Assurance Engagements – Page 2

AAA – May 2017 – L3 – Q4c – Assurance Engagements

Explain Prospective Financial Information (PFI) and procedures for assurance engagements on profit forecasts.

Question

Traditionally, the role of the auditor has focused on providing assurance on “historical” events, for example, on financial statements relating to a period of time in the past. As business and economic environments have changed, demand has grown for practising accountants to provide assurance on prospective financial information (PFI).

Required:

i. Explain “Prospective Financial Information” (2 Marks)

ii. State and explain SIX procedures you will perform in a PFI assurance engagement on Profit Forecast of a company. (6 Marks)

Answer

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Tags: Assurance engagements, Procedures, Profit Forecast, Prospective financial information
Level: Level 3

Topic: Assurance Engagements

AAA – May 2017 – L3 – Q4b – Assurance Engagements

Explain "value for money" and the 3Es of achieving it in assurance engagements.

Question

Alhaji Chukwudi is the Chairman and majority shareholder of Talking Drums Limited, a telecommunications company operating in Nigeria. The company had experienced considerable growth in the past. However, over the last three years, there has been noticeable increase in cost of operations which is slowing down the growth of the company. Management had explained that the increasing cost is a result of expansion of coverage area which management believes will lead to further expansion and growth of the company in the nearest future. Alhaji Chukwudi wants to get a certain level of assurance that there is value for the increased expansion costs the company was incurring. As a result, the Board of Directors resolved to engage a practitioner for a „value for money‟ evaluation of the coverage expansion costs.

Required:

i. Explain „value for money‟. (2 Marks)

ii. Explain the 3Es of achieving value for money. (6 Marks)

Answer

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Tags: and Economy, Audit of Efficiency, Effectiveness, Value for Money
Level: Level 3

Topic: Assurance Engagements

AAA – May 2017 – L3 – Q4a – Assurance Engagements

Explain the concept of an assurance engagement.

Question

Explain “assurance engagement.” (4 Marks)

Answer

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Tags: Assurance Engagement, Audit and Assurance, Practising Accountant
Level: Level 3

Topic: Assurance Engagements

AAA – May 2019 – L3 – Q2 – Assurance Engagements

Explain due diligence, discuss its components, benefits of using auditors, and ISRE 2400 principles and objectives.

Question

Bolokupalemo Pharmaceuticals Limited is a fast-growing company operating with its head office in Onitsha. The management of the company is targeting the takeover of another company located in the South-South zone of Nigeria with the intention of expanding its business frontier. Preliminary discussions reveal that the management of the other company has not shown any effective resistance to the proposed takeover. However, the management of Bolokupalemo wants a clear due diligence work to be performed to determine the viability of the acquisition.

As the auditor of the acquiring company, its management has approached you to carry out a due diligence work on the company that it has proposed to acquire. The management also requires your firm to carry out the engagement in accordance with the provisions of International Standard on Review Engagements (ISRE 2400).

You are required to:
a. Explain the concept of “due diligence engagement.” (2 Marks)
b. Discuss the items to be investigated in a due diligence exercise. (5 Marks)
c. Explain the benefits of using an audit firm for due diligence engagement. (5 Marks)
d. Discuss the objectives of “International Standard on Review Engagement” (ISRE 2400). (5 Marks)
e. Explain the principles to be applied in review engagements as set out by ISRE 2400. (3 Marks)

Answer

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Tags: Due diligence, ISRE 2400, Mergers & Acquisitions, Review Engagements
Level: Level 3

Topic: Assurance Engagements

AAA – May 2022 – L3 – Q2 – Assurance Engagements

Discuss due diligence processes and provide IFRS 16 guidance on lease recognition, measurement, and disclosure.

Question

Pegrace Nigeria Limited (PNL), your audit client, is a national hotel group with substantial cash resources. Its accounting functions are well managed and the group’s accounting policies are rigorously applied. The company’s financial year-end is December 31.

The company has been seeking to acquire a construction company for some time in order to bring in-house the building and refurbishment of hotels and related leisure facilities, like swimming pools, volleyball courts, and restaurants. The management has recently identified Robin Construction Company Limited (RCCL) as a potential target and has urgently requested that you undertake a limited due diligence review.

Further to the preliminary talks between the management of RCCL and PNL, you were provided with the following brief on Robin Construction Company Limited:

The Chief Executive, Managing Director, and Finance Director are all family members and major shareholders. The company has an established reputation for quality constructions.
Due to a recession in the building business, the company has been operating at its overdraft limit for the last 18 months and has been close to breaching debt obligations on several occasions.
Robin’s accounting policies are generally less prudent than those of Pegrace (assets are depreciated over longer estimated useful lives).
Contract revenue is recognized on the percentage of completion method, measured by reference to costs incurred to date. Provisions are made for loss-making contracts.
The company’s management team includes a qualified and experienced quantity surveyor, whose main responsibilities are:
- Supervising quarterly physical counts at major construction sites;
- Comparing costs to date against quarterly rolling budgets; and
- Determining profits or losses, by contract, at each financial year-end.
Labour force is provided under subcontracts. During construction, the regulatory body visited the site and discovered non-compliance with site health and safety regulations.

In February 2021, Robin received a claim that a site on which it built a housing development in Banana Estate was not properly drained and is now sinking. Residents are demanding rectification and asking for payment or damages. Robin has referred the matter to its legal counsel and denied all liability, as the site preparation was subcontracted to Sahara Services Company Limited. No provisions have been made in respect of the claims, nor has any disclosure been made.

The auditor’s report on Robin’s financial statements for the year ended December 31, 2020, was signed, without modification, in March 2021.

Required:

a. Prepare a document to give the explanatory meaning of the term ‘due diligence’ and subsequently discuss items to investigate in a due diligence exercise. (12 Marks)

b. Advise on how to recognize, measure, present, and disclose leases as required by IFRS 16. (8 Marks)

Answer

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Tags: Audit Recommendations, Due diligence, Financial instruments, IFRS 16, Lease Accounting
Level: Level 3

Topic: Assurance Engagements

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 – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

Question

Investigation under investment decision will NOT include:
A. Loan facility decision
B. Purchase of shares
C. Purchase of business
D. Reporting on profit forecast
E. Partnership participation

Answer

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Tags: Financial Analysis, Investigation, Investment Decision, Profit Forecast
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2012

AAA – Nov 2013 – L3 – A – Q6 – Assurance Engagements

This question assesses knowledge of assurance engagements and identifies an activity that is not an assurance engagement.

Question

The following are examples of assurance engagement, EXCEPT
A. Reporting on environmental performance
B. Carrying out statutory audit
C. Reviewing of accounting and internal control system
D. Reporting on statements of accounting policies and goodwill
E. Reviewing of corporate governance within an entity

Answer

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Tags: Assurance Engagement, Audit, Reporting Standards, Review
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2012

AAA – Nov 2012 – L3 – AII – Q16 – Assurance Engagements

Identifies the linkage of responsible parties in assurance engagements to financial statement examination.

Question

To examine financial statements, in Assurance Engagements, “Responsible Parties” are linked to ………………

Answer

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Tags: Assurance engagements, Audit, Financial Statements, Responsible Parties, Stakeholders
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2012

AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

Question

Which of the following is NOT an objective of profit forecast investigation on which an opinion can be given?
A. Whether or not the profit forecast complies with the Generally Accepted Accounting Principles
B. As to whether the profit forecast has been prepared on the basis of the existing organization’s accounting policies
C. Whether or not the profit forecast has been prepared on the basis of management assumptions and judgment
D. On the reasonableness of the management assumptions and judgment of the profit forecast
E. As to whether the profit forecast agrees with the underlying records

Answer

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Tags: Assurance, Compliance, GAAP, Profit Forecast, Regulatory Standards
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2012

AAA – Nov 2011 – L3 – SAII – Q20 – Assurance Engagements

Definition of an assurance engagement's objective in providing confidence to users.

Question

An assignment in which the practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter is…………………………

Answer

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Tags: Assurance Engagement, Confidence Enhancement, Evaluation, Measurement
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2011

AAA – Nov 2011 – L3 – SA – Q18 – Assurance Engagements

Identifies an engagement type that does not qualify as an assurance engagement.

Question

Which ONE of the following is NOT an example of assurance engagement?

A. Reports for lenders and other investors
B. Reports on environmental performance
C. Reports and statement of accounting policies
D. Reports on corporate social responsibility performance
E. A private audit

Answer

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Tags: Assurance Engagement, Corporate Responsibility, Financial Reporting, Reporting Standards
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2011

AAA – Nov 2011 – L3 – SA – Q11 – Assurance Engagements

Identifies an item that may be excluded from an accountant’s report in a prospectus.

Question

The accountants’ report in a prospectus may not contain ONE of the following items:

A. Summarised balance sheet of the company for the last five years
B. Evaluation of quoted and unquoted investments
C. Principal accounting policies
D. Movement in share premium account
E. Particulars of preliminary expenses

Answer

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Tags: Accountants' Report, Disclosure Requirements, Financial Reporting, Prospectus
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2011

Topic: Assurance Engagements

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AAA – May 2017 – L3 – Q4c – Assurance Engagements

Explain Prospective Financial Information (PFI) and procedures for assurance engagements on profit forecasts.

Required:

AAA – May 2017 – L3 – Q4b – Assurance Engagements

Explain "value for money" and the 3Es of achieving it in assurance engagements.

Required:

AAA – May 2017 – L3 – Q4a – Assurance Engagements

Explain the concept of an assurance engagement.

AAA – May 2019 – L3 – Q2 – Assurance Engagements

Explain due diligence, discuss its components, benefits of using auditors, and ISRE 2400 principles and objectives.

AAA – May 2022 – L3 – Q2 – Assurance Engagements

Discuss due diligence processes and provide IFRS 16 guidance on lease recognition, measurement, and disclosure.

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.

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

AAA – Nov 2013 – L3 – A – Q6 – Assurance Engagements

This question assesses knowledge of assurance engagements and identifies an activity that is not an assurance engagement.

AAA – Nov 2012 – L3 – AII – Q16 – Assurance Engagements

Identifies the linkage of responsible parties in assurance engagements to financial statement examination.

AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

AAA – Nov 2011 – L3 – SAII – Q20 – Assurance Engagements

Definition of an assurance engagement's objective in providing confidence to users.

AAA – Nov 2011 – L3 – SA – Q18 – Assurance Engagements

Identifies an engagement type that does not qualify as an assurance engagement.

AAA – Nov 2011 – L3 – SA – Q11 – Assurance Engagements

Identifies an item that may be excluded from an accountant’s report in a prospectus.

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AAA – May 2017 – L3 – Q4c – Assurance Engagements

Explain Prospective Financial Information (PFI) and procedures for assurance engagements on profit forecasts.

Required:

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AAA – May 2017 – L3 – Q4b – Assurance Engagements

Explain "value for money" and the 3Es of achieving it in assurance engagements.

Required:

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AAA – May 2017 – L3 – Q4a – Assurance Engagements

Explain the concept of an assurance engagement.

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AAA – May 2019 – L3 – Q2 – Assurance Engagements

Explain due diligence, discuss its components, benefits of using auditors, and ISRE 2400 principles and objectives.

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AAA – May 2022 – L3 – Q2 – Assurance Engagements

Discuss due diligence processes and provide IFRS 16 guidance on lease recognition, measurement, and disclosure.

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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 – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

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AAA – Nov 2013 – L3 – A – Q6 – Assurance Engagements

This question assesses knowledge of assurance engagements and identifies an activity that is not an assurance engagement.

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AAA – Nov 2012 – L3 – AII – Q16 – Assurance Engagements

Identifies the linkage of responsible parties in assurance engagements to financial statement examination.

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AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

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AAA – Nov 2011 – L3 – SAII – Q20 – Assurance Engagements

Definition of an assurance engagement's objective in providing confidence to users.

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AAA – Nov 2011 – L3 – SA – Q18 – Assurance Engagements

Identifies an engagement type that does not qualify as an assurance engagement.

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AAA – Nov 2011 – L3 – SA – Q11 – Assurance Engagements

Identifies an item that may be excluded from an accountant’s report in a prospectus.

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