Topic: Internal Audit and Corporate Governance

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  • 15 Marks

AAA – Nov 2016 – L3 – Q3a – Internal Audit and Corporate Governance

Evaluate reliance on internal auditors for cash sales testing and significance of specialist reports as audit evidence.

You are the Audit Manager in charge of the audit of Mix Biz, a company which runs a chain of snack bars operating in a number of strategic locations in Lagos. Your firm has been the auditor for a number of years and has always had to substantively test cash sales because of lack of control over the recording of takings. The audit reports to date have been unmodified.

You have recently been informed that the company has employed a newly qualified Chartered Accountant as Chief Internal Auditor and a partly qualified Assistant Internal Auditor. Since their appointment halfway through the year ended December 31, 2015, they have spent most of their time carrying out substantive tests on cash sales.

The Directors are hopeful that your audit fee this year will decrease because you will be able to rely on the work carried out by the Internal Auditors.

Required:
a. Explain the issues that will be relevant to your firm in deciding:
i. whether you can rely on the work performed by the Internal Auditors (8 Marks)
ii. how much reliance to place on that work (7 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q19 – Internal Audit and Corporate Governance

This question identifies assignments that qualify as continuous audit functions.

Which of the following assignments can be regarded as a continuous audit function?
A. Examining the effectiveness, efficiency, and economy of a cement project
B. Evaluating the adequacy of the security and control measures of the information technology
C. Ascertaining the fairness of the annual financial statements and notes to the accounts
D. Reviewing the internal control procedures before commencing the audit
E. Reviewing the company’s compliance with relevant guidance and release of financial information periodically

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  • 15 Marks

AAA – Nov 2011 – L3 – SB – Q6 – Internal Audit and Corporate Governance

Explores the functions and significance of various committees and concepts in governance, including the Public Accounts Committee and due diligence.

Write short notes on the following:

(a) Public Accounts Committee
(3 Marks)

(b) Value-for-Money Audit
(3 Marks)

(c) Audit Alarm Committee
(3 Marks)

(d) Due Diligence
(3 Marks)

(e) Due Process
(3 Marks)

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Reliable Limited is into wholesale and retail supply and distribution of stationeries to companies and educational institutions. The company maintains business relationships with other enterprises that are owned by close friends and relatives. The books of account of the company were kept manually and in simple Excel. The company had only a staff member in the accounts department since it is a small business operation.

A review of the company’s operations shows that inventory of stationeries purchased was not properly valued due to incomplete recording of purchases made. Although bank statements are obtained, the balances on the bank statements were not reconciled with the cash book.

Cash from sales made was not banked intact, and expenses relating to cash takings from the till were not all recorded or properly monitored. Added to this, goods bought from related parties were sometimes overvalued as suppliers made frivolous claims which could not be disputed due to poor record keeping. The Managing Director and owner of the company has been sick for some time, and the wife concentrated more on her own business, leaving the operations of the company to a relation who is not well educated. Available evidence revealed that invoices and vouchers of the company were approved without management review, and the procedure or selection of suppliers was not transparent.

The company has just won a contract for the supply of stationeries in one of the states in the Federation, and it was found that there was inadequate cash flow to execute the contract. The manager of the company informed the Managing Director’s wife of the development, and it was agreed that a bank loan would be needed. On approaching the bank, updated financial statements of the company were requested to determine the financial health of the business and ability to repay the loan when due.

Your firm has been appointed as auditors of the company with a stipulated deadline to complete the audit so that the company could meet the bank’s conditions. The firm has conducted a preliminary review of the operations of the company, and some control gaps have been noted.

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

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  • 20 Marks

AAA – Nov 2023 – L3 – SB – Q4 – Internal Audit and Corporate Governance

Evaluate auditor’s rights, management's responsibilities, and reasons for possible auditor resignation at Phil Plc.

Phil Plc has been in business of manufacturing textile materials for about twenty years and has been rendering good returns to shareholders on their investments until about a few years ago, precisely in 2019. The business of the company went down drastically in 2020 due to measures taken to contain the spread of the COVID-19 virus, which included travel bans, quarantines, social distancing, and closures of non-essential services. The COVID-19 pandemic significantly caused disruptions to businesses worldwide, resulting in economic slowdown. The problem was aggravated with the Federal Government of Nigeria enforcing restrictions on movement. All businesses and offices were affected with exceptions of power distribution, oil and gas (petroleum), and retail companies.

COVID-19 pandemic impacted the economy generally, and the following were the impacts on the company:

  • Increase in cost of raw materials as a result of devaluation of the currency due to the drop in the price of crude oil;
  • Shortage in supply of key raw materials sourced from other countries, for example, China; and
  • Increase in ocean freight costs and inland transportation.

The impact of the outbreak of COVID-19 directly caused economic losses through disruptions in supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. The crisis led to a decline in revenue.

However, despite the challenges, management continued to strive for impressive performance for the shareholders. A board member believed there is an unhealthy relationship between management and the board of directors as she accused management of lack of transparency and threatened to resign. The problem was compounded after the year-end audit when the auditors reported that the company’s internal controls were ineffective and accused management of fraudulent financial reporting. The external auditors also threatened to restate the prior year’s financial statements, believing there were misstatements of certain account balances.

The Managing Director and some directors argued that it is their responsibility to prepare financial statements and that auditors do not have the right to make restatements. However, the Chairman of the audit committee and a few directors supported the auditors and appealed to management to allow the auditors to perform their regulated duties, warning that they may report to the Financial Reporting Council on management’s activities.

The external auditors, surprised by management’s actions, threatened to resign. They were also uncomfortable with the following issues during the audit:

  • The supporting documents from which financial statements were prepared;
  • Review of opening balances revealing omission of some transactions and significant information in disclosures;
  • Misapplication of accounting principles regarding amounts, classifications, presentation, and disclosures.

Added to the above, the external auditors identified risks likely affecting asset valuation and other significant accrued liabilities. Your firm is preparing for a discussion with the audit committee and has instructed your team to review specific sections.

Required:

a. Evaluate the rights and duties of the auditors in a professional engagement. (10 Marks)

b. Enumerate what you consider as the responsibilities of management and those charged with governance in Phil Plc. (5 Marks)

c. Discuss the reason why your firm may resign the appointment as the auditors of the company. (5 Marks)
(Total 20 Marks)

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  • 20 Marks

AAA – Nov 2023 – L3 – SB – Q3 – Internal Audit and Corporate Governance

Discuss audit activities, key focus areas, and factors of concern in auditing Giant Club.

Giant Club has been in existence for about 6 years. The club membership comprises of eminent individuals in society and has a certificate of registration under the relevant laws. It has an approximate enrollment of 1,000 members. The club’s funding is supported by membership fees, parking fees, rental fees, voluntary donations, and income from endowment investments.

The club has been named as a beneficiary under the wills of two deceased members. Collection on the proceeds of the estate is made subsequent to the balance sheet date. Collections from the will receivable in the amount of N6,200,000 have been recorded based on the available information from the estate administrators. During the 2020 financial year, the club was committed to giving scholarships to seven students in various higher institutions. Accordingly, the club has agreed to pay these individuals regular pocket money in addition to providing medical coverage as needed. Since it is a non-for-profit organisation (NFPO), the club has not been conducting an independent statutory audit of the financial statements since inception. However, the club has been appointing its officers as and when due every two years.

The new Treasurer, who is a professional accountant, took over the control of the treasury and his review revealed that:

  • There was no periodic review of inventory items and background check on vendors/suppliers;
  • There were calls from vendors stating they haven’t been paid when records show payments have been made;
  • There were cases of cash takings not banked;
  • No control over cheque lodgments and reconciliation of the bank account;
  • No background check for those who handled money;
  • The computers used for transactions did not have protective passwords;
  • No evidence that the organisation sent acknowledgements to contributors with a record of such acknowledgements kept on file;
  • When new members were admitted and they made yearly subscription payments, the club did not issue pre-numbered tickets, which could then be compared to funds deposited;
  • When cheques were issued, supporting documentation of expenses and approvals at the time of signing cheques were not available; and
  • Requests for reimbursement were not checked for arithmetical accuracy and reasonableness before approval.

The new management of Giant Club has just appointed your firm as the external auditor, and you have been selected as the senior in charge of the audit.

Required:

a. Discuss the activities you will carry out when performing the audit of the Club. (10 Marks)

b. Evaluate the key audit areas that you will focus on to get enough audit evidence on this type of audit.

(5 Marks)

c. Determine other factors that should be of concern in this type of audit. (5 Marks)
(Total 20 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 2016 – L3 – Q3a – Internal Audit and Corporate Governance

Evaluate reliance on internal auditors for cash sales testing and significance of specialist reports as audit evidence.

You are the Audit Manager in charge of the audit of Mix Biz, a company which runs a chain of snack bars operating in a number of strategic locations in Lagos. Your firm has been the auditor for a number of years and has always had to substantively test cash sales because of lack of control over the recording of takings. The audit reports to date have been unmodified.

You have recently been informed that the company has employed a newly qualified Chartered Accountant as Chief Internal Auditor and a partly qualified Assistant Internal Auditor. Since their appointment halfway through the year ended December 31, 2015, they have spent most of their time carrying out substantive tests on cash sales.

The Directors are hopeful that your audit fee this year will decrease because you will be able to rely on the work carried out by the Internal Auditors.

Required:
a. Explain the issues that will be relevant to your firm in deciding:
i. whether you can rely on the work performed by the Internal Auditors (8 Marks)
ii. how much reliance to place on that work (7 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q19 – Internal Audit and Corporate Governance

This question identifies assignments that qualify as continuous audit functions.

Which of the following assignments can be regarded as a continuous audit function?
A. Examining the effectiveness, efficiency, and economy of a cement project
B. Evaluating the adequacy of the security and control measures of the information technology
C. Ascertaining the fairness of the annual financial statements and notes to the accounts
D. Reviewing the internal control procedures before commencing the audit
E. Reviewing the company’s compliance with relevant guidance and release of financial information periodically

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  • 15 Marks

AAA – Nov 2011 – L3 – SB – Q6 – Internal Audit and Corporate Governance

Explores the functions and significance of various committees and concepts in governance, including the Public Accounts Committee and due diligence.

Write short notes on the following:

(a) Public Accounts Committee
(3 Marks)

(b) Value-for-Money Audit
(3 Marks)

(c) Audit Alarm Committee
(3 Marks)

(d) Due Diligence
(3 Marks)

(e) Due Process
(3 Marks)

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Reliable Limited is into wholesale and retail supply and distribution of stationeries to companies and educational institutions. The company maintains business relationships with other enterprises that are owned by close friends and relatives. The books of account of the company were kept manually and in simple Excel. The company had only a staff member in the accounts department since it is a small business operation.

A review of the company’s operations shows that inventory of stationeries purchased was not properly valued due to incomplete recording of purchases made. Although bank statements are obtained, the balances on the bank statements were not reconciled with the cash book.

Cash from sales made was not banked intact, and expenses relating to cash takings from the till were not all recorded or properly monitored. Added to this, goods bought from related parties were sometimes overvalued as suppliers made frivolous claims which could not be disputed due to poor record keeping. The Managing Director and owner of the company has been sick for some time, and the wife concentrated more on her own business, leaving the operations of the company to a relation who is not well educated. Available evidence revealed that invoices and vouchers of the company were approved without management review, and the procedure or selection of suppliers was not transparent.

The company has just won a contract for the supply of stationeries in one of the states in the Federation, and it was found that there was inadequate cash flow to execute the contract. The manager of the company informed the Managing Director’s wife of the development, and it was agreed that a bank loan would be needed. On approaching the bank, updated financial statements of the company were requested to determine the financial health of the business and ability to repay the loan when due.

Your firm has been appointed as auditors of the company with a stipulated deadline to complete the audit so that the company could meet the bank’s conditions. The firm has conducted a preliminary review of the operations of the company, and some control gaps have been noted.

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

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  • 20 Marks

AAA – Nov 2023 – L3 – SB – Q4 – Internal Audit and Corporate Governance

Evaluate auditor’s rights, management's responsibilities, and reasons for possible auditor resignation at Phil Plc.

Phil Plc has been in business of manufacturing textile materials for about twenty years and has been rendering good returns to shareholders on their investments until about a few years ago, precisely in 2019. The business of the company went down drastically in 2020 due to measures taken to contain the spread of the COVID-19 virus, which included travel bans, quarantines, social distancing, and closures of non-essential services. The COVID-19 pandemic significantly caused disruptions to businesses worldwide, resulting in economic slowdown. The problem was aggravated with the Federal Government of Nigeria enforcing restrictions on movement. All businesses and offices were affected with exceptions of power distribution, oil and gas (petroleum), and retail companies.

COVID-19 pandemic impacted the economy generally, and the following were the impacts on the company:

  • Increase in cost of raw materials as a result of devaluation of the currency due to the drop in the price of crude oil;
  • Shortage in supply of key raw materials sourced from other countries, for example, China; and
  • Increase in ocean freight costs and inland transportation.

The impact of the outbreak of COVID-19 directly caused economic losses through disruptions in supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. The crisis led to a decline in revenue.

However, despite the challenges, management continued to strive for impressive performance for the shareholders. A board member believed there is an unhealthy relationship between management and the board of directors as she accused management of lack of transparency and threatened to resign. The problem was compounded after the year-end audit when the auditors reported that the company’s internal controls were ineffective and accused management of fraudulent financial reporting. The external auditors also threatened to restate the prior year’s financial statements, believing there were misstatements of certain account balances.

The Managing Director and some directors argued that it is their responsibility to prepare financial statements and that auditors do not have the right to make restatements. However, the Chairman of the audit committee and a few directors supported the auditors and appealed to management to allow the auditors to perform their regulated duties, warning that they may report to the Financial Reporting Council on management’s activities.

The external auditors, surprised by management’s actions, threatened to resign. They were also uncomfortable with the following issues during the audit:

  • The supporting documents from which financial statements were prepared;
  • Review of opening balances revealing omission of some transactions and significant information in disclosures;
  • Misapplication of accounting principles regarding amounts, classifications, presentation, and disclosures.

Added to the above, the external auditors identified risks likely affecting asset valuation and other significant accrued liabilities. Your firm is preparing for a discussion with the audit committee and has instructed your team to review specific sections.

Required:

a. Evaluate the rights and duties of the auditors in a professional engagement. (10 Marks)

b. Enumerate what you consider as the responsibilities of management and those charged with governance in Phil Plc. (5 Marks)

c. Discuss the reason why your firm may resign the appointment as the auditors of the company. (5 Marks)
(Total 20 Marks)

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  • 20 Marks

AAA – Nov 2023 – L3 – SB – Q3 – Internal Audit and Corporate Governance

Discuss audit activities, key focus areas, and factors of concern in auditing Giant Club.

Giant Club has been in existence for about 6 years. The club membership comprises of eminent individuals in society and has a certificate of registration under the relevant laws. It has an approximate enrollment of 1,000 members. The club’s funding is supported by membership fees, parking fees, rental fees, voluntary donations, and income from endowment investments.

The club has been named as a beneficiary under the wills of two deceased members. Collection on the proceeds of the estate is made subsequent to the balance sheet date. Collections from the will receivable in the amount of N6,200,000 have been recorded based on the available information from the estate administrators. During the 2020 financial year, the club was committed to giving scholarships to seven students in various higher institutions. Accordingly, the club has agreed to pay these individuals regular pocket money in addition to providing medical coverage as needed. Since it is a non-for-profit organisation (NFPO), the club has not been conducting an independent statutory audit of the financial statements since inception. However, the club has been appointing its officers as and when due every two years.

The new Treasurer, who is a professional accountant, took over the control of the treasury and his review revealed that:

  • There was no periodic review of inventory items and background check on vendors/suppliers;
  • There were calls from vendors stating they haven’t been paid when records show payments have been made;
  • There were cases of cash takings not banked;
  • No control over cheque lodgments and reconciliation of the bank account;
  • No background check for those who handled money;
  • The computers used for transactions did not have protective passwords;
  • No evidence that the organisation sent acknowledgements to contributors with a record of such acknowledgements kept on file;
  • When new members were admitted and they made yearly subscription payments, the club did not issue pre-numbered tickets, which could then be compared to funds deposited;
  • When cheques were issued, supporting documentation of expenses and approvals at the time of signing cheques were not available; and
  • Requests for reimbursement were not checked for arithmetical accuracy and reasonableness before approval.

The new management of Giant Club has just appointed your firm as the external auditor, and you have been selected as the senior in charge of the audit.

Required:

a. Discuss the activities you will carry out when performing the audit of the Club. (10 Marks)

b. Evaluate the key audit areas that you will focus on to get enough audit evidence on this type of audit.

(5 Marks)

c. Determine other factors that should be of concern in this type of audit. (5 Marks)
(Total 20 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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