SK LIMITED

SK Group Limited was incorporated and is domiciled in Uganda as a private

limited company. The company has 5 subsidiaries (all incorporated in Uganda)

engaged in different activities as indicated below.

2017 2016

SK Water Ltd Bottling (mineral water) 100 100 31 December

SK Properties Ltd Real estate 100 100 31 December

SK Motors Ltd Automobile car dealership 80 80 30 June

SK Farm Ltd Horticulture 100 100 31 December

SK Television Ltd Broadcasting 30* 100 31 December

*SK Group Limited consolidates SK Television Limited in its financial statements

due to de facto control.

All the companies prepare their financial statements in accordance with

International Financial Reporting Standards (IFRS).

Your firm, Yakana& Co., has been appointed by the directors of SK Group

Limited to carry out the audit of the company together with the five subsidiaries

for the year ended 30June, 2018. All components are considered significant. The

firm has accepted the appointment after agreeing to the terms of the audit

engagement. The audit should be completed by 20 December, 2018 to enable

the group file tax returns

The following are the notes from the meeting with the group directors:

SK Farm Limited grows flowers on a farm located along Entebbe road and

exports the flowers to the European Union(EU) countries. The EU has of recent

tightened its quality assurance measures and there are many standards to meet

right from the farm, including measures such as temperatures in the green

houses, through to the markets.

Due to the stiff competition in the bottled mineral water industry, SK Water

Limited has decided to rebrand some of its products to differentiate them from

other products on the market. The company now has water bottled in specially

designed bottles that look like bottled wine for the 'high end' clients, alongside

the normal bottles on the market.

SK Properties Limited has expanded and it has just completed three huge

buildings and a multistoried car park. The company anticipates that there will be

increased demand for rental residential and commercial properties and parking

space.

SK Limited and its subsidiaries have adopted the new accounting standards, that

is, IFRS 15Revenue from Contracts with Customers, IFRS 9 Financial Instruments

and IFRS 16 Leases. The group's desire is to fully comply with International

Financial Reporting Standards (IFRS).

SK Television Limited is regulated by Uganda Communications Commission

(UCC). The Commission has of recent issued strict regulations concerning

broadcasting. Management is endeavoring to ensure compliance with the

regulations.

SK Group Limited purchased a new software which is expected to integrate all

transactions of the group at Shs 90 million. Banking is now done online and all

payments are also approved online.

The group needs to invest at least USD1million (equivalent to Shs 3.7 billion), in

the next financial year. The group has already submitted its loan application to

PTA Bank in Nairobi. The money is needed in order to meet financial demands at

SK Farm Limited.

Other information:

Although the group has an in-house legal department, it also has external legal

advisors. The legal department is charged with many responsibilities but the

most important is to ensure that the group companies comply with all legal and

regulatory requirements.

Timothy, one of the major shareholders, has advanced SK Properties Limited a

loan of Shs900 million. Management expects to pay back the loan in three equal

installments within a period of 3 years.

SK Television Limited obtained a loan from the African Development Bank (ADB)

worth 500,000USD, equivalent to Shs.1.85 billion, in December 2017.The loan

was used to purchase equipment from the United States of America to meet the

government requirements of transiting from analog to digital technology.

On 20 September, 2018 SK Television Limited was switched off air by Uganda

Communications Commission (UCC) for 3 days over a dispute relating to a

political talk show. Management is in discussions with UCC in an effort to resolve

the question of avoiding future disagreements.

Management prepared a cash flow forecast for SK Television Limited as part of

their assessment of the going concern status of the subsidiary. The cash flow

forecast appears to be optimistic.

You are the team leader for this assignment.

Required:

(a) Discusswith your engagement team the:

(i) potential business risks facing SK Group Limited.

(12 marks)

(ii) informationthat would be used to identify the risks of material

misstatement in the group financial statements due to fraud.

(8 marks)

(b) Advise the audit team on the matters to consider in gaining an

understanding of the consolidation process of SK Group Limited's financial

statements in relation to IFRS.

(10 marks)

(c) Recommend the audit procedures to be performed:

(i) in respect of the loan advanced by Timothy to SK Properties Limited.

(10 marks)

(ii) on the going concern status of SK Television Limited in addition to

the review of cash flow forecasts.

(10 marks)

(Total 50 marks)

SECTION B

Attempt two of the four questions.

Question2

You are an audit manager atAgadi& Co. and your firm has been appointed to

audit Peace Mediation Corps (PMC) for the next 3 years commencing with the

year ended 30June, 2018. Upon acceptance of the appointment, the partners

assigned you to manage the audit.

PMC is a Non-Governmental Organisation (NGO) engaged in the promotion of

human rights activities within East Africa. It receives funding from over 10

donors and total donations received for the year ended 30 June, 2018 was Shs

10 billion.

PMC has 3 departments, that is, the Programs department; Finance department;

Human resource department; and Internal audit department. The internal audit

department consisting of three staff who report directly to the Executive director.

The department also reports directly to the Board of Trustees in case they come

across issues that require the board's attention. The head of internal audit is a

certified public accountant. Agadi& Co intend to rely on the work of the internal

audit department to minimise on the scope of work to be done.

Required:

In your brief notes for your audit engagement partner:

(a) Explain the matters you would expect the internal audit function of PMC to

consider when planning for an audit of PMC's finance department.

(6 marks)

(b) Since you intend to rely on the work of the internal audit function, discuss

thefactors youwill consider in evaluating theircompetence.

(8 marks)

(c) Explain to the audit engagement partner on the possible professional and

ethical issues/threats that may arise during the audit of PMC.

(11marks)

(Total 25 marks)

Question 3

Prime Electronics Limited (PNEL) deals in electronics for both commercial and

domestic use. The company's annual turnover is Shs7 billion. It imports most of

the goods from Asia and Europe.

The company used to have staff travel to Asia and Europe to purchase the

goods, however, due to the experience and trust gained over the years,

purchases are ordered on online using e-commerce platformsfrom the same

suppliers in Asia and Europe. PNEL has also automated all its processes including

sales, and accounting systems among others. Customers can now order for

products on line without physically visiting the various outlets of PNEL.

PNEL has corporate governance structures comprising of a board of directors

consisting of 7 members and sub-committees such as audit committee, finance

committee and human resource committee among others.

Your firm, Wok & Co. is the auditor of PNEL. You are an audit manager atWok &

Co. and have been assigned to the audit of PNEL for the year ended 30June,

2018. Wok & Co.uses audit software to conduct audits.

Required:

(a) Discuss the business risks arising from PNEL's involvement in e-commerce.

(8 marks)

(b) Discuss the benefits Wok & Co. derives from using audit software.

(4 marks)

(c) Explain the various roles of PNEL'sboard of directors.

(8 marks)

(d) Evaluate the objectives of the audit committee at PNEL. (5 marks)

Question 4

The government of Uganda is in a drive to fund a big percentage of its annual

budget. This follows a reduction in donor/foreign funding towards the national

budget. Uganda Revenue Authority (URA) is now faced with the challenge of

collecting taxes rigorously. This has resulted in tax evasion by some of the

taxpayers as businesses are constrained to pay taxes due to the hard economic

environment.

URA has of recent penalised and closed businesses of defaulters. Some

defaulters have now filed cases with the tax tribunal as they deem the

assessments made by URA to be unrealistic.

The public sector has also not been spared by URA. URA is concerned that most

government departments are not putting allocated funds to proper use hence

negatively affecting compliance of the private sector as they donot see the value

of paying taxes. The Auditor General needs to ensure that the public sector is

audited and reports filed to parliament for action.

Your firm, VAS & Co. has been approached by Solar Energy Limited (SEL) to

carry out a review engagement before the audit of their financial statements for

the year ended 30 June 2018. This follows a letter from URA to SEL informing

them about a tax audit starting on 10 December 2018. SEL is worried that URA

may issue finds arising from noncompliance.

Required:

(a) Explain to SEL's management the circumstances that may instigate URA to

carry out a tax audit/ investigation.

(8 marks)

(b) Explain to the engagement review team the inquiries that need to be made

from SEL's management to enable the team carry out the review

engagement as per International Standards on Review Engagements

(ISRE).

(8 marks)

(c) Explain:

(i) how public sector auditing contributes to good governance.

(6 marks)

(ii) the main types of audit in the public sector. (3 marks)

Question 5

You work at Sue & Co. as an audit supervisor. You have both supervision and

review responsibility in addition to ensuring quality of audit engagements as part

of your job description. Sue & Co. has established policies and procedures

designed to provide reasonable assurance that engagements are performed in

accordance with professional standards and applicable legal and regulatory

requirements. Sue & Co.promotes consistency in the quality of engagement

performance through its policies and procedures and these are due for review.

Sue & Co.has been appointed the auditors of New Blues University (NBU) for the

year ended 30June, 2018 and you are the auditor in charge of this assignment,

and you are expected to ensure quality of the engagement.

Required:

(a) Discuss with your audit manager:

(i) your supervisory responsibility in relation to the NBU audit

engagement.

(3 marks)

(ii) the matters to be included in Sue & Co.'s policies and procedures

manuals in relation to promoting consistency in the quality of

engagement performance.

(10 marks)

(b) Discuss with your audit team the key attributes in relation to the

knowledge, skills and experience needed for the NBU audit engagement.

(12 marks)