QUESTION 1

(a) Mention the fundamental principles of independent auditing contained in the ethical code for
professional accountants. (b) State the matters which the auditor should consider in determining
the scope of the audit work. (c) List matters contained in the ethical principles which govern
auditors’ professional responsibilities. (d) What do you understand by ‘independence of mind’ in
relation to ethical conduct of a professional accountant? (e) When is there a professional duty or
right to disclose information which the auditor obtained during an audit?

Answer
1. Fundamental principles of independent auditing:
The Aud itors’ Cod e, published by APB, prescribes nine fundamental principles of
independent auditing as follows:
(a) Accou n t a b i l i t y
Aud itors act in the interests of primary stakeholders, whilst having regard
to the wider public interest. The identity of prima ry sta keholders is
determined by reference to the statute or agreement requiring an audit: in
the case of companies, the primary stakeholder is the general body of
shareholders.
(b) In t e g r i t y
Au ditors act with integrity, fulfilling their responsibilities with honesty,
fa irness and truthfulness.
Confid ential information obtained in the course of the audit isdisclosed
only when required in the public interest, or by operation of law.
(c) Ob je ct ivit y a n d in d e p e n d e n ce
Aud itors are objective. They express opinions independently of the entity
and its directors.
(d) Com p e t e n ce
Auditors act with professional skill, derived from their qualification, training
and practical experience.
This demands an understanding of financial reporting and business issues,
together with expertise in a ccumula ting a nd a ssessing the evidence
necessary to form an opinion.
(e) Rig ou r
Aud itors approach their work with thoroughness and with an attitude of
p rofession a l scep t icism. They a ssess critica lly the in forma t ion a n d
explanations obtained in the course of their work and such additional
evidence as they consider necessary for the purposes of their audit.
(f) Ju d g e m e n t
Aud itors apply professional judgement taking account of materiality in the
context of the matters on which they are reporting.
(g) Cle a r Com m u n ica t ion
Auditors’ reports contain clear expressions of opinion and set out information
necessary for a proper understanding of that opinion.

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 (h) As s ocia t ion
Aud itors allow their reports to be included in documents containing other
information only if they consider that the additional information is not in
conflict with the matters covered by their report and they have no cause to
believe it to be misleading.
(i) Provid in g Va lu e
Auditors add to the reliability and quality of financial reporting; they provide
to directors and officers constructive observations arising from the audit
process; and thereby contribute to the effective operation of business, capital
markets and the public sector.

2. Scop e
The auditor considers the following matters in determining the scope of
work: (a)the relevant statements of accounting standards,
(b) the auditing standards,
(c) the requirements of relevant professional bodies,
(d) legislation and regulations and
(e) the terms of the audit engagement

3. Et h ica l p r in cip le s
In the conduct of any audit of financial statements auditors should comply with the
ethical guidance issued by their relevant professional bodies.

The ethical principles which govern auditors’ professional responsibilities include:

(a) integrity;
(b) objectivity;
(c) independence;
(d) professional competence and due care;
(e) professional behaviour; and
(f) confidentiality.

In Nigeria, the auditor should comply with the ‘Rules of Professional Cond uct for Members
issued by the Institute of Cha rtered Accounta nts of Nigeria and accounting sta nda
rds issued by the Nigeria n Accounting Sta nda rds Boa rd. The ‘Rules of Professional
Cond uct for Members’ covers the following matters:
(a) fundamental principles
(b) integrity, objectivity and independence
(c) conflicts of interest
(d) confidentiality
(e) changes in professional appointment
(f) consultancy
(g) association with non-members
(h) fees
(i) obtaining professional work
(j) the names and letterheads of practicing firms
(k) second and other opinions
(l) members in business
(m) enforcement of ethical standards

4. In d e p e n d e n ce of m in d :
The state of mind that permits the provision of an opinion without being affected
by influences that compromise professional judgement, allowing an individual to
act with integrity, and exercise objectivity and professional scepticism.

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 5. Ma t ters which shou ld b e con sid ered in d e termin in g wh eth er con fid en t ia l
information may be disclosed are as follows:
(a) When disclosure is authorised. When authorisation to disclose isgiven by
the client or the employer the interests of all the parties including those
third parties whose interests might be affected should be considered.
(b) When disclosure is required by la w. Exa mples of when a professiona l
accountant is required by law to disclose confidential information are:
(c) To p rod u ce d ocu m en t s or to g ive evid en ce in th e cou rse of leg a l
proceedings; and
(d) To disclose to the appropriate public authorities infringements of the law
which come to light.
When there is a professional duty or right to disclose:
(a) To comply with technical standards and ethics requirements; such disclosure
is not contrary to this section;
(b) To protect the professional interests of a professional accountant in legal
proceedings;
(c) To comply with the quality (or peer) review of a member body or professional
body; and
(d) To respond to an inquiry or investigation by a member body or regulatory
body.

When the professional accountant has determined that confidential information can be
disclosed, the following points should be considered:
(a) Whether or not all the relevant facts are known and substantiated,to the extent it is
practicable to do so; when the situation involves unsubstantiated fact or opinion,
professional judgement should be used in determining the type of disclosure to be
made, if any;
(b) Wha t type of communication is expected and the addressee; in particular, the
professional accountant should be satisfied that the parties to whom the
communication is addressed are appropriate recipients and have the responsibility to
act on it; and
(c) Whether or not the professional accountant would incur any legal liability having made a
communication and the consequences thereof.
In all such situations, the professional accountants should consider the need to consult lega l
counsel a nd/or the professiona l orga nisa tion(s) concerned. The ‘Rules of Professional Cond uct
for Members’ issued by the Institute of Ch a rtered Accounta nts of Nigeria provides, in rela tion
to confidentiality, that:
◆ information confidential to a client or employer acquired in the course of
professional work should not be disclosed except where consent has been
obtained from the client, employer or other proper source, or where there is a
legal right or duty to disclose.
Where a legal right or duty of disclosure does exist, the client or employer should normally be notified in
advance of the disclosure being made.

QUESTION 2

a) State the circumstances in which the remuneration of the auditors of a company may be fixed by
the directors b) Where a company suffer loss or damage because of the failure of its auditor to
discharge the fiduciary duty imposed on him? What options are available under the Companies
and Allied Matters Act to the directors? c) In which circumstances shall a person not be eligible for
appointment as the approved auditor of a bank under the Banks and Other Financial Institutions
Act? d) The ICAZ and PAAB seek to promote and enforce compliance with the accounting
standards to be observed in the preparation of financial statements. Auditors are subjected to
penalties for non-compliance with accounting standards. State three penalties prescribed by the
Act. e) Family and personal relationships between a member of the assurance team and a director,

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an officer or certain employees, depending on their role, of the assurance client, may create
selfinterest, familiarity or intimidation threats. State what the audit firm should do to reduce the
threats to independence to an acceptable level

SHORT ANSWER SOLUTIONS

1. Remuneration of auditors
(a) The remuneration of the auditors of a company-
(i) in the case of an auditor appointed by the directors, may be
fixed by the directors; or
(ii) shall be fixed by the company in general meeting or in such manner
as the company in general meeting may determine.
(b) “Remuneration” includes sums paid by the company in respect of the
auditors’ expenses. (Section 361).

2. Lia bility of auditors for negligence

(a) A company’s auditor shall in the performance of his duties, exercise all such
care, diligence and skill as is reasonably necessary in each particular
circumstance.
(b) Where a company suffers loss or damage as a result of the fa ilure of its
auditor to discharge the fiduciary duty imposed on him the auditor shall
be lia ble for negligence and the directors may institute an action for
negligence against him in the court.
(c) If the directors fa il to institute an action against the auditor any member
may do so after the expiration of 30 days’ notice to the company of his
intention to institute such action. (Section 368)

3. Any person:
(a) having any interest in a bank otherwise than as a depositor; or
(b) who is a director, officer or agent of a bank; or
(c) which is a firm in which a director of a bank has any interest as partner or
director; or
(d) who is indebted to a bank, shall not be eligible for appointment as the
approved auditor for that bank;
(e) and a person appointed as such auditor who subsequently – acquires
such interest; or becomes a director, officer or agent of the bank; or becomes
indebted to a partner in a firm in which a director of a bank is interested as
partner or director, shall cease to be such auditor.

4. NASB Act 2003 prescribes stiff penalties for non-compliance with accounting
standards issued by the NASB. These include
(a) Fines at the discretion of the Board
(b) 5 million fine
(c) One year imprisonment, or both, on conviction
(d) Proscription or delisting of the firm of accountants

5. Family and Personal Relationships

The Cod e of Ethics for Professiona l Accounta nts issued by the Interna tiona l
Federation of Accounta nts further provides that “Family and personal relationships
between a member of the assurance team and a director, an officer or certain
employees, depending on their role, of the assurance client, may create self-interest,
familiarity or intimidation threats. It is impracticable to attempt to describe in detail
the significance of the threats that such relationships may create. The significance
will depend upon a number of factors including the individual’s responsibilities
on the assurance engagement, the closeness of the relationship and the role of the
family member or other individual within the assurance client. Consequently, there
is a wide spectrum of circumstances that will need to be evaluated and safeguards
to be applied to reduce the threat to an acceptable level”.

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 When an immediate family member of a member of the assurance team is
(a) a director, an officer or an employee of the assurance client in a position to
exert direct and significant influence over the subject matter of the assurance
engagement, or
(b) in such a position during any period covered by the engagement, the
threats to independence can only be reduced to an acceptable level by
removing the individual from the assurance team. The closeness of the
relationship is such that no other safeguard could reduce the threat to
independence to an acceptable level.
If application of this safeguard is not used, the only course of action is to withdraw
from the assurance engagement. For example, in the case of an audit of financial
statements, if the spouse of a member of the assurance team is an employee in a
position to exert direct and significant influence on the preparation of the audit
client’s accounting records or financial statements, the threat to independence
could only be reduced to an acceptable level by removing the individual from the
assurance team.
When a close family member of a member of the assurance team is a director, an
officer, or an employee of the assurance client in a position to exert direct and
significant influence over the subject matter of the assurance engagement, threats
to independence may be created. The significance of the threats will depend on
factors such as:
(a) The position the close family member holds with the client; and
(b) The role of the professional on the assurance team.
The significance of the threat should be evaluated and, if the threat is other than
clearly insignificant, safeguards should be considered and applied as necessary
to reduce the threat to an acceptable level. Such safeguards might include:
(a) Removing the individual from the assurance team;
(b) Where possible, structuring the responsibilities of the assurance team so
tha t the professiona l does not dea l with ma tters tha t a re within the
responsibility of the close family member; or
(c) Policies and procedures to empower staff to communicate to senior levels
within the firm any issue of independence and objectivity that concerns
them.

QUESTION 3
a) The scope and objectives of internal audit vary widely and depend on the size and structure
of the entity and the requirements of its management and directors. State the four internal audit
activities you have come across. b) In what circumstances do the internal audit function’s
objectives vary? c) In some cases, after considering the activities of internal audit, the external
auditors may decide that internal audit work will have no effect on external audit procedures.
What should the external auditor do when face with such a situation? d) State five factors which
the auditor may adopt in assessing inherent risk at the entity level. e) State four matters which
the auditor must consider in assessing control risk in small business

SHORT ANSWER SOLUTIONS

1. The scope and objectives of internal audit vary widely and depend on the size and
structure of the entity and the requirements of its management and directors.
Genera lly, internal audit activities include one or more of the following:
(a) review of the accounting and internal control systems: the establishment
of adequate accounting and internal control systems is a responsibility of
management and the directors which demands proper a ttention on a
continuous basis. Often internal audit is assigned specific responsibility
for reviewing the design of the systems, monitoring their operation and
recommending improvements thereto.

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 (b) Examination of financial and operating information: this may include review of
the means used to identify, measure, classify and report such information and
specific enquiry into individual items including detailed testing of
transactions, balances and procedures;
(c) Review of the economy, efficiency and effectiveness of operations including non
financial controls of an organisation;
Re vie w of com p lia n ce with la ws, re g u la t ion s a n d oth e r e xte rn a l
req u irem en t s a n d with in te rn a l p olicies a n d d irectives a n d oth e r
requirements including appropriate authorisation of transactions; and
(d) Special investigations into particular areas, for example suspected fraud.

2. The internal audit function’s objectives vary

(a) according to the requirements of management and the directors and,
(b) generally, less emphasis is placed on materiality consideration.

3. In some cases, after considering the activities of internal audit, the external auditors
may decide that internal audit work will have no effect on external audit procedures.
Nevertheless, external auditors normally find it helpful to be aware of conclusions
drawn by internal audit.

In the event that the external auditors conclude that the internal audit work is not
adequate for their purposes,
(a) they should extend their procedures beyond those original planned and
(b) ensure that sufficient appropriate audit evidence is obtained to
support
the conclusions reached.

4. To assess inherent risk

(a) Aud itors use their professional judgement to evaluate numerous factors
(b) Having regard to their experience of the entity from previous audits
(c) Any controls established by management to compensate for a high level
of inherent risk and
(d) Their knowledge of any significant changes which have taken place.

Examples of the factors are:

At the entity level
(a) The integrity of directors and management
(b) Management experience and knowledge and changes in management
during the period,
(c) Unusual pressures on directors or management, such as tight reporting
deadlines, market expectations or other circumstances might predispose
them to misstate the financial statements,
(d) The nature of the entity’s business
(e) Factors affecting the industry in which the entity operates

5. Control risk in the small business

(a) Aud itors must obtain an appropriate level of audit evidence to support
their audit opinion regardless of the size of the entity.
(b) However, many internal controls relevant to large entities are not practical
in the sma ll business; for exa mple, in sma ll businesses a ccounting
procedures may be performed by few persons who may have both operating
and custodial responsibilities and, consequently, segregation of duties
may be severely limited.
(c) Inadequate segregation of duties may, in some cases, be offset by other
control procedures and close involvement of an owner or manager in strong
supervisory controls where they have direct personal knowledge of the

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 entity and involvement in transactions though this in itself may introduce
other risks.
(d) In circumstances where segregation of duties is limited and evidence of
supervisory controls is lacking, the audit evidence necessary to support
the auditors’ opinion on the financial statements may have to be obtained
entirely through the performance of substantive procedures and any audit
work carried out in the course of preparing the financial statements.

QUESTION 4
a) Comment on the statement that ‘Planning varies according to the size of the entity and the
complexity of the audit’. b) State two bodies within an entity that the auditors need to discuss
elements of the overall audit plan and certain audit procedures within order to improve the
effectiveness of the audit and to co-ordinate audit procedures. c) Work performed by audit staff
is reviewed by other more senior audit staff or the audit engagement partner. State five matters
which such reviewers consider in an audit engagement. d) Why should an audit firm appoint a
senior audit partner to take responsibility for monitoring the time aspects of audits carried out
by the firm? e) Why should auditors apply analytical procedures at the planning stage of an
audit?

SHORT ANSWER SOLUTIONS

1. Planning the work
Planning is necessary for audits of entities of all sizes. The objectives of planning
the audit work, which takes place before the detailed audit work begins, include:
(a) Ensuring that appropriate attention is devoted to the different areas of the
audit;
(b) Ensuring that potential problems are identified; and
(c) Facilitating review.

Planning also assists

(a) in the proper assignment of work to members of the audit team and
(b) their briefing, and
(c) in the co-ordination of work done by other auditors and experts, so
that the audit may be performed in an efficient and timely manner.
(d) In obtaining an understanding of the entity’s affairs and,
(e) all members of the audit team in understanding the nature and scope
of the work they are to carry out before the audit field work starts.

Obtaining knowledge of the entity’s business is required as an important part of

planning the work. The auditors’ experience with the entity and knowledge of its
business assist in the identification of events,transactions and practices which
may have a material effect on the financial statements.

Planning varies according to the size of the entity and the complexity of the audit.

2. Auditors need to discuss elements of the overall audit plan and certain audit
procedures with
(a) the entity’s management and staff, and
(b) with any audit committee in order to improve the effectiveness of the audit
and to co-ordinate audit procedures with work of the entity’s personnel,
including internal auditors.

The overall audit plan and the detailed audit procedures to be performed, however,
remain the auditors’ responsibility. When such discussions occur, care is required
not to compromise the independence and validity of the audit.

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3. Work performed by audit staff is reviewed by other more senior audit staff or
the audit engagement partner. Reviewers consider whether:
(a) the work has been performed in accordance with the firm’s procedures
and in accordance with the audit programme.
(b) The work performed is adequate in light of the results obtained and
has been adequately documented;
(c) Significant audit matters have been raised for further consideration;
(d) Appropria te consulta t ions ha ve ta ken pla ce a nd the results of such
consultations have been documented;
(e) The objectives of the audit procedures have been achieved; and
(f) The conclusions are consistent with the results of the work performed.

Audit engagement partners perform an overall review of working papers. The

review is sufficient for them to be satisfied that the working papers contain sufficient
appropriate evidence to support the conclusions reached and for the auditors’
report to be issued.

Although the review may not cover all working papers, it covers:
(a) a ll critica l a rea s of judgement, especia lly a ny rela ting to difficult or
contentious matters identified during the audit.
(b) audit evidence relating to high risk areas;
(c) any other areas which the audit engagement partner considers important.

Aud it engagement partners document the extent of their review and its timing
so as to demonstrate that is was completed before the auditors’ report was signed.
Review notes recording questions or points raised in the course of the audit need
not be retained at the end of the audit provided that the working papers have
been updated thereto and, in particular, record the reasoning on all significant
matters which require the exercise of judgement.

4. Mon i t or in g
Firms should appoint a senior audit partner to take responsibility for monitoring
the time aspects of audits carried out by the firm.

The responsibility for monitoring the time aspects of audit performance is different
from the responsibility for the establishment of quality control policy and processes.
Wherever possible, the two responsibilities are undertaken by different senior
audit partners.

The objective of monitoring time and costs to provide an independent

assessment of:
(a) the appropriateness of the time cost, billing and recovery of costs on audit;
(b) whether the firm’s own time and cost policy and processes have
been
applied.

The senior audit partner responsible for the monitoring process

(a) develops procedures for the systematic review of time cost, billing and
recovery on completed audit engagements.
(b) develops appropriate course of action where significant variances between
estimated time cost and actual cost are identified. Courses of action may
involve communication of the findings within the firm and additional tra
ining.
(c) ensures changes to the firm’s policies and procedures and disciplinary
action against those who repeatedly fail to comply with the firm’s standards.

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 5. Aud itors should apply analytical procedures at the planning stage to assist in:
(a) understanding the entity’s business,
(b) identifying areas of potential audit risk and
(c) planning the nature, timing and extent of other audit procedures.

Ana lytical procedures at this stage are usually based on interimfinancial information,
budgets and management accounts. Discussions with management, focused on
identifying significant changes in the business since the prior financial period, may
also be useful.

Applica tion of analytical procedures may indicate

(a) aspects of the entity’s business of which the auditors were previously
unaware and
(b) assist in determining the nature, timing and extent of other audit procedures.

QUESTION 5

Often an important aspect of the audit of financial statement is the observation of the taking of
the physical inventory. Required: (a) What are the general objectives or purposes of the
observation of the taking of the physical inventory? (Do not discuss the procedures or
techniques involved in the making of the observation). (b) Why would an auditor make and
record test counts of inventory quantities during observation of the taking of the physical
inventory? (c) State two factors that would influence the timing of the inventory. (d) Explain the
term, “goodwill”. State two matters which the auditor must consider before observing the
inventory at year end. (e) What is kiting?

SHORT ANSWER SOLUTIONS

1. (a) The auditor should keep in mind the objectives of observing a physical
inventory, namely:
(b) To ascertain that the inventory exists.
(c) To observe that the count are accurate.
(d) Ensure the description of the inventory are accurate; and
(e) Its condition properly recorded.

The auditor makes and records test counts of inventory for the following purposes:
(a) Confirm the accuracy of the client’s counting and
(b) Record evidence to corroborate the existence of the inventory for la ter
tracing to the inventory summary sheet.
(c) Random selection, independent counting and comparison with quantities
recorded by the clients, provide evidence tha t a ll items on ha nd a re
accurately included in the client’s recorded counts.

If the auditor’s test counts disclose an unacceptable number of errors in a particular

location, the client would ordinarily perform a recount of the inventory.

2. The factors that would influence the timing of the inventory are:
(a) When the inventory is subject to significant volatility of movement of
quantities, or if the control procedures for accounting for movement are
ineffective, it should be counted at year-end;
(b) If those procedures are effective, the count can be taken before year-end
or, if the client used cycle counts, on a staggered basis throughout the
year;
(c) If the inventory is taken at one time, both client and auditor usually prefer
a month in the last quarter of the fiscal year.

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3. “Good will is the difference between the value of a business as a whole and the
aggregate of the fa ir values of its separable net assets”. Separable net assets are
those assets (and liabilities) which can be identified and sold (or discharged)
separately without necessarily disposing of the business as a whole. They include
identifiable intangibles. Other Definitions Include:
(a) The value attributable to a company’s average strength in areas such as
technical skill and knowledge;
(b) The value of the business community’s attitudes to the entity;
(c) That part of the value of a business which arises from all its advantageous
circumstances which generate earnings above an assumed norm (super
profits).

4. Auditors should consider the following factors before observing the year-end
inventories:
(a) Timing of inventories at various locations,
(b) Difficulty of observing them, and
(c) Number of counting teams the client provides.

The auditor should also observe inventory exercise so as to ascertain:

(a) Whether supervisory personnel are present,
(b) How planned recounting procedures are executed,
(c) Whether cut-off procedures are performed,
(d) How inventory count documents are controlled,
(e) How individual areas or departments are controlled and cleared, and
(f) Whether instructions are followed.

The auditor’s assessment of how effective the client’s reconciliations are would
determine the nature, timing, and extent of many of the substantive tests of cash.
Other factors are:
(a) The adequacy of the accounting system,
(b) The competence of employees conducting the reconciliations, and
(c) The segregation of duties.

The more effective the auditor finds the client’s reconciliations to be, that is, the
lower the assessed level of control risk, the less detailed the auditor’s reconciliation
procedures have to be. Those procedures may range from simply reviewing the
client’s reconciliations a t year-end, if control risk has been assessed as low, to
performing independent reconciliations covering the entire year using the proof
of cash form. Genera lly, performing proof of cash reconciliation for the entire year
is considered necessary only in special situations, such as when a defalcation is
believed to have occurred. Between those two extremes falls the auditor’s judgmental
discretion.

5. Kiting is a way of concealing cash shortages caused by a defalcation, such as

misappropriating cash receipts that were perpetrated previously. It involves the
careful and deliberate use of the “float” (the time necessary for a cheque to clear
the bank it was drawn on). Drawing a cheque on one bank, depositing it in another
bank just before year-end, so that deposit appears on the bank statement and the
recording of the transfer in the receipts is not done until after year-end amounts to
kiting. The float period will cause the cheque not to clear the bank it was drawn on
until after year-end, and the amount transferred is included in the balances of
both bank accounts. Since the transfer is not recorded as a receipt or a disbursement
until the following year, it will not appear as an outstanding cheque or a deposit in
transit on the reconciliation of either bank account. The effect is to increase receipts
per the bank statement; if the misappropriation of cash receipts and the kiting take

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place in the same period, receipts per the bank statement will agree with receipt
per the ca sh receipts journa l a t the da te of the ba nk reconcilia tion. (If the
misappropriation of cash receipts takes place in the period before the kiting, a
proof of cash may also reveal the kiting). Kiting requires that the transfer process
be repeated continually until the misappropriated funds have been restored. Kiting
could have a wider meaning to encompass writing cheques against inadequate
funds with the intent of depositing sufficient funds la ter, but before the cheques
clear the book.
QUESTION 6

a) It is noted that there can be enough due diligence when evaluating an investment, however there are certain essentials
that can lessen the investor’s risk and possibly reduce the scope of due diligence. List these essentials. b) The term “Due
Diligence” may mean different things in different professions and industries; what do you understand by the term Due
Diligence in the perspective of private sector world of business and finance. c) Complexities in business and changes in
social and legal expectations have enhanced the need for forensic auditing. What are the areas where forensic audit can be
applied? d) What are the qualities that are required of a good forensic auditor? e) List the steps necessary by a forensic
auditor to perform a forensic audit.

1. There can actually never be enough due diligence in evaluating an investment,

but there are certain essentials that can lessen the investor’s risk and possibly
justify reducing the scope of due diligence. They include the following:
(a) Stable and proven management.
(b) Aud ited financial statements with short, easily understood notes.
(c) History of consistent earnings.
(d) Few subsidiaries, divisions or joint ventures.
(e) Strong market position.
(f) Absence of material litigation.
(g) No real estate or operations with potential environmental
problems. (h) Earnings primarily from operations.
(i) Not dependent upon one or few customers or clients.
(j) No intangible assets.
(k) No inter-company transactions.
(l) No discontinued operations or restructuring.
(m) Little or no extraordinary income or expenses.
(n) Strong internal controls.
(o) Few and readily accessible locations.
The absence of the above list will increase the signal for maximum due diligence.

2. In the perspective of private-sector world of business and finance, the term “due
d ilig en ce” refers to the p rocess throu g h which a n in vestor resea rches a n
organisation’s financial and organisational health to guide an investment decision.
The decision to fund or not to fund is based upon a balance of objective data
analysis, insight into the general state of organisational health and stability, and
intuition. A due diligence review is the process through which all the factors that
make up that equation are uncovered and understood. It is the process in which a
program officer seeks the truth about an organisation.
 Due diligence is a somewha t technica l phra se used to describe a ra nge of
assignments, legal obligations, reports and investigations which take place in
business, manufacturing and law. Its most frequently heard version is the one
pertaining to business, where due diligence refers to the steps taken by venture
capitalists before investing a round of capital in a start-up, the ongoing investigation
as to how the funds are being distributed, or the precautionary steps taken by a
larger company in deciding to acquire a smaller company.

3. Com plexities in business a nd cha nges in socia l a nd lega l expecta tions ha ve

enhanced the need for forensic auditing. Wherever a potential loss, real financial
loss, or risk of loss is perceived, a forensic audit may be commissioned. It can be applied
in the following areas;
(a) Corp ora te in vestig a t ion s. Org a n isa t ion s freq u en t ly a re fa ced with
circumstances of possible wrongdoings that may require investigations.
The forensic auditor assists in investigating a llegations ranging from
kickba cks a nd wrongful d ismissa ls to in terna l situa t ions involving
allegations of management or employee wrongdoing.
(b) Litiga tion Support. In cases of loss of profit, construction claims, product
lia bility, sha reholder disputes, ba nkruptcies a nd brea ch of contra cts,
forensic auditors assist counsel in investigating and assessing the integrity
and amount relating to such cases.
(c) Crimina l matters. In criminal matters, forensic auditors as expert witnesses
are increasingly important in court cases in verity of situations such as arson,
scams, fraud, vendor frauds, customer frauds, investment scams, and
stock market manipulations.
(d) Insurance claims. To assess the integrity and the quantum of claim, the
assistance of the forensic auditor is often required.
(e) Government. Forensic accountants assist governments to achieve regulatory
compliance by ensuring that companies follow the appropriate legislation.

4. Most aspects of forensic audit fa ll outside the normal training of financial auditors.
The following qualities are necessary to perform adequately as a forensic auditor.
(a) Ability to identify fraud with minimal initial information.
(b) Identification of financial issues. When confronted with situations arising from
a complain, allegation, rumour, etc., he should be able to quickly identify
the financial issues significant to the matter.
(c) Knowledge of investigation techniques.
(d) Knowledge of evidence. He must understand what constitute evidence.
For example the meaning of “best” and “primary” evidence, the rules of
evidence in court, and what constitute evidence in court.
(e) Interpretation of financial information.
(f) Presentation of financial findings. He must have the ability to communicate
findings in a language that must be understandable by a layperson and
without any ambiguity.
(g) Investigative skills. Investigative skills are needed for litigation support.
(h) Investigative mentality. The forensic auditor must, along with accounting
skill, develop an investigative mentality that allows him to go beyond the
limits established generally accepted auditing standards. For example;
(i) Scope is not restricted as a result of materiality.
(ii) Sampling is not recommended.
(iiii) Non assumption of integrity of management.
 5. The following steps are adopted by the forensic auditor in performing an audit:
(a) Verify compliance with regulatory, legal and evidential matters;
(b) Review documents related to legal and general business functions;
(c) Test the organisation’s motivational and ethical climate;
(d) Document ma na gement, a dministra tive, a nd orga nisa tiona l policies,
procedures, and practices;
(e) Ga ther a nd preserve evidence to corrobora te a sset losses, fra udulent
transactions;
(f) Establish accounting, audit, and internal control;
(g) Cond uct a review of internal controls;
Assess the strengths and weaknesses of those controls;
(h) Design scenarios of potential fraud losses based on identified weaknesses
in internal controls;
(i) Identify questionable and exceptional transactions;
(j) Identify questionable and exceptional account balances and variations;
(k) Distinguish between simple and human errors and omissions in entries
and fraudulent entries;
(l) Follow the flow of funds that support documents;
(m) Follow the flow of funds into and out of an organisation’s bank account;
(n) Search for underlying support documents for questionable
transactions;
(o) Review such documents for peculia rities, exa mples a re fa ke billings,
destruction of data, improper account classification, irregularities in financial
data, substitution of copies of documents for the original; and
(p) Document and report fraud loss for criminal, civil, or insurance claims.

QUESTION 17

Auditing firms do not a lwa ys describe themselves a s a uditors. They describe themselves a s
“Cha rtered Accountants” because apart from auditing, they a lso render other services to their
clients.
Describe FIVE other services, which audit firms provide for their clients in addition to auditing.

ANSWER TO QUESTION 17

Ca ndidates should consider the la test pronouncements on conflicts of interest in situations where
auditors provide services to their clients.

The other services which an audit firm may render, provided the issue of conflict of interest is
properly considered, include any five of the following:

(a ) Ta xa t ion
(i) Preparation of tax and capital allowances computations
(ii) Rendition of advisory services regarding tax matters e.g. minimization of taxes
payable and tax planning.
(iii) Filing of tax returns and collection of tax clearance certificates on behalf of
clients.
(iv) Investigation of PAYE, VAT and corporation tax frauds on behalf of tax authorities.

(b ) Fin a n cia l Con su l t in g

(i) Ad vising on investment options and optimum returns.
(ii) Monitoring liquidity management and budgetary control for clients
(iii) Reorganisation and restructuring.

(c) Re ce ive r sh ip , Liq u id a t ion a n d Tr u s t e e sh ip

(i) Handling the winding up of companies to settle creditors and shareholders.
 (ii) Receivership for debenture holders and other creditors of a company in insolvency
situations.
(iii) Acting as trustees.

(d ) In ve s t ig a t ion
(i) Investigating alleged frauds.
(ii) Va luation of shares and businesses.
(iii) Preparing prospectus reports for public issues.
(iv) Reporting on profit forecasts.
(v) Due diligence

(e ) Accou n t in g Se rvice s
(i) Writing up books of accounts from source documents
(ii) preparing financial statements from books of accounts
(iii) Advising on:
◆ Accounting and internal control systems,
◆ Budgeting,
◆ Costing ,
◆ Computerisa tion,
◆ Internal audit set up, and
◆ Financial management.

( f) Ma n p ow e r Pla n n in g , Re cru it m e n t a n d Tr a in in g
(i) Aud it firms help their clients in planning manpower development strategies.
(ii) They also function in the area of staff recruitment, training and retraining

NB: Where chartered accountants provide secretarial and registrar services, they offer
such services under corporate umbrellas different and distinct from the firm of
chartered accountants.

QUESTION 17

An auditor is expected to be independent, competent and of high

integrity. (a) Write short notes on each of the above qualities.
(b) List FIVE factors that may impair the independence of an auditor.

ANSWER TO QUESTION 17

(a) Qu a lit ie s re q u ire d of a n a u d it or

(i) In d e p e n d e n ce
Professional independence is fundamental to the accountancy profession. An auditor
cannot give an unbiased opinion unless he is independent of all the parties involved.
Not only must the auditor be independent, he must also be seen to be independent.
He must ensure that there are no circumstances that can reduce the degree of the
exercise of his independence. As a guide, he must avoid financial dependence,
financial involvement, close personal relationship and conflict of interest.

(ii) Com p e t e n ce
An auditor must be properly trained and must have acquired competence before
he can sign an audit report. The Compa nies and Allied Matters Act, 2004 states
that, to be qualified for appointment as an auditor of a company, a person must
be a member of a body of accountants recognised for that purpose by the Act.
 These bodies ensure that their members pass requisite examinations that will make
them competent. They also need to acquire practical experience before they can be
issued with licence to practice. In addition, they should a lso ensure that they
attend Mandatory Continuing Professional Education (MCPE) programmes to update
their knowledge and experience.
Furthermore, members have to be familiar with accounting and auditing standards,
guidelines and other materials in order to enhance their competence.

(iii) In t e g r i t y
Cha rtered Accounta nts are renowned for their honesty, discretion and tactfulness.
In ICAN rules of professional conduct to members, it is a fundamental requirement
that a member should exhibit a high level of integrity in a ll professional and business
relationships. Integrity implies not merely honesty but also fa ir dealing and
truthfulness.
The auditor should conduct himself or herself with courtesy and consideration towards all
with whom he/she comes into contact during the course of performing his/her work.

Fa ctors th a t m a y im p a ir th e in d e p e n d e n ce of th e a u d it or in clu d e :
(i) Where the fee is material in relation to total fee his total fee income.
(ii) Where the auditor provides other services to the client which may lead to
conflict of interest.
(iii) If the auditor owns material shares in the client company.
(iv) If the auditor receives loans from the company
(v) If the auditor is in partnership with an officer of the company.
(vi) If the auditor is related to management staff of the company (by blood or marriage)
(vii) If the auditor is employed by the company or employs an employee of the company.
(viii) If the auditor receives material gifts or gratification from the company.
N. B. any five of the above will satisfy the requirements of the question.
QUESTION 17

What are the basic steps to Comp uter-Assisted Aud it Techniques’ (CAATs) developments?

ANSWER TO QUESTION 17

Basic steps to the development of Computer-Assisted Aud it Techniques (CAAT) are:

De fin it ion of n e e d s
Fully understanding and documenting the precise audit objectives that the CAAT will test is essential
to success. For example, a CAAT-ba sed test of an inventory file could include the following types of
objective:
◆ Va luation: Recheck or extend the Naira value per item (quantity x price) and select a sample
of inventory items for price testing (invoice value to vendor).
◆ Summarisation: Foot the re-extended Naira value.
◆ Comp leteness: Comp are the gaps in the numeric sequence of an automated count tag
against those observed in a physical inventory.

A test of a receivable file could have these types of objectives:

◆ Existence: Select a statistical sample of account balances or invoices for confirmation.
◆ Va luation; Test the ageing of receivables by recalculating the number of days in receivables
using the invoice date.
◆ Summarisation: Foot the Naira value of balances.

De t e rm in e fe a s ib i l i t y
An important consideration in performing automated audit techniques is that the equipment is
able to process the available types of backup media. Data are stored in different types of backup
formats. In many cases, especially in mainframe environments, the auditor must depend on the IT
department to initially develop an extract programme to map all auditable fields to an extract
database or electronic report. The data can then be downloaded
to a file server or PC for use by the auditor.

If IT department help is required, the auditor should be alert to the possibility of data manipulation
by unscrupulous IT staff. For this reason, the auditor should always balance the extracted data to
the corresponding source system totals when possible. If an extract database of a bank contains all
loans with a non-zero balance, for example, the auditor should balance the total amount of loans in
the extract database to the total amount of loans in the general ledger. Balancing the count of
loans to the source system should also be performed. These controls also help ensure that there
was not some other operational problem with the extract programme. Despite these measures,
unauthorised changes could still be made that would not affect the total Naira amount or total
count of loans. Therefore, auditors should be alert to:
◆ IT personnel who have system access capabilities that enable them to perform changes to
extract programmes and the associated output.
◆ Compensa ting controls should be in place to monitor the activities of such IT personnel. In
this wise, all changes to extract programmes and databases could be logged to a secure
location accessible only by IT security personnel.
◆ The logs should be reviewed frequently by the IT security staff or designated audit staff.

The timely availability of data is another concern. For example, period closing date requirements
affect availability. Coord ination may require the input of MIS. MIS cooperation can play a key role in
the successful execution of a CAAT, especially when the technique deals with complex data types or
has complex programme logic.

Automa ting procedures for the sake of automation is hardly ever a successful strategy. CAATs are subject
to cost/benefit analyses. Although CAATs may improve the effectiveness of a procedure
(e.g., testing 100 percent of a report rather than a sample), or the efficiency of a procedure (e. g,
footing a large report using a CAAT rather than an adding machine), they are primarily a tool to improve
overall audit effectiveness. In the time it takes to write and test CAATs, obtain and download files, and
document the results, many CAATs end up being only marginally more effective than manual
procedures in the long-term. In general, CAATs are best used when more than one query is to be
performed. If just one query is performed, it may be more cost-effective to simply have the IT staff
generate the query. However, if multiple queries and “what if” analyses are to be performed, they
best are performed by the auditor. This adds to the independence of results and also frees the IT
staff to concentrate on running the IT operations.

Pla n t h e work
Develop the Cod e.
It is beneficial to develop a CAAT beforehand, by using a prior period’s data to ensure that the live
data will be in a usable format. Programme code that follows a structured format saves time during
the debugging and review stages.

Run and Ana lyse the Results.

The final results of a CAAT are analysed in terms of the stated audit objectives and whether they
meet them. There is a difference between CAATs that have a predictive result, which can be checked
against footed totals, extended prices, and market values, for example, and CAATs that produce
unpredictable results, such as analytical review reports. Predictive CAATs are always proven out by cross-
referencing and reconciling them to expected results.
The accuracy of unpredictable CAATs is checked by:
◆ Logic testing, which ensures that the correct results are being achieved.
◆ Compa rison of them with the original data file on a random basis.

Document the Results.

Aud itor should document evidence of work performed to support CAATs conclusion.
QUESTION 7

If auditor has assessed control risk as low, then merely reviewing the client’s reconciliations at
year-end may be appropriate. Wha t steps should an auditor take in reviewing a client’s bank
reconciliation?

ANSWER TO QUESTION 7

An auditor should take the following steps in reviewing a client’s bank reconciliation:
◆ Obtain copies of the client’s bank reconciliations and establish their mathematical accuracy.
◆ Reconcile the total of the bank balances on the reconciliations to the general ledger balance.
This will generally require using a summary of the individual cash account balances in
the general ledger account.
◆ Scan the bank reconciliation for significant unusual reconciling items and adjustments,
and obtain evidence to support them by inquiry or examination of appropriate documents.

In addition to the review procedures the auditor may decide to test the client’s reconciliations. The
tests may be performed at an interim date, if the auditor has assessed that the client’s reconciliations
are subject to effective supervisory control procedures. If supervision during the intervening period
is not considered effective, the auditor would probably perform the tests at year-end.
The following procedures in addition to the first two steps above are typically performed in testing
the client’s reconciliations:
◆ Determine that paid cheques, deposits, and debit and credit advices appearing on the cut-
off bank statements and issued on or before the balance sheet date appear on the year-
end reconciliations.
◆ Tra ce to the cash disbursements records outstanding checks listed on bank reconciliations
but not returned with the cut-off statements.
◆ Tra ce deposits in transit on the bank reconciliations to the cut-off bank statements and the
cash receipts records, and determine whether there are any unusual delays between the
date received per the books and the date deposited per the bank statements.
◆ Tra ce other reconciling items to supporting documentation and entries in the cash records.
◆ Investigate old or unusual reconciling items. If checks remain uncashed after a specified
period of time, the reason should be determined and the amounts either restored to
the cash account.
◆ Determine the exact nature of items on the year-end bank statements not accounted for by
the reconciliation procedures, such as debits or credits followed by offsetting entries of
identical amounts that appear to be, or are represented by the client to be, bank errors and
corrections not so coded. If information in the client’s records is inadequate, clarification
should be requested from the bank. In these circumstances, the auditor should consider
performing a “proof of cash” reconciliation (described below) if the client’s reconciliation process
does not include one.

These procedures assume that the testing is performed as of the balance sheet date and that cut-
off statements for a reasonable period after the balance sheet date are obtained from the
bank.

QUESTION 7

The Cha irman of XYZ LTD, a small scale enterprise has been advised by his accountant to appoint an
external auditor, but he disagreed with his accountant that since he has a qualified accountant
in his employment, there is no need appointing an external auditor.

As a consultant, explain to the chairman:-

(a) (i) The difference between auditing and accountancy work;
(ii) The objects of an external audit
(iii) The advantages of an external audit

(b) List five essential features of systems audit

ANSWER TO QUESTION 7

(a) (i) Diffe re n ce Be t we e n Au d it in g a n d Accou n t in g Work

An a udit ca n only commence a fter the necessa ry a ccounting work ha s been
completed. Accounta ncy work involves keeping proper accounting books from which
a tria l balance can be extracted and thereafter the preparation of final accounts. It
should be clearly understood that the keeping of accounting books and preparation
of the financial statements are not part of the audit work.

An audit on the other hand entails the examination of the financial statements by
a professionally qualified accountant in his capacity as an external auditor with a
view to expressing an independent opinion on the truth and fa irness of the state of
affairs, the profit or loss, and cash flow of the business entity being reported on.
 (ii) Th e ob je cts of a n Exte rn a l Au d it
There are three main objects viz:
◆ To examine and report on financial statements prepared by a client. This is
the primary object.
◆ To ensure that the correctness of the accounts is not impaired by fraud,
error other misstatements that should have been detected in the normal
course of the audit.
◆ To prevent errors and frauds by the deterrent and moral effect of the audit.

If an audit is well planned and conducted with reasonable skill and care, materials
errors and fraud should be discovered in the process of the audit work. The auditor
must not be regarded as a detective. He is not expected to carry out on his duties
suspecting fraud or error. Nevertheless, if in the course of his examination of the
books and records, suspicious circumstances are brought to light, he must do
everything that may be reasonably necessary to probe such circumstances in order
to either confirm or allay his suspicion.

(iii) Th e Ad va n t a g e s of a n Exte rn a l Au d it
◆ It fa cilita tes th e a g reem en t of ta x a ssessm en t s with th e Reven u e
Departments.
◆ It facilitates claims for loss profit from an insurance company; including
consequential loss.
◆ Applica tion to banks and other parties for the purpose of raising finance or
credit are greatly enhanced if supported by audited accounts.
◆ It helps to reduce fraud and error, through objective review and evaluation
of the effectiveness of the internal control system etc.
◆ Disputes between partners and other business associates may be avoided
especially where complicated profit-sharing arrangements are in force.
◆ It enables the client to obtain general and sound financial advice.
◆ Users of financial statements would have more confidence in the audited
financial statements.

(b) Esse n t ia l Fe a t u re s of Syst e m Au d it

(i) To ascertain, record, assess and evaluate the adequacy of the accounting and
internal control system on which the auditor wished to place reliance.
(ii) To test the accounting records and perform compliance tests on the effectiveness of
the internal control as basis for determination of other audit procedures.
(iii) To compare the financial statements with the accounting records in order to ensure
that they are in agreement.
(iv) To carry out a review of the financial statements e.g. by use of analytical review
procedures etc.
(v) To send preliminary report on the financial statements to the management with
respect to observed weakness in the system. In compliance with any relevant
statutory requirements and professional standards.

QUESTION 8
(a) Explain the term “Aud it Committee” considering the provision of the Compa nies Act 24:03
(b) Wha t are the functions of the Aud it Committee?

ANSWER TO QUESTION 8
(a) The Aud it Committee is a body established under Section 359 (3) of the Compa nies and
Allied Matters Act. 1990 to which the Aud itor of a Public Compa ny will report in addition to
the Aud itor’s duty to report to the members of the company in accordance with Section 359
 (1) of the Act. The Audit Com mittee sha ll consist of equa l number of directors a nd
representatives of the shareholders of the public company with a maximum number of six
members. Any member of a Comp any may nominate a shareholder as a member of the
Aud it Committee if a notice is given to the Compa ny Secretary at least 21 days before the
Annua l Genera l Meeting. The memb ers of the Audit Com mittee a re not entitled to
remuneration.

(b) The Aud it Committee shall examine the auditors’ report and make recommendations
thereon on the Annua l Genera l Meeting. Section 359 (6) states that subject to such other
additional function and powers that the company’s Articles of Associa tion may stipulate, the
objectives and functions of the audit Committee shall be to:
(i) ascertain whether the accounting and reporting policies of the company with legal
requirements and agreed ethical practices.
(ii) Review the scope and planning of audit requirements.
(iii) Review the findings on management letters in conjunction with the external
auditor and departmental responses thereon.
(iv) Keep under review the effectiveness of the company’s system of accounting and
internal control.
(v) Make recommendations to the Board in regard to the appointment, removal
and remuneration of the External Aud itors of the company.
(vi) Authorise the Internal Aud itor to carry out investigations into any activities of the
company, which may be of interest or concern to the Committee.

QUESTION 15

Your client of over five years – ABC Rubber Products Limited , is proposing to change over to a
computer-based accounting system.
(a) How would this impact on your approach to the audit?
(b) Enumerate the major differences between manual and computer-based accounting system.

ANSWER TO QUESTION 15

(a) ABC Ru b b e r Prod u ct s Lim it e d

The approach of the auditor to a computerised system is considered not fundamentally
different from that of the manual system. The auditors’ duties and responsibilities actually
do not change. The only thing that would change is the method of gathering of relevant,
reliable and sufficient audit evidence to support the expression of an opinion by him on
the financial statements.

The method of gather audit evidence would change because of special characteristics of
processing data on the computer system. Some of the characteristics include:
◆ The complex nature of computer system vis-à-vis the manual system.
◆ Centra lisa tion of processing operations in the computer department or section.
The auditor has to ascertain, evaluate and test the system to determine if it produces
records, which form a reliable basis for the preparation of the financial statements
and safeguards the organisation’s assets.
It is important that the auditor takes due cognizance of special computer control
problems to aid him in the determination of the audit techniques to be applied.

Some of the control problems include:

(i) the records and files are in the form of densely packed magnetic media making it
difficult to identity their contents visually.
(ii) Processing is done in the “black box” creating loss of visible processing trail in the
course of computer processing.
 (iii) Too much dependence on the electronic data processing department – because of
the specialized nature of processing financial data. This results in loss of recording
autonomy by user departments.
(iv) Where auditor is not consulted during planning and installation stages some vital
in-built controls could be ignored.
(v) Programmes reliability can only be inferred indirectly as opposed to being capable
of direct observation while functioning.
(vi) Com p u ter h a rd wa re a n d p rog ra m m es a re vu ln era b le to a tm osp h eric a n d
environmental conditions, electric and magnetic interference, accidental damage
or destruction and human manipulation.
(vii) Loss of audit trail due to certain records which give no breakdown for checking purpose
or for cross-referencing to original documents.
(viii) There is often a change in documentation on the audit files necessitating the
redrafting of standard questionnaire and check-lists to record client data processing
documentation and details of major controls included in programmes, systems
flow diagrams, etc.

(b) Diffe re n ce s b e t we e n m a n u a l a n d com p u t e r–b a se d a ccou n t in g syst e m s

These include:
(i) Comp lexity of the computerised system vis-à-vis the manual system is a major
difference. Less skill is required to operate the manual system while operation of
a computer-based system requires special skill.
(ii) In the manual accounting system internal checks which the duty of one officer
bears to the duty of the other in the transactions processing chain is absent in a
computerised environment.
(iii) There is lack of visible evidence since records are stored in the hard disc, magnetic
disc a nd ta pe “files” wherea s a ll records a re visible in the ma nua l system
consequently errors and frauds could be more difficult to discover in a computerised
system.
(iv) In a computer-based system, organisation may use an outside agency – like a
computer service bureau to maintain and process their records. This is hardly
often done in a manual system.
(v) Data processing is faster in a computerised system than a manual system.
(vi) Even though a computerised system is more expensive to install, in the long run,
the benefit derivable outweighs the installation and establishment cost.
(vii) Information retrieval is faster in a computer-based system that in a manual system.

QUESTION 8

It is common practice for auditors to send a letter of engagement to new clients and increasingly to
existing clients. Matters usually included range from definition of scope to audit fees.

Re q u i r e d :
(a) Briefly describe an engagement letter.
(b) List the purpose of the engagement letter
(c) List some of the principal contents of an engagement letter.

ANSWER TO QUESTION 8

(a) An engagement letter is a letter showing the auditor’s understanding of the agreement
between the auditor and his client written before the commencement of any professional
work detailing the precise scope and nature of work to be undertaken.
(b) The purpose of the letter is to:
(i) define clearly the extent of the auditor’s responsibilities
(ii) minimise misunderstanding between the auditor and the client
(iii) confirm verbal agreement in writing.
(iv) confirm details of the auditor’s engagement
(v) inform and educate the client on what the audit process entails
(vi) state client’s responsibilities for preparing the financial statements.
(vii) state the form and contents of the audit report
(viii) state other services the practice firm provides apart from audit.
(ix) state basis for computation of audit fees.

(c) The principal contents of the engagement letter are:

(i) The Aud itor’s responsibility to report on the financial statements prepared by
the directors.
(ii) The scope of the auditor’s work based on:
◆ auditing standards and guideline
◆ accounting systems review
◆ collection of audit evidence
◆ test of and reliance on internal control
(iii) The letter of weakness to the Management
(iv) Special areas such as:
◆ relationship with internal audit, if any
◆ audit of branches
◆ relationship with other auditors, if any
◆ significant reliance on directors’ supervision in small companies
(v) Need for a letter of representation from the Management.
(vi) Any agreement for the auditors to carry out work of a book keeping and accounting
nature and the additional charges.
(vii) Any agreement for the auditor to provide taxation services – this could be a separate
letter.
(viii) The fees and the basis on which they are charged.
(ix) A request for a letter of acknowledgement signed on behalf of the Board or a direct
authentication signature as acceptance of the auditor’s letter.

QUESTION 9
(a) Define and explain what is meant by analytical review procedures.
(b) Mention four types of general analytical review procedures.
c) What is the purpose of performing preliminary analytical review
procedures at the audit planning stage?

ANSWER TO QUESTION 9
(a) ‘Ana lytical review procedure’ is defined as audit procedure which systematically analyses
and compares related figures, trends, ratios and other data with the a im of providing
evidence to support the audit opinion on the financial statements.
The data used in such examination may be financial or non-financial and may originate from
within or outside the client organisation. Ana lytical review procedures range from simple
comparisons such as current with the prior year figures or accounting ratios; to complex
analysis using advanced statistical techniques and computer audit programmes.
(b) Four types of general analytical review procedures:
(i) Compa rison of current-year account balances to balances for one or more comparable
periods.
(ii) Compa rison of the current year account balances to anticipated results found in
the company’s budget and forecasts.
(iii) Compa rison of current year account balances and financial relations (e.g. rations)
with similar information for the industry in which the company operates.
(iv) Study of the relationship of current year account balances with relevant non-financial
information (e.g. physical production statistics relating to input and out, energy
 consumption etc.

(c) Purpose of performing preliminary analytical review procedures in the audit planning
stage:
The main purpose is to discover any misstatement in financial statement presentation, to
confirm information supplied, to apply reasonableness test, estimates and judgements
and to perform a cursory review of financial statements at the audit planning state. The
auditor will endeavour to identify areas of potential risk or new development so that he
can plan his other procedures in these areas.

QUESTION 14

(a) As the audit manager in charge of an audit of a large multinational company, draw up an
audit programme for fixed assets for the use of the field staff. (10 Marks)
(b) Wha t are the shortcomings of using standardised audit programmes? (5 Marks)

ANSWER TO QUESTION 14

(a) Au d it p rog ra m m e for fixe d a sse t s

Au ditors
De t a ils of Work W/P. Ref Initia l Da te
i. Obtain or prepare a summary of Fixed Assets
and schedule of each type or category to – (a)
reconcile the summary with the figures in the
Balance Sheet and the opening figure with
the balance brought forward, (b) cast and
cross cast summary and the schedules.

ii. Obtain or extract schedules of additions

during the year for all classes of asset, to-
test-vouch items with suppliers invoices or
other supporting documents like debit notes,
architect’s or surveyor’s certificate and
completion statements
◆ check directors’ minutes and budgets for
capital expenditure authorisations and
approvals.
◆ check appropriateness of capitalisation policy
considering effect of accounting standards
provisions.

iii. Obtain or extract schedules of disposals to

◆ check minutes for authority for disposals.
◆ test–vouch proceeds of sale with independent
external and internal evidence like sales
agreement or correspondence as well as
receipts.
◆ check if assets are scrapped or
written off.
◆ verify that the original cost (or valuation) and
related accumulated depreciation have been
eliminated from the fixed assets accounts.
◆ check that the profit or loss on disposal agree
with the amount in the profit and loss
account.
 De t a ils of Work W/P. Ref Initia l Da te

i v. Obtain and examine certificates of title Deeds

And leases of landed properties to
◆ Confirm that beneficial ownership is in the
company.
◆ If held by a bank for safekeeping confirm from
the bank, the status regarding encumbrance or
lien, the bank to confirm directly to the
auditors.
◆ Confirm directly from other third parties if they
hold title documents as a result of charge on
properties, details of the liability or
indebtedness and nature of the charge.

v. In the case of leasehold properties, to

◆ verify that provision has been made for
dilapidation in accordance with the terms of the
lease, and
◆ ensure that adequate amortisation is
regularly effected.
vi. If assets have been revalued during the year,
(a) obtain a copy of the valuation report.
If valuation is to be incorporated into the
accounts, to:
◆ verify the independence and qualification of
the valuers
◆ verify the basis of valuation from the report
and ensure that it is acceptable
◆ ensure adequate disclosure and agreement
with accounting standards.
vii. Reconcile fixed assets register with accounts
balances
viii. Verify that depreciation rate is as approved by
the Board and is consistently applied in
accordance with accounting policy.
ix Obtain explanation for any change in depreciation
rate, test reasonableness and highlight for possible
disclosure in the accounts.
x Check repairs and maintenance accounts for
possible capital expenditure items.
xi. Physically inspect material items of all types of
assets.
xii. Verify adequacy of insurance cover for the assets.
xiii. Inspect motor vehicle registration documents.
xiv Ascerta in if approved user certificates have been
obtained from the Inspectorate Division of the
Federal Ministry of Industry.
xv. Request and obtain representations from
management.
 De t a ils of Work W/P. Ref Initia l Da te
xvi Write a conclusion memo on the work done,
problems encountered and solutions proffered.
(b) The shortcomings of using standardised audit
programmes may:
(i) lead to a perfunctory approach on the part of audit
staff and this may lead to poor quality work.
(ii) Impair audit staff’s spontaneous response to changing
situations in client system or management.
(iii) Stifle audit staff initiatives.
(iv) Encourage speculation of audit procedures by the
client’s staff.
(v) Parts of the audit programme may be executed
without due regard to other sections of the assignment.
(vi) If changes in client’s system and personnel are not
taken into consideration when preparing audit
programmes certain area of the assignment may be left
out .
QUESTION 12

Mr. Ad alat George, the staff Partner of Binitie, George and Co., a firm of Cha rtered Accounta nts
based in Port Harcourt, is conducting a recruitment interview, as a prelude to the employment of
some Aud it Staff into his firm.

As one of the applicants, you were requested to come to the interview venue with a report addressed
to the staff Partner, detailing the Aud it steps necessary, to verify the values appearing for the
following assets, in a clients financial statements for an accounting year end.
(a) Freehold La nd and Buildings
(b) Plant and Machinery
(c) Motor Vehicles

SOLUTION TO QUESTION 12

The Staff Partner, Date:

Binitie, Georg e and Co.
Horsefall Street,
Port Harcourt.

Dear Sir,

AUDIT STEPS TO BE TAKEN, IN VERIFYING LISTED ASSETS

I write in response to your request that I present a report stating the audit steps necessary to verify
the values appearing for the following assets, in a client’s Financial Statements, for an accounting
year end.

The Steps are as follows:

Fre e h old la n d a n d b u i ld in g s

Fre e h old la n d
◆ Obtain and examine title documents and costs relating to the land.
◆ Ensure that title is registered in the name of the company at the La nds Registry.

Bu i ld in g s
◆ Ag ree balance to the Genera l ledger
◆ Verify significant additions with relevant Invoices, Architects and Quantity Surveyor’s
Certifica tes
◆ Check and agree depreciation charges and ensure consistency of rate applied
◆ Obtain Board’s approval relating to construction handled internally
◆ Tra ce to fixed assets register
◆ Verify insurance policy relating thereto
◆ In case of revaluation, obtain valuation report done by a professional value
Pla n t a n d m a ch in e ry
◆ Ag ree balance to the general ledger
◆ Verify additions by checking related purchase invoices
◆ Re-check and agree depreciation figures, and rates applied
◆ Check to fixed assets register
◆ Verify insurance policies relating thereto
◆ If there are disposals, confirm authorisation and proceeds
◆ If construction is done internally, check and agree cost sheets
◆ Ca rry out a physical verification of material items

Mot or ve h icle s
◆ Ag ree figures to the general ledger
◆ Verify purchase invoices
◆ Check that registration of vehicles with the licensing authorities are done in the name
of company rather than individuals
◆ Check and agree depreciation figures; rates applied and its consistent application.
◆ Ca rry out physical verification of motor vehicles
◆ Verify and agree insurance policies relating thereto
◆ Check items to fixed assets register
◆ Confirm authorisation in respect of disposals where applicable and trace proceeds to bank
statement/ cash book.

Once the above steps are followed painstakingly, the authenticity of the values stated against, the
listed assets, can either be affirmed or otherwise.

Thanks You, Yours

fa ithfully

QUESTION 13

Mr. Yekini Sofola, an Aud it Senior in Sekibo Achike Ga mba and Co. a firm of Practicing Accounta nts
has recently been commissioned by the Managing Partner of the firm to:

(a) Briefly outline the nature of the

(i) Applica tion controls and
(ii) Genera l Controls, expected in a computer-based accounting system

(b) List and briefly comment on 5 (five) components of audit planning documentation as an
important aspect of the audit process.

(c) You are required to provide what you consider should be the content of Mr. Yekini Sofola’s
response

SOLUTION TO QUESTION 13

The contents of Mr. Yekini Sofola’s response, should include: (a)

Description of Controls
 (i) Ap p l ica t ion Con t rols
These relate to the transactions and standing data pertaining to each computer-
based accounting system and are therefore specific to each such application. The
objectives of application controls are to ensure the completeness and accuracy of
the accounting records and the validity of the entries made in these records resulting
from both manual and programmed processing.

(ii) Ge n e ra l Con t rols

These are controls, which relate to the environment within which computer-based
accounting systems are developed, maintained and operated and are therefore
applicable to all the applications.

The objectives a re to ensure the proper development a nd implementa tion of

applications and the integrity of program as well as data files and computer
operations. They may be manual or programmed.

Five Com p on e n t s of Au d it Pla n n in g Docu m e n t a t ion

Ba ckg rou n d In form a t ion

◆ Meeting with client
◆ Brief history of the organisation
◆ Nature of Business
◆ Organisational Structure
◆ Accounting and internal control systems
◆ Aud it Objectives
◆ Terms of engagement
◆ Financial Trend s

Au d it St ra t e g y
◆ Aud it approach
◆ Ana lysis of audit risks
◆ Outline of audit emphasis

Job Ad m in is t ra t ion
◆ Timing of audit work
◆ Staff requirement
◆ Work Alloca tion
◆ Job review
◆ Reporting deadline
◆ Interim audit
◆ Attend ance at stock-taking

Aud it Budget
◆ Time
◆ Cost

Aud it Programmes
◆ For all areas of the business

Aud it Briefing (Pre-audit conference)

◆ Date of Meeting
◆ Name and level of staff to be briefed
◆ Specific matters requiring particular attention such as changes in management structure,
technology, etc.
QUESTION 10

Aud it is “An independent examination of and the expression of opinion on the financial statements
of an enterprise by an appointed auditor in purauance of that appointment”.
Required:

(a) List FIVE types of audit

(b) State ONE advantage of an audit to each of five different users of the audit report.
(c) Write short notes on the following:
◆ Complia nce tests
◆ Substantive tests
◆ Vouching

SOLUTION TO QUESTION 10

(a) Typ e s of a u d it a re
(i) Final Aud it
(ii) Management Aud it
(iii) Interim Aud it
(iv) Internal Aud it
(v) Continuous Aud it
(vi) Environmental Aud it
(vii) Va lue for money Aud it
(viii) Forensic Audit
(ix) Social Responsibility Aud it.

(b) Five a d va n t a g e s of a u d it a re :
(i) To the Ta x Authorities, it helps to agree tax assessment with tax authorities
(ii) To the insurance underwriters, it facilities claims for loss of profit or stock from an
insurance company, including consequential loss.
(iii) To the Banks, it facilities processing of application for bank facilities
(iv) To the Shareholders, it help to prevent or reduce incidents of fraud, error and other
misstatements.
(v) To the Pa rtnerships, it provides a proper ba sis for va lua tion of goodwill on
admission, retirement, or death of a partner and helps reduce or settle disputes
that may arise from financial statements

(c) Sh ort Not e s

(i) COMPLIANCE TESTS
These are detailed tests of transactions, which seek to assure the auditor (i.e.
provide audit evidence) that the Internal control procedures are being adhered to
by the company management.

(ii) SUBSTANTIVE TESTS

These are tests of transactions, balances and other procedures such as analytical
review, which seek to produce audit evidence regarding completeness, accuracy
and validity of balances in the accounting records or financial statements.

(iii) VOUCHING
Vouching is the examination of transactions of the business through vetting of
documentary and other evidence of sufficient validity to satisfy the auditor that
such transactions are in order and have been properly authorised and correctly
recorded.
QUESTION 11

An Aud itor is expected to obtain relevant and reliable audit evidence sufficient to enable him draw
measurable conclusions as a basis for his report. You are required to:

(a) List the factors, which may influence the auditor’s judgment in relation to sufficiency of
the evidence so collected.
(b) State the factors that would enable the auditor assess the reliabilty of such evidence.

SOLUTION TO QUESTION 11

(a) Su fficie n cy of Au d it Evid e n ce

The sufficiency of audit evidence will be affected by the following factors:

(i) The relevance of the evidence collected.
(ii) The reliability of the evidence collected.
(iii) The materiality and nature of the item being checked.
(iv) The auditor’s experience of the reliability of management, staff, accounting records
as well as the effectiveness of the internal control system.
(v) The possibility of management bias and the accompanying risk of mis-statements
(vi) The time and cost of collecting the evidence in relation to the value of the evidence.
(vii) The auditor’s knowledge of the client’s business and the operating industry

(b) Re lia b ilit y of e vid e n ce

The auditor will consider the following factors when assessing the reliability of the evidence.
(i) Relia bility of the source a nd his previous experience a bout tha t source: the
independence, objectivity, qualification, and experience of the provider of evidence.
(ii) The form of the evidence e.g.
◆ Documentary evidence is more reliable than oral evidence
◆ Externally generated evidence is better than internally generated one
◆ Evidence generated by the auditor through physical inspection,
computation or analysis is more reliable than evidence presented by
client staff.
(iii) Whether the evidence agrees or conflicts with other related evidence: for example,
if there is a conflict, more evidence will be required to prove the reliability of one source
or evidence.