Acc 424

OLABISI ONABANJO UNIVERSITY
OPEN AND DISTANCE LEARNING CENTRE

AGO-IWOYE
ACC 424: Auditing and Assurance Services 2

COURSE DEVELOPMENT TEAM
Dr. Kenny Soyemi – Subject Expert
Prof I. R. Akintoye – Course Reviewer
Prof. Dare Samson – Language Editor
Prof. Oyesoji Aremu – ODL Expert
Mr. Israel O. Asogba – Instructional Designer
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Vice Chancellors Message
It is with great pleasure that I welcome you as learners to the Olabisi Onabanjo University
Open and Distance Learning Centre.
Massive and Democratisation of higher education via Open and Distance Learning as
advocated globally has since been one of the goals of Olabisi Onabanjo University
Management, hence, Open and Distance Learning constitutes one of the areas of focus since
my assumption of duty. Through the efforts of the University Governing Council and Senate,
the establishment of the Open and Distance Learning Centre was approved in July, 2016.
Open and Distance Learning is a mode of study that affords tertiary education opportunities
to all and sundry regardless of age, gender, location, space and other limiting factors.
Quite a large number of qualified applicants for tertiary education are denied admission
yearly, there are also several others who wish to advance educationally but could not, because
of their job which is their means of livelihood.
Olabisi Onabanjo University via its Open and Distance Learning Centre offers quality,
technology driven, flexible, self-directed and cost effective tertiary education. It is a viable
option for learners who wish to study online from their location and at desired time.
This course material provides learners with vital information relevant to our programme and
schedules. I advise learners to make judicious use of it. I congratulate our Open and Distance
Learning Centre Staff, Department and Faculty for their effort towards the production of this
handbook.
I hope your learning experience with the Olabisi Onabanjo University Open and Distance
Learning Centre is memorable and exciting.
Prof Ganiyu Olatunji Olatunde
Vice Chancellor OOU
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Course Study Guide
Introduction
ACC 424: Auditing and Assurance Services 2 is a 3-unit. The course is designed for learners
studying to acquire a Bachelor of Science Degree in Accounting. It is divided into six
sessions designed to consolidate initial appreciation knowledge acquired in auditing.
Recommended Study Time
ACC 424 is a 3-unit course divided into study sessions. You are enjoined to spend at least 3
hours in studying the content of each study session.
What you are to expect in this course
The overall aim of ACC 424 is to introduce you to the nature, scope, meaning and purpose of
audit. At the end of this course, you are expected to have appreciated essentials of internal
audit, external audit, reporting responsibilities performed in an audit firm.
Course Aim
This is an introductory course that seeks to equip learners with the necessary information
required in understanding auditing practice at this level. It is expected that the exposure will
excite the students to desire a much deeper knowledge of what is entailed to practice the
profession.
Course Objectives
The objective of this course is to further introduce the learners to deeper matters in auditing
and assurance engagements.
Working through this course
In order to have a thorough understanding of the course units, you will need to read,
understand the contents and practice what is discussed in this module.
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This course is designed to cover approximately Fifteen weeks and it will require your devoted
attention. You should do the exercises in the Tutor-Marked Assignments and submit to your
tutors via the LMS (Learning Management System)
Course Materials
The major components of the course are;
1. Course Guide
2. Printed Lecture Materials
3. Textbooks
4. Interactive DVD
5. Electronic Lecture Materials via LMS
6. Tutor-Marked Assignments
Printed Lecture Materials
The printed lecture material consists of 6 study sessions broken down into sub-sessions;
Assessment
There are two aspects to the assessment of this course. First, there are tutor-marked
assignments and second the written examination. Therefore, you are expected to take note of
the facts, information and problem solving gathered during the course. The tutor-marked
assignments must be submitted to your tutor for formal assessment in accordance with the
deadline given. The work submitted will count for 30% of your total course mark.
At the end of the course, you will need to sit for a final written examination. This
examination will account for 70% of your total score. You will be required to submit some
assignments by uploading them to ACC 424 page on the LMS.
Tutor-Marked Assignment (TMA)
There are TMAs in this course. You need to submit all the TMAs. The best 10 will be
counted. When you have completed each assignment, send it to your tutor as soon as possible
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and make sure that it gets to your tutor on or before the stipulated deadline. If for any reason
you cannot complete your assignment on time, contact your tutor before the assignment is
due for submission for the possibility of extension. Extension will not be granted after the
deadline, unless on extraordinary cases.
Final Examination and Grading
The final examination for ACC 424 will last for a period not more than 3 hours and has a
value of 70% of the total course grade. The examination will consist of questions which
reflect the Self-Assessment Questions (SAQs), In-text Questions (ITQs) and tutor-marked
assignments that you have previously encountered. Furthermore, all areas of the course will
be examined. It would be better to use the time between finishing the last unit and sitting for
the examination to revise the entire course. You might find it useful to review your TMAs
and comment on them before the examination. The final examination covers information
from all parts of the course. Most examinations will be conducted via Pen-On-Paper (POP)
and Computer-Based Testing (CBT) mode.
Tutors and Tutorials
There are a few hours of face-to-face tutorial provided in support of this course. You will be
notified of the dates, time and location together with the name and phone number of your
tutor as soon as you are allocated a tutorial group. Your tutor will mark and comment on your
assignments, keep a close watch on your progress and on any difficulties you might
encounter and provide assistance to you during the course. You must submit your tutor-
marked assignment to your tutor well before the due date. At least two working days are
required for this purpose. They will be marked by your tutor and returned as soon as possible
via the same means of submission.
Do not hesitate to contact your tutor by telephone, e-mail or discussion board if you need
help. Contact your tutor if:
 You do not understand any part of the study units or the assigned readings.
 You have difficulty with the self-test or exercise.
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 You have questions or problems with an assignment, with your tutor’s comments on
an assignment or with the grading of an assignment.
You should endeavour to attend the tutorials. This is the only opportunity to have face-to-face
contact with your tutor and ask questions which are answered instantly. You can raise any
problem encountered in the course of your study. To gain the maximum benefit from the
course tutorials, have some questions handy before attending them. You will learn a lot from
participating actively in discussions.
Recommended Texts
The following texts and Internet resource links will be of enormous benefit to you in learning
this course:
Kenny Ade Soyemi (2104). Auditing and Assurance Services. 1st Edition, Leksilicon
Publishing Company Limited, Abeokuta.
Adeniji A. A. (2012). Auditing and Assurance Services. Lagos: Value Analysis Consults.
Accounting technicians scheme of West Africa (ATSWA) 2011
ACCA (2015). Study Text on Audit and Assurance. London: BPP Learning Media
FGN (2004). Companies and Allied Matters Act, Cap C20, LFN 2004
ICAN (2014): Study Pack on Advanced Audit and Assurance, Lagos: VI Publishing Ltd
International Standard on Auditing (ISA)
Table of Contents
Vice Chancellors Message ......................................................................................................... 3
Course Study Guide ................................................................................................................... 4
Introduction ............................................................................................................................ 4
Study Session 1: Audit Sampling ............................................................................................ 13
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Introduction .......................................................................................................................... 13
Learning Outcome for Study Session 1 ............................................................................... 13
1.1 Audit Sampling .............................................................................................................. 14
1.1.1 Definition and Meaning of Audit Sampling ........................................................... 14
Determinants of Audit Sampling ..................................................................................... 14
Features of a Good Sample .............................................................................................. 15
1.2 Types of Audit Sampling ............................................................................................... 15
Steps involved in Audit Sampling ................................................................................... 17
Summary of Study Session 1 ............................................................................................... 19
Self-Assessment Questions (SAQ’s) for the Study Session 1 ............................................. 20
Glossary of Terms ................................................................................................................ 21
References/ Further Reading................................................................................................ 22
Study Session 2: Audit of Group Accounts ............................................................................. 23
Introduction .......................................................................................................................... 23
2.1 Definition and Meaning of Group.................................................................................. 24
Audit Consideration of Group Audit ............................................................................... 24
The Primary Auditor ........................................................................................................ 24
The Secondary Auditor .................................................................................................... 25
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2.2 Specific Planning Problems ........................................................................................... 26
Study Session 3: Specialised Audit.......................................................................................... 33
Introduction .......................................................................................................................... 33
3.1 Introduction .................................................................................................................... 34
Audit of Banks ................................................................................................................. 34
CBN Act and BOFIA ....................................................................................................... 34
BOFIA and Accounting and Audit of Banks ................................................................... 36
NDIC AND Bank’s Deposit Insurance ............................................................................ 37
BOFIA and Prudential Guidelines on Bank Audit .......................................................... 38
Income Recognition ......................................................................................................... 38
3.2 Revolving and Overdraft Facilities ................................................................................ 41
Investment in Securities ................................................................................................... 41
Audit of Insurance Companies......................................................................................... 46
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Study Session 4: Computer Audit ............................................................................................ 56
Introduction .......................................................................................................................... 56
4.1 Introduction .................................................................................................................... 57
Advantages of using EDP System ................................................................................... 57
Control in Computerised Environment ............................................................................ 58
Approaches to Computer Audit ....................................................................................... 58
Computer Assisted Auditing Technique (CAAT) ........................................................... 59
Study Session 5: Auditor’s Liabilities ..................................................................................... 65
Introduction .......................................................................................................................... 65
5.1 Introduction .................................................................................................................... 66
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Categories of auditor’s liabilities ..................................................................................... 66
Liabilities under the Statues ............................................................................................. 67
Study Session 6: Investigation ................................................................................................. 74
Introduction .......................................................................................................................... 74
1.1 Introduction .................................................................................................................... 75
Notes on Self-Assessment Questions for Study Session 1 .................................................. 86
SAQ 1.1................................................................................................................................ 86
SAQ 1.2................................................................................................................................ 86
SAQ 2.1................................................................................................................................ 86
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SAQ 3.1................................................................................................................................ 87
SAQ 3.2................................................................................................................................ 88
SAQ 4.1................................................................................................................................ 88
SAQ 5.1................................................................................................................................ 88
SAQ 6.1................................................................................................................................ 89
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Study Session 1: Audit Sampling
Introduction
Understanding the procedure in taking the overall accountability and transparency

in any transaction of a firm is very germane.
In this study session, we will be discussing the meaning of audit sampling and types of audit
sampling.
Learning Outcome for Study Session 1
At the end of this session, you should be able to:
1.1 Explain the meaning of Audit sampling

1.2 Identify the types of audit sampling
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1.1 Audit Sampling
1.1.1 Definition and Meaning of Audit Sampling
The Nigerian Standards on Auditing (NSA) No 1 defines it as “the application of audit

procedures to less than 100% of items within an account balance or class of transactions such
that all sampling units have chance of selection. This will enable the auditor to obtain and
evaluate audit evidence about some characteristics of items selected in order to form or assist
in forming a conclusion concerning the population from which the sample is drawn”.
In a large percentage of audit work, it is not feasible or possible to carry out examination of
all the items in the account balances. Therefore, a sample of some items are selected from the
bulk and tested. The sample selected and tested are then used for other audit procedures to
assist the auditor in forming an opinion on the financial statements. The items so selected,
tested and used for audit procedures are called audit sampling.
Determinants of Audit Sampling
Since it is not all the items in the account balances that are used for audit procedure but some
selected items (i.e sample), there exists an element of risk in the auditor’s opinion called
sampling risk. To reduce the sampling risk, the auditor has to decide on the number or
degree of items considered to be good enough to properly represent all the items in the
account balances called population. To do this, a number of factors are taken into
consideration as follows:
(a) The effectiveness and efficiency of internal control system of the client
(b) The materiality or significance of a transaction to the whole of financial statement.
(c) The value and volume of items of transactions
(d) The purpose for which audit is done

(e) Cost of sample testing
(f) Risk factor: that is, the probability of risk or irregularity in an account or class of
transaction (g) The past experience of the auditor
(h) Unusual items
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Features of a Good Sample

a) Random – each item of the population has an equal chance of being selected.
b) Representative – the sample should be representative of the items in the whole
population.
c) Protective of the auditor – More intensive auditing should occur on high-value items
known to be high risk.
d) Unpredictable – Client should not be able to know or guess which items will be
examined.
In-Text Questions (ITQs)
1. Mention four features of a good sample.

2. State three determinants of audit sampling.
In-Text Answers (ITAs)
1. a. Random b. Representative c. Protective of the auditor d. Unpredictable
2. a. The purpose for which the audit is done b. Cost of sample testing c. Risk Factor
1.2 Types of Audit Sampling
This can be classified into two: Statistical Sampling and Non-Statistical Sampling.
(a) Statistical Sampling: This is also known as the probability sampling technique. It
involves the use of mathematical probabilities in selecting the samples. It also allows the
sampling risk involved in the sample selected to be quantified and results evaluated.
The various types of Statistical Sampling are:
(a) Simple Random Sampling
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(b) Random Systematic Sampling

(c) Multi-Stage Sampling
(d) Cluster or Block Sampling

(e) Stratified Sampling.
Advantages
a. It reduces the sample size to the minimum required to achieve the objective of the audit
test.
b. It is scientific.
c. Results obtained can be quantified.
d. It enhances uniform standard among different audit firms.
e. Audit risks are minimised.
f. It is unbiased.
Disadvantages
(a) It is not cost effective to be used for small client.

(b) Sample selection process may be time consuming.
(c) It is not easy to understand and use.
(d) It requires special knowledge of statistics.
(e) It is not flexible.
(f) It does not require auditor’s experience and judgment.
(b) Non-Statistical Sampling: This is also known as judgmental sampling. Here, the auditor
simply uses his wealth of experience and exposure to select the samples required from the
population for audit procedures.
Advantages
(a) It is simple to understand and use.

(b) It is more appropriate for small client.
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(c) It does not require any knowledge of statistics.

(d) It saves time.
Disadvantages
(a) It is unscientific.
(b) It could be biased.
(c) Results obtained are not quantitative.
(d) Evidences from sampling are usually vague.
Steps involved in Audit Sampling
(a) Planning of the Sample to use, taking into consideration the following matters:
(i) Objective of the audit test
(ii) Definition of the attributes and exceptional conditions
(iii) Setting the tolerable error
(iv) Specify the acceptable risk
(v) Define the population
(vi) Define the sample size
(b) Selecting the items to be tested
(c) Perform audit test and procedure
(d) Evaluation of results.
Circumstances where 100% Items are tested:
(a) Where items are few, but material

(b) Where the auditor is put upon enquiry
(c) Where the items are extraordinary in nature
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In-Text Question (ITQs)
1. Mention various statistical sampling.
In-Text Answer (ITAs)
1. a. Simple random sampling b. Random Systematic Sampling c. Multi- Stage Sampling d.
Cluster Sampling e. Stratified Sampling
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Summary of Study Session 1
In this study session 1, you have learned the following;
1. The Nigerian Standards on Auditing (NSA) No 1 defines it as “the application of audit

procedures to less than 100% of items within an account balance or class of transactions such
that all sampling units have a chance of selection. This will enable the auditor to obtain and
evaluate audit evidence about some characteristics of items selected in order to form or assist
in forming a conclusion concerning the population from which the sample is drawn”.
In a large percentage of audit work, it is not feasible or possible to carry out examination of
all items in the account balances. Therefore, a sample of some items are selected from the
bulk and tested. The sample selected and tested are then used for other audit procedures to
assist the auditor in forming an opinion on the financial statements. The items so selected,
tested and used for audit procedures are called audit sampling.
2. Steps involved in Audit Sampling
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Self-Assessment Questions (SAQ’s) for the Study Session 1
Now that you have completed this study session, you can assess how well you have achieved
its Learning Outcome by answering these questions. Write your answers in your study diary
and discuss them with your Tutor at the next Study Support Meeting. You can compare your
answers with the Notes on the Self-Assessment Questions at the end of this Session.
SAQ 1.1 (Text Learning Outcome 1.1)
What are the features of a good sample?
SAQ 1.2 (Text Leaning Outcome 1.2)
List the steps involved in audit sampling.
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Glossary of Terms
Audit: an official inspection of an organisation's accounts, typically by an independent body.
Sampling: is a process used in statistical analysis in which a predetermined number of

observations are taken from a larger population.
Sample: refers to a smaller, manageable version of a larger group. It is a subset containing

the characteristics of a larger population.
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References/ Further Reading
Should you require more explanations on this study session, please do

not hesitate to contact your e-tutor via the LMS.
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Study Session 2: Audit of Group Accounts
Introduction
The proper accountability of a company that has different components of it spread

all over a geographical boundary has its own procedures and essentials.
In this study session, we will be discussing the meaning of group and audit consideration and
Specific planning Problem Audit
2.1 Explain the meaning of group and audit consideration of group audit.
2.2 Understand the meaning of specific planning problem audit.
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2.1 Definition and Meaning of Group
A group consists of a parent company with either wholly and/or partly owned subsidiaries,
associates(where the holding company can exercise significant oversight over their affairs)
and other related parties such as partnerships, joint ventures etc. A group exists where a
company has controlling interest in another company or companies. That is, where a
company acquired 51% or more of the equity shares of another company. The company that
acquired 51% shares in another company is called Parent or Holding Company while the
company in which the shares are acquired is called Subsidiary Company.
Sec. 336(1) of CAMA provides that at the end of a financial year, a company that has a
subsidiary or subsidiaries, the directors shall as well preparing individual accounts for that
year also must prepare group financial statements being accounts or statements which deal
with the state of affairs and profit or loss of the holding companies and the subsidiaries.
Audit Consideration of Group Audit
The audit of group accounts follows basic principles, guidelines and standard for the conduct
of typical audit engagement. There are two dramatis personae that are important in audit of
group account. They are, Principal Auditor and Secondary Auditor. Note that the auditors
(Group, Primary, Principal or Lead Auditors) who sign the group audit report are responsible
for all matters arising from the audit, even in respect of subsidiaries not audited by them.
The Primary Auditor
This is the auditor of the Holding Company. He is also called Principal Auditor. According to
NSA 25, he is responsible for reporting on the financial statements of an entity including that
of subsidiaries or components audited by another auditor.
Matters to consider as Primary or Principal Auditor:
(a) The materiality of the portion of the financial statement he audited.

(b) The degree of knowledge of the business of the components he has.
(c) The risk of material misstatement in the financial statement audited by other auditor.
(d) The performance of additional procedures regarding the components audited by other
auditor.
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Responsibilities of Primary Auditor on Holding Company’s Accounts:
(a) Audits schedules to accounts.
(b) Verification of existence and ownership of investments in the subsidiaries account.
(c) Verification of current and loan accounts with subsidiaries.
Responsibilities of Primary Auditor on the Group Accounts:
(a) forming opinion on the truth, fairness and compliance with statute of account of each
company in the group.
(b) forming opinion on the truth, fairness and compliance with of the consolidated account as
a whole.
The Secondary Auditor
This is the auditor(s) to subsidiaries accounts in the group. Accounts audited by Secondary
auditor may be included in the consolidated group account.
Responsibilities of Primary Auditor on Secondary Auditor: When the Primary Auditor

intends to use the works of secondary auditor, he should consider the following:
(a) The professional competence of the secondary auditor regarding the assignment.
(b) He may discuss with the other auditor about the audit procedure applied.
(c) Review the written summary of the secondary auditor’s procedures.
(d) He must satisfy himself with respect to the accounts audited by secondary auditors:
 Accounting policies
 Availability of information on subsidiary
 Scope of the work of the other auditors
 Materiality of subsidiary to the group
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 Cooperation between Auditors

 Reporting considerations
 Division of Responsibility
1. …………… is the auditor holding the company.
2.………….. is the auditor to subsidiaries account
1. Primary Auditor
2. Secondary auditor
2.2 Specific Planning Problems
Specific planning problems which the audit of group financial statement creates include:
1. Reviewing the respective size and locations of all operating units/components of the group.
2. Where the principal audit firm does not audit all the subsidiaries, the following issues do
arise:
a. Quality control of audit work
b. The risk of material misstatements in works audited by other auditors
c. Arrangements for review of work completed
d. Timing and co-ordination of audit work.
e. Standardisation of audit working papers.
f. Standardisation of information to be sent to the principal/group auditors.
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3. It is important that the group auditors audit a significant proportion of the group financial
statements; otherwise they may not fully understand the business of the client and the likely
risks that may arise during the audit.
4. The principal auditor should have knowledge of all group activities in order to be able to
evaluate the risks of material misstatements arising in a subsidiary.
5. The lead auditor will need to consider management’s arrangements for preparing the
consolidated financial statements including:
a. Collection of data from subsidiaries
b. Group accounting instructions to ensure consistency of presentation
c. Group accounting timetable
d. Translation of financial information from overseas subsidiaries
e. Additional information requests from subsidiaries where local accounting regimes
are not as comprehensive as those of the holding company.
f. Liaison with other audit firms, particularly overseas firms.
g. Staffing and budget issues
These arrangements will be reviewed by the holding company’s auditors and incorporated in
their planning. Also to be included in the principal auditor’s planning are:
a. Audit staffing and mix that can satisfactorily carry out the audit strategy adopted;
b. Liaison with the auditors of the subsidiaries and associates; and
c. Anticipated special audit problems.
1. …………….is the auditor holding the company.
2 ………….. is the auditor to subsidiaries account
1. Primary Auditor
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2. Secondary Auditor
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In this study session 2, you have learned the following:
1. A group consists of a parent company with either wholly and/or partly owned subsidiaries,
associates(where the holding company can exercise significant oversight over their affairs)
and other related parties such as partnerships, joint ventures etc. A group exists where a
company has controlling interest in another company or companies. That is, where a
company acquired 51% or more of the equity shares of another company. The company that
acquired 51% shares in another company is called Parent or Holding Company while the
company in which the shares are acquired is called Subsidiary company.
Sec. 336(1) of CAMA provides that at the end of a financial year, a company that has
subsidiary or subsidiaries, the directors shall as well as preparing individual accounts for that
year also must prepare group financial statements being accounts or statement which deal
with the state of affairs and profit or loss of the holding companies and the subsidiaries.
2. Specific planning problems which the audit of group financial statement creates include:
1. Reviewing the respective size and locations of all operating units/components of the group.
2. Where the principal audit firm does not audit all the subsidiaries, the following issues do
arise:
a. Quality control of audit work
b. The risk of material misstatements in works audited by other auditors
c. Arrangements for review of work completed
d. Timing and co-ordination of audit work.
e. Standardisation of audit working papers. f. Standardisation of information to be
sent to the principal/group auditors.
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What are the functions of the Primary Auditor and Secondary Auditor?
What are the specific planning problems?
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Glossary of Terms
Audit: conduct an official financial inspection of (a company or its accounts).
Group: a number of people or things that are located, gathered, or classed together.
Auditor: a person who conducts an audit.
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Study Session 3: Specialised Audit
Introduction
The audit procedure of some contingent institution differs in terms of steps and
process.
In this study session, we will be discussing the essentials of audit of banks and revolving and
overdraft facilities and audit of insurance companies
3.1 Explain the essentials of bank audit.
3.2 Understand the details of revolving and overdraft facilities and audit of insurance
companies.
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3.1 Introduction
Some organisations– incorporated and unincorporated- operate and are regulated by laws and
constitutions outside the companies and Allied Matters Act (CAMA) and/or in addition to
CAMA. The auditor has to be familiar with the provisions of the relevant enabling Acts when
auditing such organisations; otherwise, the auditing principles are the same for all audits.
Some of the special institutions or audits of interest include:
a) Banks
b) Other Financial Institutions -Insurance Companies, Primary Mortgage Institutions and
Microfinance Banks
c) Clubs and Associations(including incorporated Trustees)
d) Hospitals and Clinics
e) Hotels and Restaurants
f) Pension Funds
g) MDAs including Corporations.
Audit of Banks
The operations, accounting and audit of banks fall under the following regulatory framework:
a) The CAMA, cap C20, LFN 2004 (as amended)
b) The CBN Act 2004 (as amended)
c) The Banks and Other Financial Institutions Act (BOFIA)1991 as amended
d) The Prudential Guidelines(as updated till date)
e) The CBN Monetary Circulars – issued from time to time; more often on yearly basis
f) The NDIC Act 1988 as amended
For the effective audit of banks, the auditor should be knowledgeable about, and familiar with
the current provisions of the above Acts, Guidelines and Standards.
CBN Act and BOFIA

The provisions of these Acts regarding the operations of banks include such vital issues as –
a) Minimum Paid-Up Share Capital requirements
b) Capital Adequacy ratio
c) Minimum holding of cash reserves, specified liquid assets including special deposits.
d) Returns to be rendered to CBN – mid-month, monthly, quarterly etc.
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e) Power of CBN to conduct routine and special examinations or investigation of the

books and affairs of the banks.
f) Power of CBN to assume management of ailing banks
g) Power of CBN to revoke or vary conditions for licences of banks
h) 8. Maintenance of Reserve funds etc Areas of audit attention should thus include:
a) Areas of audit attention should thus include:
1. The Capital base: There is the need to confirm that the bank has met the minimum capital
requirement as stipulated by CBN (currently put at N25billion)
2. Statutory Reserves: A confirmation of the bank’s compliance with the statutory reserves
stipulated by BOFIA and Monetary circulars.
3. Internal Control: It is important to review controls put in place by management, especially
over foreign exchange, loans and advances, cash and other tangible assets.
4. Loans and Advances portfolio: To review and confirm the income earning asset quality,
ensuring that the loans are adequately secured and that adequate loan loss provisions are
made in accordance with regulations/guidelines.
5. CBN/NDIC Rules and Regulations: A confirmation that the bank is operating within the
ambits of CBN rules, guidelines and regulations and that required premium had been paid to
NDIC in respect of insured deposits.
6. Accounting system: A review of accounting system is necessary to ensure adequacy for
banking operations.
7. Liquidity: The ability of the bank to meet its current obligations as at when due is pivotal
to its continued existence. The Auditor needs to confirm that the bank’s liquidity position is
adequate for its operations and that enough liquid assets are available.
8. Going Concern status: In this regard, the auditor needs to review the quality of
management, adequacy of working capital, quality of assets and income including deposit
liabilities and risk assets.
9. Branch networks: Review network of branches and their locations with a view to paying
visits, and for unvisited branches, review returns from them for reasonableness and
completeness.
10. Assets Valuation: Review the valuation of bank assets and confirm whether adequate
provisions have been made for any permanent diminution in their values.
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BOFIA and Accounting and Audit of Banks
Some provisions of BOFIA deal specifically with the books of accounts and the audit of
banks. These include:
S.24(1) Every bank shall cause to be kept proper books of accounts with respect to all the
transactions of the bank.
S.24(4) - Gives the CBN the power to appoint qualified accountants to prepare proper
accounts or render proper returns(at the bank’s expense), if the CBN is not satisfied with the
accounts kept by the bank or with the returns rendered by it.
S.25 - Specifies the returns to be rendered by banks to CBN on a monthly basis. The
requirements of these returns may be reviewed from time to time through the Monetary
Policy Circulars but usually include monthly statements showing:
* The assets and liabilities of the bank
* An analysis of Advances and other assets
* Profit and loss account
* Such other information, documents and statistics which CBN deems necessary for the
proper understanding of the statements.
S.26 – Empowers CBN to prepare and publish consolidated statements aggregating the
statements furnished under S.25 for each category of banks.
S.27 – Not later than 4 months after its financial year end, every bank shall publish, subject to
approval by CBN, its Balance Sheet and Profit and Loss a/c, duly signed and containing the
full and correct names of the directors of the bank. Every published financial statement must
disclose any contraventions of BOFIA and penalties paid for such contraventions. Auditors’
report shall specify such contraventions.
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S.28 – Specifies the contents and form of accounts. They shall give a true and fair view of the
state of affairs of the bank as at the end of the reporting period and shall comply with the
requirements of any circular which has been issued by the CBN.
S.29 – Deals with the appointment, power and report of “approved Auditor”. Every auditor of
a bank shall be –
* A member of a professional accountancy body recognised in Nigeria
* Approved by CBN
* Carrying on in Nigeria professional practice as accountant and auditor.
By S.29 (7), if an approved Auditor, in the course of his duties as an auditor of a bank is
satisfied that –
* There has been a contravention of BOFIA, or that an offence under any other law has been
committed by the bank or any other person; or
* Losses have been incurred by the bank which substantially reduce its capital funds; or
* Any irregularity which jeopardizes the interest of depositors or creditors of the bank or any
other irregularity has occurred; or
* He is unable to confirm that the claims of depositors or creditors are covered by the assets
of the bank; he shall immediately report the matter to CBN.
S.29(8) – The Approved Auditor shall forward to the bank(CBN) two copies of the domestic
report on the (client) bank’s activities not later than 3 months after the end of the bank’s
financial year.
NDIC AND Bank’s Deposit Insurance

By the NDIC Act, the banks are mandated to insure their total deposit liabilities (Current,
savings and Deposit account balances less deposits held in Collaterals) with the NDIC. The
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premium payable per annum is 15/16 of 1% of total assessable deposit liabilities standing in
the books as at 31 December of the preceding year.
BOFIA and Prudential Guidelines on Bank Audit

The standard and BOFIA give guidelines with regard to:
* Income recognition
* Loss recognition
* Balance Sheet classification
* Disclosure requirements.
Income Recognition
Income sources of banks include interest on loans and advances, COT, transfer fees,
commitment fees, syndication fees, arrangement fees, lease rentals, income from sale of CPs,
Forex, BAs and discount of bills etc.
Low Recognition: Risk assets (Loans and Advances) are to be classified as performing and
non-performing
a. Sub-standard facilities
i) Objective criteria: Facilities on which unpaid principal or interest remain outstanding for
more than 90 days but less than 180 days.
ii) Subjective Criteria: Credit facilities which display well-defined weaknesses which could
affect the ability of borrowers to repay such as inadequate cash flow to service debt,
undercapitalisation or insufficient working capital, absence of adequate financial information
or collateral documentation, irregular payment of principal and/or interest, or inactive
accounts where withdrawals exceed repayments or where repayments can hardly cover
interest charges.
An Advance is non-performing if principal or interest due remains unpaid for 90 days or
more. According to BOFIA Non-performing loans and Advances should be re-classified into
three categories, namely: Substandard, doubtful or lost based on the following criteria:
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b. Doubtful facilities
i) Objective Criteria: facilities on which unpaid principal and/or interest remain outstanding
for at least 180 days but less than 360 days and are not secured by legal title to leased assets
or perfected realizable collateral in the process of collection or realization.
ii) Subjective Criteria: facilities which, in addition to the weaknesses associated with sub-
standard credit facilities reflect that full repayment of debt is not certain or that realizable
collateral values will be insufficient to cover bank’s exposure
c) Low Credit Facilities
i) Objective Criteria: facilities on which unpaid principal and/or interest remain outstanding
for 360 days or more and are not secured by legal title to leased assets or perfected realisable
collateral in the course of collection or realisation.
ii) Subjective Criteria: facilities which in addition to the weaknesses associated with doubtful
credit facilities, are considered uncollectible and are of such little value that continuation as a
bankable asset is unrealistic such as facilities that have been abandoned, facilities secured
with unmarketable and unrealisable securities and facilities extended to judgment debtors
with no means of fore closable collateral to settle debts.
Loss provision Requirements are as follows:
i. Interest overdue by more than 90 days (or shorter period as regulatory authorities may
specify): Suspend such interest and recognize income on cash basis.
ii. Principal repayment overdue by more than 120 days (or shorter period as regulatory
authorities may specify): Make full provision and recognize recoveries on cash basis.
iii. When principal repayments are subject to provision, it should be made as follows:
No of days principal and or Classification Min % provision for
Interest is overdue principal not due
Greater than 90 days but less Standard 10%
than 180 days
Greater than 180 days but Doubtful 50%
less than 360 days
Greater than 360 days and Lost 100%
not secured
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The standard also recommends a general provision of at least 1% of risk assets not
specifically provided for, in addition to the specific provisions, to provide against as yet
unidentified losses which are inherent in any portfolio.
Note:
1. Where the facility is secured by a perfected fixed legal charge over, or by title to, tangible
property, the principal provisioning could cease once the outstanding principal is less than a
specified proportion of the estimated net realisable value of the security as follows:
(i) Where the principal repayment is overdue by more than one year, the outstanding un-
provided principal should not exceed 50% of the estimated net realisable value of the
security.
(ii) Where the principal repayment is overdue by more than two years, there should be no
outstanding un-provided portion of the credit facility irrespective of the estimated net
realisable value of security held.
(iii) In both (i) and (ii) above, where regulatory authorities stipulate shorter periods or lower
percentages, such shorter periods or lower percentages should be followed.
2. Where a facility is secured by a floating charge or an unperfected or equitable charge over
tangible property, it should be treated as an unsecured credit and no account taken of any
security held in determining the provision for loan loss.
1. Audit of Banks fall under which regulatory authority?
a) The CAMA, cap C20, LFN 2004 (as amended)

b) The CBN Act 2004 (as amended)
c) The Banks and Other Financial Institutions Act (BOFIA)1991 as amended
d) The Prudential Guidelines(as updated till date)
e) The CBN monetary Circulars – issued from time to time; more often on a yearly basis
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f) The NDIC Act 1988 as amended
3.2 Revolving and Overdraft Facilities
Normally the first indication that a revolving or overdraft facility may be non-performing is
when the turnover on the account is considerably lower than anticipated when the facility was
arranged or when interest is charged which takes the facility above its credit limit. In these
circumstances: [a] A revolving facility should be classified as non-performing and unpaid
interest suspended once 90 days ( or shorter period as may be specified by regulatory
authorities) elapses after the facility limit is exceeded.
[b] Where credit limits are not exceeded, each bank should have a systematic method for the
identification of non-performing revolving credits. Once classified as non-performing, all
unpaid interest on the facility should be suspended.
[c] Once a facility is classified as non-performing, provision against principal and unpaid
interest should be made in accordance with a systematic method to reduce the outstanding
principal to the estimated net realisable value of any security held over a specified period.
Investment in Securities
1. Long-term investments in marketable securities should be stated at the lower of cost and
net realisable value. The market value should be disclosed.
2. Short-term investments in marketable securities should be stated at net realisable value.
The original cost should be disclosed.
3. Investments in securities for which there is no active market should be stated at the lower
of cost and net realizable value.
Disclosures
In addition to other disclosure requirements of relevant accounting standards, banks should
also disclose:
1. Accounting Policies – Statement of Accounting policies to include –
a. A brief description of the systematic method by which non-performing loans are identified
and the method by which loan loss provisions are determined.
b. The nature of Off-balance sheet engagements and the methods used to recognise income
thereon.
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2. Income Statement – Each principal revenue item should be stated separately in the
financial statements.
The disclosure in the income statement and the notes to the financial statements should
include, but are not limited to, the following income and expense captions:
Income
* Interest and discount income
* Lease finance income
* Fees for services rendered
* Foreign exchange income
* Commission income
* Income from investments
Expenses
* Interest expense
* Loan loss expense, showing separately any release of provisions previously made
* Commissions paid
* Foreign exchange losses
* General and administrative expenses
* Diminution in asset values
The following items should be disclosed in the financial statements

a. Interest income split between bank and non-bank sources
b. Interest expense split between bank and non-bank sources
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c. Credit related fee income and expenses where such fees are recognized at once ( that is, not
amortized or deferred)
A bank should not offset one item of revenue or expense by deducting from it another item of
revenue or expense.
3. Balance Sheet (Statement of Financial position) - Assets and liabilities should be grouped
according to their nature and be listed in order of liquidity. The disclosures in the balance
sheet and the notes to the financial statements should include but are not limited to the
following assets and liabilities.
Assets
* cash and short-term funds
* Due from other banks
* Bills discounted
* Investments
* Loans and advances
* Advances under finance leases
* Other assets
* Fixed assets (non-current assets)
Liabilities
* Deposits and current accounts
* Due to other banks
* Taxation payable
* Dividend payable
* Other liabilities
* Long term loans
* Shareholders funds
4. Maturity Profile of Risk Assets and Deposit liabilities
The profile should be given in the following categories:
Under - 1 month
1 month - 3 months
3 months - 6 months
6 months - 12 months
Over - 12 months
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The above maturity profile should be based on the expected normal repayment periods of the
assets and liabilities.
5. Loan Losses
The amount of provision for loan losses, segregated between principal and interest, should be
disclosed and deducted from the relevant asset category. Provision for losses of off balance
sheet engagements should be shown separately as a component of other liabilities. An
analysis of the movement in the various categories of loan loss provision should be disclosed.
One item of asset or liability should not offset by deducting another asset or liability unless a
legal right of set-off exists.
6. Loans and Advances
An analysis of Loans and Advances between performing and non-performing loans should be
disclosed.
7. Off-Balance Sheet (Statement of financial position) Engagements and Contingencies
Certain transactions are not currently recognised as assets or liabilities in the balance sheet
but nonetheless give rise to credit risks, contingencies and commitments. Such transactions
include letters of credit, bonds, guarantees, indemnities, acceptances, trade related
contingencies such as documentary credits, etc. These types of transactions are referred to as
“Off Balance Sheet (Statement of Financial position) Engagements”.
The nature and amount of contingencies and commitments arising from different classes of
off balance sheet engagements should be disclosed by way of notes on the accounts. Their
disclosure in note form should distinguish between:
[a] direct credit substitutes, such as guarantees, acceptances and standby letter of credit
serving as guarantees;
[b] transaction-related contingencies, such as bid bonds, performance guarantees and standby
letters of credit related to particular transaction;
c) Short term self-liquidating trade related contingencies resulting from the movement of
goods and
d) Other contingencies
Other Assets and Liabilities
Major items that make up “Other Asset” and “Other Liabilities” should be shown in the notes
on the accounts.
Provisions of Schedules 4 and 5 of BOFIA
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Schedule 4 of BOFIA specifies matters to be expressly stated in the Approved Auditor’s

Report. These are:
1. Whether proper books of account have been maintained at the bank’s head office and at
each of the bank’s branches in such a way as to give a true and fair view of the bank’s
transactions.
2. Whether the auditors have examined the books of account at the bank’s head office and at
each of the bank’s branches and whether adequate returns have been received from branches
not visited.
3. Whether the auditors have obtained information and explanations considered necessary for
audit purpose.
4. Whether in the opinion of the auditors, the bank’s assets have been properly valued and
whether adequate provisions have been made for diminution in assets’ values.
5. Whether to the best of the knowledge of the auditors, the bank has contravened the
provisions of BOFIA and the guidelines issued by CBN and NDIC, and where relevant, the
Nigeria Stock Exchange. Where there have been contraventions, the auditors should state
whether the associated penalties have been paid.
6. Whether in the opinion of the auditors, the financial statements of the bank give a true and
fair view of the state of affairs of the bank at the balance sheet date and of the profit or loss
and statement of cash flows for the relevant year end.
Schedule 5 requires the analysis of the loans and advances portfolio into:
1. Loans and advances not wholly recoverable due to insufficient efforts by the bank.
2. Loans and advances that are partly or wholly irrecoverable due to the poor financial
position of the debtor.
3. Others – which may be classified into loans to –
i. Deceased persons
ii Companies in liquidation or already liquidated
iii Bankrupt Individuals
The Schedule requires that following information be given on loans of doubtful values
i. The original amount advanced
ii. The date loan was advanced
iii. The interest rate
iv. The date of the last repayment
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v. Balance outstanding, distinguishing between the principal and interest

vi. Effort made by the bank to recover loan
vii. The realizable value of the collateral used a security
viii. Estimate of bad and doubtful debts
Audit of Insurance Companies

The operations, accounting and audit of insurance companies must conform to the following
legal and regulatory frameworks viz.
1. CAMA, cap C20 LFN 2004.
2. The Insurance Act 2003
3. IFRS 4 Insurance Contracts
4. Relevant circulars issued by NAICOM.
The Insurance business is broadly divided into two main classes:
a. Life insurance business
b. General insurance business
(a) Life business is subdivided into 3 categories, with corresponding fund accounts required
to be maintained namely:
*Individual life assurance business
*Group life insurance business and
*Health insurance business.
(b) General insurance business is subdivided into 8 categories:
*Fire insurance
*General accident insurance
*Motor vehicle insurance
*Marine and Aviation insurance
*Oil and Gas insurance
*Engineering insurance
*Bonds, credit guarantee and surety insurance business; and
*Miscellaneous insurance business.
Areas of Audit Importance/Emphasis on Minimum Paid Up Capital
The minimum paid up capital requirement for the different classes of insurance business are
as follows:
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a. Life Insurance Business: not less than =N=150million, presently fixed at =N=2bn.
b. General Business: not less than =N=200million, currently fixed at =N=3bn
c. Composite Insurance Business: not less than =N=350million, currently fixed at =N=5bn
d. Re-Insurance Business: not less than =N350million, currently =N=10bn.
Statutory Deposit: By Sec.10 of the Insurance Act, every intending insurance company
should make a “statutory Deposit” of 50% of the paid up capital with the CBN. Sixty (60)
days after registration of the insurer, 80% of this deposit is released with interest. Existing
companies are required to maintain a statutory deposit of 10% of their paid-up share capital
with CBN. Any withdrawal from the deposit shall be made good within 30 days, failing
which the insurer may be suspended from business.
Accounts and Maitenance of Reserve Funds: Where an insurer carries on the two classes
of business, all the receipts of each of those classes of insurance business shall be entered in a
separate and distinct account and shall be carried to and form a separate insurance fund with
the appropriate name.
Required Provisions and Reserves for General insurance business are:
Unexpired Risks
An insurer in non-life (i.e. general) business shall maintain for each class of insurance
business a provision for unexpired risks which shall be calculated on a time apportionment
basis of the risks accepted in the year. There is the possibility of the covered risk attracting
full liability on a future date; thus, just as the company carries forward premiums which relate
to future periods as “unearned premiums”, provision needs to be made in the accounts to
meet full claims for businesses still in force after the accounting period.
It is the duty of the company to determine the method of assessing and making provision for
unexpired risks. The auditor ensures the adequacy and reasonableness of the provision as well
as the consistency of method adopted in making the provision.
Outstanding Claims
Provision for outstanding claims shall be credited with an amount equal to the total estimated
amount of outstanding claims plus 10% of the estimated figure for claims incurred but not
reported at the end of year under review [s.20(1b)].
Usually, provision made for outstanding claims are in respect of –
*Claims notified and agreed: this is normally made up of the amount of the claims plus
claims handling expenses;
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*Claims notified but not agreed: provision will be the best estimate by management plus
estimated amount of claims handling expenses; and
*Claims incurred but not notified/reported: this is based on the experience of management
relating to such business.
The auditor should satisfy himself that a consistent, reasonable and acceptable method has
been adopted in making the provisions. A change in method with any material effects on the
financial statements will need to be disclosed.
Contingency Reserve: This reserve is established and maintained to cover fluctuations in
securities and variation in statistical estimates. This reserve account is to be credited with an
amount not less than 3% of total premium or 20% of net profits, whichever is greater. This is
accumulated until it is equal to the minimum paid up capital or 50% of net premiums
whichever is greater.
For life business, there shall be maintained:
General Reserve Fund:
To be credited with an amount equal to the net liabilities on policies in force at the time of
actuarial valuation plus 25% of net premiums for every year between valuation dates; and
Contingency Reserve Fund:
To be credited with an amount equal to 1% of gross premiums or 10% of the profits
whichever is greater and accumulated until it is equal to the minimum paid-up capital.
A re-insurer shall create a General Reserve Fund which shall be credited with an amount –
a. Not less than 50% of the gross profit for the year, where the fund is less than the authorized
share capital of the insurer
b. Not less than 25% of re-insurer’s gross profit for the year if the fund is equal to or exceeds
the authorised capital of the re-insurer.
Claims
Claims are amounts payable under a contract of insurance on the occurrence of the insured
event. Claims handling expenses, direct or indirect, are usually incurred on the process of
investigating or settling claims. The auditor should ensure the inclusion of all claims handling
expenses in the determination of the amount of claims. This ensures that each revenue
account is charged with all expenses related to the claims incurred. Care should be taken to
ensure that handling expenses are charged in the same period with the related claims.
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Solvency Margin
1) For general business, a solvency margin is required to be maintained. The solvency
margin is calculated as the excess of the value of the insurer’s admissible assets in
Nigeria over its liabilities in Nigeria consisting of :
a. Provisions for unexpired risks;
b. Provision for outstanding claims;
c. Provision for claims incurred but not yet reported; and
d. funds to meet other liabilities.
The solvency margin shall not be less than 15% of the gross premium income less
reinsurance premiums paid out during the year under review or the min. paid-up capital
whichever is greater.
The Auditor is required to issue a certification stating the extent to which the insurer has
satisfied the solvency margin. Where an auditor issues a false certification, NAICOM may
report the auditor to the appropriate professional body for disciplinary action. In the event
that the insurer becomes insolvent after certification, any auditor or official of the
commission who in the previous 3 years had certified the company as being solvent shall be
held liable.
Note: Admissible assets consist of –
a. Cash and bank balance
b. Quoted investments at market value
c. Unquoted stock at cost;
d. Land and buildings;
e. Furniture and fittings;
f. office equipment;
g. Motor vehicles;
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h. Prepaid expenses to members of staff;

i. Amount due from retrocession
j. Staff loans and Advances; and claims receivable
Investments
Insurance companies shall have investments of not less than the amount of the policy holders’
funds which shall be invested in the following areas:
a. Shares of limited liability companies;
b. Shares in registered co-operative societies;
c. Loans to building societies approved by the commission;
d. Loan on real property, machinery and plant in Nigeria;
e. Loans on Life Policies within their surrender values;
f. Cash deposit in or bills of exchange accepted by licenced banks;
g. Such other investments that may be prescribed by NAICOM. The auditor should ensure
that investment expenses (i.e. cost of buying and selling investments) are matched with the
related income from investments and in the correct period.
Note: Not more than 35% of the insurance company’s investments should be in real property.
Determination of Life Insurance Profits
The profit of a life business is determined only by actuarial valuation of the liabilities and
comparing this by available assets. Valuation may be made whenever bonuses (dividends) are
to be distributed but at least once every 3 years.
The method of actuarial valuation is as follows:
i. Determine the PV of the company’s total liabilities on all current policies in respect of
*Sum assured and
*Bonuses already declared
ii. Determine the present value of the total premiums receivable by the company under
existing policies less expenses.
iii. Deduct (ii) from (i) above. The result is the net liability on all policies.
iv. Deduct the net liability (iii above) from total life fund as per the last Balance sheet (i.e.
statement of financial position). The difference, if positive, is the surplus on the life fund to
be credited to the income account; if negative it is charged to income account.
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Statement of Accounts
Not later than 31st March of each year, the insurance company shall submit to NAICOM
a. A duly audited Balance Sheet together with a copy of the relevant Income statement which
the insurer will present to its shareholders at the AGM.
b. A Revenue account for each class of insurance business the company undertakes
c. A statement of investments representing the insurance funds.
The auditor should ensure compliance with this provision.
1. What is Contingency Reserves?
1. Contingency Reserve is established and maintained to cover fluctuations in securities and

variation in statistical estimates. This reserve account is to be credited with an amount not
less than 3% of total premium or 20% of net profits, whichever is greater.
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1. Some organisations– incorporated and unincorporated- operate and are regulated by laws
and constitutions outside the companies and Allied Matters Act (CAMA) and/or in addition
to CAMA. The auditor has to be familiar with the provisions of the relevant enabling Acts
when auditing such organisations; otherwise, the auditing principles are the same for all
audits.
Some of the special institutions or audits of interest include:
a) Banks
b) Other Financial Institutions -Insurance companies, Primary Mortgage Institutions and
Microfinance banks
c) Clubs and Associations(including incorporated Trustees)
d) Hospitals and Clinics
e) Hotels and restaurants
f) Pension Funds
g) MDAs including Corporations.
2. Normally the first indication that a revolving or overdraft facility may be non-performing
is when the turnover on the account is considerably lower than anticipated when the facility
was arranged or when interest is charged which takes the facility above its credit limit. In
these circumstances: [a] A revolving facility should be classified as non-performing and
unpaid interest suspended once 90 days ( or shorter period as may be specified by regulatory
authorities) elapses after the facility limit is exceeded.
[b] Where credit limits are not exceeded, each bank should have a systematic method for the
identification of non-performing revolving credits. Once classified as non-performing, all
unpaid interest on the facility should be suspended.
[c] Once a facility is classified as non-performing, provision against principal and unpaid
interest should be made in accordance with a systematic method to reduce the outstanding
principal to the estimated net realisable value of any security held over a specified period.
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and discuss them with your Tutor at the next Study Support Meeting. You can check your
What are the regulatory institution concerning bank audit?
What are the regulatory framework concerning insurance companies

audit?
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Glossary of Terms
Audit: to conduct an official financial inspection of (a company or its accounts).
Revolving: moving in a circular orbit around.
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Study Session 4: Computer Audit
Introduction
The usage electronics to carry out audit responsibilities in the organization is very
germane in the developing century.
In this study session, we will be talking about meaning of computer audit and computer
assisted auditing technique
1.1 Explain the meaning of computer audit and computer-assisted auditing technique
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4.1 Introduction
Computer Audit is also referred to as Electronic Data Processing Audits. Electronic Data
Processing (EDP) refers to method of processing information where processing tasks are
carried out electronically by a computer with the aid of magnetically coded instructions.
A computer is an electronic device which is capable of accepting input data, systematically

process the data and producing and /or storing the required output (information)
autonomously under the control of stored program instructions.
Therefore, auditors are required to possess update knowledge about the adoption of
computers and their effects on their audit engagements. An encompassing concept is
“Information Technology”.
Advantages of using EDP System

a) Quick processing of data
b) Accuracy of Output
c) Complex problems are easily handled by computer
d) Saves overall cost for large firms
e) Faster transfer of data
Challenges Associated with EDP
a) Undue emphasis and reliance on the functioning of hardware and software

b) Loss of audit trail
c) Loss of data
d) Unauthorised access
e) Reduction in human involvement
f) Incidence of systematic errors
g) Reduction in segregation of duties
h) Need of IT experts
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Control in Computerised Environment
The controls in computerised environment can be classified into two, viz:
a. General Controls
b. Application Controls
c. Application Controls
General Controls:
Also known as Information Technology General Controls (ITGC), are controls applied to all
applications of a computerised system. For example processing of transactions across
various cycles. These can further be classified into the following:
 Hardware Controls
 Programme Development Controls
 Programme Changes Controls
 Controls over Computer Operations
 Controls over Access to Programmes and Data
Application Controls:
Also known as Information Technology Application Control (ITAC), it includes

computerised steps within the application software and related manual procedures to control
the processing of various types of transactions. It includes the following:
 Input Controls
 Processing controls
 Output Controls
Approaches to Computer Audit

a. Audit round the Computer
b. Audit through the Computer
c. Audit within the Computer
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Computer Assisted Auditing Technique (CAAT)
These are techniques which make use of computer system in auditing. It is classified into the
following:
a. Test Data
b. Computer Audit Software
c. Parallel simulation Technique
d. Mapping
e. Snapshot
f. Tracing Software
g. System Control and Review Facility
h. Integrated testing Facility
i. Standard Utilities
j. Expert system
k. Specialist Audit Software.
Advantages of CAATs
 It reduces the level of audit risk

 It makes availability of information faster
 It broadens and makes audit coverage more consistent
 Improves exception identification
 Assists to overcome the loss of audit trail
 Enhances sampling and cost savings overtime
 Creates greater independence from the auditor and flexibility of run times
 Provides greater opportunity to quantify internal control weakness
Loss of audit trail: Possible solutions

A major problem of auditing computer systems is the loss of paper audit trail. Solutions to
this problem include the following:
(a) Use of Computer-Assisted Audit Techniques to assess reliability.
(b) Testing on a total basis and ignoring individual items to access report.
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(c)Closer co-ordination between internal and external auditors to bridge gaps in compliance
tests.
(d) Arranging for special print-outs of individual information for the auditors to attempt to re-
create transaction trail.
(e) Clerical re-creation of individual items of data for comparison with computer generated
totals.
(f) Programmed interrogation facilities whereby records held on magnetic files are printed on
a selective basis by means of direct request to those files.
1. What is the meaning of Computer Audit?
2. State two advantages of EDP System.
1. it refers to the method of processing information where processing tasks are carried out
electronically by a computer with the aid of magnetically coded instructions.
2. a. Quick processing of data b. Accuracy of output c. Complex problems are easily
handled by computer d. Faster transfer of data
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1. Computer Audit is also referred to as Electronic Data Processing Audits. Electronic Data
A computer is an electronic device which is capable of accepting input data, systematically

process the data and producing and /or storing the required output (information)
autonomously under the control of stored program instructions.
Therefore, auditors are required to possess update knowledge about the adoption of
computers and its effects on their audit engagements. An encompassing concept is
“Information Technology”.
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What is Computer Audit? State three advantages of EDP System.
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Glossary of Terms
Computer: an electronic device for storing and processing data, typically in binary form,
according to instructions given to it in a variable program.
Data: facts and statistics collected for reference or analysis
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Study Session 5: Auditor’s Liabilities
Introduction
The auditor is open to some liabilities and risks that challenge the effectiveness of
his/her services to companies.
In this study session, we will be discussing the essentials of auditor’s liabilities under statutes
5.1 Explain the essentials of auditor’s liabilities under statutes
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5.1 Introduction
The audit work is a contract of service with its attendant responsibilities and risks, which do
give rise to liabilities. The liability may be criminal or civil, and this implies that the auditor
needs to carry out his assignment with an appropriate care, skill set, competence and due
diligence failure of which can lead to his/her arraignment and conviction in court of law.
Categories of auditor’s liabilities

(a) Liability under Common Law:
Clients (under contract)
Third parties (under tort)
(b) Liability under Statutes:
Civil liability
Criminal liability
Liability under Common Law
Denotes that the audit client, that is, the company has a contract with the auditor. The
common Law is the ancient unwritten law for the community and binding on the community.
It is classified into:
(a) Liabilities to Client (under contract): This refers to liabilities of auditor for the breach of
contractual terms, that is, failure of auditors to fulfil the obligations under the contract. These
agreements are usually stated expressly in the letter of engagement. Apart from these express
agreements, there are also implied agreements, that is, agreements not expressly stated in the
letters of engagement but are too obvious and glaring from the agreement. These are duties of
skill and reasonable care in the course of his work to the client and negligence of which the
auditor can be sued.
Judicial rulings on liabilities to clients (under Contract) include the following:
London and Generale Bank (1895)
Kingston Cotton Mill (1896)
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The Mackesson and Robbins case (1939)
Thomas Gerrad & sons (1967)
(b) Liabilities to Third Parties (under Tort)
Here, the third party who is not a party to the contract can sue an auditor for a loss he
sustained. This is a clear departure from the concept of privity which states that a person who
is not a party to a contract cannot lay claim for damages nor benefits under it.
For a third party (under tort) to sue an auditor for a loss, the following conditions must be
fulfilled:
* The loss suffered must be economic in nature (i.e quantifiable in terms of price),
* The loss suffered must be as a result of financial misstatement,
* The loss must be as a result of auditor’s negligence.
* And that the auditor knew in advance that the third party will rely on his work.
Some decided cases in support of auditors’ liability to third Party include the following:
a) Donoghue vs Stevenson (1932)

b) Candler vs Crane Xmas (1951)
c) Hedley Bryne & Co Ltd. Vs Heller & Partner (1963)
d) Jeb Fastner Vs Kark Bloomer & Co (1980)
Liabilities under the Statues
This is also referred to as Statutory Liability. It simply means that auditors are also liable
when they violate any specific law. The Companies and Allied Matters Act (CAMA,1990)
and the Nigerian Criminal Codes (NCC) are the two general laws considered here:
Civil Liabilities under CAMA:
 Sec 368: Liabilities of Auditors for Negligence

 Sec. 502: Offence by Officers of a Company in Liquidation
Criminal Liabilities under Sec 563 and Sec 564 of CAMA:

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 Sec. 563(1) provides that where a prospectus issued includes any untrue statement, any
officer who authorized the issue of the prospective shall be guilty of an offence and shall
be liable to:
a. Imprisonment for a term not exceeding 2 years or a fine not exceeding N500,000 or
both.
b. Imprisonment for a term not exceeding 3months or a fine not exceeding N50,000 or
both.
 Sec. 564(1) is similar to that as provided in Sec. 563(1)
Minimising Professional liabilities of Auditors:

1. Client acceptance procedures
2. Proper use of engagement letters
3. Performance and documentation of audit work
4. Use of quality control procedures
5. External consultations
6. Disclaimers
7. Professional indemnity Insurance
1. What are the categories of auditor’s liabilities?
1. a. Liability under common law b. Liability under statues
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1. The audit work is a contract of service with its attendant responsibilities and risks, which
do give rise to liabilities. The liability may be criminal or civil, and this implies that the
auditor needs to carry out his assignment with an appropriate care, skill set, competence and
due diligence of which can lead to his/her arraignment and conviction in court of law.
Categories of failure auditor’s liabilities
(a) Liability under Common Law:

(b) Liability under Statutes:
Civil liability
Criminal liability
Liability under Common Law
Denotes that the audit client, that is, the company has a contract with the auditor. The
common Law is the ancient unwritten law for the community and binding on the community.
It is classified into:
(a) Liabilities to Client (under contract): This refers to liabilities of auditor for the breach of
contractual terms, that is, failure of auditors to fulfill the obligations under the contract. These
agreements are usually stated expressly in the letter of engagement. Apart from these express
agreements, there are also implied agreements, that is, agreements not expressly stated in the
letters of engagement but are too obvious and glaring from the agreement. These are duties of
skill and reasonable care in the course of his work to the client and negligence of which the
auditor can be sued.
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State the categories of auditor’s liabilities.
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Glossary of Terms
Liabilities: things for which someone is responsible, especially an amount of money owed.
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Study Session 6: Investigation
Introduction
The corporate organisation is a body that takes cognizance of the financial and
non-financial aspects in determining its overall effectiveness.
In this study session, we will be discussing the meaning and difference between investigation
and audit
6.1 Explain the meaning and difference between investigation and audit
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1.1 Introduction
Investigation is the examination of financial and non-financial data for a specific purpose. It
is an enquiry into the affairs of an entity for a special and specific purpose. Investigation is an
inquiry commissioned by management for a specific purpose. “It is an act of examining,
searching and inquiring into a matter with adequate care and accuracy, usually undertaken to
obtain information of particular or special nature.” (Oremade, 1988).
An investigating accountant may or may not be the auditor of the entity but it should be noted
that any accountant/auditor undertaking an investigation assignment is seen as an expert and
he must therefore exercise great care and skill in working towards achieving the defined
purpose/objectives laid down in the client’s instructions. The accountant should note that the
matter under investigation may start as an internal matter that could eventually end up in
court. Thus, great care and proper documentation is very important.
Comparison between Investigation and Audit
Similarities:
(a) Both involve the examination of data, especially financial data.

(b) Both involve objective gathering of evidence using similar techniques such as
observation, computation, analytical review etc.
(b) Both are being conducted by accountants using specialized expertise and experience
acquired through training over the years.
Dissimilarities:
S/N Point of Audit Investigation

Difference
1 Subject Matter Examination of only Inquiry of accounting
accounting information and other relevants
issues.
Information of business.
2 Object To report on the truth and Specified by client or arising
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fairness of the financial from his specific needs.

statements
3 Scope As laid down by statutes & As agreed with Client. May cover
GAAP and covers Entity’s only specified areas of the fin.
financial statements Statements.
4 Extent of Governed by the Companies’ Terms of reference agreed with

regulation Act and Auditing Client governs the relationship or
standards/guidelines assignment.
5 Period Covers 1 year or 6 months or Covers several years depending

any shorter period. on the purpose for which the
investigation is carried out.
6 Essence of Pre- It is never stated with foregone The essence of investigation lies
conceived Notion conclusion that something is in critical examination of
wrong that needs to be probed. accounts with some pre-
conceived notion about the state
of affairs of the business concern
under investigation.
7 Conduct It is carried out on behalf of It may be conducted on behalf of
the shareholders in the case of shareholders or proprietors, but
a company and proprietors in generally it conducted on behalf
the case of non-corporate of the prospective purchasers of
concern. the business or the potential
investors or the government or
the court.
8 Legal Binding It is compulsory under the There are no legal provisions to
law, especially statutory audit. make investigations obligatory.
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9 Extent of Test checking may be done In normal course, investigation

Checking provided the auditor can trust accounts are not audited.
the system of internal control
in operation.
10 Possibility of re- Audited accounts may further In normal course, investigation
occurrence be investigated with some accounts are not audited.
specific objective behind it.
11 Sequence of work Its rarely happens that It relates to the book which
investigation is done earlier to already has been audited.
the investigation.
Stages of conducting an Investigation
(a) Preparation
* Preliminary review- Background information about the client and the assignment,
culminating in the acceptance of the client and assignment.
* Obtain written instructions from the client; agree on terms of reference.
* Planning.
(b) Field Work
* Ascertaining the facts and obtaining information/evidence from relevant sources.
* Examination and verification of data/evidence obtained.
(c) Reporting
* Analysis, interpretation and evaluation of evidence.
* Writing the report of the assignment
Note: Depending on the investigating accountant, the above stages may be modified, but in
all cases, there must be detailed planning (giving the approach, time schedule etc), obtaining
of sufficient evidence (including through the assistance of experts) and reporting.
Classes of Investigation:
Investigations carried out by Accountants often fall into the following classes:
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(a) Investigations for investment purpose (including partnership participations) or purchase of

a business.
(b) Investigation for a lending banker (loan decisions).
(c) Investigations under CAMA:
* Section 314 – Investigation into the affairs of a company on application by not less than
25% of members on the register of the company (for companies not having share capital) or
not less than 25% of the class of shares issued.
* Section 315 – In response to sect. 314, CAC can appoint competent inspectors to
investigate the affairs of a company and report on them, if the court orders so. Reasons for
such investigation include, if there are circumstances suggesting that:
i. the company’s affairs are being or have been conducted with intent to defraud its creditors
or the creditors of any other person or in a manner which is prejudicial to some part of its
members; or
ii. any actual or proposed act or omission of the company is or would be prejudicial or that
the company was formed for any fraudulent or unlawful purpose; or
iii. persons concerned with the company’s formation or the management of its affairs have in
connection therewith been guilty of fraud, misfeasance or other misconduct towards it or
toward its members; or
iv. the company’s members have not been given all information with respect to its affairs
which they might reasonably expect.
Section 326 – investigation of the ownership of a company by CAC on the application of
members as in sect. 314.
(d) Investigation under Investment and Securities Act (ISA) 2007:
* Section 172 – investigation of a collective Investment scheme.
(e) Investigation for financial crime, fraud, burglary or damage caused by fire.
(f) Investigation preceding the issue of a Prospectus or statement in lieu of Prospectus
(g) Investigation for business reorganizations and reconstructions or for mergers and
acquisition schemes.
(h) Tax investigations (Back duty).
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Investigation for Prospectus Reporting:
The CAMA defines a prospectus as “any prospectus, notice, circular or other invitation,
offering to the public for subscription or purchase of any shares or debenture of a company”.
Schedule 15, part 1 of the CAMA set out the mandatory contents of a prospectus.
These include:
(a) The company’s proprietorship, management, and its capital requirement,

(b) Details relating to the offer,
(c) Commissions preliminary expenses,
(d) Dates, parties to and the general nature of material contracts
(e) Names and addresses of the company’s auditor.
Since prospectus is require to raise finance on the capital market, it therefore necessary that a
prospectus must be investigated for the purpose of reporting by an accountant.
Parties to a Prospectus:
 The issuing house

 The Registrar
 The Stockbroker
 The Auditor
 The solicitors to the company and to the issue and the receiving banker etc
Procedures for conducting Prospectus Investigation:
(A) Agree and obtain terms of reference with the issuer (the company) on the following:
 Clarify and reach an agreement of understanding with the management on the
responsibilities of reporting accountant,
 Whether he/she will be required to prepare the ‘long form report’,
 Where there is a profit forecast prepared by management for inclusion in the
prospectus,
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 Whether the reporting accountant will be attending completion board meeting where
the prospectus is drafted and the possibility of receiving a copy,
(B) The reporting accountant will request and obtain the audited financial statements for
the past 6 years and the interim/management accounts for the current year,
(C) Conduct a detailed audit test and procedures in order to gather sufficient appropriate
evidence,
(D) The reporting accountant will make appropriate adjustments, where necessary on the
reported figures in the accounts of the period covered,
(E) The reporting accountant will conduct a detailed review of the profit forecast, as far as
the accounting policies and calculations are concern,
(F) The reporting accountant prepares and submits his/her report addressed jointly to the
directors of the issuer company and the issuing house.
Investigation of Profit Forecast:
A profit forecast is described as any estimate of profit made in respect of past financial
periods, current or future accounting periods. It is required where a prospectus contains a
profit forecast.
Procedures for conducting Profit forecast:

A. Obtain a letter of engagement detailing agreements reached with management on the
following:
 The periods covered by the profit forecast,
 The rationale behind the preparation and inclusion of such forecast,
 The specific duties and responsibilities of the accountant with respect to the
forecasted,
 The managements duties and responsibilities with respect to the forecast
 Ensure that there is no restriction on time limit for the task and no limitation on the
scope of work
B. Conduct a thorough review of the profit forecast.
C. Prepare and submit the account report.
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1. Define the term investigation.
1. Investigation is an inquiry commissioned by management for a specific purpose
Page 81 of 89
1. Investigation is the examination of financial and non-financial data for a specific purpose.
It is an enquiry into the affairs of an entity for a special and specific purpose. Investigation is
an inquiry commissioned by management for a specific purpose. “It is an act of examining,
searching and inquiring into a matter with adequate care and accuracy, usually undertaken to
obtain information of particular or special nature.” (Oremade, 1988).
An investigating accountant may or may not be the auditor of the entity but it should be noted
that any accountant/auditor undertaking an investigation assignment is seen as an expert and
he must therefore exercise great care and skill in working towards achieving the defined
purpose/objectives laid down in the client’s instructions. The accountant should note that the
matter under investigation may start as an internal matter that could eventually end up in
court. Thus, great care and proper documentation is very important.
Comparison between Investigation and Audit
Similarities:

observation, computation, analytical review etc.
(c) Both are been conducted by accountants using specialized expertise and experience
acquire through training over the years.
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Enumerate the similarities in investigation and audit.
Page 83 of 89
Glossary of Terms
Fraud: wrongful or criminal deception intended to result in financial or personal gain.
Page 84 of 89

Page 85 of 89
Notes on Self-Assessment Questions for Study Session 1
SAQ 1.1
a. Random – each item of the population has an equal chance of being selected.
b. Representative – the sample should be representative of the items in the whole
population.
c. Protective of the auditor – More intensive auditing should occur on high-value items
known to be high risk.
d. Unpredictable – Client should not be able to know or guess which items will be
examined.
SAQ 1.2
SAQ 2.1
Primary Auditor
Responsibilities of Primary Auditor on Holding Company’s Accounts:
(a) Audits schedules to accounts.

Page 86 of 89
(b) Verification of existence and ownership of investments in the subsidiaries account.
(c) Verification of current and loan accounts with subsidiaries.
Responsibilities of Primary Auditor on the Group Accounts:
(a) forming opinion on the truth, fairness and compliance with statute of account of each
company in the group.
(b) forming opinion on the truth, fairness and compliance with of the consolidated account as
a whole.
Secondary Auditor
Responsibilities of Primary Auditor on Secondary Auditor: When the Primary Auditor

intends to use the works of secondary auditor, he should consider the following:
(a) He consider the professional competence of the secondary auditor regarding the
assignment.
(b) He may discuss with the other auditor about the audit procedure applied.
(c) Review the written summary of the secondary auditor’s procedures.
SAQ 3.1
g) The CAMA, cap C20, LFN 2004 (as amended)

h) The CBN Act 2004 (as amended)
i) The Banks and Other Financial Institutions Act (BOFIA)1991 as amended
j) The Prudential Guidelines(as updated till date)
k) The CBN monetary Circulars – issued from time to time; more often on yearly basis
l) The NDIC Act 1988 as amended
Page 87 of 89
SAQ 3.2
a. CAMA, cap C20 LFN 2004.

b. The Insurance Act 2003
c. IFRS 4 Insurance Contracts
d. Relevant circulars issued by NAICOM.
SAQ 4.1
Computer Audit is also referred to as Electronic Data Processing Audits. Electronic Data
Advantages of EDP
f) Quick processing of data

g) Accuracy of Output
h) Complex problems are easily handled by computer
SAQ 5.1
(c) Liability under Common Law:

(d) Liability under Statutes:
Civil liability
Criminal liability
Page 88 of 89
SAQ 6.1
Similarities:

observation, computation, analytical review etc
(c) Both are been conducted by accountants using specialized expertise and experience
acquire through training over the years.
Page 89 of 89

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OLABISI ONABANJO UNIVERSITY

OPEN AND DISTANCE LEARNING CENTRE

ACC 424: Auditing and Assurance Services 2

COURSE DEVELOPMENT TEAM

Dr. Kenny Soyemi – Subject Expert

Prof I. R. Akintoye – Course Reviewer

Prof. Dare Samson – Language Editor

Prof. Oyesoji Aremu – ODL Expert

Mr. Israel O. Asogba – Instructional Designer

Vice Chancellors Message

Prof Ganiyu Olatunji Olatunde

Vice Chancellor OOU

Course Study Guide

Recommended Study Time

What you are to expect in this course

Working through this course

The major components of the course are;

Printed Lecture Materials

Tutor-Marked Assignment (TMA)

Final Examination and Grading

Tutors and Tutorials

Accounting technicians scheme of West Africa (ATSWA) 2011

International Standard on Auditing (ISA)

Vice Chancellors Message ......................................................................................................... 3

Course Study Guide ................................................................................................................... 4

Study Session 1: Audit Sampling ............................................................................................ 13

Learning Outcome for Study Session 1 ............................................................................... 13

1.1 Audit Sampling .............................................................................................................. 14

1.1.1 Definition and Meaning of Audit Sampling ........................................................... 14

Determinants of Audit Sampling ..................................................................................... 14

Features of a Good Sample .............................................................................................. 15

1.2 Types of Audit Sampling ............................................................................................... 15

Steps involved in Audit Sampling ................................................................................... 17

Summary of Study Session 1 ............................................................................................... 19

Self-Assessment Questions (SAQ’s) for the Study Session 1 ............................................. 20

Glossary of Terms ................................................................................................................ 21

References/ Further Reading................................................................................................ 22

Study Session 2: Audit of Group Accounts ............................................................................. 23

Learning Outcome for Study Session 2 ............................................................................... 23

2.1 Definition and Meaning of Group.................................................................................. 24

Audit Consideration of Group Audit ............................................................................... 24

The Primary Auditor ........................................................................................................ 24

The Secondary Auditor .................................................................................................... 25

2.2 Specific Planning Problems ........................................................................................... 26

Summary of Study Session 2 ............................................................................................... 29

Self-Assessment Questions (SAQ’s) for the Study Session 2 ............................................. 30

Glossary of Terms ................................................................................................................ 31

References/ Further Reading................................................................................................ 32

Study Session 3: Specialised Audit.......................................................................................... 33

Learning Outcome for Study Session 3 ............................................................................... 33

3.1 Introduction .................................................................................................................... 34

Audit of Banks ................................................................................................................. 34

CBN Act and BOFIA ....................................................................................................... 34

BOFIA and Accounting and Audit of Banks ................................................................... 36

NDIC AND Bank’s Deposit Insurance ............................................................................ 37

BOFIA and Prudential Guidelines on Bank Audit .......................................................... 38

Income Recognition ......................................................................................................... 38

3.2 Revolving and Overdraft Facilities ................................................................................ 41

Investment in Securities ................................................................................................... 41