A public company holds its annual general meeting. The shareholders receive the accounts and the auditor's report. They also expect that a committee of their own representatives has looked at the audit, asked questions and made recommendations. In Nigeria that is not just good practice.
The Companies and Allied Matters Act 2020 (CAMA) says what the auditor must state in the report and requires a public company to have an audit committee to which the auditor also reports.
This topic covers the auditor's report to the members under CAMA 2020, the matters that the report must expressly state, the audit committee of a public company, its membership, nomination and functions, and how the CAMA report relates to the ISA 700 report. The previous topics covered ISA reports, and the next covers going concern.
In 30 seconds
Report to members on the accounts examined, including each statement of financial position, profit or loss account and group accounts laid before the company in general meeting. Matters stated expressly (s. 404(2), Fifth Schedule):
- information and explanations obtained
- proper books kept and returns from branches
- statements agree with the books
- true and fair view and compliance with the Act
- for a holding company, group accounts
Public company: also reports to an audit committee of five (three shareholder members and two non-executive directors) that reviews the report and recommends to the annual general meeting. Functions: policies, scope, management findings, internal control, auditor appointment and pay, internal audit investigations.
Key terms in plain English
| Term | What it means |
|---|---|
| Fifth Schedule | The CAMA list of matters the auditor must state |
| Audit committee | A committee of shareholders and non-executive directors in a public company |
| Public company | A company that may offer its shares to the public |
| Non-executive director | A director who is not part of day-to-day management |
| Books of account | The accounting records a company must keep |
| Group financial statements | Consolidated statements of a holding company and its subsidiaries |
Syllabus check
This topic is in syllabus area C, audit evidence, completion and reporting (25% of marks). It covers:
- audit reporting under the Companies and Allied Matters Act 2020
- the audit committee
- the contents of an unmodified report
CAMA 2020 and audit reporting
The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 404(1) | The auditor reports to the members on the accounts examined | Report on each statement and the group statements |
| s. 404(2) and Fifth Schedule | Matters to be expressly stated in the report | Five matters |
| s. 404(3) to (7) | The audit committee: membership, nomination, functions | Public company only |
| s. 407 | Duties and powers of the auditor, including access to books and information | Basis of the first statement in the report |
The rules in more depth
The auditor's report to the members
Under CAMA 2020 the auditors of a company must make a report to its members on the accounts examined by them, and on every statement of financial position and profit or loss account, and on all group financial statements, copies of which are to be laid before the company in general meeting during the auditors' tenure of office.
The report must state the matters set out in the Fifth Schedule to the Act, as required by section 404(2). This is a legal reporting duty. The report under ISA 700 is the professional duty. In practice the auditor writes one report that meets both: the ISA sections plus a section headed, for example, Report on Other Legal and Regulatory Requirements, which gives the matters required by CAMA.
Matters to be expressly stated in the report
The Fifth Schedule lists these matters:
- Information and explanations. Whether the auditors have obtained all the information and explanations which, to the best of their knowledge and belief, were necessary for the purpose of their audit.
- Books of account. Whether, in the auditor's opinion, proper books of account have been kept by the company, so far as appears from examining those books, and whether proper returns adequate for the audit have been received from branches not visited.
- Agreement with the books. Whether the company's statement of financial position (balance sheet) and, unless it is framed as a consolidated profit and loss account, its profit and loss account dealt with by the report are in agreement with the books of account and returns.
- True and fair view and compliance with the Act. Whether, in the auditor's opinion, and to the best of their information and according to the explanations given, the statements give the information required by the Act in the manner required, and give a true and fair view of the state of the company's affairs at the end of the year (statement of financial position) and of the profit or loss for the year (profit and loss account). If matters are not disclosed because the First Schedule does not require disclosure, the report says so.
- Group financial statements. For a holding company, whether in the auditor's opinion the group statements have been properly prepared under the Act so as to give a true and fair view of the state of affairs and profit or loss of the company and its subsidiaries and associates, so far as concerns the members.
| Matter | What the auditor needs to have done |
|---|---|
| Information and explanations | Asked for, and received, everything needed. Use the right of access in section 407 |
| Proper books and branch returns | Evaluated the accounting system and tested records; reviewed branch returns |
| Agreement with books | Agreed the statements to the trial balance and ledgers |
| True and fair view and Act compliance | Checked recognition, measurement, presentation and the disclosure checklist |
| Group statements | Audited, or relied on the work of auditors of, subsidiaries; checked consolidation |
If the auditor cannot make a required statement positively, the report says why. For example, if proper books have not been kept, the report says so, and if information needed was not received, the report says what was missing. These statements are in addition to the opinion in the ISA 700 report, and a failure to give any of them is a breach of the Act.
The audit committee
In addition to the report to the members, the auditor of a public company also reports to an audit committee, which the public company must set up. Under section 404 of CAMA 2020, the committee consists of five members: three members of the company (shareholders) and two non-executive directors. The committee examines the auditor's report and makes recommendations to the annual general meeting as it thinks fit.
Members of the committee are not paid for this role, other than their normal fee as directors where relevant, and are subject to re-election every year. Any member of the company may nominate another shareholder as a member of the committee by giving written notice to the company secretary at least 21 days before the annual general meeting. Executive directors cannot serve, so that the committee is independent of management.
Members should be able to read financial statements, and the Act expects at least one to have financial literacy. The committee is chaired by a member of the committee elected by its members.
Functions of the audit committee
Subject to any added functions in the articles of association, the committee's functions are to:
- ascertain whether the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices;
- review the scope and planning of audit requirements;
- review the findings on management matters, in conjunction with the external auditor, and departmental responses to them;
- keep under review the effectiveness of the company's system of accounting and internal control;
- make recommendations to the board on the appointment, removal and remuneration of the external auditors; and
- authorise the internal auditor to investigate any activity of the company that may interest or concern the committee.
In practice the committee also reviews the annual and interim financial statements before they go to the board, discusses significant accounting judgements, reviews the management letter and the response, considers the auditor's independence and any non-audit services, meets the auditors privately without management, oversees whistleblowing arrangements and the internal audit function, and reports to the members at the annual general meeting.
The auditor should attend the committee's meetings, discuss the audit plan, report significant findings and deficiencies, and communicate matters required by ISA 260.
Linking CAMA reporting and the ISA 700 report
| ISA 700 report | CAMA 2020 requirement |
|---|---|
| Opinion on true and fair view under IFRS | True and fair view and the information the Act requires |
| Basis for opinion, ISAs, independence | Information and explanations obtained |
| Other reporting responsibilities | Proper books and returns; agreement with the books; group statements |
| Addressee: shareholders | Report to the members; also the audit committee for public companies |
The auditor's other duties under the Act include the right of access to books, accounts and vouchers and to information and explanations from officers (section 407), the duty to report if the information needed is not received, the right to attend and be heard at general meetings, and the rules on appointment, qualification, resignation and removal covered earlier in the course.
The Financial Reporting Council of Nigeria adds requirements for public interest entities, including audit committee rules in the corporate governance code and, for listed companies, the reporting of key audit matters.
Applying the rules in the exam
A question may give a scenario and ask what the report to members must state, or whether a public company has a properly formed audit committee. For the report, tick off the five matters in turn. For the committee, check the number (five), the mix (three shareholders and two non-executive directors, not executive directors), the nomination (21 days' written notice to the secretary), re-election each year and no pay.
A committee made up of executive directors, or of more than five members, does not meet the Act. If the committee has fewer than the legal number, the company should fill the vacancies before the annual general meeting.
Worked examples
Example 1: branches. A company has three branches. The auditor visits two and receives returns from the third.
- The report must state whether proper returns adequate for the audit were received from the branch not visited.
- The auditor checks the returns and states the position in the report.
Example 2: committee. A public company's audit committee has two shareholders, two executive directors and one non-executive director.
- The committee does not follow the Act: it needs three shareholders and two non-executive directors.
- The company must reconstitute it, and the auditor reports the matter.
Example 3: nomination. A shareholder gives written notice to the secretary 10 days before the meeting to nominate a member for the committee.
- The notice must be given at least 21 days before the meeting.
- The nomination is late and is not valid.
Example 4: missing information. The directors would not give the auditor the loan agreements.
- The report must state that all the information and explanations needed were not obtained.
- The auditor also considers a limitation of scope on the opinion.
How to score full marks
- Quote section 404 and the Fifth Schedule.
- List the five matters to be stated.
- For the committee give number, mix, nomination, re-election and functions.
- Link the CAMA report to the ISA 700 report.
Common mistakes in the exam
- Saying all companies need an audit committee. Only public companies must.
- Putting executive directors on the committee.
- Forgetting the 21-day rule.
- Leaving out proper books and branch returns.
Quick revision
- Report to members; five matters in the Fifth Schedule.
- Public company: audit committee of five, three shareholders and two non-executive directors.
- 21 days' notice; annual re-election; no pay.
- Six functions, from policies to internal audit.
Practice questions
Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.
Question 1. Under CAMA 2020 the auditor reports to the:
- Members
- Bank
- Registrar only
- Tax authority
Show the answer
A. On the accounts examined.
Question 2. The matters the report must state are set out in the:
- Fifth Schedule
- First Schedule
- Second Schedule
- Seventh Schedule
Show the answer
A. Under section 404(2).
Question 3. The report must state whether proper books of account were kept and whether returns were received from:
- Branches not visited
- Customers
- Suppliers
- Banks
Show the answer
A. Adequate for the audit.
Question 4. An audit committee is required in a:
- Public company
- Sole trader
- Small private company
- Partnership
Show the answer
A. Under CAMA 2020.
Question 5. The audit committee has how many members?
- Five
- Three
- Seven
- Ten
Show the answer
A. Three shareholders and two non-executive directors.
Question 6. Nominations for the committee need notice of at least:
- 21 days before the annual general meeting
- 7 days
- Same day
- 90 days
Show the answer
A. To the company secretary.
Question 7. Executive directors:
- Cannot serve on the committee
- Chair it
- Must be a majority
- Appoint the auditor
Show the answer
A. The committee is independent.
Question 8. The committee makes recommendations on the appointment and removal of the:
- External auditors
- Directors
- Staff
- Customers
Show the answer
A. And on their remuneration.
Question 9. The committee may authorise the internal auditor to:
- Investigate any activity of the company
- Sign the accounts
- Appoint directors
- Pay dividends
Show the answer
A. One of its functions.
Question 10. Members of the committee are subject to re-election:
- Annually
- Every five years
- Never
- Every ten years
Show the answer
A. At each annual general meeting.
Question 11 (10 marks). State the matters that the auditor's report must expressly state under CAMA 2020. (8 marks)
Question 12 (10 marks). Explain the composition, nomination and tenure of the audit committee of a public company. (6 marks)
Question 13 (10 marks). Describe the functions of the audit committee. (6 marks)
Model answers
Show the model answer to Question 11
Whether all information and explanations were obtained; whether proper books were kept and branch returns received; whether the statements agree with the books and returns; whether they give the information required by the Act and a true and fair view; for a holding company, group statements properly prepared and true and fair. (8)
Show the model answer to Question 12
Five members: three shareholders and two non-executive directors. (2) Any member may nominate a shareholder by written notice to the secretary at least 21 days before the annual general meeting. (2) Members are unpaid for the role and subject to annual re-election. (2)
Show the model answer to Question 13
Ascertain accounting and reporting policies comply with law and ethical practice; review audit scope and planning; review management findings with the auditor; review internal control; recommend appointment, removal and pay of the auditor; authorise internal audit investigations. (1 each)
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