Question
CML is a motor vehicle dealership dealing in only brand new vehicles. CML holds franchises for two European vehicle manufacturers and one Japanese manufacturer. The
CML is a motor vehicle dealership dealing in only brand new vehicles. CML holds
franchises for two European vehicle manufacturers and one Japanese
manufacturer. The company also offers car service and spare parts for the
brand of cars they sell. In addition, it also generates revenue from walk-in-
customers who buy spare parts for their own use.
The following are brief notes from the meeting between theengagement partner
and Phillip, Director of Finance (DOF - CML).
The property & equipment of CML includes leased motor vehicles, owned motor
vehicles, workshop equipment, furniture and fittings and office equipment. The
net book value of all assets was Shs10.9 billion as at 31 December, 2017.
Management revalued workshop equipment during the year and this resulted in
a gain of Shs500million. Phillip and his team agreed to pass a journal entry in the
accounting system recognising the increase in the carrying value of the workshop
assets and recognised the corresponding entry under other income in profit or
loss.
The Directors, in their meeting held on 20 December, 2017 decided to dispose of
some assets which had been kept at one of the warehouses of CML ready for
sale. The assets to be disposed of had a carrying amount of Shs 1.7 billion. The
assets were intended to be sold in their condition at that date. The assets are
part of the financial statements under property & equipment with a net book
value of Shs10.9 billion. The directors expected that the sale would be completed
within the following financial year.
The company also had investments composed of shares and advances held in
related companies. Shs 1.5 billion was advanced to City Properties Limited (CPL)
as a soft loan to acquire property 2 years ago. CML prepared a loan repayment
schedule for a period of 3 years but CPL has not paid anything to date due to
cash flow constraints.
The company purchased a software license from India on 2 January, 2017 to
track its fleet of leased motor vehicles. The license covers a period of 10 years
and as agreed, the software will be maintained by the supplier over the duration
of the licence. The cost of the license was Shs 2 billion and this will be amortised
over 10 years on a straight-line basis. The net book value of the intangible assets
in the financial statements is Shs 1.8 billion and the amortisation in profit or loss
is Shs 200million. The installation of the software in the vehicles was not done
until 30 June, 2017 as that was when the vendor was able to come to Uganda to
install the software and train CML staff.
The inventory of CML includes brand new vehicles, spare parts for motor
vehicles, spare parts inventory under work in progress and third party inventory
for the motor vehicles held on behalf of the manufacturers. The company has in
the past experienced difficulties with spare parts inventory. The physical
inventory of spare parts does not normally reconcile with the inventory balance
in the accounting system ledger. Inventory included on the balance sheet is
worth Shs 1.6 billion. Wise & Co. was invited for the physical inventory count but
the reconciliation between the count results and the book balance is likely to
take long and hence may not be considered during the audit of this year's
financial statements.
CML's income is largely from three sources, that is, car lease rental income, car
service and sale of spare parts; and sale of spare parts to walk-in-customers.
The company has decided to adopt IFRS 15 (Revenue from Contracts with
Customers).
The statement of financial position of CML indicates deferred tax of Shs 300
million and tax claimable under current assets of Shs 300million. Uganda
Revenue Authority (URA) has written to CML that it will be carrying out a routine
audit in July 2018.
The following is an extract of CML's statement of profit or loss & other
comprehensive income for year ended 31 December, 2017.
2017 2016
Shs 'billion' Shs 'billion'
Revenue 25.7 21.7
Direct costs (15.8) (14.2)
Gross profit 9.9 7.5
Other income 0.9 1
Operating income 10.8 8.5
Expenses (6.1) (4.8)
Operating profit 4.7 3.7
Finance costs (3.6) (3)
Profit before taxation 1.1 0.7
Income tax (0.5) (0.2)
Profit after tax 0.6 0.5
Other comprehensive income - -
Total comprehensive income for the year 0.6 0.5
Extract of the statement of financial position as at 31 December, 2017
2017 2016
Assets: Shs 'billion' Shs 'billion'
Non-current assets:
Property & equipment 10.9 11.5
Investments 5.2 5.1
Intangible assets 1.8 -
Deferred tax 0.3 0.4
18.2 17.0
Current assets:
Inventories 1.6 1.2
Trade & other receivables 9.5 9.3
Income tax 0.3 0.2
Cash & cash equivalents 1.1 0.3
12.5 11.0
Total assets 30.7 28.0
Brief notes from the pre-audit meeting held with the engagement partner and
the audit team.
The engagement partner informed the audit team about a new pronouncement
that has been included in the Code of Ethics for Professional Accountants, that is,
non-compliance with laws and regulations (NOCLAR). He elaborated that certified
public accountants (CPAs) now have a duty to respond to non-compliance or
suspected non-compliance with laws and regulations. NOCLAR is defined as any
act of omission or commission, intentional or unintentional, committed by a
client, such as CML, or by those charged with governance (the Board) or
management, or by other individuals working for or under the direction of a
client or employing organisation, which is contrary to the prevailing laws or
regulations. The Code sets out the expectation that 'turning a blind eye' to non-
compliance or suspected non-compliance is not an acceptable response from a
CPA.
Required:
(a) Evaluate the audit risks relevant at the planning stage of the audit of CML.
(12 marks)
(b) Discuss with the audit team responsible for attending the inventory count,
the matters to consider before attending the inventory count at CML.
(10 marks)
(c) Recommend to the audit team the principal audit procedures to be carried
out before the inventory count.
(10 marks)
(d) Discuss with your audit team the steps Wise & Co. would take on
becoming aware of any NOCLAR or suspected NOCLAR at CML.
(10 marks)
(e) Prepare n extract of a suitable audit opinion assuming CML's
management was unable to reconcile the inventory in the financial
statements with the physical inventory count. (Please consider only the
opinion paragraph and the basis of opinion paragraph).
(8 marks)
(Total 50 marks)
SECTION B
Attempt two of the four questions in this section
Question 2
You work for Niko& Co. (Niko) as an audit manager. Nikooffers both external
and internal audit services to a range of clients both in the public and private
sectors.
Niko is the external auditor of African Breweries Limited (ABL). The firm has
been approached by Victoria Breweries Limited (VBL) to provide internal audit
services. The fees for this assignment are significant and Niko is likely to accept
the appointment. Both ABL and VBL are in the same business of beer brewing.
The Uganda Environmental Authority (UEA), a government parastatal has also
outsourced Niko for provision of internal audit services. This engagement will
contribute at least 7% of the total revenue of the firm. During a meeting with
UEA officials, Niko was informed about the Principles of Public Life. They were
cautioned that any breach of any of the principles would automatically result into
cancellation of the contract. They also cautioned Niko about communication of
the findings of the internal audit engagement and the confidentiality needed.
Required:
Prepare brief notes for Niko's managing partner on the following issues:
(a) Matters Niko should establish while planning an internal audit engagement
of VBL and UEA.
(3 marks)
(b) Various safeguards Niko should consider to ensure that no ethical conflicts
arise in relation to the services offered to both ABL &VBL.
(12 marks)
(c) Expected public sector life principles as required of the internal auditors in
public offices.
(10 marks)
(Total25 marks)
Question 3
Your firm Abby & Co. (Abby) has been approached by Zip Uganda Limited (ZUL)
to perform a review engagement of their (ZUL's) financial statements for the
year ended 31 December, 2017 before they are submitted to their auditor,
Rutledge & Co. (Rutledge). ZUL's financial statements for the year ended 31
December, 2016 were qualified because they(financial statements) were
materially misstated and there were circumstances where the auditor was not
able to obtain sufficient appropriate audit evidence for material balances.
ZUL manufactures plastic products such as chairs, water tanks, basins, jerry
cans, utensils among others. It is located in Namanve Industrial park and has
various outlets in Uganda and South Sudan.
ZUL has both manual and automated internal controls.The controls over
information systems include internal accounting controls, operational controls
and administrative controls. The company is in the process of minimising on
manual controls due to the impact of information technology on the global
scene. You are a senior supervisor at Abby.
Required:
(a) Discuss the factors that:
(i) may hinder Abby from accepting the review engagement.
(8 marks)
(ii) Abby should consider before accepting the engagement. (3 marks)
(b) Explain the nature of audit procedures necessary to obtain audit evidence
that will enable the auditor to draw reasonable conclusions on which to
base their opinion. (2 marks)
(c) Discuss the intended objectives of information system controls at ZUL.
(12 marks)
Question 4
Your firm, Blueprint & Co. (Blueprint) offers both audit and accountancy services
to a wide range of clients. Accountancy services sometimes involve managing the
whole finance department of an entity including payment of salaries for client
staff and the related statutory deductions of taxes and social security. Blueprint
has been offering accountancy services to KK Hospital for the last 6 months. The
hospital management recently discovered that there had been loss of money due
to fraudulent practices. It was noted that some doctors and laboratory
technicians colluded on several occasions to charge clients for services they
never billed for and reflected in the accounting system. The hospital
management inquired as to why Blueprint staff were not able to stop this fraud
given the ethical requirements expected of professional accountants. The
hospital intends to open criminal and civil proceedings against Blueprint and their
own staff after ascertaining the actual loss incurred. You are an audit manager at
Blueprint & Co. and need to prepare some notes for discussion with the
engagement partner which will later be presented to the directors of the hospital.
Required:
(a) Prepare brief notes for the Board of Directors of KK Hospital on the
following:
(i) Categories of fraud. (7 marks)
(ii) The steps undertaken by fraudsters in execution of their fraudulent
practices.
(6 marks)
(b) Explain how Blueprint can be protected from criminal and civil liability.
(12 marks)
(Total25 marks)
Question 5
You are an audit supervisor at Zink & Co. (Zink). The firm has been appointed
by Wit Commercial Bank Limited (WCBL), a medium-sized financial institution, to
carry out the audit for the year ended 31 December, 2017. Zink views this as an
opportunity to enter the market of financial services in Uganda. The firm has
never audited a client in the financial services sector but all the necessary
measures can be put in place to ensure that the firm carries out the audit as per
the requirements of the Financial Institutions Act (FIA), International Financial
Reporting Standards (IFRS) and the Company's Act, 2012.
WCBL's shareholders include two Ugandans and one Dutch national. The bank
has a board of directors consisting of 7 members with various committees as
required by the central bank.
The central bank has very strict regulations in relation to auditors and offences
committed by auditors under the Accountants Act, 2013 could lead to serious
consequences.
You have been informed by the engagement partner that you will be required to
head the audit team.
Required:
(a) Discuss with the engagement partner:
(i) matters to consider when assessing WCBL's integrity.
(12 marks)
(ii) criminal offences referred to by the central bank.
(3 marks)
(b) Discuss the necessary considerations during the assessment of Zink's
capacity to accept the WCBL engagement.
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