Advanced Audit, Assurance and Forensics · November 2025

a. Requirement for audit firm and partner rotation

i. The need for auditor rotation has been a topic of discussion, following various major corporate failures in recent years.

ii. There has been a general perception that in many cases of corporate collapse, the accounting firm was ’too close’ to the audit client and had failed to detect the warning signs of collapse for the client to take appropriate preventive measures. This triggered the regulatory requirement to mandate change of the statutory auditor of a public interest entity after a certain period.

iii. The essence of this is to ensure independence, objectivity, quality service delivery and transparency in the discharge of audit work.

iv. It has been observed that long association with audit clients can lead to familiarity threat, which could create an integrity issue. Rotation reduces complacency on part of auditors and helps to protect the interest of stakeholders. These are two different suggestions about how auditor rotation should be achieved. Audit partner rotation: The accounting firm may remain as auditors of the same client for a number of years (or until the company decides to change its auditors). However, the ’lead’ Engagement Partner and other key members of the audit team should be ’rotated’ regularly. Audit firm rotation: The accounting firm should remain as auditor of a client company for no longer than a specified maximum number of years, say up to ten years. Note that in many countries (including Nigeria), this would require legislative amendment, as the law frequently provides that auditor’s appointment is for one year, renewable indefinitely. The regulatory requirements for audit firm and partner rotation

i) The rules regarding rotation of audit firms vary from country to country. According to Nigeria’s Code of Corporate Governance 2018 and Audit Regulations 2020, released by Financial Reporting Council of Nigeria for all public interest entities, external audit firms shall be statutory auditor to a company for a continuous period of ten years and shall not be reappointed until after a period of seven years after disengagement.

ii) In the case of a joint audit situation, no firm of statutory auditors will be on the audit for more than a period of fifteen years. It is also required that an Engagement Partner should only be on an engagement for a maximum period of five years before he rotates out.

iii) Rotating audit firms and partners can make clients have access to expertise and innovation that will improve the financial reporting process.

iv) From the perspective of investors, it is believed that rotation of audit firms will bring out credibility in financial reporting process, which leads to accuracy and reliability of the financial statements. However, the challenge associated with appointing a new auditor on a complex audit is delay in ability to understand the business environment and the internal control process, especially if the new firm does not have adequate resources to work on the engagement. This may lead to transition stress on the entity when onboarding the new engagement team and likely delay reporting. It can also affect deliverables on other business activities of the company.

v) It has, therefore, been suggested that there should be a regular change in the individuals who are involved in the audit of a client company. This should prevent the auditor from becoming too familiar with the client and key members of the client’s staff, because of developing a long and ’comfortable’ relationship. b. How fees dependence undermines the independence of an auditor

i) Where the fee from a particular client represents a large proportion of a firm’s total fee income, there is a significant self-interest or intimidation threat. This will depend on factors, such as the structure of the firm and whether it is established or emerging.

ii) The International Ethics Standard Board for Accountants (IESBA) Code of Ethics states that, for public interest entities, when recurring fees paid by one client or a related group of clients exceed 15% of the total fee income of the audit practice for two consecutive years, the firm shall: ▪ disclose the fact to those charged with governance: Disclosure to those charged with governance (TCWG) is a necessary step but it is not a sufficient safeguard. Disclosure merely informs TCWG of the situation; it does not eliminate the underlying financial incentive and the resulting pressure on the audit team; and ▪ conduct a review (either by an external professional accountant or a regulatory body).

iii) If total fees significantly exceed 15%, then a pre-issuance review is likely to be necessary rather than a post-issuance review: ▪ a pre-issuance review is a review of the audit work performed by a party who is not a member of the audit team (typically another partner) before the auditor's report is issued; and ▪ a post-issuance review is a review of the audit work performed by a party who is not a member of the audit team (typically another partner) after the auditor's report has been issued.

iv) The ICAN code of ethics applies a higher threshold of 25%.

v) Larger firms may find that the proportion of an individual office’s income is higher than these figures, but not the firm’s income as a whole. Where an individual office has fee income in excess of these figures from a single client, responsibility for signing off the audit file should be passed to a different office.

vi) Overdue fees from an assurance client might become a loan to client and should be avoided; Specific guidance regarding fees as provided by ICAN Code of conduct

i) ICAN advises minimum charge-out rates in respect of fees for professional services, which are intended to set a benchmark below which members are not ordinarily expected to charge. A member should inform a client in writing prior to commencement of any engagement the basis upon which any fee he proposes to charge for his services will be calculated and, on request and where practicable, the level of fees likely to be charged for any assignment.

ii) The members should discuss and explain the basis on which fees will be calculated, including the estimated initial fee, at the earliest opportunity. This discussion should be confirmed in writing, normally in an engagement letter.

iii) Firms should not quote a level of fees for new audit work, which is lower than that charged by an existing auditor. Firms should also not quote by tender a level of fees which they have reason to believe is significantly lower than those quoted by other tendering firms. In both instances the firm’s objectivity could be threatened.

iv) when performing audit work, firms should ensure that their work complies with auditing standards and guidelines and quality control procedures. In the event of a report being made to the Institute (which might have arisen because of a Professional Practice Monitoring Committee’s inspection), where fees were a feature in obtaining or retaining the work, firms should be prepared to demonstrate that: ▪ the work done was in accordance with Auditing Standards; and ▪ the client was not misled as to the basis on which fees for the current and subsequent years were to be determined.

v) The request for governance, risk and compliance (GRC) software development not only increases the fee dependence, but also triggers a self-review threat (auditing a system the firm helped design), compounding the ethical dilemma).

c. Concept of second opinion

i) In an audit context, a second opinion is when a different auditor provides professional advice on a matter (like accounting, auditing, or reporting standards) that has been or maybe considered by the client’s current auditor.

ii) This process helps a company confirm or question its existing auditor's approach, but it is distinct from "opinion shopping,’’ which is the unethical practice of seeking an auditor who will give a desired answer. The primary ethical concern is that the client may be engaging in Opinion Shopping.

iii) For a second opinion to be conducted ethically, the new auditor must address potential threats to independence, such as self-interest, by ensuring the opinion is based on accurate facts and often by communicating with the existing auditor. A second opinion occurs when an entity seeks advice from an accountant (Oladapo & Partners) who is not their existing auditor on the application of accounting principles or the appropriateness of an audit conclusion. For factors to be considered by Oladapo & Partners (Consulting Firm), they must address the self-interest and advocacy threats by considering the following factors before acceptance: ▪ Communication with existing auditor: Oladapo & Partners must request the client's permission to communicate with Adeniyi, Okonkwo & Co. to understand all relevant facts and the basis of the disagreement. If permission is denied, they should decline the engagement. ▪ Access to comprehensive facts: The firm must ensure they are provided with all available documentation, including management's full argument and the existing auditor's technical rationale for their conclusion. ▪ Motive of the client: The firm must evaluate the reason FinEdge is seeking the opinion (that is, whether the disagreement is based on legitimate technical uncertainty or an attempt to undermine the current auditor). ▪ Assumptions: They must ensure the opinion is based on the same set of facts and assumptions provided to the existing auditor, avoiding misrepresentation. ▪ Competence: Oladapo & Partners must confirm they possess the specialised expertise in software capitalisation, AI valuation, and IFRS to render a credible and objective opinion.

d. The system a firm should establish to protect whistleblowers like Zainab The firm must establish a robust internal whistleblower protection framework to promote ethical reporting and safeguard employees like Ms. Zainab Ahmed from retaliation (victimisation). This is fundamental to ensuring that the principle of integrity is upheld. The system the firm should establish to protect whistleblowers should include:

i) Clear, and documented policy: A formal policy, accessible to all staff, that explicitly outlines the procedures for reporting suspected misconduct, specifying what can be reported and to whom.

ii) Confidential reporting channels: Provision of independent and secure channels (for example, external hotline, dedicated email) to allow reporting anonymously and without the risk of immediate identification by those involved in the alleged misconduct.

iii) Designated independent authority: Appointment of an individual or committee (for example, the Chief Compliance Officer or the Audit Committee) with the authority and independence to receive, investigate, and handle sensitive reports outside the normal line of management structure.

iv) Commitment to non-retaliation: An explicit guarantee and disciplinary measures for any employee found to have victimised or retaliated against the whistleblower, even if the reported concern is ultimately unfounded (provided it was made in good faith).

v) Secure follow-up: A process for promptly investigating the concern and providing feedback to the whistleblower (where feasible and non- compromising) on the action taken.

vi) Tone from the top: Senior leadership must visibly demonstrate a strong commitment to ethical behavior and a "speak up" culture, showing that all concerns are valued and taken seriously.

vii) Continuous monitoring: Periodically monitor and audit the effectiveness of the whistleblower programme and anti-retaliation policies to identify and address weaknesses.

viii) Managerial training: Train managers and supervisors on how to respond constructively to reports, understand what constitutes retaliation, and ensure they do not discourage reporting.

ix) Fundamental principles of the IESBA Code include: ▪ dilemma in the need to maintain confidentiality and disclosure of unethical behaviour could be an issue. The international standards on auditing regarding non-compliance with laws and regulations may require the auditor’s disclosure of issues on contraventions or non-compliance with certain guidelines or regulations. This could be a challenge for the auditor. This challenge could be addressed by ensuring confidentiality through proper channel for whistleblowing and making management to be aware of this requirement of the laws and regulations as well as the implication of suppression of such information; and ▪ anonymous hotlines, encrypted email systems, or third-party reporting platforms.

e. Statement of key audit matters for inclusion in the independent auditor’s report for AI reliance: Key Audit Matters ’’The company applies Artificial Intelligence (AI) algorithms to allocate transaction prices across bundled product and service contracts (Note xx). These AI models are self-learning and operate using large datasets, which increase complexity and reduce transparency of the allocation process. There is a risk that errors in training data, algorithm bias, or inadequate monitoring controls could lead to misstatement of revenue. Due to the significance of revenue to the financial statements and the inherent complexity of AI systems, this area requires significant audit attention. The company capitalises significant costs related to the in-house development of proprietary AI algorithms. This area requires substantial audit effort due to high degree of management judgement, specifically in determining when the technical feasibility threshold was met, the appropriate capitalisation of costs, and the ongoing assessment of their useful economic lives and potential impairment. FinEdge’s high volume of transactions and reliance on proprietary AI Algorithms for determining and allocating revenue streams presented significant risks to the completeness and accuracy of recorded revenue. Our audit focused on the design and operational effectiveness of the automated IT controls embedded within the AI platform, requiring specialised skills to test the logic”.

Examiner’s Report The question tests the candidates’ knowledge of audit firm and partner rotation, fee dependence and independence, the concept of second opinion, whistle blowing in a firm and key audit matters in audit report. This being a compulsory question, all the candidates attempted it. The performance was below average. The common pitfall of the candidates was the lack of understanding of audit firm and partner rotation, the second opinion in the audit process, the process of whistle blowing in the firm and reporting of key audit matters. Candidates are advised to familiarise themselves with aspects of practice management, compliance with laws and regulations, and also read the Institute’s Study Text and review the Pathfinder which are freely available on the institute’s website.

Marking guide Marks Marks 1a. Requirements for audit firm and partner rotation in an audit engagement Auditor rotation process (1 mark each for any 3 points) 3 Suggestions about how auditor rotation should be achieved (1½ marks each for any 4 points) 6 9 b. Discussion of fee dependence and independence even if disclosed. Stating various guidelines and processes relating to fee dependence (1 mark each for any 4 points) 4

c. Discuss the concept of second opinion and factors to be considered in deciding to accept an engagement to provide a second opinion. Concept of second opinion and factors to be considered (1 mark each for any 7 points) 7

d. The system a firm should establish to protect whistle blowers and fundamental principles of IESBA. Protection of whistleblowers (1 mark each for any 5 points) 5

e. The draft of the key audit matters required for disclosure in the independence auditor’s report: Title of the statement of the key audit matters (1 mark) (2 marks each for any 2 statements included) 1 4 _5_ Total _30_

SECTION B

a. (i) The concept and purpose of scope determination and group risk assessment in group audit ▪ In a group audit, scope determination defines the specific audit areas and components to be examined, and to what extent. ▪ Group risk assessment identifies and analyses the potential risks of material misstatement across the entire group. ▪ The purpose is to develop an effective audit strategy by focusing resources on the most significant risks and areas, ensuring the group audit opinion is supported by sufficient evidence. The group auditor (Adeyemi & Partners) is responsible for the overall audit opinion on the consolidated financial statements.

(ii) The concept and purpose of scope determination required are further discussed as follows:

• scope determination involves identifying which components (subsidiaries in Ghana, Sierra Leone, Kenya, etc.) are significant to the group and deciding the appropriate level of audit work required for each one;

• components are usually deemed significant based on size (for example, assets, revenue, or specific risks or critical intellectual property assets and AI based assets);

• the purpose is to ensure that the group auditor obtains sufficient appropriate audit evidence to reduce the risk of material misstatements in the consolidated financial statements to an acceptably low level and guides the allocation of resources;

• scope determination results in classifying components into categories;

• for financially significant components (for example, the manufacturing arm or the Ghana financial services subsidiary);

• for components significant only due to specific balances (for example, testing inter-company balances in a small subsidiary); and

• for components not considered individually significant, analytical procedure would apply.

(iii) The concept and purpose of group risk assessment are as follows: Concept: This is the process of identifying and assessing the risks of material misstatement in the consolidated financial statements. This requires understanding the group, its environment, and its control over financial reporting. Purpose: To establish the overall group audit strategy and determine the nature, timing, and extent of procedures.

(v) The group auditor must identify risks arising from:

• Consolidation process: Risks related to accounting for complex consolidation adjustments, goodwill calculation, and the elimination of inter-company transactions (for example, transfer pricing issues).

• Regulatory differences: Risks arising from subsidiaries operating in diverse regulatory environments (Ghana, Sierra Leone, Kenya) which may affect the application of the group's accounting policies (IFRS);

• Foreign currency: Risks related to foreign currency translation differences and the complex conversion process.

• Specific group assets: Risks related to critical assets held in smaller subsidiaries (for example, the IT subsidiary holding critical intellectual property) which may affect the overall valuation.

b. Considerations for setting group and component materiality When setting group and component materiality, group auditors consider the group's financial statement context, the risk of misstatement, and the significance of each component. This involves setting a lower aggregate component materiality that may exceed the group materiality level and may vary for each component based on factors like size, complexity, and risk. The goal is to manage the risk that the aggregate of uncorrected misstatements exceeds the group materiality for the financial statements as a whole. Materiality is fundamental in determining the scope and sufficiency of audit evidence (ISA 320) detailed below:

i) Group materiality: This is set for the consolidated financial statements as a whole. It is typically determined by applying a percentage to a chosen benchmark (e.g., Group profit before tax (PBT), total assets, or revenue). The choice of benchmark reflects the primary interests of the stakeholders.

ii) Component materiality: This must be set at an amount that is lower than group materiality.

iii) Purpose: To reduce the probability that the aggregate of uncorrected and undetected misstatements in the components, when consolidated, exceeds the group materiality level.

iv) Qualitative factors: Adeyemi & Partners must consider qualitative aspects, such as the regulatory sensitivity of the financial services subsidiary in Ghana and stakeholder expectations, which may require lower materiality levels even if the quantitative thresholds are not strictly met.

c. Involvement of the group auditor in the work performed by component auditors

i) It is the group auditor’s responsibility to decide what work is to be performed on the financial information of the component by the component auditor. ii) The group auditor then must decide the extent of his involvement in that work. For significant components he must, as a minimum: ▪ discuss with component management or the component auditor the business activities of the component that are significant to the group; ▪ discuss with the component auditor the risk of material misstatement of the financial information of the component; and ▪ review the component auditor’s documentation of identified significant risks of material misstatement of the group financial statements.

iii) Where significant risks of material misstatement of the group financial statements have been identified at a component, the group auditor should: ▪ evaluate the further audit procedures to be performed to address the risks; and ▪ consider whether it is necessary to be involved in those procedures. Such involvement might include: - meeting with component management/auditors to obtain an understanding of the component; - reviewing the component auditor’s overall audit strategy and plan ; and - performing risk assessment procedures at the component. ▪ designing and/or performing further audit procedures; ▪ participating in closing/other key meetings between component auditors and management; and ▪ reviewing other relevant parts of the component auditor’s documentation.

iv) For other components, the extent of the group auditor’s involvement will depend on his understanding of that component auditor. If he has concerns about that particular component auditor’s competence, or a lack of local regulation, he may decide that he needs to be involved in that component auditor’s risk assessment.

v) In all cases, the group auditor is required to evaluate the report of the work performed by the component auditor. If, after such evaluation and after discussion with the component auditor/management, the group auditor concludes that the work is insufficient, he should: ▪ determine what additional procedures are needed, and ▪ whether such procedures should be performed by the component auditor or himself.

Examiner’s report The question tests the candidates’ knowledge of scope determination and risk assessment in group audit, and related materiality and responsibilities toward component auditors. The question was attempted by about 70% of the candidates. The performance was above average. The common pitfall was the lack of understanding of the various aspects of group engagement and the respective responsibilities of the firms involved. Candidates are advised to pay attention to the requirements of the question and understand codes and responsibilities of various parties in engagement.

Marking guide Marks Marks

a. The concept and purpose of scope determination and group risk in group audit (1 mark each for any 12 points) 12

b. Consideration for setting group and component materiality Consideration for setting group and component materiality (1 mark each for any 2 points) 2

c. The involvement of the group auditor in the work performed by the component auditor Involvement of the group auditor in the work performed by tax component auditor (1 mark each for any 6 points) 6 Total 20

a) Roles of Audit Committee The Audit Committee's fundamental role is oversight of financial reporting, internal controls, and risk management. In this scenario, the committee failed significantly across all these responsibilities, directly contributing to the N30 million tax liability restatement and subsequent resignations. In terms of composition of the committee, in the scenario, it consists of five non- executive directors instead of three shareholder representatives and two non-executive directors.

i) Evaluation of failed roles ▪ Oversight of internal control The committee ignored the external auditors' repeated concerns about inadequate documentation for inter-company transactions. This critical failure created the high-risk environment exploited by the FIRS, as a result of transfer pricing allegation and deferred tax misstatements leading to tax liability. ▪ Oversight of financial reporting The committee failed to ensure appropriate accounting for deferred tax misstatements and ultimately presided over the restatement of the 2023 financial statements as the issues have been reported to relevant authorities. This showed a lack of due diligence in validating the tax provisions which resulted in a material misstatement requiring correction. ▪ Risk management and compliance The committee failed to convene an emergency meeting to address the FIRS audit findings promptly. This displayed a complete failure of the risk response mechanism. By delaying action, they escalated the problem, leading to intervention by the Financial Reporting Council of Nigeria (FRC). ▪ Interaction with external auditor The committee failed to challenge management or request detailed evidence of discussions on tax exposures. This is a primary oversight lapse. The committee is meant to provide a communication channel independent of management; its failure to intervene forced the external auditors to resign due to lack of governance support. \`ii) Post-crisis reforms should include: ▪ Enhance independence and expertise: The remaining committee members must be evaluated. New members should possess demonstrable need expertise that are required to carry out the statutory roles required of them. ▪ Mandatory auditor/management review: Establish a formal protocol requiring the Audit Committee to hold a dedicated and private session with the external auditors (without management presence) or as required. ▪ Risk escalation protocol: Implement a mandatory documented risk threshold. Any communication from a major regulator (FIRS, SEC, FRC) that alleges material non- compliance must trigger a mandatory emergency meeting (e.g., within 48 hours) to form a crisis response team. ▪ Strengthen whistleblowing: Ensure the company’s internal whistleblowing policy allows auditors or compliance personnel to directly contact the Chairman of the Audit Committee or a non-executive member of the audit committee regarding significant unresolved issues. ▪ External consultant engagement: Commission an independent, one-time review by a forensic accounting or governance expert to assess the root cause of the breakdown and recommend specific controls for inter-company transactions management. ▪ Review the Audit Committee requirements to explicitly include oversight of tax strategy and compliance. ▪ Implement a tax governance framework, defining responsibilities, thresholds for disclosures, and escalation procedures.

b) The strategies to resolve the issues raised include:

i) Immediate governance crisis: The Board must immediately appoint a new, independent external auditor to ensure compliance with listing requirements. New suitably qualified members must be appointed to the Audit Committee to restore stakeholder confidence.

ii) Tax and transfer pricing dispute: Engage specialised tax consultant and forensic accountant to conduct an independent review of the subsidiary's transfer pricing policy and documentation. This team will quantify the true liability, handle the negotiations with FIRS, and prepare the necessary documentation for FRC compliance.

iii) Internal control remediation: The company must immediately invest in governance, risk, and compliance (GRC) software and strengthen the finance function to ensure that documentation for all inter-company transactions is rigorous and subject to strong review controls before financial reporting.

iv) Accountability and culture: The Board must thoroughly investigate why management downplayed the auditor's concerns and respect to refusal to take disciplinary action where necessary. The "tone from the top" must shift to prioritise compliance and ethical of reporting over short-term financial targets.

v) Restructuring of the composition of the audit committee: The committee should be restructured to be in line with the provision of CAMA 2020 (as amended), which stipulates that this membership of the committee should comprise three members of shareholders and two non-executives directors.

vi) Proper documentation and notification of material weaknesses in the system. Every major observation by the external auditor should be well documented in the management letter that should be given to the company’s management and those charged with governance and feedback should be obtained by the auditors for proper resolution of the issues.

vii) Auditors’ rotation The company should have policies on rotation of auditors and other professionals in order to align with the expected professional practices.

Examiner’s report The question tests the candidates’ knowledge of the role and responsibilities of the audit committee in a given business scenario. The question was attempted by about 80% of the candidates and performance was less than average. The common pitfall was the candidates’ inability to evaluate responsibilities as given in standards and other regulations, and apply them to given situations. Candidates are advised to pay close attention to the Institute’s Study Text and the Pathfinder to enhance performance in future.

Marking guide Marks Marks 3a Evaluation of the roles of Audit committee in this case and suggest of possible post-crisis reforms Roles of Audit committee and consequences of failure: (1 mark each for any 7 points) 7 Post crisis reforms (1 mark each for any 7 points) 7 14 b Discussion of the strategies to resolve the issues raised in the scenario: (1 mark each for identification of any 3 points) 3 (1 mark each for discussion of the points identified) 3 6 20

a. The risks that the external auditor must consider and recognise in auditing the fair value measurements:

i) The auditor must consider risks related to inherent limitations, management bias and the complexity of the valuation process, when auditing fair value measurements. These risks can lead to material misstatement and include challenges like using subjective inputs, complex models and the potential for management to manipulate estimates to their benefit.

ii) Auditors must also consider the risk that the company’s internal controls are ineffective at preventing or detecting these misstatements.

iii) Issues relating to the audit of fair value measurements are similar to those for the audit of accounting estimates (both are covered by ISA540). Balances of items measured at fair value, such as property and financial instruments, are often significant items in the statement of financial position. The following risks scenarios would manifest through the conventional audit risks which are given below:

i) Inherent risk: Many fair value measurements are largely subjective and imprecise, and there is unavoidable inherent risk in their measurement. Valuation models may be used, but these are often complex and may be unreliable (for example, in the case of non-marketable financial instruments, or models to assess the amount of liabilities to a company’s pension fund). The inherent risk is much less when an open market exists for the items measured at fair value.

ii) Control risk: There are some risks that the entity’s systems may fail to prevent or detect valuation errors. Fair value measurements are often made by external experts, outside the normal course of routine business operations, and controls over the valuation process are, therefore, likely to be weak.

iii) Detection risk: The auditor should try to minimise detection risk, but the auditor may lack the knowledge and expertise to verify fair value measurements. This means that the auditor may need to rely on the work of an external expert, increasing the risk that errors in fair value measurements will not be discovered.

iv) The audit of fair value measurements (derivatives, carbon credit contracts) is governed by ISA 540 (Auditing Accounting Estimates) and presents significant inherent risks, especially since Enogiexy uses internal, Level 3 inputs. The auditors, must recognise the following specific risks:

i) Valuation model risk (Level 3 Inputs): Enogiexy uses internal models with highly subjective and complex assumptions (future energy prices, discount rates). These are Level 3 inputs under IFRS 13, meaning they are unobservable. The risk is that small, subjective changes to these assumptions can lead to a material misstatement in the reported fair value of the derivatives and carbon credit contracts.

ii) Management bias risk: The in-house team prepared the valuation report without an external valuer. This creates a high risk that management's internal assumptions are overly optimistic (for example, maintaining assumptions about stable energy prices despite market volatility), intended to conceal the true financial impact of the subsidy cuts and interest rate hikes.

iii) Specialised knowledge risk: The complexity of financial instruments like derivatives and carbon credit contracts requires the audit team to possess specialised knowledge. If Bright Chartered Accountants lack this expertise, they risk failing to adequately challenge the internal valuation models or the appropriateness of the underlying assumptions.

iv) Impairment risk (Wind farm asset): The regulatory changes that reduced feed- in tariffs clearly indicate a potential reduction in future cash flows. Although management estimated the recoverable amount at N770 million (a N10 million impairment, as carrying value is N780 million), the auditor must recognise the risk that the valuation models supporting the 'value-in-use' are aggressively optimistic and that the impairment recognised is materially understated.

b) The implications for the amount as are likely to be reflected in the audit report dire to the scenario

i. The scenario indicates a material uncertainty related to going concern (debt, interest rate hikes, falling subsidies). The auditor's response is governed by ISA 570 (Going Concern) and ISA 705 (Modified Opinions).

ii. If management refuses to make the required appropriate disclosure about the material uncertainty, the financial statements are considered materially misstated due to inadequate disclosure. As a result of the scenarios, the possible reflections on the opinion are as follows:

i. Modified opinion: The auditor must modify the opinion due to material misstatement. Given the fundamental nature of the going concern assumption, the modification is likely to be a qualified opinion (if the misstatement is material, but not pervasive) or, more likely, an adverse opinion (if the lack of disclosure is judged to be pervasive to the users' understanding of the financial statements).

ii. Basis for opinion section: The Basis for Opinion section of the audit report must explicitly state that the financial statements are materially misstated because management has failed to disclose the nature and future impact of the material uncertainty related to going concern. On the attitude to the disclosure, the management of a client company will probably be reluctant to include a disclosure about material uncertainty in relation to the going concern assumption. There are several reasons for this:

i. admitting that there is material uncertainty about whether the company can continue as a going concern for the next 12 months can be seen as a sign of management failure. Management will probably be reluctant to admit their responsibility for failure to the company’s shareholders;

ii. a statement that there is material uncertainty about the ability of the company to continue in business will make the situation even worse for the company. Banks will be reluctant to lend more money and may withdraw existing lending facilities. Suppliers may be reluctant to supply more goods without a credit guarantee (which the company would have to buy from an insurance company). Customers may stop buying the company’s products due to concern that the company will not be in existence to provide after-sales service;

iii. employees will become more concerned about job security, and many might look for jobs with other employers. Staff turnover, would, therefore, increase.

iv. it is also possible that management does not accept that there is material uncertainty about the ability of the company to continue in business. There could therefore be genuine disagreement between management and the auditor on this issue; and

v. If management refuses to provide suitable disclosure, the audit opinion shall be modified.

c. Indicators of possible management bias in estimates that must be challenged by auditor

i. Changes in an accounting estimate, or the method for making it, where this is a subjective assessment.

ii. Use of an entity’s own assumptions for fair value accounting estimates when they are inconsistent with observable market place assumptions.

iii. Selection or construction of significant assumptions that yield an estimate which favours management objectives.

iv. Selection of an unduly optimistic or pessimistic estimate.

v. Management’s refusal to engage an expert in the area.

d. The form of Audit Report where the use of the going concern assumption is appropriate but a material uncertainty exists

i. Where the auditor considers that the going concern assumption is appropriate, but a material uncertainty exists, he must consider whether the financial statements: ▪ adequately describe the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and management’s plans to deal with those events or conditions; and ▪ disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.

ii. If there is adequate disclosure, then the auditor shall express an unmodified opinion;

iii. The auditor would add a separate section to the auditor's report immediately after the ’Basis for Opinion’ paragraph entitled Material Uncertainty Relating to Going Concern.

iv. The separate section would: ▪ highlight the uncertainty; ▪ draw attention to the relevant note in the financial statements; and ▪ state that the audit opinion is not modified in respect of this matter.

v. A minor amendment would be made in the introductory paragraph of the Key Audit Matters section (if relevant) referring to the Material Uncertainty Relating to Going Concern paragraph.

vi. If there is no adequate disclosure of the uncertainty, then the auditor shall express a qualified or adverse opinion. In this instance, the auditor would not include the separate ’Material Uncertainty Related to Going Concern’ section because the material uncertainty would be fully explained in the ’Basis for Qualified (Adverse) Opinion’ section.

vii. There will be the inclusion of going concern because of material uncertainty If: ▪ the use of the going concern basis of accounting is appropriate, but a material uncertainty exists; and ▪ the auditor considers that adequate disclosure about the material uncertainty has been made in the financial statements. ▪ then the auditor shall express an unmodified opinion and include an extra paragraph in the auditor's report entitled ’Material Uncertainty Related to Going Concern’.

viii. The extra paragraph to be included shall: ▪ draw attention to the note in the financial statements that describe the material uncertainty. ▪ state that these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern; and ▪ state that the auditor’s opinion is not modified in respect of the matter.

Examiner’s report The question tests the candidates’ knowledge of fair value measurement, uncertainties in the financial reporting process and going concern situation of an entity. The question was well attempted by about 70% of the candidates but the performance was just average. The common pitfall was the candidates’ inability to evaluate developments and standards guiding businesses and the reporting of their financial statements. Candidates are advised to be acquainted with developments that impact on entities that are reported on. They are also advised to pay close attention to the Institute’s Study Text and the Pathfinder to enhance their performance in future.

Marking guide Marks Marks

a) The risks the auditors must recognise and consider in auditing the fair value measurement (1 mark each for any 3 points) 3 Specific risks to be recognised by the auditor (1 mark each for any 3 specific risks) 3 6

b) Possible implications for the audit if management refuses to appropriately disclose in the financial statements the existence of a material uncertainty together with management attitude (1 mark each for any 3 points) 3 The reason management may be reluctant to include a disclosure about material uncertainty (1 mark each for any 2 reasons) 2 5

c) Indicators of possible management bias in estimates that should be challenged by the auditor (1 mark each for any 2 points) 2

d) Evaluate the form of audit report to be expected when going concern assumption is appropriate but a material uncertainty exists (1 mark each for any 7 points) 7 Total 20

a. Elements or components of audit expectation gap The term ’expectation gap’ refers to the fact that the public perception of the role and responsibilities of an external auditor is different from his statutory role and responsibilities. The expectations of the public are often set at a level higher than that at which the external auditor actually operates. This is the difference between:

i. the view of the role and responsibilities of the auditors that is held by the users of financial statements; and

ii. the auditor’s actual (statutory) role and responsibilities. The elements/components of expectation gap are:

i. Performance (reasonableness) gap: Users often expect auditors to detect all fraud, illegal acts or to guarantee company solvency. Research and regulatory reviews repeatedly find that many users misunderstand the auditor’s ability to find cleverly concealed fraud or to predict going concern failures. This occurs because of a perception that audit work has fallen below the required standards.

ii. Liability gap: This arises from a lack of understanding about the auditor’s liability and who the auditor may be liable to.

iii. Standards gap: Auditing standards set reasonable-assurance objectives, not absolute assurance; the public often expects absolute assurance. Regulatory bodies (International Auditing and Assurance Standards Board, Public Company Auditing Oversight Board) have examined how audit reporting and standards contribute to misperception.

iv. Knowledge gap: Education levels, financial literacy, and low public awareness of audit scope and limitations feed misunderstandings - many empirical studies in emerging markets (including Nigeria, Morocco, Libya) document significant knowledge gaps and their contribution to public mistrust.

v. Evolution gap: The gap in areas where the audit function needs to develop to meet changing societal demands, are technologies and evolving business complexities.

b. Strategies for closing the expectations gap To reduce the frequency and cost of legal action, and to maintain the image of the audit profession in the mind of the public, it is in the interest of the profession to take steps to close the expectations gap. Strategies that could assist in closing the expectation gap include:

i) attempting to improve the general level of knowledge in the profession and understanding about the audit process. One such attempt has been made with updates to the auditing standards on auditor’s reports published by IFAC in 2015. These updates enhanced the auditor's report to make it more relevant and transparent to users, for example, by introducing a new section on key audit matters, more requirements with regards to reporting going concern and improved descriptions of the responsibilities of the auditor;

ii) ensuring controls over the auditing profession are important in enhancing public confidence, for example: - The European Union requires the audit of companies whose shares are quoted on a stock market in the EU to be conducted in accordance with international auditing standards (ISAs); and

- national oversight bodies such as PCAOB (Public Company Accounting Oversight Board) in USA and FRCs (Financial Reporting Councils) in the UK and Nigeria monitor the compliance of audit firms in their conduct of audits by performing audit inspections;

iii) ensuring significant guidance for auditors and management aimed at increasing quality and addressing issues such as going concern has been issued by standard setters, professional bodies and regulators. There has been an increased focus on corporate governance and the role that Audit Committees play in companies, reducing inconsistencies and enhancing quality;

iv) opening candid communication between internal and external auditors, financial management and the Audit Committee is increasingly seen as critical in helping reduce the expectation gap. Such communication helps the Audit Committee to perform their governance role with the necessary transparency and realistic expectations that will help achieve effective risk management;

v) enhancing communication between the parties and confirmation of their respective roles and responsibilities should be presented in the Audit Committee’s and directors’ reports to the shareholders. This will ensure that users become much more aware of the various parties’ roles and responsibilities beyond the understanding they gain just from the audit report;

vi) hoping that expectation gap will hopefully narrow further as financial reporting participants work together even more effectively to improve the deterrence and detection of financial reporting fraud;

vii) hoping that the level of success in narrowing the expectation gap will vary considerably between territories depending on factors, such as culture, ethics, the level of incidence of governance mechanisms beyond the minimum required by law and regulation and the quality, availability and transparency of corporate reporting;

viii) positioning the audit committees to play a vital role in reducing the expectation gap, given their open and direct relationship with all the key parties, including shareholders, board of directors, internal audit and external audit;

ix) applying enhanced fraud risk mitigation procedures by applying more forensic-style testing in high-risk areas (journals, related parties, unusual transactions), using data analytics across full populations, where feasible. (Note: more testing raises costs, hence must be targeted);

x) ensuring stronger documentation and transparency by explicitly documenting judgment calls and why evidence did or did not support fraud findings; prepare clear internal briefings for regulators if needed;

xi) strengthening audit committees and internal controls improve oversight, reduce fraud risk and narrow the performance gap; and

xii) conducting public education: coordinated outreach by professional bodies and regulators to improve financial literacy about audit since research shows that education reduces the knowledge gap.

Examiner’s Report The question tests the candidates’ knowledge of the expectation gap in the audit processes and the strategies to closing the gap. The question was attempted by about 90% of the candidates, but the performance was just about average. The common pitfall was the candidates’ inability to link the requirements of the question to the scenario presented and poor demonstration of the understanding of expectation gap. Candidates are advised to be abreast of professional developments and with the ICAN Study Text and Pathfinder.

Marking guide Marks Marks 5a Discussion of the elements or components of audit expectation gap Meaning of expectation gap (1½ mark for definition) 1½ Difference/perception of roles and responsibilities of auditors (1½ mark for any 1 role mentioned) 1½ The elements/components of expectation gap (½ mark for any 2 elements mentioned) 1 (1 mark for any 2 elements explained) 2 6 Discussion of strategies that could be implemented by practitioners to close the expectation gap Strategies for closing expectations gap: (1 mark each for any 9 points) 9 Total 15

a. The auditor’s application of information technology in the examination of the financial statements of FedRex:

i. Audit engagement plannings: Audit planning involves identifying the areas to be audited; audit team set up, assigning responsibilities to each audit staff, time allocation, establishing the materiality threshold. There are many aspects of these activities that could be automated and made more efficient with the use of technology. Most available off-the-shelve audit software have capabilities and in-built tools to enhance audit planning activities.

ii. Audit risk assessment: Audit software and advanced data analytics solutions can be used to conduct audit risk assessment – both qualitative and quantitative risk assessments. For instance, in conducting quantitative risk assessment, all that is required is to upload the financial information of the client into the audit software and use existing functions to select and compute the relevant ratios, percentages and proportions for the auditor to interprete. In some cases, the results from the computations are given interpretation by the software and made available for the auditor to review and exercise human judgement.

iii. Evaluation of internal controls: After planning and risk assessment, the external auditor is expected to evaluate the operating effectiveness of internal controls which would most likely include computer controls. The only viable means to evaluate computer or IT controls is using computer assisted audit tools (CAATs). Many audits software are built with the capacity to test IT controls to ascertain their level of adequacy and operating effectiveness.

iv. Audit substantive testing: Substantive testing involves the use of analytical procedures and test of details to confirm the completeness, accuracy and validity of financial statements amounts and disclosures. Ratios and trend analysis can easily be carried out by auditors using software. Also automated audit solutions could be used to prepare and serve circularisation letters to obtain third party confirmations.

v. Audit reporting: Auditors normally use word processors and spreadsheets to compile their reports at the end of the exercise. However, modern audit software has embedded reporting modules that could be used by the auditor to put together relevant reports to users. With the help of the reporting modules of these applications, the auditor could convert aspects of his findings into diagrams and pictures which are easier to understand by the executives.

vi. Data analytics/CAATs: The use of specialised software to analyse the reported $150 billion revenue (a 65% increase) derived from digital payments.

vii. Automated data feeds: The use of automated bots and scripts to pull exchange price data from multiple crypto platforms to independently assess the fair value range of the N120 billion crypto holdings.

viii. System review: Reviewing and testing controls over FedRex's critical IT infrastructure, including access controls to the mobile wallet services and the encryption/security controls over customer data.

ix. Testing logic: Testing the programming logic of the stable coin (PX-coin) system and the peer-to-peer lending collateral mechanism to ensure transactions are recorded accurately and completely, based on the programmed rules.

x. Cryptographic verification: Utilising cryptographic tools to independently verify the existence of the N600 billion in customer crypto assets under custody on the public blockchain ledger.

xi. Private key attestation: Applying cryptographic procedures to verify that FedRex possesses the private keys (cryptographic control) necessary to access and move the verified wallet balances.

b. i. Blockchain technology became popular globally through the advancements in digital currency transactions, such as Bitcoin. Many businesses now leverage blockchain technology to record their financial and non-financial transactions in an open, secured and decentralised ledger. Blockchain technology fundamentally changes the audit environment by altering how transactions are recorded, authenticated, and secured.

ii. Where the auditors are made part of the transaction flow and given access to the data chain, it makes it possible for them to see each transaction as they occur and be able to advise the client in real time.

iii. Blockchain enables smart contracts, protecting and transferring ownership of assets, verifying people's identities and credentials;

iv. Once blockchain is widely adopted, and challenges around industry regulation are overcome, it will benefit businesses by reducing costs, increasing traceability, and enhancing security.

v. There is an increasing fear that with blockchain, auditors may no longer be useful since the transactions are recorded in an open and distributed ledger where every party’s consent is required for the recording to be complete.

vi. Blockchain creates a distributed, immutable ledger. This inherently reduces the risk associated with transaction completeness and accuracy, as data recorded is verifiable and cannot be unilaterally altered, making transaction history more reliable.

vii. With blockchain, auditor's focus shifts away from extensive testing of the historical record of transactions and toward verifying the smart contracts (the self-executing business logic) and the integrity of the initial data entry onto the blockchain.

viii. Blockchain creates a demand for specialised assurance services, such as auditing the code of smart contracts and providing assurance over digital asset control (as seen in the PoR engagement).

ix. The real-time, transparent nature of the ledger facilitates the development and deployment of continuous auditing techniques, allowing auditors to monitor transactions and controls constantly rather than relying on year- end sampling.

x. The chain provides a full, verifiable audit trail of asset ownership (provenance), which enhances the ability to trace assets and transactions.

Examiner’s Report The question tests the candidates’ knowledge of the application of information technology in the audit process and examination of financial statements The question was attempted by most of the candidates and the performance was average. The common pitfall of the candidates was their inability to exhibit proper knowledge of the application of Information Technology in preparing financial statement and offering assurance services. Candidates are advised to read relevant materials on information technology and assurance provision when preparing for subsequent examinations.

Marking guide Marks Marks 6a. The external auditor’s application of information technology in the examination of financial statements of FedRex and providing assurance report over the PoR Auditor’s application of information technology in the examination of the financial statements (½ mark each for any 5 points mentioned) 2½ (1½ mark each for any 5 points explained) 7½ 10

b. The impact of blockchain technology on audit and assurance services (1 mark each for any 5 points) 5 Total 15

a. An audit strategy is the overall approach that the auditor decides to take for an audit, from which a detailed audit plan can be developed. The audit strategy determines the scope, timing, and direction of the audit, essentially deciding the planned reliance on internal controls (control reliance approach) versus direct testing of balances (Substantive Approach). The auditor's choice of strategy should be influenced by the following factors:

i. Risk assessment: This is the auditor's assessment of the risk of material misstatemnt (RMM) at the assertion level. If the risk of material misstatement (RMM) is assessed as low, a control reliance approach may be chosen, if RMM is high (as implied by BISI's weak controls), a purely substantive approach is adopted.

ii. Effectiveness of controls: The initial assessment and subsequent testing of the client's internal controls. The control reliance approach is only suitable if controls are strong and reliable (BISI's controls were weak - manual records/outdated software - making reliance inappropriate).

iii. Cost-benefit analysis: The relative cost-effectiveness of testing controls versus performing extensive substantive procedures. For large volumes of highly automated transactions, the control reliance approach is often more efficient.

iv. Nature and complexity of operations: Complex transactions and the use of outdated manual records (as in BISI) usually necessitates a high degree of substantive testing, due to the high inherent risk.

v. Information technology environment: The sophistication and reliability of the IT system. Manual records and outdated software increase complexity and lower the reliability of controls, demanding less reliance.

vi. Size and nature of the client’s business: Client’s business might be small or large and this may affect the choice of audit strategy that may be applied by the auditor during the course of his audit. A business risk approach is best suited for large companies, and a statement for financial position approach is usually the most suitable for small companies.

vii. Control environment in place: Where management does not have good attitude and awareness towards the establishment of sound internal control system within an entity, a substantive test approach would be appropriate for the audit strategy to be applied.

viii. The audit methods and techniques favoured by the audit firm: For example, larger audit firms may favour a business risk approach.

ix. Materiality of items involved.

b. The auditor must obtain sufficient appropriate audit evidence (ISA 500). Appropriateness refers to the quality of the evidence, determined by its relevance and reliability. The reliability of audit evidence is determined by the following principles:

i. Source independence: Evidence obtained from independent sources outside the entity (for example, bank confirmations, external valuation reports) is generally more reliable than evidence obtained solely from the entity;

ii. Internal control effectiveness: Evidence generated internally is more reliable when the entity’s related controls (for example, controls over inventory counting or receivables recording) are effective. In BISI's case, the weak controls undermine the reliability of the internal records;

iii. Direct knowledge: Audit evidence obtained directly by the auditor (for example, physical observation of inventory, recalculation of depreciation) is more reliable than evidence obtained indirectly or by inference (for example, through management representation);

iv. Documentary form: Evidence that exists in documentary form (paper or electronic) is more reliable than evidence obtained orally (for example, verbal inquiries to management).

v. Originality: Original documents (contracts, invoices) are more reliable than copies or facsimiles.

vi. Consistency of evidence: Evidence obtained from different sources or of different natures that points to the same conclusion is more reliable than evidence that contradicts other evidence;

vii. Expertise: When information is provided by a qualified expert (for example, a valuer or actuary), that evidence is more reliable than that provided by management alone, provided the expert is objective and their work is understood by the auditor;

viii. Timeliness: The reliability of evidence is enhanced when it is obtained from a period close to the date of the financial statements (for example, obtaining a stock count on the balance sheet date is more reliable than a count six months prior);

ix. Cost-benefit consideration: Auditors weigh the persuasiveness of the evidence against the cost of obtaining them. However, difficulty or expenses is not a valid basis for omitting a necessary audit procedure for which there is no problem.

x. Professional judgment: The determination of what constitutes sufficient appropriate evidence is a matter of professional judgement.

xi. Professional skepticism: Auditors must maintain a questioning mind and critically assess audit evidence, being alert to any contradictory information or circumstances that might cast doubt on the reliability of documents and responses from management.

Examiner’s Report The question tests the candidates’ knowledge of the requirements of audit strategy and audit evidence gathering. About 80% of the candidates attempted the question but the performance was average. The common pitfall was the candidates’ inability to demonstrate relevant knowledge of standards and processes applied in auditing. The candidates are advised to study relevant materials before entering for examinations.

Marking Guide Marks Marks

a. The factors the auditor should consider in the choice of audit strategy Definition of Audit strategy (1 mark for definition) 1 Factors that influenced the choice of audit strategy to be used by auditor (1 mark each for any 4 points) 4 5

b. The principles set out to assist the auditor in assessing the reliability of audit evidence (1 mark each for mentioning any 5 points) (1 mark each for discussing the 5 points mentioned) 5 5 10 Total 15 Examination ICAN/252/V/C3 No............... INSTITUTE NSTITUTE OF OF CHARTERED CHARTE ACCOUNTANTS OF NIGERIA PROFESSIONAL NAL LEVEL LEVEL EXAMINATION EX – NOVEMBER 2025 STRATEGIC STRATEGIC FINANCIAL FIN MANAGEMENT EXAMINATION INSTRUCTIONS PLEASE READ D THESE THESE INSTRUCT INSTRUCTIONS BEFORE THE COMMENCEMENT OF T

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