Question 1

BONTON INVESTMENTS LIMITED

Bonton Investments Limited (BIL) is incorporated in Uganda whose principal

activities include international forwarding and logistics, inland transport and

haulage, customs brokerage services, trucking and distribution, warehousing,

storage and redistribution, project planning, management and forwarding supply

chain management solutions.

The financial statements for BIL are prepared in accordance with international

financial reporting standards (IFRS). During the year ended 31 December,

2017the company realised total revenue of Shs 32 billion, profit before tax of

Shs10 billion and total assets worth Shs 60 billion.

Your audit team at TPK & Co. has completed the audit of BIL for the year ended

31 December, 2017 and handed over the audit file to you for your review.

The following are your findings from the review of the audit file.

Materiality:

There was no evidence on file to indicate that the audit team computed

materiality for the audit of BIL. You were, however, reliably informed that this

was computed. The engagement manager has also shared with you his

computation. The materiality was Shs 1.27 billion at the planning stage.

Investments in an associate:

The working papers on file indicate that BIL made an investment of Shs 4 billion

in Hope Radio Limited (HPL) an associate. An inquiry was made from the Finance

Director who indicated that BIL has 20% shareholding in HPL and the rest of the

shares are owned by the directors of BIL. The team did not, therefore, see any

need of carrying out any audit procedures since HPL is owned by the directors

and shareholders of BIL.

Property and Equipment:

The working papers show that property and equipment has a net book value of

Shs 8 billion of which, Shs 6 billion relates to purchase of land located in

Namanve industrial park and in Luzira. The company intends to develop the land

as a yard for its trucks and also build administration blocks. The audit team was

able to obtain the sale agreements, the ledger in the accounting system and traced all payments made to the respective supporting documents such as

invoices and the assets register. There is no other evidence on file.

BIL has been in negotiations with its insurers, PVC Insurance Company Limited,

over compensation for their 3 trucks that had accidents during the year. The

insurance company had in principle agreed to compensate BIL but there were

disagreements on the amounts to be reimbursed. On 10 January, 2018 an

agreement was reached and BIL will receive Shs 1.5 billion from the insurers as

compensation. No adjustments have been made to the financial statements since

the agreement was reached after 31 December, 2017.

Prepaid operating lease rental:

The working papers also indicate that the company has prepaid operating lease

rental worth Shs 30 billion for three properties located in Malaba, Namanve, and

Kampala industrial area each having a 99 year lease period with 80 years, 70

years and 50 years respectively remaining on the lease. All the necessary audit

evidence is on file. The properties are depreciated on the reducing balance

method over the period of their lease.

Trade and other receivables:

Trade and other receivables have a carrying amount of Shs 20 billion. The

customer base is of both large and small clients. All these clients are known to

BIL and therefore all are expected to pay although some have been experiencing

financial difficulties. BIL has therefore made a general provision of 5% and

management is comfortable with this accounting treatment.

Employee costs:

BIL has over 200 employees on their payroll. The working papers indicate that

the audit objectives on the payroll system were met. The audit team made

inquiries from the Human Resource manager whether there was any fraud

relating to the payroll during the year, to which she replied no. Further audit

tests were deemed not necessary since the time allocated for the audit was not

enough. The total payroll amount for the year was Shs 2 billion.

Brief notes of the engagement partner on key audit matters:

The engagement partner informed you about the new international standard on

auditing, ISA 701: Communicating Key Audit Matters in an Independent Auditors'

Report. She informed you that the main objective of this Standard is to enable

the auditor determine key audit matters, and having formed an opinion on the

financial statements, communicate these matters by describing them in the audit

report.The Standard applies to audits of a complete set of general purpose financial

statements of listed entities and circumstances where the auditor otherwise

decides to communicate key audit matters in the auditor's report or when

required by law or regulation. The Institute of Certified Public Accountants of

Uganda is still debating whether to regulate and decide that all auditor's reports

should include key audit matters irrespective of whether the entity audited is

listed or not.

Key audit matters are matters that, in the auditor's professional judgement, were

of most significance in the audit of the financial statements of the current period.

Key audit matters are selected from those matters communicated to those

charged with governance.

Required:

(a) Prepare notes to be presented to the audit team after your file has been

reviewed.

(16 marks)

(b) Recommend to the audit team the audit procedures that need to be

carried out for events and or transactions, such as, the Shs 1.5 billion to

be received from PVC Insurance Company Limited.

(8 marks)

(c) Advise the audit team on the audit procedures necessary to verify the

investment in associates of Shs 4 billion made by BIL.

(10 marks)

(d) In case the audit team discovers that Shs 3 billion of the Shs 4 billion

investment in HPL was diverted to the directors' accounts; recommend the

appropriate audit opinion (giving reasons) in case BIL refuses to amend

the financial statements.

(6 marks)

(e) Discuss with the engagement partner the considerations that may be

relevant in determining matters of most significance in the audit of the

financial statements of the current period that constitute key audit

matters.

Question 2

You work for SOSH & Co.as an audit manager. During the routine review carried

out by the Institute of Certified Public Accountants of Uganda (ICPAU), SOSH &

Co. was found not to be fully compliant with the required laws and regulatory

requirements. As a result, ICPAU has included the firm on the list of those firms

that face the risk of being closed if they do not rectify their weaknesses in a

period of twelve months.

SOSH & Co. offers a wide range of services including internal audit services

where it has a niche. The Institute of Internal Auditors of Uganda has requested

for a meeting next week with the firm. The agenda of the meeting will be mainly

on quality assurance in internal auditing. The quality assurance and

improvement programme (QAIP) will also be discussed. QAIP enables an

evaluation of the internal audit activity's conformance with the definition of

internal auditing and professional standards for professional practice of internal

auditing and evaluates whether internal auditors apply the code of ethics.

Required:

(a) Draft a letter advising the partners of SOSH & Co. on the following:

(i) The purpose of abiding with laws and other regulatory requirements.

(7 marks)

(ii) The related consequences in case of failure to comply with laws and

other regulatory requirements.

(6 marks)

(b) Advise the partners on the benefits QAIP has to offer to SOSH & Co. in

their capacity as internal auditors.

(8marks)

(c) Discuss the possible benefits to companies that outsource their internal

audit services to SOSH & Co.

Question 3

You work for the Office of the Auditor General (OAG) as a principal auditor. Part

of the OAG's mandate is to carry out value for money audits (VFM). The director

of VFM audits at the OAG has informed you that you will head the team to carry

out a VFM audit of Peace and Reconciliation Projects (PRP) in Northern Uganda.

This is a five year project funded by the development partners to the tune of Shs

20 billion. The audit is expected to focus on the 3Es as explained below:

Economy: Is the project buying inputs of the appropriate quality at the

right price?

Effectiveness: Is the project acquiring resources of appropriate quality and

quantity at the lowest cost.

Efficiency: How well does the project convert inputs into outputs

therefore referring to maximising the useful output from the

resources used or minimising the level of work in producing a

given level of output?

Required:

Prepare brief notes for the Director of VFM audits at the OAG on the following:

(a) The matters to be agreed upon prior to commencement of PRP's value for

money audit.

(8 marks)

(b) The red flags to be alert to during the value for money audit of PRP.

(7 marks)

(c) The common areas of consideration during a value for money audit.

(10 marks)

Question 4

Your audit firm Promise & Co. is on the list of pre-qualified firms of NAM Bank

Limited (NBL) to offer audit services to its clients. You have been approached by

the bank with an offer to audit Fusion Petroleum Limited (FPL) a small-size

entity, for the year ended 31 December, 2017.

FPL deals in importation of petroleum products such fuel oil, automobile oils and

related products. FPL obtained a loan of Shs 1 billion from NBL. The company's

financial statements were poorly prepared by the previous auditors and the bank

suspects fraudulent practices which could eventually lead to FPL failing to pay

back the loan. Although FPL's loan is secured, the bank has to ensure that the

company remains afloat if it (NBL) is to recover its loan.

Required:

(a) Discuss with the audit team:

(i) The objectives of carrying out fraud investigation at FPL.

(4marks)

(ii) The patterns of unusual or illogical business practices the team

should be alert to during the fraud investigations at FPL.

(5marks)

(b) Explain to the audit team:

(i) The reasons why Promise & Co. may encounter difficulties in

obtaining audit evidence in relation to a small enterprise like FPL.

(6 marks)

(ii) Different ways the audit team may use to obtain audit evidence at

FPL especially in circumstances where there may be no internal

controls in place.

Question 5

You recently attended a continuing professional development (CPD) training

organised by the Institute of Certified Public Accountants of Uganda on behalf of

your audit firm Jotham & Co. The following is an extract of the presentation by

one of the facilitators.

"Professional appointments involve client acceptance, engagement

acceptance and change in professional appointments. Unlike other goods and

services, direct advertisement for audit services is not allowed. The

assumption is that clients look out for the professional services provider but

not vice versa. However, what guides the auditors during the marketing

process are the ethical and professional considerations in the process of

establishing and negotiating fees."

........"During an engagement acceptance, a professional accountant in public

practice should evaluate the significance of identified threats and, if they are

clearly significant, safeguards should be applied to either eliminate or reduce

the threats to an acceptable level. At firm level, policies and procedures

should be designed to ensure independence."

Required:

(a) Discuss the safeguards that should be applied to the likely significant

threats during an engagement acceptance process.

(12 marks)

(b) Examine the matters that should be considered during the evaluation of

the quality control system.

(10 marks)

(c) Discuss the policies and procedures relevant for enhancing independence

of the staff at Jotham & Co.