Tambre Foods Group Audit: Covenant Headroom, a Restricted Component Auditor and a Cut-off Anomaly

The headroom is illusory until the covenant definition is tested. Recompute EBITDA strictly on the loan agreement's definitions. If the revaluation gain is excluded (a common carve-out, and almost certainly a non-cash, non-recurring item), EBITDA falls by NGN 0.9bn and the ratio moves from 1.27 to below 1.25 - i.e. the covenant is breached at 31 December 2025.

Classification. IAS 1.74 requires a liability to be classified as current if the entity has breached a covenant at the reporting date that makes the loan repayable on demand, unless the lender had agreed by the reporting date (or before the statements are authorised for issue) to provide a waiver or a grace period of at least twelve months. A waiver obtained after the reporting date but before authorisation does not fix the classification at the reporting date; it is a non-adjusting event. So obtain: the signed facility agreement, the bank's covenant compliance certificate and its computation, correspondence and board minutes, and written confirmation from the bank of whether it considers a breach has occurred and whether it will waive.

Going concern (ISA 570). Obtain the 12-month cash flow forecast, including headroom on all facilities, the debt service schedule, forecast covenant compliance, and any shareholder support. Stress-test for a further naira depreciation and for the NGN 1.4bn of revenue that may reverse. Challenge the assumptions and check the forecast's historical accuracy.

Reporting. If the loan becomes current and refinancing is not assured, a material uncertainty may exist and the going concern section of the auditor's report is required; if the disclosures are inadequate, qualify or express an adverse opinion as appropriate. Communicate with those charged with governance before the opinion is finalised, and ensure the covenant position and any waiver are disclosed.

Framework. Under ISA 600 (Revised), the group engagement team is solely responsible for the group opinion and must obtain sufficient appropriate audit evidence over the component. Access to the component auditor's working papers supports direction, supervision and review but is not the only route to evidence - the team can also perform procedures itself or use the component's own records.

Escalation ladder. (1) Establish the contractual right: the group's engagement letter with the subsidiary and the group audit engagement terms should entitle the group team to access; ask Tambre management, as the entity that appointed Mensah & Co., to instruct access. (2) Understand the stated restriction - 'local confidentiality rules' is often a misunderstanding of professional confidentiality rather than a legal bar. (3) If access remains denied, perform alternative procedures at group level: review the component's financial statements and trial balance, agree intra-group balances and unrealised profit, perform analytical review, attend a closing meeting, test significant balances directly, and consider a separate engagement or a firm-locally-arranged review. (4) Evaluate whether Mensah & Co. is subject to an acceptable quality management system (ISQM 1 equivalent) and whether its work is adequate, documenting the assessment.

Opinion consequence. If, after all alternatives, the team cannot obtain sufficient appropriate evidence on 28% of revenue - material but not pervasive - a qualified opinion ('except for') on the group financial statements is required. If the component were so significant that its exclusion was pervasive, a disclaimer would follow. A management-imposed restriction on access is a limitation on the evidence available, not a change in the scope of the audit, so it cannot be accepted by varying the engagement terms. Document the restriction and report it to those charged with governance and, where relevant, to the regulator.

Cut-off testing on the 312 invoices (NGN 1.4bn). This population is 2.9% of revenue but 45% of profit before tax - clearly material. Obtain the full invoice and goods-despatch note population as a computer-assisted extract, recompute the flagging rule (invoice date in the period, despatch date after), and agree the population to the sales ledger to confirm completeness. For each flagged item, obtain the despatch note, weighbridge ticket and customer confirmation of receipt; check the revenue recognition policy (control normally passes on despatch for these terms) and whether any bill-and-hold arrangement exists, which needs the IFRS 15.26 criteria to be met. Extend testing to early-January credit notes and returns. If the invoices are recognised before despatch, propose an adjustment and consider whether the misstatement is deliberate - ISA 240 requires treating cut-off manipulation as a fraud risk.

The 47 late-night manual journals. Test the complete journal population for the period, not just the flagged items: understand the business rationale of each posting, agree to supporting documentation and approval, and review user access rights - two users holding both journal and payments rights is a segregation-of-duties failure that should be reported to those charged with governance.

Scepticism. Do not accept management's explanation at face value; corroborate oral explanations with documents and third-party evidence. Ask why month-end revenue was posted after hours by users with AP rights, whether targets or bonuses depend on revenue, and whether the pattern existed in prior years. Record the fraud indicators and consider whether the matter, once quantified, requires communication to the audit committee and, potentially, under ISA 250 where law or regulation is breached.