Question 1

The Office of the Auditor General (OAG) is an institution established under the

provisions of Article 163 of the Constitution of the Republic of Uganda. Its

mandate, functions and powers as enshrined in the National Audit Act, 2008 are

to audit and report on the public accounts of Uganda and of all public offices or

bodies and organizations established by Acts of Parliament, thereby make an

effective contribution to improving public accountability and value for money

spent.

In the recent published reports submitted to the Parliament of Uganda, the

Auditor General noted the following:

Rejected Medical Hospital equipment:

Under the Uganda Health Systems Strengthening Project (UHSSP), there was

delayed removal of the rejected medical equipment from the health facilities

contrary to what was agreed upon earlier in the IDA Mission. It was noted that

medical equipment estimated at a cost of USD 1,927,194 had been rejected and

suppliers asked to remove and make good of this equipment within a period of

five months. It was noted that one firm complied while the other one was

declared bankrupt after the equipment had been rejected. Although the

accounting officer indicated that the official receiver of the bankrupt firm had

been appointed to collect the rejected items, this had not been done.

Bidder eligible to participate in public procurement:

Under the Mulago Kampala Capital City Authority Project (MKCCAP), an

international firm was procured to supply and install endoscopy and urology

equipment at a cost of euro () 836,994. An advance payment of 167,398.80

(20%) was paid to the firm but at the time of audit, only 3.3% of equipment

worth 27,620.80 had been delivered. Details available show that the supplier

was declared bankrupt. As a result, the procurement process had to be redone

leading to loss of time.

Irregular payments to pensioners:

It was also noted that Shs 11 billion was paid to pensioners who had exceeded

their pensionable period of 15 years, yet no life certificates were availed as proof

of their continued existence. Lack of evidence of continued existence of

pensioners in form of life certificates to support pension payments implies

payments to non-existent pensioners could arise. In addition, it was observed

multiple payments amounting to Shs 1,161,382,909 were made to various pensioners. These include monthly pension payments made to accounts of

pensioners who had already received their monthly remittances for the particular

months.

In all the reports, it was established that an accountant had a role to play as a

creator, enabler, preserver, and reporter of sustainable value for their

organizations thus protecting public interest.

Required:

(a) With reference to the scenario, explain:

(i) the different types of fraud exhibited in the above projects.

(3 marks)

(ii) the symptoms of fraud demonstrated.

(2 marks)

(b) (i) Discuss the fundamental principles of professional ethics which the

accounting officers failed to observe.

(5 marks)

(ii) Explain to the accounting officers how an awareness of their duty to

the public interest may have prevented the occurrence of the

unethical practices in the above scenarios.

(4 marks)

(c) Explain the factors that can contribute to the accounting officer's values

and standards in the implementation of government projects.

(6 marks)

(d) Evaluate the measures the Office of the Auditor General should

recommend to be adopted by accounting officers to ensure public

accountability in government projects.

(10 marks)

(Total 30 marks)

SECTION B

Attempt three of the four questions in this section

Question 2

Anyense & Co is a registered small audit firm. The partners are Agnes Anyen

and Elvis Senkoto. They have 3 trainee accountants who are pursuing the CPA

course.

The partners are aware of all the professional and ethical requirements of an

accountant. They have encountered scenarios where money launderers seek

assistance of professionals such as accountants and bankers to execute their

mission. They often request the accountant to wire money to and from various

bank accounts without giving any rea sonable explanation for it or through phishing. They have shared their dilemma with the trainees as part of the

training contract.

The partners are faced with a challenge of obtaining audit assignments.

Recently, they responded to an "Expression of Interest" advert by Kagwilawo

SACCO Ltd (KSL) for audit and other assurance services. After the advert

deadline Anyen made a follow up phone call to KSL to find out the status of their

submission. She was informed that her firm should prepare appropriate gift

for the finance director in order to be considered.

Required:

(a) Explain to the trainee accountants the:

(i) term 'phishing' and discuss how it can be prevented to reduce on

money laundering attacks.

(5 marks)

(ii) process which money launderers use to make 'dirty' money appear

legal.

(6 marks)

(b) Discuss the dilemma faced by Anyense & Co and advise them on the way

forward.

(5 marks)

(c) Explain how Anyense & Co should obtain audit assignments to ensure

compliance with the ICPAU Code of Ethics?

(4 marks)

(Total 20 marks)

Question 3

You are an audit supervisor at GK & Co. Your firm has been appointed to audit

Drug Chemicals Limited (DCL) for the year ending 31 December, 2017. DCL

manufactures drugs which are supplied to hospitals and pharmacies within the

great lakes region. The previous auditors would send trainee accountants for the

assignments. The partners never had face to face meetings with the

management of DCL. Some partners became suppliers of DCL products. They

would obtain drugs on credit and fail to pay. Eventually their services were

terminated.

In the pre-audit meeting, the Head of Finance at DCL cautioned GK & Co. about

the uniqueness of the sector in which the company operates. Therefore the

engagement partner concluded that there will be need to approach the audit

with professional skepticism, and deployment of staff that are able to apply

professional judgment during an audit. The company operates in a computerized

environment and most of the controls are automated. The company has material levels of inventory and GK & Co. will be invited to witness the inventory count

after year end. You are the audit senior for this engagement.

Required:

(a) Explain to the audit team the meaning of:

(i) professional skepticism.

(2 marks)

(ii) professional judgment.

(2 marks)

(b) With examples, explain to your audit team the circumstances that give rise

to self-interest threats during the audit of an entity.

(2 marks)

(c) Explain to the audit team the:

(i) circumstances under which the auditor may be held liable to third

parties for professional negligence.

(2 marks)

(ii) ways the auditor can use to minimise potential liability arising from

professional negligence.

(5 marks)

(d) Explain the audit procedures GK & Co will apply during the count of DCL's

inventory.

(7 marks)

(Total 20 marks)

Question 4

You are an audit senior with MTK & Co. Your firm has been appointed the

auditor of Saving Microfinance Limited (SML) for the year ended 31 December

2017. Microfinance deposit taking institutions (MDI) are regulated by Bank of

Uganda but carry with them high audit risk and therefore audit planning is key.

SML prepares its financial statements in accordance with International Financial

Reporting Standards (IFRS) and the financial statements are also audited as per

International Standards on Auditing (ISAs). MTK & Co will therefore be required

to perform risk assessment procedures to provide a basis of identifying and

assessing the risks of material misstatements at the financial statement and

assertion levels.

There is need, therefore, for a discussion among the audit team members

assigned to SML's audit about the susceptibility of SML's financial statements to

misstatements.

You have been notified by the audit manager that you will lead the team auditing

SML.

Required:

Explain to your audit team the:

(a) meaning of the term 'audit risk'.

(2 marks)

(b) components of audit risk.

(6 marks)

(b) the importance of having a discussion among the audit team about the

susceptibility of SML's financial statements to misstatements.

(6 marks)

(d) the audit objectives of auditing the revenue system of SML.

(6 marks)

(Total 20 marks)

Question 5

You work at CT & Co. as an audit senior. Your firm is the auditor of Fabrication

Machinery Limited (FML) for the year ended 31 December, 2017. You are the

leader of the audit team assigned to audit FML.

FML deals in Fabrication of metals and specialises in making metallic door and

window frames, specialised hospital beds and local machinery used for

commercial purposes.

FML is a medium-sized entity with an annual turnover of Shs 5 billion. The

internal audit function of the company is outsourced to Mark & Co who works on

a part time basis. Mark prepares internal audit reports on a quarterly basis.

FML acquired a loan of Shs 1 billion from PKL Bank payable in 5 years. The loan

is to enable the company purchase machinery from Germany. The company has

another loan of Shs 200 million from the same bank.

Required:

(a) Explain to your audit team the various sources of audit evidence.

(4 marks)

(b) Discuss with your team the quality of internal audit reports you should

expect from Mark. (6 marks)

(c) Describe the assertions made by FML's management in relation to the loan

balances in their financial statements. (4 marks)

(d) Suggest to your audit team the audit procedures for verifying the loan

balances of FML.

Question 6

Social responsibility of business means duties and obligations of a business

towards different social groups such as consumers, employees, shareholders, the

community and society at large. A business has to look at its economic interests

and also give satisfaction and welfare to different social groups.

However, some businesses exploit the employees. As a result some employees

are forced to quit paid employment and opt to be self-employed. In the process,

they are no longer assured of earning a stable income and they face many other

demerits of self-employment.

Required:

(a) Explain the demerits faced by people who are self-employed. (5 marks)

(b) Describe the social responsibilities of business to the community where

they operate. (5 marks)

(Total 10 marks)

Question 7

KPM Graphics was established in 1998. Its major business is commercial printing.

The only employee of the company at the start was the director. The company

would source for business, design and outsource printing services. The company

has grown by leaps and bounds. Currently it employs 70 full staff. All designing

and printing are done in-house. As the business grew, there were risks and

challenges encountered. Some led to heavy losses. To minimize these risks, KPM

Graphics took insurance policies. The company discovered that the system of

insurance depends on certain principles. For instance, a person applying for

insurance is required to disclose all relevant and material facts about the

property being insured so as to enable the insurance company assess its

suitability for insurance and calculate the premium accurately.

Required:

(a) Given that you are the insurance executive for Mebo Insurance Ltd;

describe to the management of KPM Graphics the principles upon which

Mebo Insurance Ltd bases when selling out insurance policies to business

ventures.

(4 marks)

(b) Explain the factors affecting the growth of entrepreneurial ventures such

as KPM Graphics.