Question 1

NAT Group Limited (NAT) is registered in Uganda as a limited liability company operating a chain of Star Hotels in Kabale, Kampala, Fort Portal, Gulu and Mbale. NAT prepared consolidated financial statements to 31 October 2020. The financial statements were prepared in accordance with International Financial Reporting Standards. NAT Group Limited has two major subsidiaries (JOR Limited and BEZ Limited) and one associate (BUE Limited). JOR and BUE are registered in Uganda, while BEZ is registered in Kenya with a branch in Tanzania. NAT, its two subsidiaries and one associate have been in existence for more than eight (8) years. NAT Group Limited has 70% interest in JOR Limited, 70% interest in BEZ Limited and 45% interest in BUE Limited. NAT chain of hotels provides accommodation, foods and beverages, conference and entertainment services with a capacity of accommodating 350 guests per day each. JOR Limited and BEZ Limited deal in tour and travel services specifically tour/area guide, air ticket reservations and taxi/shuttle services. The group mainly targets foreigners from Europe, North America and the Far East. BUE Limited deals in importation of hotel supplies such as wines and spirits, chocolates, beverages, spices etc. from Europe, North America, and the Far East countries. ZEK & Co., Certified Public Accountants have been appointed the group external auditors and have also been the external auditors of JOR Limited for the last two accounting periods. You have been appointed as the new audit manager for the external audit of NAT Group Limited. Following your appointment, the engagement partner has communicated that he needs to approve the planning schedule and procedures before execution of the assignment in January 2021. You have assembled a team to commence audit planning as part of the process of understanding the audit client. The exercise is commencing with preliminary documentary reviews, including review of previous working papers, and client interactions. During the audit planning stage, the engagement team noted the following: NAT has a five (5) year strategic plan for running the business operations and affairs of the Group. The strategy has been continuously assessed and found to be sound according to existing working papers and information on the previous audit file. During the audit planning discussions with the Board of Directors and Senior Management team of NAT, the audit team learnt that that the on-going worldwide corona virus epidemic (COVID-19) that broke out in December 2019 has distorted the current focus. Following the outbreak of COVID-19, the occupancy rate in all the five (5) hotels of NAT Group Limited dropped very significantly from an average of 85% (298 guests) per night to less than 15% (52 guests) per night from December 2019. NAT Group had registered prepaid hotel reservations across the 5 hotels of 80% (1,400 guests) of whom 90% (1,260) cancelled their hotel reservations. Senior management resolved that all deposits, amounting to Shs 882 million, from cancelled hotel bookings could only be refunded after completion of the external audit exercise. The decision was made in order to prevent NAT Group Limited from reflecting a low revenue performance for the year. Senior management further guided that cancelled sales from hotel bookings would only be reversed after the completion of the audit. Prior to the global travel restrictions due to COVID-19, NAT had anticipated a very high demand for foods and beverages based on the previous records for hotel bookings and reservation. The five hotels in the chain had ordered and received food supplies worth Shs 920 million. Most of the foodstuff and drinks had a short shelf life and therefore should have been used by the end of September 2020. It was discovered that stock of foods and beverages worth Shs 330 million expired but management insisted on disclosing it as part of stock as at 31 October 2020. It was further discovered that additional stock of foods and beverages worth Shs 290 million expired by 31 October 2020 and was still included in inventory in the draft financial statements presented for audit. In order for NAT to deal with the cash flow challenges resulting from expired stock worth Shs 620 million, senior management of the group secured an overdraft facility from DSE Bank Limited of Shs 750 million in August 2020 to finance its operating activities until the COVID-19 pandemic is under control globally. Management has not included the overdraft in the draft financial statements for the year ended 31 October 2020. Management argued, in a meeting between ZEK and NAT, that not disclosing the overdraft facility was deliberate to maintain a positive position of the group for the year since most of the facility is anticipated to be used after 31 October 2020. At the beginning of December 2019, NAT Group Limited had ordered and prepaid for a set of new conference and entertainment equipment together with associated software from China worth Shs 1 billion. During the same month of December 2019, the Government of China imposed a countrywide lockdown which prevented the contracted manufacturer/ supplier of conference and entertainment equipment from proceeding with execution of the order. The prepaid cost of the equipment has been included in the draft financial statements under property, plant and equipment. In June 2020, NAT received communication from China that the equipment ordered could not be delivered due to compulsory liquidation of the supplier in May 2020 and that there would not be any refund because of circumstances beyond the manufacturer's control. The Government of Uganda also imposed a lock down in the month of April which restricted local and international travels. This directive had a serious impact on the operations of NAT Group Limited. In response, senior management decided to scale down operations and suddenly lay off a number of employees without any compensation (due to cash flow challenges) and they sought redress in courts of law. The company lawyer analysed the company decision in June 2020 and has indicated that NAT Group Limited is most likely to pay ex-employees a total of Shs 266 million in compensation and damages. Management is reluctant to recognise the staff compensations and damages in the draft financial statements. In June 2020, NAT received a notice of intention to sue from two (2) of its major local suppliers. During the year ended 31 October 2020, the two companies supplied NAT Group Limited various items worth Shs 156 million. Several reminders were sent by each supplier requesting for payment, in vain. Management has recognised the outstanding obligations in the draft financial statements but is reluctant to capture the fines and penalties that may result from the potential court case. In order to further ease cash flow problems, senior management of NAT resolved to sell off part of the investments that were considered non-core to the main business of the group. NAT thus agreed to sell off up to 20% of the 45% stake in BUE Limited at a minimum of Shs 910 Million. The decision was reached in September 2020 and the process of selling the 20% interest commenced in mid- October 2020. By the end of October 2020, the company had not yet identified a buyer because it was still evaluating the best possible bidders. While preparing the draft financial statements, senior management of NAT Group Limited included the anticipated proceeds from the sale of the 20% interest including recognizing a profit on disposal of Shs 50 million. ZEK & Co. being the external auditor of JOR Limited noted that the client also suffered from the effects of COVID 19 after the tour and travel business in Uganda was shut down. Staff of JOR have also been scaled down as a result of very low business.

Required: (a) Draft a report from your audit planning of NAT Group Limited for the Engagement Partner indicating the: (i) Risk assessment procedures designed for identifying material misstatement due to fraud. (7 marks) (ii) Audit procedures for identifying and evaluating subsequent events of NAT Group Limited. (8 marks) (b) Advise the ZEK & Co. engagement team for audit the of NAT Group Limited; (i) the importance of audit working papers to ZEK & Co. Certified Public Accountants. (ii) characteristics of a good audit working paper. (c) Using the information provided, evaluate the audit risks to be considered in planning the audit of NAT Group Limited. (18 marks) (d) Analyse the matters you will consider in forming the audit opinion for NAT Group Limited. SECTION B Question 2 JJN is a firm of Certified Public Accountants. The firm has been in existence for 15 years providing external audit services. Seven years ago, JJN diversified into providing internal audit services to clients without an internal audit function. JJN also has competencies to provide external quality assessments for clients with in- house internal audit functions. JJN was appointed by BCM Limited four years ago to provide internal audit services. BCM Limited is in the textile business and has never maintained an in- house internal audit function. The engagement terms included assisting BCM Limited to develop an in-house internal audit function by the end of the 5th year following the date of the appointment. During the 4th year, JJN has developed and begun implementation of a phased exit strategy. Over the period of their engagement, JJN has continuously assessed and confirmed the need for a full- time internal audit function at BCM Limited. JJN has also indicated the need for periodic external assessments of the in-house internal audit function every five years to ensure efficiency and effectiveness of the function. You have been the audit manager for this engagement for the 4 years. During your tenure, you also noted that there are a lot of ethical violations at BCM. The company does not have proper reporting channels to communicate the violations for remedial action. You are part of the team preparing the exit strategy. You have been tasked to guide on reporting channels for ethical violations and how internal audit can coordinate the external audit.

Required: (a) Advise on the factors to take into consideration when assessing the need for internal audit at BCM Limited. (8 marks) (b) Discuss how you would assess the competence and objectivity of the internal auditors to be hired by BCM Limited. (5 marks) (c) Describe how coordination of the external audit work with internal auditors can be achieved. (6 marks) (d) Suggest ethical violation reporting channels that can be adopted by BCM Limited. (6 marks) (Total 25 marks) Question 3 UBB Limited (UBB) is a company registered in Uganda. UBB has been in existence for eight years dealing in printing and publishing. The company has experienced rapid expansion in the last four years following introduction of online products. The printing and publishing sector is heavily regulated by the Uganda Communications Commission (UCC). For two years in a row, UBB has faced a series of investigations from 3 government agencies namely; UCC, Uganda Revenue Authority (URA) and the Financial Intelligence Authority following complaints from stakeholders including competitors for breach of different regulations. Some of the complaints included publishing inappropriate content, tax evasion and suspicion of involvement in money laundering activities. The various investigations have resulted into heavy fines and penalties including threats of suspension of the company from conducting business. This has created serious financial distress and forced the proprietors to sell off the company. UZA Limited is in television services and has intentions of diversifying into printing and publishing. UZA Limited is interested in acquiring UBB despite the current position. The owners of UZA have appointed DYN & Co. to carry out a due diligence of UBB to reveal the actual financial situation and level of non- compliance to inform their investment decisions. You are the audit manager in DYN & Co. and you have been assigned to perform this engagement.

Required: (a) Assess the factors that may indicate non-compliance with Ugandan laws and regulations by UBB Limited. (12 marks) (b) Discuss the circumstances that would exist for DYN & Co. to reject the due diligence engagement. (6 marks) (c) Analyse the key audit enquiries to be conducted by DYN & Co. during the due diligence assessment of UBB Limited. Question 4 HMR Ltd is registered in Uganda and listed on the Uganda Securities Exchange. The company has been in existence for the last 12 years dealing in processing dairy products such as pasteurised milk, yoghurt, milk chocolates, cheese etc. HMR Ltd prepares financial statements to 30 June every year. During the financial audit for the year ended 30 June 2020, the external auditors, ZZT Certified Public Accountants (ZZT) detected numerous suspicious transactions. The engagement partner for this assignment immediately communicated about the suspicious transactions and their impact on the outcome of the audit to the Board of Directors of HMR Ltd. During the meeting between the Board of Directors and the external auditors from ZZT, the Board proposed a forensic investigation by the external auditors. The external auditors declined to perform the forensic investigations on grounds of ethical threats to professional independence. The Board embarked on the process of identifying an experienced and competent forensic auditor. HMR Ltd finally appointed DBA Certified Public Accountants to perform the engagement. DBA has vast experience in performing forensic investigations and accepted to perform the engagement. You the audit manager for the engagement which has a timeframe not exceeding 3 months.

Required: (a) Discuss the techniques which the management team of HMR Ltd could use to commit organisational fraud. (5 marks) (b) Assess the investigative tools and techniques that you would apply in the forensic audit of HMR Ltd. (10 marks) (c) Discuss the key benefits of conducting the forensic investigation to both HMR Ltd and DBA. Question 5 The Government of Uganda identified the need to regulate the activities and behaviour of accounting professionals in the country. The need of regulating the accountancy profession is a result of the fact that the activities of accountants are, by nature, of public interest. As part of the regulatory framework, the Government enacted the Accountants Act and also supported the creation of the Institute of Certified Public Accountants of Uganda (ICPAU). This framework was to develop, promote and enforce regulated activities and behaviour within the profession. The ICPAU has the mandate to vet and license practising accountants and firms on an annual basis. Every year, ICPAU receives new applicants for practising certificates as well as license renewals for firms and practitioners. As part of the application process, the Institute requires the new applicants to undergo thorough orientation in a practitioners' seminar. Among the sessions in the practitioners' seminar is a segment on managing an audit firm. You have been identified by ICPAU as a resource person to make several presentations on the topic "Managing an Audit Firm".

Required: (a) Discuss the guidance available for CPAs and firms in relation to advertisement and publicity of their professional services. (14 marks) (b) Evaluate the factors considered in determining and setting of chargeable fees for professional services. (3 marks) (c) Analyse the issues that practitioners should take into consideration before accepting a specific client engagement.