Going Concern, Component Auditor Reliance and Unpaid Audit Fees

The starting point is that the loan covenant was breached at 31 December 2024; the loan was therefore payable on demand at the reporting date unless a valid waiver or refinancing existed. Reclassifying the ₦450m loan from short-term to long-term improves the current ratio only if the reclassification is supported by an agreement or waiver that existed at year-end. A waiver dated 15 February 2025, after the reporting date, does not change the condition at 31 December 2024, although it is relevant evidence for the going concern assessment. More importantly, the waiver expires on 30 June 2025, which is less than twelve months from the reporting date. IAS 1 requires the going concern assessment to cover at least twelve months from the end of the reporting period, so the waiver period is insufficient. There is therefore a material uncertainty over the group’s ability to continue as a going concern. If management makes adequate disclosure of the material uncertainty, the auditor issues an unmodified opinion with a separate material uncertainty relating to going concern section. If the disclosure is inadequate, the opinion should be qualified or adverse, depending on pervasiveness. The reclassification may also be a material misstatement of the current ratio and covenant compliance.

Under ISA 600, the group engagement partner remains responsible for the group audit opinion even when a component auditor performs work. The group team must evaluate the component auditor’s competence, independence and quality control, communicate clearly on scope and instructions, review the component auditor’s work and documentation, and evaluate whether the work is sufficient for the group’s purposes. The group auditor should not make reference to the component auditor in the group audit report unless required by law or regulation; the group auditor owns the opinion. The undisclosed ₦300m loan to a company owned by a director’s wife is a related party transaction under IAS 24. The relationship and the outstanding balance, terms and any security should be disclosed. Its omission is a material misstatement. The auditor should obtain written representations, communicate the matter to those charged with governance, assess whether the loan is legal and properly approved, and consider the effect on the audit opinion. If the misstatement is material but not pervasive, a qualified opinion is appropriate; if pervasive, an adverse opinion may be needed. The auditor should also consider whether the matter indicates fraud or non-compliance with laws and regulations.

Unpaid fees for two consecutive years create a self-interest threat, and may also create an intimidation threat if the client can influence fee recovery. The fee dependency is significant: 18% of firm revenue from one listed client tests the IESBA threshold for listed entities, which requires disclosure to those charged with governance and consideration of safeguards where total fees exceed 15% of the firm’s total fees for two consecutive years. The combination of overdue fees and high dependency increases the risk that the audit partner will be reluctant to challenge management, particularly on going concern and the related party loan. Safeguards could include an independent quality control review of the engagement, review of the fees by the firm’s ethics committee, a formal fee recovery plan, and disclosure to those charged with governance. If the firm’s independence or objectivity cannot be protected, the firm should resign from the audit. The firm should not allow the unpaid fees to become a loan to the client.