Advanced Audit, Assurance and Forensics · May 2026

(a) In accordance with ISQM 1 (Quality Management for Firms that Perform Audits or Reviews of Financial Statements), a firm must design, implement, and operate an ISQM to provide it with reasonable assurance that:

i. it has a road map for quality that will create awareness for value and uphold quality in the way the firm discharges its duties. This will increase the revenue of the firm and help to reduce waste or cost;

ii. it will help to ensure compliance with standards, build trust, make for consistency and transparency with clients and other stakeholders. This will help to build the image of the firm;

iii. it will help to identify areas requiring improvement to make the firm relevant as business operations change. This will add value and provide a proactive approach to responding to challenges, and will enable the firm to align operations with emerging issues and challenges;

iv. it will help to provide the firm with an objective evaluation of business processes and enlighten clients on what they need to do to enhance their business operations. It provides strong evidence that reports are based on thorough analysis. The clients will take the firm’s report seriously and may encourage the firm to get more referrals from the clients;

v. when personnel understand the process, they are motivated to achieve greatly, build team spirit, productivity and improve the learning curve. This may eventually improve the turnaround time;

vi. early identification, assessment and effective management of the problem will help to reduce risk and prevent avoidable mistakes. It will also help to prevent customer dissatisfaction and reputational damage as the quality work will reveal whether the control environment is robust and working as expected; and

vii. having a robust quality process will lead to quality service delivery. This will be a selling point in positioning the firm for competition. 133

(b) Principles of quality management for audit and assurance engagements

i. Meeting and exceeding the expectations of clients: The firm should be client-focused by identifying their needs and striving to always provide exceptional service, working with them as business partners.

ii. Ensuring the existence of leadership skills that guide and motivate others.

iii. Providing vision to invest in the growth of personnel and their work with a collaborative mind.

iv. Encouraging every member to have a good sense of belonging and a committed mind: Having an environment that drives staff commitment and improvement that gives opportunity for career progression, recognises individual differences and rewards excellent performance.

v. Ensuring a proactive organisation where all work towards stipulated goals that will produce consistent and outstanding results: Have an environment that allows for creativity and allows for constant update and improvement for outstanding results.

vi. Having an organisation that always strives for continuous improvement: The organisation should perform root cause analysis and work on issues that will lead to robust performance.

vii. The organisation should have a robust database for effective decision- making: There should be reliable information which should form the bedrock of developing a sustainable plan. Having convincing evidence to understand the cause will help to reduce uncertainty and allow understanding of the effect.

viii. There should be good relationship management with all stakeholders: The goal of the firm and the clients should be harmonised, and the line of communication should be kept open for an effective relationship.

(c) The components of a system of quality management in a firm

i. The risk assessment process: The firm shall gain an understanding of issues that can militate against performing quality engagements and take into account how action or inaction may affect the achievement of the objectives of the firm. The firm shall institutionalise policies and procedures that can lead to additional quality objectives and consider such when necessary. 134

ii. Tone at the top: There should be leadership responsibilities for the system of quality control. Leadership should be accountable and committed to quality by providing structure and support for the internal culture of compliance with global requirements of quality. The tone at the top should promote a quality-oriented internal culture based on clear, consistent and frequent actions and messages from all levels of management, emphasising quality control policies and procedures.

iii. Ethical requirements: The firm and its network should ensure a proper understanding of relevant ethical requirements and how they are applied to all its engagements. It should show responsiveness to the identification of what constitutes threats to ethical requirements and independence. It should also ensure that staff who work on engagements complete a form indicating compliance with independence issues. The firm should assign relevant partners and staff to engagements in line with International Standards and applicable legal and regulatory requirements.

iv. Inquiries should be made to ascertain that individuals participating in an engagement have no issues of personal conflicts. Conflict checks should be performed on all prospective engagements to identify potential conflicts of interest. Once the relationship is identified, such a relationship should be assessed.

v. Acceptance and continuance of client relationships on engagements: There should be guidelines for acceptance and continuance of engagement through assessment of the credibility of those charged with governance and the ability of the firm to deliver on the engagement, according to high levels of professional standards.

vi. Fee should not be a primary consideration for engagement acceptance and continuance, especially when quality is likely to be compromised.

vii. Engagement performance: The firm should ensure that the partner takes responsibility for assigned tasks by his involvement and commitment to the engagement. He should ensure adequate resources are available. There should be prompt direction, supervision and review, so that issues can be resolved timely. The engagement assigned partner should ensure that the engagement team maintains professional scepticism throughout the audit. Consultation on grey areas and issues of differences of opinion should be promptly addressed. Currently the engagement partner acknowledges responsibility in the audit report. 135

viii. The engagement team should ensure gathering and documentation of sufficient appropriate evidence, which should be maintained in compliance with the firm's ethical requirements, professional standards, relevant laws and regulations.

ix. Resources: The firm should ensure that appropriate resources are available for the engagement, and they are well-maintained to prevent service disruption. They should ensure any partner or staff assigned responsibility has sufficient knowledge and experience to perform the assigned task. The engagement team members should be well-trained and kept abreast of quality control issues and procedures. The staff members should have the necessary authority to implement the policies and procedures given for the assigned task. The staff should be well compensated.

x. Information and communication: The firm should institute a culture of maintenance of relevant and reliable information channel that supports the system of quality management, and to be shared within the firm and with other identified stakeholders. There should be procedures in place where there is a need to share information with third parties, whether required by law or legislation.

xi. The monitoring and remediation process: There should be monitoring activities for the purpose of identifying areas of weakness. There should also be a culture of procedures for remediation on files with deficiencies from practice review results within a time frame. Partners who have practice review deficiencies on their engagements should be prevented from supervising Public Interest Entities (PIE) and from acting as Engagement Quality Reviewers on big engagements, pending the remediation of the deficiencies. The firm should ensure the performance of root cause analysis and develop actions to address the identified deficiencies.

(d) The responsibilities of the Engagement Partner regarding quality management i. He should consider all sensitive information gathered during the acceptance and continuance process of the audit, during the planning and implementation of the audit.

ii. He is responsible for the overall direction, supervision and review of the audit. It is his duty to set and ensure adherence to the nature, timing and extent of audit work done. 136

iii. He should ensure the competence and capabilities of the team members, as well as the specialists. He should allow sufficient time to be allocated to the engagement team for execution of assigned tasks. He should communicate with the appropriate team or firm resource personnel for additional hands, if the resources assigned or made available are insufficient or inappropriate in the circumstances of the engagement.

iv. He has the responsibility to delegate and ensure more experienced members on his team, direct, supervise and review the work of less experienced members of the engagement team. Regardless of this, he should constantly monitor and ensure proper management of the audit for the achievement of quality on the engagement, as he has the overall responsibility for the work.

v. The Engagement Partner is responsible for accountability for the engagement as well as ensuring compliance with provisions of ISQMI and Quality Control for an Audit of Financial Statements (ISA 220).

vi. He has the responsibility for ensuring proper review of all audit documentation, as well as the financial statements, the auditor’s report, the management letter, and reports to those charged with governance or regulatory authorities. He should ensure that there is sufficient appropriate evidence to support the audit work conducted.

vii. In case there is an issue with the audit work done and remediation has to be made on the working paper file, he should anchor the remediation process as instituted by the firm. He should be abreast of all necessary information required for the monitoring and remediation process on the file.

viii. There should also be appropriate documentation of his involvement in the engagement by: ➢ ensuring progress meetings between the engagement team, specialists and the client. This will ensure that all significant and judgmental areas are satisfactorily resolved; and ➢ conduct periodic visits on the field and engage with the audit team and the client to resolve key audit issues. 137

ix. If an Engagement Quality Reviewer is appointed on the engagement, he should work closely with the reviewer to ensure he performs his duties to enhance the quality of the file. He should schedule meetings and ensure all issues raised are attended to by the engagement team.

e. (i) Scenarios that can impact the integrity, objectivity, independence professional competence and due care, confidence and professional behaviour of FFO & CO. ▪ Self-interest threat: This arises when the audit firm has a financial interest or other interest in a matter. Typically, this means that the firm’s decisions might be influenced by self-interest, and the firm will, therefore, not act with objectivity and independence. ▪ Self-review threat: This occurs when a firm is required to review or re- evaluate (for a different purpose) a previous judgment it has made or action that it has taken. Self-review threats can also apply to audit firms, for example; if an audit firm prepared the financial statements for a client company and then acted as auditor, it would be reviewing its own work and would be reluctant to criticise or question it. This would be a threat to objectivity and independence. ▪ Advocacy threat: This occurs when the firm is in a position where it is expected to defend or justify the position of the client, and act as an ’advocate’ for the client’s position or point of view. This would be a threat to objectivity and independence. ▪ Intimidation threat: This occurs when the firm is deterred from acting with objectivity due to threats against this firm, for example, the client may threaten that it will take the engagement away from the firm unless it agrees with the point of view of the client's management. ▪ Familiarity threat: This occurs when the firm becomes to sympathetic with the client’s position due to close relationships. Examples of this type of threat include: ▪ long association – when this audit firm is engaged over many years in carrying out the annual audit and becomes overly trusting of the client; 138 ▪ when a member of the engagement team has a family or personal relationship with someone at the client’s office who can exercise significant influence on the financial statements; and ▪ where there is an interchange of employees between the firm and the client. Procedures that can be put in place to manage these ethical threats ▪ Rotation of the engagement partner and of senior staff. Rotation means that an individual should not be involved in the annual audit of the same client company for more than a maximum number of years as specified by relevant laws and regulations. ▪ Appropriate training. This includes training in how to maintain an independent opinion during audit work. ▪ Quality control procedures. A firm shall have procedures for quality control to ensure that independence is considered in respect of all work undertaken by the audit firm. ▪ Consultation procedures. A firm shall have internal procedures for consultation, whereby questions arising in relation to independence can be discussed.

(ii) As a component auditor, FFO & CO., would be required to submit a Report of work performed that would include: ▪ a statement of compliance with ethical and group auditor requirements; ▪ identification of the financial information on which the component auditor is reporting; ▪ any instances of non-compliance with laws and/or regulations which could lead to a material misstatement of the group financial statements; ▪ a list of uncorrected misstatements of the financial information of the component auditors; ▪ indicators of possible management bias; ▪ any identified material weaknesses in internal control; ▪ any other significant matters the component auditor expects to communicate to those charged with governance of the component; 139 ▪ any other matters that may be relevant to the group audit; and ▪ the component auditor’s overall findings, conclusions and opinion.

Examiner’s Report The question tests candidates’ knowledge of quality management of an audit engagement. This being a compulsory question, all the candidates attempted it and the overall performance was above average. The commonest pitfall of the candidates was their display of poor understanding of various aspects of the quality management practices expected on an engagement and the firm in general. Candidates are advised to acquaint themselves with quality management practices relating to engagements and also read the Institute’s Study Text and Pathfinders which are freely available on the Institute’s website.

Marking Guide Marks Marks a. Evaluation of the purposes of quality management that are expected in your firm’s quality control system (1 mark each, subject to a maximum of 3 points) 3

b. Identification and discussion of the principles of quality management of audit and assurance (1 mark each, subject to a maximum of 5 points) 5

c. Discussion on the component of a system of quality management (1 mark each, subject to a maximum of 6 points) 6

d. Identification of what should be the responsibilities of your firm’s engagement partner regarding quality management (1 mark each, subject to a maximum of 4 points) 4

e. i. Discussion on what you would include in the framework to demonstrate that the firm, FFO & Co. has the capacity to conduct its activities in a matter that can impact integrity, objectives and independence (1 mark each for any 3 threats and 3 safeguards mentioned) 6 140

ii. Typical reports issued by component auditors, considering communication (1 mark each, subject to a maximum of 6 points) 6 12 Total 30

a. The areas to be covered by the audit planning memorandum for the audit of the bank

i. Risk assessment: The engagement should be risk-based. The efforts of the auditors should be geared towards ensuring that what may lead to material misstatements in the report or may mislead the users of the financial statements are in focus and well addressed during the exercise. It is to be noted that risk assessment is iterative or continuous as the engagement progresses.

ii. Objectives: The objectives of the engagement will show the areas to be covered, that is, whether statutory, compliance, internal control review and value for money. The efforts should meet the requirements of the stipulated objectives.

iii. Users of the financial statements: The engagement should meet the needs of the board of directors, audit committee, management and regulators. There could be areas of attention that the board of directors expects the engagement to focus on. The laws and regulations expect certain disclosures, which may lead to sanctions if not well addressed. There is a need to establish focus areas based on these parameters.

iv. Available resources: The audit firm should consider the expected audit time set, the budget, the competence of the engagement team, and their specialists. No engagement should be embarked upon without considering the efficient use of the resources to be deployed on the assignment. There is the need to ensure that no unrealistic expectations are set.

v. Materiality and significance: The engagement to be carried out should not lose focus on areas with material account balances, both qualitatively and quantitatively. The engagement team should focus on areas that are 141 significant enough to influence the decisions of the users of the financial statements. The auditor makes use of a materiality threshold, which helps to guide his/her work to prevent material misstatement.

vi. Compliance with applicable standards: The engagement team should ensure that requirements of enabling laws, regulations and standards are complied with. To ensure quality, uniformity and comparability, the standards expect that all organisations should conduct their businesses by ensuring compliance with laws and regulations to avoid sanctions, security breaches, penalties and reputational damage. Omission of the requirements of the standards may render the audit report misleading and not fit for use.

vii. Previous findings: The engagement team should bring into focus prior- year findings which have not been addressed and which require follow- up. For audit or other engagements, regulatory, internal audit and other identified findings could give useful information that calls for focus to ensure presenting a report that is not misleading. Some sensitive findings earlier identified need to be critically reviewed and followed up to ensure that the organisation works towards addressing the issues to prevent a negative effect on the bank.

viii. The audit timetable is to meet the required reporting deadlines for the auditor’s report.

ix. Changes in the client’s organisation or business, or external (environmental) changes affecting the client’s business, since the previous audit.

x. A summary of key financial ratios and other ratios from previous years.

xi. Planning decisions for the audit.

xii. The use that will be made of the client’s staff in the audit (for example, internal auditors) and the external experts. 142

xiii. Possible problem areas in the audit and the approach to be adopted to deal with them.

xiv. Proposed methods of communication with the client (for example, meetings/reports).

(b) The issues for the auditors to consider when assessing the objectivity of an expert includes whether:

i. the expert has a financial interest in the audit client, for example, a shareholding;

ii. the expert has a personal relationship with a senior manager in the audit client;

iii. the fee paid for the expert’s services was a fair commercial price;

iv. the work of the expert provides sufficient and appropriate evidence for the audit purposes;

v. the auditor should review the terms on which the expert was engaged by the audit client, such as the objective and scope of the expert’s work and whether the expert was notified that his work may be relied on by the auditors;

vi. the auditor should obviously study the content of the expert’s report and the conclusions that the expert reached. Any assumptions used by the expert may be significant (for example, in making an asset valuation), and the auditor should compare those assumptions with their own understanding of the audit client’s business;

vii. the auditor may also need to check the methods used by the expert. For example, for the valuation of investment property, the method of valuation used should be consistent with the requirements of (International Accounting Standards) IAS 40; 143

viii. the expert has been used to provide a valuation, the date of the valuation should be close to the end of the financial year of the audit client (so that it is up-to-date and current).

c. Procedures for gathering audit evidence

i. Inspection: Physically examining an asset, like a vehicle, provide strong evidence for its existence, though not its value or ownership. Inspection of entries in accounting records of documents (for example, invoices).

ii. Observation: Watching a procedure (for example, physical inventory and cash counts, distribution of wages, opening of mail). This is limited to the point in time when the observation takes place. This allows the auditor to directly see how the count is being performed and assess the reliability of the company’s procedures.

iii. Inquiry: Seeking information from knowledgeable persons inside or outside the entity, evaluating responses to those inquiries, and corroborating those responses with other audit evidence.

iv. External confirmation: A specific type of inquiry – seeking confirmation from a third party (for example, a bank or loan customer, trade payable or trade receivable). It is the process of obtaining evidence directly from a third party in written form. A common example is when an auditor sends a request to a company’s bank to confirm its account balances and loan details. Confirmations are also used to verify accounts receivable balances with customers.

v. Recalculation: An auditor might recalculate the depreciation expense for a sample of assets to ensure it aligns with the company’s stated policy. This procedure provides strong evidence regarding the accuracy assertion. Checking the mathematical accuracy of documents or records (For example, adding up the list of year-end loan portfolio or trade receivables)

vi. Reperformance: Independently carrying out procedures or controls which were originally performed by the client (for example, reperforming the ageing of year-end loan balances or trade receivables). 144

vii. Analytical procedures: Evaluating and comparing financial and/or non- financial data for plausible relationships and investigating unexpected fluctuations, for example, comparing last year’s gross profit percentage to this year’s and ensuring any change is in line with expectations.

d. Factors that may affect the identification of an appropriate materiality benchmark include the following: i. the elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);

ii. whether there are items on which the attention of the users of the entity’s financial statements tends to be focused (for example, for the purpose of evaluating financial performance, users may tend to focus on profit, revenue or net assets);

iii. the nature of the entity. Where the entity is in its life cycle, and the industry as well as the economic environment in which the entity operates;

iv. the entity's ownership structure and the way it is financed (for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity's earnings); and

v. the relative volatility of the benchmark.

Examiner’s Report The question tests candidates’ knowledge of audit planning memorandum, identification of issues to consider when assessing the objectivity of an expert, the procedures for gathering audit evidence and the factors that may affect the materiality benchmark for an audit. The question was attempted by about 80% of the candidates but performance was just average. The commonest pitfall was the poor understanding of engagement procedures for both the client’s engagement and the use of an expert for aspects of the engagement. Candidates are advised to pay close attention to the requirements of the question and ensure adequate preparation in order to identify the relevant features of the question. They are also advised to study properly the Institute’s Study Text and Pathfinders for future examinations. 145

Marking Guide Marks Marks a Discussion on the areas the audit planning memorandum should cover (1/2 mark for each subject to a maximum of 10 points) 5 b Identification of the issues needed to be considered when assessing the objectivity of expert (1 mark for each point, subject to a maximum of 5 points) 5

c. Description of the main procedures with examples, that relate to gathering audit evidence (1/2 mark for each point, subject to a maximum of 4 points) 2 (1 mark for each explanation subject to a maximum of 4 points) 4 6

d. Discussion on the factors that may affect the Identification of an appropriate materiality benchmark (1 mark each for each points, subject to a maximum of 4 points) 4 Total 20

(a) Factors the board of directors need to consider when the entity wants to outsource its internal audit function.

i. The outsourced accounting firm must have a greater level of independence than the entity’s own internal audit staff. If the firm handling the outsourcing function is not properly independent from the executive management of the entity, it should not be given any internal audit work. 146

ii. The outsourced accounting firm should have access to more highly trained, specialist employees.

iii. The outsourced accounting firm should have more employees available for any urgent internal audit assignments.

iv. The professional code of conduct and standards of behaviour should regulate outsourced the accounting firm. This might not be the case with an in-house internal audit department.

v. The outsourced firm should have professional indemnity insurance to meet claims for losses due to negligent work as if may be sued for breach of contract or for negligent work.

(b) The importance of the internal audit function to the organisation:

i. Internal audit helps management to monitor the controls within their entity. As entities increase in size and complexity and become global in nature the task of monitoring controls becomes more difficult. An internal audit function helps management to monitor these controls.

ii. Similarly, as markets become increasingly competitive, it is important that entities should be very competitive themselves. This means using resources efficiently and effectively. An internal audit function can be used to monitor the efficiency of operations.

iii. In many countries, there is a large amount of statutory and accounting regulations, including corporate governance regulations. An internal audit function can be used by management to check on compliance with laws and regulations.

iv. Many entities use complex IT systems. Specialist internal auditors can help management to review the effectiveness of controls within information technology (IT) systems (by means of IT audits).

v. The increasing cost of the external auditor’s services means that it may be cheaper to use internal auditors to perform routine audit tasks whenever possible.

vi. Work not related to the external audit that might otherwise be given to an external firm of accountants as non-audit work could be given to the internal auditor. 147

viii. The existence of an internal audit department may enhance the reputation of the entity for sound corporate governance in the opinion of customers and investors.

(c) Disadvantages with outsourcing the internal audit function to external accounting firm

i. Professional firms are not under the control of the entity in the same way as their ’in-house’ internal audit employees. The outsourcing arrangement needs to be effectively managed and controlled by the organisation.

ii. Fees for internal audit work can be high.

iii. Professional firms may not have the same level of detailed knowledge of the entity and its operations that ’in house’ internal auditors (working in the organisation on a daily basis) should have. The service provider may not understand the requirements of the entity in respect of the service that it is providing. If the work is not properly specified, the service provider may fail to do all things that the entity requires it to do.

iv. There may be threats to the independence of the external audit where the firm acts as both internal auditors and external auditors.

v. The entity relies on the service provider to do its work on time and have it ready at the time that the entity requires it. This means that management must carry out regular reviews of the service level and service quality provided. In general, this is particularly important, for example, when payroll operations are outsourced. This means that management must carry out regular reviews of the service level and service quality provided.

vi. If the external auditor must review their own internal audit work, efforts are duplicated creating unnecessary cost to the client.

Examiner’s Report The question tests candidates’ knowledge of the factors to be considered in the outsourcing of internal audit functions, the importance of internal audit functions to an organisation, and the disadvantages of outsourcing the internal audit functions. The question was attempted by more than 60% of the candidates and performance was less than average. 148 The commonest pitfall of the candidates was their inability to demonstrate understanding of the differences between outsourcing the internal audit and the process of outsourcing. Candidates are advised to read the Institute’s Study Text and Pathfinders to enhance their performance in future.

Marking Guide Marks Marks a. Analyse of the factors to be considered when the entity wants to outsource its internal audit functions (1 mark each, subject to a maximum of 5 points) 5

b. Discussion of the importance of internal audit functions to the organisation (11/2 marks each, subject to maximum of 5 points) 71/2

c. Evaluation of the disadvantages of outsourcing internal audit functions to an external audit firm (11/2 marks each, subject to maximum of 5 points) 71/2 Total 20

(a) Issues to be considered before accepting sustainability assurance, including ethical and professional considerations Aside the fact that it is either a reasonable or limited assurance engagements, the process for accepting sustainability reporting and assurance is similar to other engagements. The risk-based approach should be employed in performing the engagement acceptance process. Consequent to this, the practitioner has to:

i. ensure following formal acceptance and continuance procedures that are in alignment with the firm’s policy. The practitioner should ensure that relevant ethical issues, including independence, will not be compromised by both the engagement team and the specialists. Background check 149 should be conducted on the directors. The risk associated with the engagement should be assessed and properly analysed;

ii. ensure that there is no scope limitation that will lead to modification of the conclusion expressed on the engagement and that quality management will be in place to ensure the standard will not be compromised. There may be need for the appointment of quality assurance reviewer.

iii. set terms of engagement with the client by the use of letter of engagement which will be the responsibility of both the directors and the practitioner. This will provide common understanding on the engagement by both parties. Also, the basis of reporting and conclusion will be stated in the terms of the engagement, for example, the need to ensure compliance with International standards on sustainability assurance and other standards or laws relevant to the engagement and whether it will be a limited or reasonable assurance conclusion.

iv. ensure that there will be adequate competent resources, including specialists to be put on the engagement. The people that will work on the engagement need to have the necessary skills and time. The Engagement Partner shall take responsibility for the quality of work to be performed.

(b) Process for sustainability reporting and assurance

i. There is the need to identify scope and objectives of the engagement. The practitioner shall gain a preliminary understanding of the sustainability information and whether the scope covers the whole engagement with no limitation. This will be done by making inquiries of personnel and review on documentation provided. The information obtained should be evaluated to determine whether it is consistent with the information provided for review.

ii. The next exercise is data gathering and analysis by assessing environmental, social, and governance (ESG) impacts. This will help in understanding what to be done through robust planning of work and needed resources. The practitioner shall plan the work with professional skepticism and exercise professional judgement for accuracy to get a true reflection of company’s performance. For effective planning, the practitioner is expected to understand the client’s business, the internal control procedures, the reporting processes, including the information 150 systems and risks relating to sustainability of the business.

iii. There should be evaluation of the sustainability policies and procedures of the organisation. It is important to ensure that the layout or format of the procedures is in accordance with sustainability reporting standards. Effective monitoring will assist in identifying areas for improvements to achieve the stipulated sustainability objectives. The practitioner is expected to perform analytical and substantive procedures on selected disclosures in the financial statement to ensure there are no material variances with the expected.

iv. Ensuring collection of sufficient appropriate evidence to reveal how the conclusion is arrived at. Evidence are gathered through procedures of inquiry, testing and analysis and obtaining third party confirmation where necessary. This will help in developing a robust report on strengths, weaknesses, opportunities, and threats that will give insight on the sustainability activities of the company when presenting the report to those charged with governance for improvement.

v. Ensuring maintenance of proper documentation of work done. This should include section on evaluation of misstatements and control deficiency, communication with those charged with governance, consideration of other information, the assurance report, as any other report. This will give attestation that the opinion which is publicly reported is based on the evidence obtained and documented.

(c) Need for sustainability reporting and assurance

i. It helps to give transparency and accountability to stakeholders that the organisation is aware of their challenges in their environment and it is ready to assist in protecting them especially in relation to provision of amenities. It makes the report to be more credible and reliable. With this, friction between the company and the community will be avoided.

ii. It enables the company to identify and prepare early for likely risks that may arise from climate change, scarcity of resources and societal pressures. It can help the company reduce legal and compliance risks by ensuring compliance with stipulated guidelines, laws and regulations. 151

iii. Boost good decision making: More organised companies are better equipped to comply with increasing regulatory demands on climate change disclosures, customer and other stakeholders appetite for quality products or service which require transparent reporting. This can only be done through business decisions hinged on analysis of performance and assessment of future business risks as guided by sustainability reporting. It helps to support long term decision making.

iv. It helps to make companies to be conscious of efficiency and cost. Areas of energy savings and wastage of resources can be pinpointed and fixed. This will increase returns to investors.

v. It helps to boost the reputation of the company. It shows how the company thinks about its responsibility to the environment where it is situated, its future and it is working in line with international standards. It helps to attract and retain customers and staff who are interested in sustainability.

vi. It helps to boost the reputation of the company and invariably the goodwill.

(d) Ethical Concerns on the use of Artificial Intelligence (AI) in Sustainability Reporting

i. Accuracy and reliability of information: AI systems may generate inaccurate or misleading sustainability information if:

• input data is incomplete;

• algorithms are flawed; and

• data quality is poor.

ii. Bias and discrimination: AI models may produce biased outputs due to biased training data, leading to unfair or distorted sustainability reporting.

iii. Lack of transparency: Some AI systems operate as “black boxes,” making it difficult to understand how conclusions or disclosures were generated. This may reduce stakeholder trust. 152

iv. Data privacy and confidentiality: AI systems may process sensitive corporate and stakeholder information, creating risks of:

• unauthorised access;

• data breaches; and

• misuse of confidential information.

v. Manipulation and greenwashing: AI may be misused to exaggerate sustainability achievements or conceal adverse environmental and social impacts.

vi. Accountability issues: It may become difficult to determine responsibility when AI-generated sustainability reports contain errors or misleading disclosures.

vii. Reduction in professional judgement: Overreliance on AI may weaken human professional skepticism and judgement required in sustainability reporting and assurance engagements.

Examiner’s Report The question tests candidates’ knowledge of the issues for consideration before accepting sustainability assurance engagements, including ethical and professional considerations, the process of sustainability assurance reporting, the justification for sustainability reporting and assurance, and the ethical concerns on the use of artificial intelligence in sustainability reporting. The question was attempted by about 60% of the candidates but performance was below average. The commonest pitfall was the candidates’ inability to properly discuss sustainability assurance services and reporting and the application of artificial intelligence (AI) in the audit process. Candidates are advised to be conversant with the developments that have impacted on auditing and assurance services and read the Institute’s Study Text and Pathfinders to enhance their performance in the future.

Marking Guide Marks Marks a. Evaluation of the issues to be considered before accepting sustainability assistance, including ethical and professional considerations (1 mark each, subject to a maximum of 5 points) 5 153

b. Discussion on the process for sustainability reporting and assurance (11/2 marks each, subject to a maximum of 4 points) 6

c. Justification of the need for sustainability reporting and assurance (1 mark each, subject to a maximum of 4 points) 4

d. Discussion on the ethical concerns on the use of Artificial Intelligence (AI) in sustainability reporting (1 mark each, subject to a maximum of 5 points) 5 Total 20

a. The factors in the case of Clement Nigeria Limited that can raise significant doubt about the entity’s ability to continue as a going concern

i. Recurring operating losses: The company has continuously recorded losses: The loss of ₦3.555 billion for 2023 (2022: ₦2.723 billion loss) indicates that the company may not be generating sufficient profits to sustain operations. ii. Accumulated losses and erosion of equity: The recurring losses have resulted in Increased accumulated losses and erosion of shareholders’ funds. This weakens the financial position of the company.

iii. Negative working capital position: The entity has a net current liability position of ₦19.660 billion in 2023 and ₦16.105 billion in 2022 that suggests potential liquidity difficulties and inability to meet short- term obligations as they fall due.

iv. Weak financial support from parent company: The direct parent company, Wagge Limited, is itself not financially viable to provide adequate financial support. This weakens the reliability of expected financial assistance.

v. Dependence on comfort letter: Management relies heavily on a letter of comfort from the parent company and beneficial shareholders. The 154 comfort letter may not constitute legally enforceable guarantee. The assurance only covers 12 months and there is uncertainty regarding the actual capacity to provide the funds.

vi. Material uncertainty regarding future funding: The company’s continued operation depends significantly on external financial support rather than internally generated funds. This creates uncertainty over future solvency and liquidity.

vii. Low shareholders’ equity: Although equity declined from (₦894 million) to (₦1.102 billion) indicating that the equity remains weaker for the company’s scale of operation.

viii. Financial distress indicators: The combination of persistent losses, liquidity pressure, eroded capital and reliance on shareholders support, constitutes strong indicators of financial distress under ISA 570 (Going Concern).

(b) Audit procedures to assess the going concern status where events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern Where events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor must obtain sufficient appropriate evidence to determine whether in fact a material going concern uncertainty does exist. He does this by performing the following additional audit procedures.

i. Discussion with management: Management should be asked to explain the reasons why they consider the going concern assumption to be valid. They should also be asked about their future plans for the business. If the entity is expecting to make a loss the following year, the possible implications of this for the going concern assumption should be discussed extensively.

ii. Obtain a cash flow forecast: A cash flow forecast should be obtained from the company and this should also be discussed with management. The assumptions in the forecast should be checked and, if appropriate, challenged. If there is a forecast of a cash shortage, the auditor should 155 discuss with management their plans for obtaining the additional financing that will be required.

iii. Review the sales order book: If this indicates a decline in sales orders, the issue should be discussed with management.

iv. Review ageing receivables: Check a list of ageing receivables and assess the average time to pay. If customers are taking longer to pay, this may have adverse implications for operational cashflow.

v. Consider whether planned capital expenditure by the entity may be insufficient to support the business as a going concern in the future.

vi. If key senior employees have left the company in the recent past, the possible implications (for example, the possibility of losing key customers with the loss of the key employees) should be discussed.

vii. Litigation: If the company is involved in continuing litigation, and faces the possibility of having to pay a large amount of money to settle the dispute, the implications should be discussed.

viii. Information from the client entity’s bank: If the client entity is expecting to rely on continuing financial support from its bank (for example, a continuation of its bank overdraft facility) the bank should be asked to confirm that the finance will remain available.

ix. After discussing the issues with management, the auditor should obtain a letter of representation from management confirming their opinion that the entity is a going concern.

x. The financial statements are the responsibility of management, and if the auditor considers that the going concern assumption is invalid whereas management consider it to be valid, the options available to the auditor are to: ▪ discuss the matter with management, having carried out audit procedures to obtain more evidence; ▪ try to persuade management to change its mind and prepare the financial statements on a different basis (a break up basis); and 156 ▪ If management does not agree to change its view, consider making a qualified audit report.

xi. Unless all those charged with governance are also involved in managing the entity, the auditor must communicate to those charged with governance any events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. Such communication must include whether: ▪ whether the events or conditions constitute a material uncertainty; ▪ whether the use of the going concern assumption is appropriate; and ▪ whether the related disclosures in the financial statements are adequate.

xii. If there is a significant delay in the approval of the financial statements, which the auditor believes is due to events or conditions related to the going concern assessment, he must:

- perform the additional audit procedures listed above; and

- consider the effect of this delay on his conclusions.

Examiner’s Report The question tests candidates’ knowledge of going concern considerations from a scenario and the audit procedures when events have been identified that may cast significant doubt on an entity’s ability to continue as a going concern. The question was attempted by about 80% of the candidates but performance was just average. The commonest pitfall was the candidates’ inability to identify going concern issues raised in the scenario that was presented. Candidates are advised to cover the syllabus adequately and read the Institute’s Study Text and Pathfinders when preparing for subsequent examinations.

Marking Guide Marks Marks a. Discussion on the factors that raise significant doubts about the going concern assumptions of the entity. (1 mark each, subject to the maximum of 6 points) 6 157

b. Development of the audit procedures to be carried out, where events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern ( ½ marks each, subject to a maximum of 18 points) 9 Total 15

(a) The component auditor’s report of work performed should include:

i. a statement of compliance with ethical and group auditor requirements;

ii. identification of the financial information on which the component auditor is reporting; iii. any instances of non-compliance with laws and/or regulations which could lead to a material misstatement of the group financial statements;

iv. a list of uncorrected misstatements of the financial information of the component;

v. indicators of possible management bias;

vi. any identified material weaknesses in internal control;

vii. any other significant matters the component auditor expects to communicate to those charged with governance of the component;

viii. any other matters that may be relevant to the group audit; and

ix. the component auditor’s overall findings, conclusions and opinion. (b) Factors to consider by audit firms performing joint audits

i. Each audit firm will need to consider if the other firm is independent, there are no conflicts of interest and the technical competence to do the work as they will be providing a joint opinion.

ii. The two audit firms will need to agree on a joint audit strategy. The joint auditors will need to agree how to co-ordinate their work. This may be difficult if each firm follows different methodologies. 158

iii. Ideally, there will be no duplication of work as this increases costs for the audit client. However, there may be some key areas where this occurs, for example, both firms wish to perform risk assessment procedures.

iv. The audit firms will need to agree how to allocate the audit work. Ideally, one firm will not be dominant, for example, performing 90% of the work. The split of work can be based on a number of factors including:

- number of hours work performed; - the relevant experience of each audit firm; - geographical location of the audit firms in relation to the client premises; and - audit client business sectors.

v. The audit firms will wish to review each other's work as they are both responsible for the audit opinion. It may be difficult to resolve situations where the firms have difference of opinions or feel that the work carried out is not sufficient and appropriate.

vi. Other issues to consider are:

- professional clearance has been obtained from the previous auditors of the new client(if any);

- appropriate anti-money laundering (client identification) procedures are performed;

- fee is sufficient considering the nature and circumstance of the engagement without compromising quality of audit; and

- legal and regulatory compliance has been met.

vii. The engagement will be conducted using the appropriate financial reporting framework as stipulated by the relevant laws and regulations, for example, use of International Financial Reporting Standards.

viii. Management has accepted their responsibilities for the preparation of the financial statements and had instituted suitable internal control mechanism that will ensure that the financial statements will give a true and fair view.

ix. All required information to execute the audit will be made available and the auditor will have access to relevant individual in the company who will provide required audit evidence. 159

(c) Advantages of joint audits

i. The client company may be so large that it requires the services of more than one firm of auditors.

ii. After the acquisition of a large subsidiary, using joint auditors may help the transition process while the group auditors become familiar with the new subsidiary. The ’old’ auditors should be familiar with the business of the subsidiary and should pass their knowledge over to the parent company auditors. For the parent company auditors, this should accelerate the process of getting to know the business of the new subsidiary.

iii. Joint auditors may provide a higher level of technical expertise than either audit firm could provide individually.

iv. Improved geographical coverage may be obtained for the audit, where each of the joint auditors on its own does not have offices that cover all the geographical locations of the component companies in the group.

v. It has been suggested that two medium-sized accountancy firms might ’join forces’ and tender for the audit of a company for which the auditors would normally be one of the ’Big 4’ accountancy firms.

Examiner’s Report The question tests the candidates’ knowledge of group audit with emphasis on the work expected of the component auditor and his report, the factors to consider before accepting engagement in joint audit and the benefits attributable to the client from a joint audit. The question was attempted by about 70% of the candidates but performance was average. The commonest pitfall of the candidates was their inability to differentiate between the respective responsibilities of the parties in a joint audit engagement and reporting on the financial statements in a group audit. Candidates are advised to read relevant materials to enhance their performance in the future. 160

Marking Guide Marks Marks a. Development of the matters the group auditor expects the component auditors to perform and include in their report. (1 mark each, subject to a maximum of 5 points) 5

b. Discussion of the factors the audit firm needs to consider before participating in this type of joint audit and the report the component auditor did. (1 mark each, subject to a maximum of 5 points) 5

c. Assessment of the benefits the client might likely get from a joint audit. (1 mark each, subject to a maximum of 5 points) 5 Total 15

(a) Risk Consideration by an audit firm to accepting an engagement The firm should design and implement risk management strategies and respond to those risks identified prior to accepting an engagement. If the auditor wants to accept an engagement, to firm has to consider the following important issue or matters:

i. Understanding the client and its business: The firm should understand the client and its structure, the industry and the regulatory framework where it operates. It should also ensure management is aware and accepts its responsibility.

ii. Risk of integrity and reputation: There is the need to conduct background checks on those charged with governance and the company’s litigation history to be sure the firm will not associate with people with criminal records. It is also important to assess whether there is any related party relationship or transactions that might likely affect the image of the firm. The background checks should be done through the internet and media search. The firm should check whether there are threats to compliance 161 with the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. There is the need to obtain an understanding of the conditions, events, circumstances, actions or inactions that may adversely affect the performance of quality engagement.

iii. Financial instability: A review of the financial records to reveal the credit status of the company and whether there is any issue on going concern, significant contraventions or breaches of laws, like loan covenants or engagement in money laundering or any other criminal financial activities.

iv. Nature of the client’s operations: There is the need to consider the organisation structure, if they are involved in complex transactions or in highly risky business operations. The firm needs to consider also if it is a public interest entity that is highly regulated or a group entity with complex transactions and business operations. Consideration should be given to volatility of the country’s political environment if it is a public sector engagement.

v. Financial reporting standards and the internal control environment: There is the need to ensure that the entity does not have a history of creative accounting, by not following appropriate accounting frameworks, or have history of wrong interpretation of standards or relevant laws and regulations, for example, tax regulations that have impact, especially on financial reporting. The firm should also assess that they have good book-keeping and accounting records.

vi. There is the need to ensure sufficient and appropriate resources to undertake the engagement: This entails availability of competent human and material resources in terms of well-trained staff and specialists. Consideration of the firms tools vis a vis the entity’s information technology (IT) environment.

vi. Consider compliance with firm’s independence and conflicts of interest requirements: Whether any partner of staff member of the firm has business relationships with the client. Whether the fee on acceptance will not compromise the ability to deliver quality work. Whether there are threats to compliance with the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. There is the need to obtain an understanding of 162 the conditions, events, circumstances, actions or inactions that may adversely affect the performance of quality engagement.

viii. The engagement should not be accepted, if the firm is not convinced of the reason for changing auditor or the client declines the request to communicate with the previous auditor or the previous auditor gives a valid reason why the appointment should not be accepted.

b) Quantitative methods and automated tools and techniques likely to be used on the audit engagement The audit firm may use the following quantitative methods and automated tools and techniques during the audit of Jovial Limited: Quantitative methods

i. Ratio analysis The auditor may analyse ratios such as:

• liquidity ratios;

• debt ratios

• profitability ratios; and

• lease liability ratios. This helps identify unusual trends and financial risks.

ii. Trend analysis comparison of:

• current year figures with prior year balances;

• changes in lease liabilities;

• movement in property values; and

• expense fluctuations.

iii. Materiality calculations Quantitative benchmarks such as:

• Percentage of total assets;

• Equity;

• Revenue;

• Profit or loss; and

• May be used in determining materiality.

iv. Statistical sampling The auditor may use statistical techniques to:

• select lease transactions;

• test payables;

• verify journal entries; and

• examine supporting documents. 163

v. Regression and predictive analysis Analytical models may be used to estimate:

• Expected lease expenses;

• Property income trends; and

• Relationships between occupancy and revenue. Automated tools and techniques include: vi. Computer-assisted audit techniques (CAATs) CAATs may be used to:

• analyse large volumes of lease data;

• recalculate amortisation and interest expenses; and

• identify unusual transactions. Examples include:

• ACL - Audit Command Language

• IDEA - Integrated data extraction analysis

• Excel audit functions.

vii. Data analytics tools Audit software may be used to:

• identify anomalies;

• detect duplicate transactions;

• analyse journal entries; and

• assess trends and outliers.

viii. Automated recalculation tools Software tools can automatically recalculate:

• right-of-use assets;

• lease liabilities;

• interest expenses; and

• depreciation/amortisation under IFRS 16.

ix. Electronic working paper systems The firm may use electronic audit documentation systems to:

• store evidence;

• track audit progress;

• facilitate supervision and review; and

• enhance audit quality.

x. Artificial intelligence and machine learning tools AI-enabled tools may assist in:

• risk assessment;

• pattern recognition;

• fraud detection; and

• document review. 164

xi. Spreadsheet modelling Advanced spreadsheet models may be used to:

• evaluate lease modifications;

• perform sensitivity analysis; and

• model future cash flows.

xii. Document management systems Digital systems may be used to:

• organise contacts and digital records;

• retrieve lease agreements; and

• Maintain audit trails securely.

Examiner’s Report The question tests the candidates’ knowledge of risk management and the response to risk identified during the client acceptance evaluation. The candidates are also required to identify the quantitative methods and automated tools and techniques used on audit engagements. About 50% of the candidates attempted the question and the performance was below average. The common pitfalls were the inability of the candidates to properly discuss risk management practices, the relevant quantitative methods, and the automated tools and techniques in audit. The candidates are advised to be conversant with the quantitative tools and techniques in audit and read the Institute’s Study Text and Pathfinders for better performance in future examinations.

Marking Guide Marks Marks a. Discussion of the risk management practices to be considered in response to risks identified during the client acceptance evaluation (1 mark each, subject to a maximum of 6 points) 6

b. Identify the quantitative methods and automated tools and techniques your firm is likely to use on the audit engagement (1 mark each, subject to a maximum of 6 points) 9 Total 15 165