existence.
Required:

i. Explain the term “potential ordinary share” and provide THREE examples as stated in IAS 33. (3 Marks)
ii. Describe the procedure for ranking when there are several types of potential ordinary share in issue when calculating diluted EPS.
(3 Marks)

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  • 7 Marks

FR – Nov 2022 – L2 – Q6b – Potential Ordinary Shares

Rank the types of potential ordinary shares and calculate the diluted EPS for Jumai Nigeria Limited.

The following information relates to Jumai Nigeria Limited for the year ended December 31, 2020.
Issued ordinary shares of 50k each N3,000,000
Profit for the year N18,000,000
Average market price of shares during the year was N70 per share. The potential financial instruments in existence in the company are detailed below:
i. 800,000 options with exercise price of N52.50.
ii. 5% convertible bond of N6,000,000. Each bond is convertible in year 2025 into ordinary shares at the rate of 30 new shares for every N100 bonds.
iii. 200,000 8% convertible preference shares at N10 per share. Each preference share is convertible in year 2024 at the rate of one ordinary share for every 25 preference shares held. The Company income tax rate is 30%. Assume that all the options are exercised.
Required:
Rank the potential ordinary shares and calculate the diluted EPS for the year ended December 31, 2020. (7 Marks)

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  • 2 Marks

FR – Nov 2022 – L2 – Q6c – Limitations of EPS

Identify three limitations of EPS as an indicator of performance.

EPS is probably the single most important indicator of an entity’s performance.
Required:
State THREE of the limitations of EPS.

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  • 9 Marks

FR – Nov 2022 – L2 – Q7a – Conceptual Framework Purposes

Short Summary: Summarize the six primary purposes of IASB's Conceptual Framework in international standards development.

Briefly explain SIX purposes of the Conceptual Framework of the International Accounting Standard Board (IASB). (9 Marks)

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