ICAN/201/Q/B2 Examination No. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION - MARCH/JULY 2020 AUDIT AND ASSURANCE EXAMINATION INSTRUCTIONS PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER 1. Check your pockets, purse, mathematical set, etc. to ensure that you do not have prohibited items such as telephone handset, electronic storage device, programmable devices or any form of written material on you in the examination hall. You will be stopped from continuing with the examination and liable to further disciplinary actions including cancellation of examination result if caught. 2 Write your EXAMINATION NUMBER in the space provided above. 3. Do NOT write anything on your question paper EXCEPT your examination number. 4. Do NOT write anything on your docket. 5. Read all instructions in each section of the question paper carefully before answering the questions. 6. Do NOT answer more than the number of questions required in each section, otherwise, you will be penalised. z All solutions should be written in BLUE or BLACK INK. Any solution written in PENCIL or RED INK will not be marked. WEDNESDAY, SEPTEMBER 16, 2020 DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SOTHE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA ‘SKILLS LEVEL EXAMINATION - MARCH/JULY 2020 AUDIT AND ASSURANCE Time Allowed: 3/, hours (including 15 minutes reading time) INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX QUESTIONS IN THIS PAPER ‘SECTION A: COMPULSORY QUESTION (40 MARKS) QUESTION 1 Mr. Ajibade, a businessman based in the south west region of Nigeria intends to ‘Start a new company. The new company when it is formed will be focused solely on the production of face masks and alcohol-based hand sanitizers which are needed to prevent the spread of the novel corona virus. This has been documented in his draft Memorandum of Association to be submitted to the Corporate Affairs Commission (CAC). Mr. Ajibade has heard of section 377 of Companies and Allied Matters Act (CAMA) CAP C20 LFN 2004 which offers exemption from an audit if a company qualifies as a small company as per section 351 of the Act. He thinks that when he starts a small company, he will therefore be exempted from statutory audit and he would save cost. Mr. Ajibade has a growth plan for his prospective company. He has also heard that if the company is to grow bigger in the future, he will require more funding in the form of loans from banks and other financial institutions. The banks will require an audited financial statements as a prerequisite to grant his company loan facilities. Therefore, he is curious to know more about the importance of audited financial statements. He has approached you for advice. 1 ICAN/201/Q/B2Required: Explain to Mr. Ajibade a. What qualifies a company as a small company according to CAMA. (6 marks) b. The benefits and limitations of an audit. (9 marks) ¢c. The eligibility for qualification as external auditor. (6 Marks) d. The scope of a statutory audit. (4 Marks) e. According to ISA 300 Planning an audit of financial statements, the objective of the auditor is to plan the audit work so that the audit will be performed in an effective manner. Explain the benefits of adequate planning of the audit. (5 Marks) {. Explain THREE risk assessment procedures required by ISA 315 identifying and assessing the risks of material misstatement through understanding the entity. and its environment. (10 Marks) (Total 40 Marks) SECTION B: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE QUESTIONS IN THIS SECTION (60 MARKS) QUESTION 2 At an inaugural lecture, a professor stated that ‘professionals all over the world should be alive to their duties and not betray the ethics of their profession’. As a professional, you are aware that The Institute of Chartered Accountants of Nigeria (ICAN) has “Accuracy and Integrity” on its logo, and you also know that professionals should not act contrary to ethical standards and public interest in discharging their duties. An attendee of the inaugural lecture, asked you to explain the following phrases from the professor's lecture. a. Professional ethics. (2 Marks) b. Importance of professional ethics. (5 Marks) c. __ Differences between rule based and principle-based professional ethics. (3 Marks) 2 ICAN/201/0/B2d. Weaknesses of rule-based professional ethics. (4 Marks) e. Advantages of principle-based professional ethics. (6 Marks) (Total 20 Marks) QUESTION 3 Big Man Nigeria Limited is registered with the Corporate Affairs Commission. The services to be rendered are awaiting regulatory approval. Pending that approval, directors of the company have been funding the operations of the company through the parent company for the past four years. However, the newly appointed chairman of the company’s board of directors believes there is the need to organise the company strategically so as to make it more attractive to interested investors. Your father's friend, Mr. Ado, has been appointed as the managing director of the company, and he is interested in appointing an accountant to keep the book of accounts of the company. The present financial operation of the company does not show a good internal control structure. Added to this, Ado is thinking of recommending to the board of directors the need to appoint an external auditor. The managing director who is a non-accountant, has requested for your advice on the need for an adequate internal control system in a company. Required: Explain to Mr. Ado, the following: a Meaning of internal control. (4 Marks) b. Objectives of internal control. (6 Marks) ie Features of a good internal control system. (4 Marks) da Regarding internal control, what are the responsibilities of: i. Management; (2 Marks) ii, Board of directors; and (2 Marks) iii. External auditors (2 Marks) (Total 20 Marks) 7 ICAN/201/Q/B2QUESTION 4 During a debate session, there were arguments among the accountancy students of the University of Kunu that the quality of audit work performed recently did not portray accountancy professionals as men of integrity. In their opinion, most financial malpractice committed by members of staff of a company are not detected by the auditors at the time of their audit and this causes corporate failures or leaves the shareholders with little or no return on their investments. It is obvious that most students are unclear about the various types of audit. They all agreed that an informed person should be invited to educate the members of the Association on this topic. As an ex-student of University of Kunu, you have been invited to give a talk on various types of audit. Required: Explain the following, giving examples to support your answer: a. Forensic Audit (5 Marks) b. Information systems audit (5 Marks) c. Compliance Audit (5 Marks) d. Value for money audit (5 Marks) (Total 20 Marks) QUESTION 5 The directors of the Hallmark Limited have decided that in order to improve its operating efficiency, there is the need to increase the working capital of the company. The last audited financial statements of the company was up to September 30, 2018. A prospective investor has decided to perform due diligence on the company before investing a certain amount of money in the business. 4 ICAN/201/Q/B2The Financial Controller of Hallmark Limited has advised the directors that prior to the due diligence exercise, there might be need to perform assurance services on the company’s financial result as the investor may not be willing to accept the last audited financial statements for the due diligence. Your father, who is a director of the company, has approached you as an accountancy student to give more explanation to him on the foregoing. ‘You are required to explain a. Assurance services (5 Marks) b. The various levels of assurance services (7 Marks) c. The components/elements of an assurance engagement (8 Marks) (Total 20 Marks) QUESTION 6 In a medium sized trading organisation, the accountant was given the additional responsibility of pursuing recoveries from debtors. On one occasion, when an insurance claim of ¥1million was received, accountant credited it to the account of a debtor to cover up a previous misappropriation of ¥1million he/she had recovered in cash from the debtor. Required: a. — Identify and describe the weaknesses in the internal control system which led to this situation (10 Marks) b. List TWO control objectives and THREE control activities that should be put in ieee! for each of the following: Cash Sales (5 Marks) Lodgments into bank (5 Marks) (Total 20 Marks) 5 ICAN/201/Q/B2