ICAN NOVEMBER 2023 MOCK EXAMINATIONS

AUDIT AND ASSURANCE

FIRST CHOICE ACCURATE SUCCESS LINK LTD

 FIRST CHOICE ACCURATE (FCA) SUCCESS LINK INC.
SKILLS LEVEL MOCK EXAMINATION – NOVEMBER 2023
AUDIT AND ASSURANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN

THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS)

Question 1

In an accountancy class on “Audit Opinion in International Standards on Auditing”, Ado,

a lecturer at ICAN University, was explaining to the students that the end product of
external audit work is the auditor‟s opinion expressed on the financial statements. He
stated that a general purpose financial statement was in compliance with the financial
reporting framework designed to meet the common financial information needs of a
wide variety of users.

The role of audit is to provide a high level of assurance to the users of the financial
statements and that it is necessary for users to have confidence that consistent auditing
standards have been applied to the audits of financial statements of companies. He went
further to explain that the overall objectives of the independent auditor is to ensure that
the conduct of an audit is in accordance with International Standards on Auditing. He
concluded that the auditor‟s report shall include a section with the heading “Opinion” as
stated below

Opinion We have audited the financial statements of Inajit Plc set out on pages XXX to
XXXX which comprise the statement of financial position as at year end date, and the
statement of profit or loss and other comprehensive income, the statement of changes
in equity and the statement of cash flows for the year then ended, the notes to the
financial statements, including a summary of significant accounting policies.

In our opinion, the financial statements give a true and fair view of financial position of
Inajit Plc as at year end date, and its financial performance and cash flows for the year
then ended in accordance with International Financial Reporting Standards and the
requirements of the Companies and Allied Matters Act 2020 and Financial Reporting
Council Act, 2011.

At the end of the lecture a student in the class came to you for further explanation on
the topic.

Required:

ICAN NOVEMBER 2023 PREPARATORY MOCK EXAMS 1

a. State the objectives of the independent auditor as stated in International Standards on
Auditing. (5 Marks)

b. Outline what ISA 200 requires the auditor to do in relation to the audit of financial
statements. (10 Marks)

c. Explain the scope of audit as described in the independent auditor‟s report. (5 Marks)
d. Highlight the role of regulatory bodies in ensuring that audits are carried out in line
with standards. (10 Marks) (Total 30 Marks)

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS IN
THIS SECTION (40 MARKS)

Question 2

The date is 3 December 2008. The audit of ZeeDiem Co is nearly complete and the
financial statements and the audit report are due to be signed next week. However, the
following additional information on two material events has just been presented to the
auditor. The company’s year end was 30 September 2008.

Event 1 – Occurred on 10 October 2008

The springs in a new type of mattress have been found to be defective making the
mattress unsafe for use. There have been no sales of this mattress; it was due to be
marketed in the next few weeks. The company’s insurers estimate that inventory to the
value of $750,000 has been affected.

The insurers also estimate that the mattresses are now only worth $225,000. No claim
can be made against the supplier of springs as this company is in liquidation with no
prospect of any amounts being paid to third parties.

The insurers will not pay ZeeDiem for the fall in value of the inventory as the company
was underinsured. All of this inventory was in the finished goods store at the end of the
year and no movements of inventory have been recorded post year-end.

Event 2 – Occurred 5 November 2008

Production at the ShamEve factory was halted for one day when a truck carrying dye
used in colouring the fabric on mattresses reversed into a metal pylon, puncturing the
vehicle allowing dye to spread across the factory premises and into a local river.

The Environmental Agency is currently considering whether the release of dye was in
breach of environmental legislation. The company’s insurers have not yet commented on
the event.

Required:
(a) Explain the auditors’ responsibility and the audit procedures and actions that should
be carried out according to ISA 560 (Redrafted) Subsequent Events. (10 marks)

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(b) Assume that the date is now 20 December 2008, the financial statements and the
audit report have just been signed, and the annual general meeting is to take place on 10
January 2009. The Environmental Agency has issued a report stating that ZeeDiem Co is
in breach of environmental legislation and a fine of $900,000 will now be levied on the
company. The amount is material to the financial statements.

Required:
Explain the additional audit work the auditor should carry out in respect of this fine. (5
marks)

Question 3

At an inaugural lecture, a professor stated that „professionals all over the world should
be alive to their duties and not breach the ethics of their profession‟. As a professional,
you attended the inaugural lecture and 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.

Required:

Explain the following:

a. Professional ethics. (2 Marks)

b. Importance of professional ethics. (5 Marks)

c. Differences between rule based and principle-based professional ethics. (3 Marks)

d. Weaknesses of rule-based professional ethics. (4 Marks)

e. Advantages of principle-based professional ethics. (6 Marks) (Total 20 Marks)

Question 4

Grains 4U Co (Grains) manufactures breakfast cereals and has three factories, four
warehouses and three distribution depots spread across North America. The audit for the
year ended 31 December 2015 is almost complete and the financial statements and audit
report are due to be signed shortly. Profit before taxation is $7·9 million. The following
events have occurred subsequent to the year end and no amendments or disclosures
have been made in the financial statements.

Event 1 – Fire
On 15 February 2016, a fire occurred at the largest of the distribution depots. The fire
resulted in extensive damage to 40% of the company’s vehicles used for dispatching
goods to customers; however, there have been no significant delays to customer
deliveries. The company estimates the level of damage to the vehicles to be in excess of
$650,000. Only a minimal level of inventory, approximately $25,000, was damaged.

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Grain’s insurance company has started to investigate the fire to assess the likelihood and
level of payment, however, there are concerns the fire was started deliberately, and if
true, would invalidate any insurance cover.
Event 2 – Inventory
On 18 February 2016, it was discovered that a large batch of Grain’s new cereal brand
‘Loopy Green Loops’ held in inventory at the year end was defective, as the cereal
contained too much green food colouring. To date no sales of this new cereal have been
made. The cost of the defective batch of inventory is $915,000 and the defects cannot be
corrected. However, the scrapped cereal can be utilised as a raw material for an
alternative cereal brand at a value of $50,000.
Required:
For each of the two subsequent events described above:
(i) Based on the information provided, explain whether the financial statements require
amendment; and
(ii) Describe audit procedures which should now be performed in order to form a
conclusion on any required amendment.

SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS IN
THIS SECTION (30 MARKS)

Question 5

Describe the auditor’s responsibility for subsequent events occurring between:

(i) The year-end date and the date the auditor’s report is signed; and (8 Marks)

(ii) The date the auditor’s report is signed and the date the financial statements are
issued. (7 marks)

Question 6

Kyanite Pizzas Co (Kyanite) operates a large chain of fast food restaurants. You are an
audit supervisor of Jasper & Co and are currently preparing the audit programmes for the
audit of Kyanite’s financial statements for the year ended 31 March 2016. You are
reviewing the notes of last week’s meeting between the audit manager and finance
director where two material issues were discussed.

(i) Property, plant and equipment

In the past Kyanite has received negative press reports over the condition of its fast food
restaurants, with comments suggesting they are old fashioned and tired looking.
Therefore during the year the company undertook a full review of all its assets and
carried out extensive refurbishments to the majority of its restaurants. This review
resulted in a significant amount of ageing fixtures and fittings being disposed of and a
significant amount of capital expenditure was invested in all remaining restaurants.
(15marks)

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Required:
Describe substantive procedures you should perform to obtain sufficient and appropriate
audit evidence in relation to the above two matters

Question 7

Dashing Co manufactures women’s clothing and its year end was 31 July 20X7. You are an
audit supervisor of Jaunty & Co and the year-end audit for Dashing Co is due to
commence shortly.

The draft financial statements recognise profit before tax of $2·6m and total assets of
$18m. You have been given responsibility for auditing receivables, which is a material
balance, and as part of the audit approach, a positive receivables circularisation is to be
undertaken.

At the planning meeting, the finance director of Dashing Co informed the audit
engagement partner that the company was closing one of its smaller production sites
and as a result, a number of employees would be made redundant. A redundancy
provision of $110,000 is included in the draft financial statements.

A few months have now passed and the audit team is performing the audit fieldwork
including the audit procedures which you recommended over the redundancy provision.
The team has calculated that the necessary provision should amount to $305,000. The
finance director is not willing to adjust the draft financial statements.

Required:
Discuss the issue and describe the impact on the auditor’s report, if any, should this issue
remain unresolved. (15 marks)

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