Examiners often take one balance in a set of accounts, such as a warranty provision, a capitalised cost or a deferred tax asset, and ask how the auditor would audit it. To answer you need two things: the rules of the accounting standard behind the item, and a set of audit procedures that test whether the rules were followed.
This topic gives a method for those questions, a checklist of the main International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) points the auditor tests, the rules for litigation and claims under International Standard on Auditing (ISA) 501, and worked examples. It is a revision aid more than a read-through topic, so use the tables to check your knowledge of each standard.
In 30 seconds
For any specific area, ask three questions: is the item material, what does the standard require that the auditor must test, and how can suitable evidence be obtained. Questions come in three forms. A request for audit procedures wants actions, such as “discuss with management” or “vouch to invoice”. A request for audit evidence wants items or records, such as a copy of a contract.
A request for matters to consider wants materiality, risk and the requirements of the standards. The auditor checks recognition, measurement, presentation and disclosure against the standard for each item. For litigation and claims, ISA 501 requires inquiry of management and in-house counsel, a review of minutes, legal correspondence and legal expense accounts, and, if a risk is assessed, a letter of inquiry to external counsel.
If management refuses permission or counsel will not respond, and no alternative evidence is available, the opinion is modified.
The method
In the exam you must apply the general principles of obtaining audit evidence to specific areas governed by an IFRS or IAS. This means you need to know the detail of the standard. Then consider:
- Materiality. Is the item material to the financial statements?
- Key requirements of the standard. What does the auditor need to test to confirm compliance?
- Evidence. How can suitable audit evidence be obtained to check compliance?
Three forms of question
| The question asks | What your answer contains | Example |
|---|---|---|
| What audit procedures should be carried out? | Actions by the auditor | Discuss with management; vouch to invoice; recalculate; compare with industry |
| What audit evidence would you expect to see? | Items or records on file | A copy of the sales contract; the warranty terms; job cards |
| What matters would you consider? | Materiality, risk and the requirements of the standards | The IAS 37 criteria; the size of the best estimate; the effect on the report |
Discussions with managers about significant matters count as evidence if they are recorded in the working papers.
Checklist of the main standards
The table groups the points the syllabus lists. Use it to prompt yourself on what each standard asks the auditor to test.
| Standard | What the auditor checks |
|---|---|
| IAS 1 Presentation | Going concern basis adopted and appropriate; disclosures if not, or if uncertain; accruals concept; consistent presentation and classification; material classes shown separately; offsetting only as permitted; suitable formats; appropriate notes |
| IAS 2 Inventories | Lower of cost and net realisable value item by item; acceptable costing method (LIFO is not allowed); accurate count; proper treatment of overheads |
| IAS 8 Policies, estimates, errors | Appropriate policies applied consistently; changes in policy and prior period errors restated; changes in estimates applied prospectively |
| IAS 10 Events after the reporting period | Correct definition; adjusting events adjusted; non-adjusting events disclosed |
| IAS 12 Income taxes | Tax liability correctly calculated; deferred tax on all material temporary differences; right rate; deferred tax assets recoverable |
| IAS 16 Property, plant and equipment | Cost determined correctly and allocated to components; capital and revenue expenditure separated; depreciation; revaluations; disposals and gains or losses |
| IAS 19 Employee benefits | Liabilities recognised for service received; expense recognised correctly |
| IAS 20 Government grants | Revenue grants credited when the related expense is recognised; capital grants deducted from the asset or deferred and amortised |
| IAS 21 Foreign exchange | Right rates used; exchange differences on settlement and on year-end monetary items calculated and classified correctly |
| IAS 23 Borrowing costs | Expensed unless directly attributable to a qualifying asset; disclosure of policy, amount capitalised and rate |
| IAS 24 Related parties | Disclosures made so users can see the possible effect (see the earlier topic) |
| IAS 32, IFRS 7, IFRS 9 | Debt and equity classified by substance; compound instruments split; payments classified as borrowing cost or dividend; risk disclosures; recognition and measurement |
| IAS 36 Impairment | Indicators identified; recoverable amounts calculated properly; cash-generating units identified; losses allocated and recorded |
| IAS 37 Provisions and contingencies | All necessary provisions recorded; contingent liabilities and assets disclosed; litigation under ISA 501 |
| IAS 38 Intangible assets | Recognition and measurement; reasonable useful lives; support for indefinite lives; annual impairment reviews |
| IAS 40 Investment property | Cost or fair value model; if cost, IAS 16 principles; if fair value, annual valuations and gains or losses |
| IFRS 2 Share-based payments | Number of employees and options, grant date, vesting period and conditions; cost spread over vesting; reasonable staff turnover assumptions; fair value consistent with any expert valuation |
| IFRS 5 Held for sale and discontinued operations | Definitions properly applied; results quantified and disclosed; assets valued and disclosed |
| IFRS 13 Fair value | Correct principal or most advantageous market; transaction orderly; highest and best use for non-financial assets |
| IFRS 15 Revenue | Contract exists; modifications; distinct performance obligations; significant financing; over time or at a point in time |
| IFRS 16 Leases | Portfolio groupings appropriate; arrangements that are leases in substance; discount rate implicit in the lease, or incremental borrowing rate adjusted for the lease |
The syllabus also lists smaller sets of points for IAS 7 (cash flow presentation), IAS 26 (retirement benefit plans), IAS 29 (hyperinflation), IAS 33 (earnings per share), IAS 34 (interim reporting), IAS 41 (agriculture), IFRS 1 (first-time adoption, with the Financial Reporting Council of Nigeria (FRC)’s guidance), IFRS 6 (mineral exploration), IFRS 8 (segments), IFRS 14 (regulatory deferral accounts) and IFRS 17 (insurance contracts, including aggregation and the actuary’s skills).
The syllabus lists IAS 39 alongside IFRS 9. IFRS 9 replaced IAS 39 for periods starting on or after 1 January 2018, and IAS 39 survives only for the hedge accounting option that some entities still use, so use IFRS 9 for classification, measurement and impairment. IFRS 18 Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board (IASB) in April 2024 and replaces IAS 1 for periods starting on or after 1 January 2027, with early application permitted.
Press reports say the FRC of Nigeria has confirmed mandatory adoption from the same date, but confirm against the FRC notice. The syllabus does not mention it, so check whether it is examined.
Litigation and claims: ISA 501
One section of ISA 501 Audit evidence: specific considerations for selected items deals with litigation and claims. The auditor designs and performs procedures to identify litigation and claims involving the entity that may give rise to a risk of material misstatement. These include:
- inquiry of management and, where applicable, others in the entity, including in-house legal counsel;
- reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and
- reviewing legal expense accounts.
If the auditor assesses a risk of material misstatement for litigation or claims already identified, or if the procedures suggest other material claims may exist, the auditor must also seek direct communication with the entity’s external legal counsel. This is done by a letter of inquiry, prepared by management and sent by the auditor, asking counsel to write directly to the auditor.
If law, regulation or the legal professional body stops counsel from communicating directly, the auditor performs alternative procedures.
The auditor modifies the opinion under ISA 705 if:
- management refuses permission to communicate or meet with external counsel, or counsel refuses to respond properly to the letter or is prohibited from responding; and
- the auditor cannot get sufficient appropriate evidence by alternative procedures.
Litigation is the main part of audit work on contingencies under IAS 37.
The rules in more depth
Why start with materiality
The auditor has limited time. If an item is not material by size or nature, extensive testing is not justified. If it is, the question becomes how reliable the evidence for it must be. In the exam, a short materiality calculation, such as the item as a percentage of total assets or profit, earns marks and shows that you have judged the area.
Why procedures and evidence are separate
A procedure is what the auditor does and evidence is what the auditor ends up with. Examiners mark them separately. If the question asks for evidence and you answer with “vouch to invoice”, you have given an action and lost the mark. Say “a copy of the invoice”.
Why the standard sets the test
An item can be arithmetically right and still be wrong because it breaks the standard. A development cost that does not meet the capitalisation criteria is misstated whatever its total. So the auditor lists what the standard requires and tests each point.
Why counsel’s letter is needed
Management’s view of a legal claim may be optimistic, and the lawyers hold the facts. A direct reply from counsel is independent evidence of the status and likely outcome of the case. Without it, or an alternative, the auditor cannot rule out an unrecorded liability.
Worked examples
Example 1: useful life of a brand
Scenario. Kano Fashions Ltd bought the Zuri brand name three years ago and amortises it over ten years. What procedures would the auditor use on the useful life?
- Compare the life used with the lives of similar brands in the industry.
- Review annual marketing spend on the brand.
- Review planned future spending, to see if the value is likely to be maintained.
- Review management’s impairment test.
- Look at sales of the branded products since purchase and discuss with management whether they support the ten years.
Vouching the original cost would not answer the question, because the issue is the period of amortisation.
Example 2: capitalised development costs
Scenario. Extracts: development costs at cost ₦2,400,000 less amortisation ₦900,000, so carrying value ₦1,500,000; total assets ₦18,000,000; development costs capitalised in the year ₦600,000; research costs expensed ₦150,000; revenue ₦6,000,000; profit before tax ₦2,400,000. What evidence should the auditor obtain?
- Materiality. The carrying value is 8.3% of total assets, so material. The ₦600,000 capitalised in the year is 25% of profit before tax, so if it had been expensed, profit would be a quarter lower. Total research and development spending was ₦750,000, which is 12.5% of revenue.
- The IAS 38 criteria for capitalising. Intention to complete and use or sell; technical feasibility; ability to generate future economic benefits; availability of technical, financial and other resources; ability to measure the cost reliably.
- Evidence. For each criterion, project plans, test results (for feasibility), market research on demand, budgets and finance approvals, and timesheets and invoices supporting the cost.
- Amortisation. Market research on likely demand and, for a launched product, sales since launch compared with the period chosen.
Example 3: warranty provision
Scenario. From 1 January, Bolu Drilling Ltd gives a two-year warranty to re-install equipment that fails. The notes say no provision is made because the amount cannot be measured reliably. What matters should the auditor consider and what evidence is needed?
- Matters. The IAS 37 requirements and whether a provision is needed on these facts, the materiality of the best estimate, and whether the report would have to be modified if no change is made.
- Evidence. The warranty terms given to customers; management’s costings; schedules of installations in the period; customer complaint letters showing claims; and costs of re-installations from job cards.
Example 4: deferred tax asset
Scenario. A draft statement includes a deferred tax asset of ₦5 million for unused tax losses from three years. Management is confident of future profits. What should the auditor do?
- Check that the amount is reliable by agreeing the client’s tax computations to the accounting records and reviewing tax correspondence.
- Decide whether the losses will be recoverable by obtaining forecasts of future profitability and testing the assumptions for reasonableness against the auditor’s knowledge of the business.
- Estimate how long recovery will take and check the period against tax rules for any limit on carrying losses forward.
How to score full marks
- Read the verb. Procedures are actions, evidence is records, matters are materiality, risk and standards.
- Start with a materiality figure where numbers are given.
- Name the standard and its main criteria, then test each criterion.
- Tie each procedure to the item. Procedures for a brand’s useful life are not the same as procedures for its cost.
- For litigation, give the inquiry, minutes and legal expense review, then the letter to counsel and the modification rule.
- Add the effect on the report if the item is material and uncorrected.
- Time. Spend time in proportion to marks.
Common mistakes in the exam
- Giving procedures when the question asks for evidence.
- Testing the cost of an asset when the question is about its useful life or recoverability.
- Leaving out materiality.
- Not knowing the criteria of the standard, such as the IAS 38 conditions.
- Relying on management’s own legal view of a claim without writing to counsel.
- Forgetting that LIFO is not allowed under IAS 2.
- Forgetting to link an uncorrected issue to a modified opinion.
Quick revision
- Method: materiality, the standard’s requirements, suitable evidence.
- Question types: procedures (actions), evidence (records), matters (materiality, risk, standards).
- IAS 2: lower of cost and net realisable value (NRV); no LIFO. IAS 16: components, depreciation, revaluation, disposals. IAS 36: indicators, recoverable amount, CGUs.
- IAS 37: provisions and contingencies. IAS 38: capitalisation criteria and useful lives. IFRS 15: contract, obligations, timing.
- ISA 501: inquiry, minutes and correspondence, legal expense review, letter to external counsel.
- Opinion is modified if counsel cannot be contacted and no alternative evidence exists.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. A question asking what audit evidence you would expect to see wants:
- Actions by the auditor
- Items or records on file
- The auditor’s opinion
- The client’s plans
Show the answer
B. For example, a copy of a contract.
Question 2. Under IAS 2, inventory is valued at:
- Selling price
- The lower of cost and net realisable value
- Replacement cost only
- LIFO cost
Show the answer
B. LIFO is not permitted.
Question 3. A change in accounting estimate under IAS 8 is applied:
- Retrospectively
- Prospectively
- Never
- Only to the opening balance
Show the answer
B. A change of policy is restated.
Question 4. Which is a condition for capitalising development costs under IAS 38?
- Technical feasibility of completing the asset
- The auditor’s approval
- That research costs exceed development costs
- That the asset is insured
Show the answer
A. Intention, resources, benefits and cost measurement are also required.
Question 5. To audit the useful life of a brand, the most relevant procedure is:
- Vouch the cost to the purchase agreement
- Compare the life with those of similar brands and review marketing spend
- Count inventory
- Confirm a bank balance
Show the answer
B. The issue is the amortisation period, not the cost.
Question 6. Under ISA 501, if a risk from litigation is assessed, the auditor seeks:
- No further evidence
- Direct communication with external legal counsel through a letter of inquiry
- Only management’s view
- Only press reports
Show the answer
B. The letter is prepared by management and sent by the auditor.
Question 7. The auditor should modify the opinion if management refuses permission to contact counsel and:
- Alternative procedures give sufficient evidence
- Alternative procedures give no sufficient evidence
- The claim is small
- The lawyer is a friend
Show the answer
B. Both conditions must apply.
Question 8. An expected deferred tax asset on unused losses is recoverable only if:
- Future taxable profits are likely
- The company is large
- The auditor agrees
- The losses are old
Show the answer
A. The auditor tests the forecasts and the time limits.
Question 9. Which is a first step when asked how to audit a specific item?
- Assess materiality
- Sign the report
- Delete the item
- Ask the client to decide
Show the answer
A. Then the standard’s requirements and the evidence.
Question 10. Capital grants under IAS 20 are:
- Credited to the asset or deferred and amortised over its life
- Always taken to income at once
- Ignored
- Treated as equity
Show the answer
A. Revenue grants match the related expense.
Written questions
Question 11 (10 marks). Explain the approach an auditor takes to obtaining evidence on a specific item governed by an accounting standard, and the three forms an exam question on it may take.
Question 12 (20 marks). (a) Describe the matters an auditor checks on inventory under IAS 2. (5 marks) (b) Describe the matters an auditor checks on property, plant and equipment under IAS 16. (5 marks) (c) Describe the procedures required by ISA 501 on litigation and claims. (6 marks) (d) Explain the effect on the audit report if counsel cannot be contacted. (4 marks)
Question 13 (10 marks). Tade Mining Ltd has a deferred tax asset of ₦8 million on losses of four years and says it will be recovered from profits from a new mine opening in 18 months. Total assets are ₦90 million and profit before tax is ₦15 million. State the matters to consider and the audit evidence needed. (10 marks)
Model answers
Show the model answer to Question 11
Approach (6 marks). Consider whether the item is material to the financial statements. (2) Identify the key requirements of the relevant standard, which tell the auditor what to test. (2) Decide how to obtain suitable evidence of compliance. (2)
Forms of question (4 marks). Audit procedures, which are actions such as discussing with management or vouching to invoice. (1.5) Audit evidence, which is an item or record such as a copy of a contract. (1.5) Matters to consider, which are materiality, risk and the requirements of the standards. (1)
Show the model answer to Question 12
(a) IAS 2 (5 marks). Valued at the lower of cost and net realisable value, item by item. (1.5) An acceptable costing method, noting LIFO is not permitted. (1) The count is accurate, with evidence for it. (1.5) Overheads are treated appropriately. (1)
(b) IAS 16 (5 marks). Cost determined under the standard. (1) Cost allocated correctly to components. (1) Later expenditure analysed between capital and revenue. (1) Depreciation properly calculated and accounted for. (1) Revaluations and disposals, with gains and losses, done and recorded correctly. (1)
(c) ISA 501 (6 marks). Inquire of management and others, including in-house counsel. (1) Review minutes of those charged with governance and correspondence with external counsel. (1.5) Review legal expense accounts. (1) If a risk is assessed or other claims may exist, seek direct communication with external counsel by a letter of inquiry prepared by management and sent by the auditor. (2) If counsel is barred from replying, do alternative procedures. (0.5)
(d) Effect on the report (4 marks). The opinion is modified under ISA 705 if management refuses permission to contact counsel, or counsel refuses or is prohibited from responding. (2) And the auditor cannot get sufficient appropriate evidence by alternative procedures. (2)
Show the model answer to Question 13
Matters to consider (4 marks). Materiality: the asset is about 8.9% of total assets and 53% of profit before tax, so it is material. (1.5) The IAS 12 requirement that a deferred tax asset be recognised only to the extent that future taxable profit is likely. (1.5) The effect on the audit report if the asset is overstated and not corrected. (1)
Evidence (6 marks). The tax computations, agreed to the accounting records. (1) Tax correspondence and assessments confirming the losses. (1) The forecasts of profit from the new mine, with the assumptions tested for reasonableness against the mining plans, costs and prices. (2) Evidence that the mine will open on time: licences, construction progress and funding.
(1) A calculation of how long it takes to use the losses, checked against any statutory limit on carrying losses forward. (1)
Pathfinder on auditing specific areas of the financial statements
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
No written question in these two diets tests this topic on its own. The scenario questions use the same standards-based thinking, for example impairment of the wind farm, lease liabilities and the revenue streams in the November 2025 cases. Use the checklist to prepare for them.
Revise first: Checklist of the main standards
Section A is a single compulsory case with several requirements. It has drawn on ethics, quality management, group audits and reporting. Practise the scenario method in this topic before you attempt it.
Revise first: How to score full marks
Source: ICAN Pathfinder, Advanced Audit, Assurance and Forensics. Diets covered: May Diet, 2026 and November Diet, 2025.
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