Not every audit is the same. An audit of a bank with branches in five countries and an audit of a family-owned furniture maker are both audits under the ISAs, yet the work, the risks and even the law that applies are very different. This topic looks at the two ends of that range: transnational audits, and the audit of small companies, which Nigerian law often exempts altogether.
It covers the definition and features of a transnational audit, the Transnational Audit Committee of International Federation of Accountants (IFAC), the idea that “an audit is an audit”, the audit exemption for small companies and how Companies and Allied Matters Act 2020 (CAMA 2020) defines them, and how an auditor adapts the approach to a smaller entity. November 2025 Question 7 used a private company above the small company threshold as its setting.
The previous topic covers ethics and the profession. The next topic covers social and environmental reporting.
In 30 seconds
A transnational audit is an audit of financial statements that may be relied on outside the entity’s home country for significant lending, investment or regulatory decisions. It includes listed companies, listed debt issuers and other public interest entities.
Features include different auditing standards in some countries, different audit regulatory oversight, extra duties on corporate governance and internal control reporting, and local accounting standards that need adjustment to International Financial Reporting Standards (IFRS). IFAC’s Transnational Audit Committee (TAC) serves the Forum of Firms. “An audit is an audit” means all audits follow the ISAs and end in an opinion, but size changes the approach.
Under CAMA 2020, a small company (section 394(3)) is exempt from audit (section 402), though it may choose to be audited. In a smaller entity, segregation of duties is weak, owners dominate, documentation is informal, control risk is usually high, so the audit leans on substantive procedures. Materiality may use profit before remuneration and tax, and going concern may rest on the owner-manager’s support.
CAMA 2020: audit exemption and small companies
This topic is where CAMA 2020 matters most for whether an audit is needed at all.
| Provision | What it says | Link to this topic |
|---|---|---|
| s. 401 | Every company appoints an auditor at each annual general meeting (AGM) to audit the financial statements, holding office until the next AGM | The starting rule, before the exemption applies |
| s. 394(3) | A small company is a private company with turnover of ₦120 million or less and net assets of ₦60 million or less (or other amounts the Commission fixes), no alien member, no government member, and directors holding at least 51% of the equity | Institute of Chartered Accountants of Nigeria (ICAN) teaches turnover “less than” ₦120 million and net assets “not more than” ₦60 million. Published commentary on the Act says “not more than” for both. Write ICAN’s version in the exam and know the difference |
| s. 402 | Exempts a small company, and a company that has not carried on business since incorporation, from the audit of a financial year. Banks and insurers are excluded | The statutory audit exemption |
| s. 404(3) | A public company establishes an audit committee of five members | Small companies are private, so this does not apply to them |
| s. 405 | The chief executive officer (CEO) and chief financial officer (CFO) of a company other than a small company certify responsibility for internal controls | A small company is outside the certification duty, which is one reason control reliance is weak there |
Transnational audits
Definition
A transnational audit is an audit of financial statements that are, or may be, relied on outside the audited entity’s home jurisdiction for significant lending, investment or regulatory decisions. It covers all audits of companies with listed equity or debt, and other public interest entities that draw attention because of their size, products or services.
Examples are multinational banks, life and non-life insurers with cross-border services, and large non-governmental or charitable bodies. An office audited only to prove its legal formation does not qualify. A component of a group, such as a foreign subsidiary that is not insignificant, can be a transnational audit even if the group is not, especially if the component operates in a different country from the parent.
Government bodies whose statements may be relied on abroad, for example because of foreign borrowing, can also qualify. Users include investors, lenders, financial institutions, governments and regulators. The auditor must understand the business, political, economic, legal and regulatory environment of every country where the entity operates.
Conditions for accepting and continuing
A firm that accepts or continues a transnational audit should make sure that:
- it complies with International Standards on Quality Management;
- the audit follows the International Standards on Auditing; and
- it keeps its independence from the client and has policies that conform to the International Ethics Standards Board for Accountants (IESBA) Code of Ethics and national codes.
Features of a transnational audit
| Feature | Effect on the audit |
|---|---|
| Auditing standards | Some countries use local rules or a modified version of the ISAs. This leads to inconsistency and may lower quality at group level. The group auditor needs clear group audit instructions |
| Audit regulatory oversight | Some countries have an oversight board and others rely on legislation. Different rules and risk responses affect quality across a group |
| Reporting on corporate governance and internal control | Some countries add duties for governance and control review. This widens the scope in components where the duty applies |
| Accounting standards | Local standards may still be used instead of IFRS. Adjustments and reconciliations are needed to match the group’s IFRS statements, which takes judgement |
The Transnational Audit Committee
IFAC’s Transnational Audit Committee (TAC) represents and meets the needs of the Forum of Firms, the firms that take part in transnational auditing.
Its responsibilities include identifying audit practice issues and recommending that IFAC standard-setting boards review them, giving a forum to discuss best practice in quality control, auditing practice, independence and training, proposing members for the IFAC Regulatory Liaison Group and candidates for standard-setting boards, and acting as a formal link between transnational firms and international regulators and financial institutions on audit quality, quality control systems and the transparency of international networks.
IFAC’s examples: a United States (US) company raising debt in Canada (lenders in Canada will rely on its statements), and an international charity that takes donations through national branches and makes grants worldwide. Listed companies face heavy listing and governance rules, and a listing in Europe, for example, means IFRS and ISAs apply. This shows why global standards are needed.
Small companies
An audit is an audit
This phrase means the essentials of all audits are the same. All are regulated by the ISAs and all end in an opinion on whether the statements give a true and fair view. But the process differs with the client’s characteristics, especially size, and with the audit strategy chosen. A smaller entity may need a very different approach from a large one.
Audit exemption
Many countries do not require small companies to have an annual statutory audit, though the definition varies. ICAN teaches that United Kingdom (UK) law at the time exempted companies with annual revenue not exceeding £6.5 million, and that in the United States only companies listed with the Securities and Exchange Commission (SEC) need an annual audit. In Nigeria, companies listed on the exchange must submit audited statements.
Section 401 of CAMA 2020 requires every company to appoint an auditor at each AGM, but small companies as defined in section 394 are exempt. An exempt company may still choose a voluntary audit, for example for credibility when raising capital.
What CAMA 2020 changed
A small company must also have no alien as a member, no government or government agency as a member, and directors holding at least 51% of its equity. Insurers and banks are excluded from the exemption. A company that has not carried on business since incorporation is also exempt from audit.
The audit of smaller entities
Standard practice requires the auditor to understand the business and its environment when developing a strategy. For a smaller entity the key issue is usually internal control and its limits:
- Segregation of duties is weak because few staff are employed.
- Owners or senior managers dominate all major activities. This helps as supervision but controls over management are weak.
- In a growing business, management may be too busy developing it to supervise or monitor controls.
- Record-keeping and documentation of systems and controls may be informal and inadequate.
Audit approach to smaller entities
| Area | Comment |
|---|---|
| Acceptance | Beware risks to independence from close involvement with management and pressure to reduce the audit fee |
| Engagement letter | Formalises the relationship and, if needed, separates accounts preparation from the audit |
| Planning | Similar to a larger audit but simpler. A small team makes communication easier. A brief memorandum from the last audit, updated after talking to the owner-manager, may be enough as the audit strategy |
| Accounting systems | May not be adequate for audit. Control risk is likely to be high |
| Substantive procedures | Likely to be the basis of the audit if controls are weak, but completeness of the records is hard to conclude on with substantive work alone |
| Audit evidence | High-quality evidence may be harder to find |
| Materiality | Profit before tax may be consistently negligible because the owner takes profit as remuneration, so profit before remuneration and tax may be more relevant |
| Analytical procedures | There may be no monthly accounts, so the auditor may use an early draft of the year-end statements, as International Standard on Auditing (ISA) 315 suggests, and must find evidence to support representations |
| Going concern | The entity can respond quickly but may be vulnerable to a bank withdrawing support. The owner-manager’s continued support may be vital, so assess the risk it fails |
| Audit report | Insufficient evidence on completeness and accuracy may lead to a qualified opinion |
Applying the ISAs in proportion
The International Auditing and Assurance Standards Board (IAASB) alert of August 2009 explains that ISAs apply to entities of all sizes and complexity. The auditor’s objectives are the same, but the procedures to meet them can vary. Requirements say what must be addressed and seldom the exact procedure. Simple structures make it easy to understand the entity and document it, and internal control in an SME may be simpler.
The ISAs help by giving alternative procedures where there is no risk assessment process, by letting the auditor choose procedures for the circumstances, and by marking requirements as conditional where governance and management are the same people.
The auditor must comply with all ISAs relevant to the audit. But several may not apply: ISA 402 if there is no service organisation, ISA 510 if it is not an initial engagement, ISA 600 if it is not a group audit, ISA 610 if there is no internal audit function, and ISAs 800, 805 and 810 for a general purpose audit.
Not every requirement of a relevant ISA applies either, for example an engagement team discussion in a one-person team. Documentation need not record everything. An audit plan itself shows that the audit was planned.
The rules in more depth
Why control reliance is a poor fit for small entities
To rely on controls the auditor must test them and find them working. With few staff, one person may authorise, record and hold the asset, so there is little control to test. The owner can override what exists. That is why control risk is likely to be high and the auditor leans on substantive work.
Why completeness is the hard assertion
Substantive work usually starts from the records. If a cash sale never reached the records, testing the records will not find it. Without controls over completeness, the auditor can only use analytical procedures, enquiry and external evidence, and may have to qualify if the evidence is not enough.
Why a draft is acceptable for analytical review
A small company may produce no monthly accounts. A draft of the year-end statements still gives figures to compare with last year and with expectations. The auditor must be careful that the draft is not just built to fit the audit.
Why the exemption does not mean no value
An audit can reassure suppliers, show weaknesses in controls, help improve economy and efficiency and impose control discipline. Banks often do not rely heavily on audited statements of small companies, though they may use them if available.
Worked example: is an audit required, and how is it done?
Scenario. Tunde Print Ltd is a private company. Turnover last year was ₦95 million and net assets ₦40 million. The directors hold 60% of the equity and all members are Nigerian individuals. A second company, Kano Bakeries Ltd, is private with turnover of ₦140 million, net assets ₦70 million and the same ownership. Kano’s records are manual and one clerk records and banks all cash.
The owner takes most profit as salary. The figures are illustrative. Advise on the audit exemption and the audit approach.
- Tunde Print. Private company: yes. Turnover ₦95 million is within ₦120 million. Net assets ₦40 million are within ₦60 million. No alien or government member. Directors hold 60%, above 51%. It meets section 394(3), so it is a small company and exempt from audit under section 402. It may still choose a voluntary audit.
- Kano Bakeries. Turnover ₦140 million is above ₦120 million, and net assets ₦70 million are above ₦60 million. It fails section 394(3), so it is not exempt and must appoint an auditor at the AGM under section 401.
- Control risk. One clerk records and banks all cash, so there is no segregation of duties. Controls are manual and informal. Control risk is high.
- Approach. Rely mainly on substantive procedures. Use analytical review with the draft year-end statements, since there are no monthly accounts. Look for external evidence on cash and sales, such as bank confirmations.
- Materiality. Profit before tax is small because the owner takes salary, so use profit before remuneration and tax.
- Independence. The auditor should be alert to close involvement with management and pressure on fees, and use the engagement letter to separate any accounts preparation from the audit.
- Report. If completeness of cash sales cannot be confirmed, the opinion may need to be qualified for lack of evidence.
How to score full marks
- Apply every criterion. For small company questions, test each condition in section 394(3) in turn and state the result. One failed condition means the company is not small.
- Name the threats to a smaller audit. Weak segregation, owner dominance, informal records, high control risk.
- Link control weakness to approach. State that control risk is high, so the audit is substantive, and then state the completeness limitation.
- Use the table of areas as headings in a long answer: acceptance, planning, systems, substantive, evidence, materiality, analytical, going concern, report.
- For transnational audits, give the definition first, then two examples, then the four features.
- Write ICAN’s figure for the small company thresholds, and mention the Act’s wording if space allows.
Common mistakes in the exam
- Saying all small companies are exempt. Banks and insurers are excluded, and every section 394(3) condition must be met.
- Forgetting the non-financial conditions: no alien member, no government member, directors holding 51%.
- Calling a company’s own head-office audit transnational just because it has an overseas customer.
- Saying an audit of a small entity can skip ISAs. All relevant ISAs apply, in proportion.
- Relying on controls in a one-clerk business without testing them. This is the error in the November 2025 Question 7 facts.
- Using profit before tax as the materiality base when the owner takes profit as salary.
Quick revision
- Transnational audit: relied on outside the home country for lending, investment or regulatory decisions. Listed and public interest entities.
- Accept and continue only with quality management, ISAs and IESBA-based independence.
- Features: auditing standards, oversight, governance and control reporting, accounting standards.
- TAC: IFAC committee for the Forum of Firms.
- An audit is an audit: same ISAs and opinion, different approach by size.
- CAMA 2020: s. 401 appoint, s. 394(3) small company, s. 402 exemption, s. 405 certification excludes small companies.
- Small entity: weak segregation, owner dominance, informal records, high control risk, substantive approach, completeness hard.
- Materiality: profit before remuneration and tax. Analytical: draft year-end statements. Going concern: owner and bank support.
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 transnational audit is an audit of financial statements that:
- Are only used inside the home country
- May be relied on outside the home jurisdiction for significant lending, investment or regulatory decisions
- Belong to a sole trader
- Have no auditor
Show the answer
B. It covers listed and other public interest entities.
Question 2. Which of the following is an example of a transnational audit given by IFAC?
- A small shop
- A club with ten members
- A US company raising debt finance in Canada
- A school bus company
Show the answer
C. Lenders in Canada will rely on the statements.
Question 3. IFAC’s Transnational Audit Committee represents the needs of:
- The Forum of Firms
- The tax authorities
- The stock exchanges
- Small companies
Show the answer
A. It acts as a link between transnational firms and international regulators.
Question 4. Which of the following is a feature of transnational audits?
- Identical rules in every country
- No accounting standards
- Local accounting standards that may need adjustment to IFRS
- No regulators
Show the answer
C. Auditing standards and oversight also differ.
Question 5. Under section 394(3) of CAMA 2020, which of the following is a condition for a small company?
- It is a public company
- It has a foreign member
- Directors hold at least 51% of its equity
- It is a bank
Show the answer
C. It must also be private, within the turnover and net assets limits, with no alien or government member.
Question 6. Which section of CAMA 2020 exempts a small company from audit?
- Section 401
- Section 402
- Section 404
- Section 407
Show the answer
B. Section 401 is the appointment rule that the exemption modifies.
Question 7. Which of the following is NOT excluded from the audit exemption?
- Banks
- Insurance companies
- A private manufacturing company that meets section 394(3)
- A company outside the exemption by size
Show the answer
C. It is exempt if it meets all the conditions.
Question 8. In the audit of a smaller entity, control risk is usually:
- Low, so tests of control are heavy
- Nil
- Irrelevant
- High, so substantive procedures form the basis of the audit
Show the answer
D. Segregation of duties is weak and owners dominate.
Question 9. When an owner-manager takes most profit as remuneration, a more relevant materiality benchmark is:
- Profit before tax
- Profit before remuneration and tax
- Share capital
- Inventory only
Show the answer
B. Profit before tax may be consistently negligible.
Question 10. Which of the following is a reason an exempt small company might still choose an audit?
- Enhanced credibility when attracting new capital
- It is forbidden to stop
- To avoid keeping records
- To remove the directors
Show the answer
A. Others include reassurance to suppliers and control discipline.
Written questions
Question 11 (10 marks). (a) Define a transnational audit and give two examples. (4 marks) (b) Explain three features of a transnational audit that affect the quality of work in a group audit. (6 marks)
Question 12 (20 marks). (a) Explain what is meant by “an audit is an audit” and why the audit of a smaller entity may differ. (4 marks) (b) State the conditions a company must meet to be a small company under section 394(3) of CAMA 2020. (6 marks) (c) Discuss the matters an auditor should consider in the audit approach to a smaller entity. (6 marks) (d) State the responsibilities of IFAC’s Transnational Audit Committee. (4 marks)
Question 13 (10 marks). Bola Furniture Ltd is a private company above the small company thresholds. It has manual records and one accountant who records, authorises and banks all receipts. The owner takes most of the profit as salary and the company relies on a bank overdraft. (a) Explain why control risk is likely to be high and how this affects the audit approach.
(5 marks) (b) Discuss the materiality, analytical procedures, going concern and reporting issues. (5 marks)
Model answers
Show the model answer to Question 11
(a) Definition and examples (4 marks). A transnational audit is an audit of financial statements that are, or may be, relied on outside the entity’s home jurisdiction for significant lending, investment or regulatory decisions. (2) Examples are a US company raising debt in Canada, and an international charity that takes donations through national branches and makes grants around the world. (1 each)
(b) Features (6 marks, any three at 2). Auditing standards: some countries use local or modified ISAs, which leads to inconsistent quality at group level, so the group auditor needs clear group audit instructions. Audit regulatory oversight: oversight differs by country, so rules and risk responses differ. Reporting on governance and internal control: extra duties in some countries widen scope in those components.
Accounting standards: local standards may need adjustment and reconciliation to IFRS, which takes judgement.
Show the model answer to Question 12
(a) An audit is an audit (4 marks). All audits are regulated by the ISAs and end in an opinion on whether the statements give a true and fair view. (2) The process differs with the client’s size and characteristics and the strategy adopted, so a smaller entity may need a very different approach. (2)
(b) Small company (6 marks, 1 each). It is a private company. Turnover does not exceed the limit of ₦120 million (ICAN teaches less than). Net assets are not more than ₦60 million. None of its members is an alien. None of its members is a government, government corporation or agency. Directors hold at least 51% of its equity.
(c) Approach (6 marks, any six at 1). Independence risk from close involvement with management and fee pressure. An engagement letter that separates accounts preparation from the audit. Simple planning, possibly updating last year’s memorandum. Accounting systems may be inadequate, so control risk is high. Substantive procedures form the basis but completeness is hard to conclude on. High-quality evidence is harder to find.
Materiality may use profit before remuneration and tax. Analytical procedures may use a draft of the year-end statements. Going concern depends on bank and owner support. Insufficient evidence may lead to a qualified opinion.
(d) TAC (4 marks, 1 each). Identify audit practice issues and recommend that standard-setting boards review them. Provide a forum on best practice in quality control, auditing practice, independence, training and development. Propose members to the IFAC Regulatory Liaison Group and candidates for standard-setting boards. Act as a formal link between transnational firms and international regulators and financial institutions on audit quality, quality control and network transparency.
Show the model answer to Question 13
(a) Control risk (5 marks, any five at 1). One accountant records, authorises and banks all receipts, so segregation of duties is weak. (1) The owner dominates the business, so controls over management are weak. (1) Records and controls are manual and probably informally documented. (1) Control risk is therefore high, so the auditor should not rely on controls without testing and should base the audit mainly on substantive procedures.
(1) It is hard to conclude on completeness of receipts with substantive tests alone, so the auditor should use analytical procedures and external evidence. (1)
(b) Other issues (5 marks). Materiality: profit before tax is small because of the owner’s salary, so use profit before remuneration and tax. (1.5) Analytical procedures: there may be no monthly accounts, so use a draft of the year-end statements and seek evidence for representations. (1.5) Going concern: the bank may withdraw the overdraft and the owner’s support may be vital, so assess whether it will continue.
(1) Reporting: if evidence on completeness and accuracy is insufficient, the opinion may be qualified. (1)
Pathfinder on transnational and small company audits
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.
The facts are a company above the threshold, so an audit is mandatory, with weak manual controls, high materiality and control reliance without testing. The requirements asked for audit strategy factors and the reliability of audit evidence, so this topic supplies the small entity setting and the control risk reasoning rather than a direct answer.
Revise first: Small companies
Transnational features such as different standards, oversight and accounting frameworks are the reasons a group auditor sends detailed instructions to component auditors. Use the transnational section as supporting material for those group audit answers. No question in the two diets asks for the definition of a transnational audit directly.
Revise first: Transnational audits
Source: ICAN Pathfinder, Advanced Audit, Assurance and Forensics. Diets covered: May Diet, 2026 and November Diet, 2025.
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