Your firm, Khisa Yiga & Co. (KYC), has been re-appointed as auditors of Great Lakes Courier Services Limited (GLS) for the year ended 30 June, 2019. KYC has been auditing GLS for 5 years. GLS’s financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). You are the audit senior in charge of the audit of GLS and you have to ensure, among other things, that the audit is conducted in accordance with International Standards on Auditing (ISAs). As part of planning, you and the audit manager attended a pre-audit meeting with GLS’s management. The following brief notes were prepared during that meeting:

1. GLS finance manager Mr. Tom Balongo joined the company on 1 July, 2018. He previously worked at Mukula University as a university bursar.

2. GLS carried out a restructuring exercise in December 2018 and 50 employees were laid off. A provision of Shs 50 million has been included in the financial statements for compensation. Some employees have, however, sued the company claiming the compensation to be given to them is too small.

3. GLS’s trade and other receivables amount to Shs 5 billion as at 30 June, 2019. GLS made a general provision of 5% of the total trade and other receivables. Some clients have written to GLS about the financial difficulties they are facing but the Finance Manager is sure that they will be able to pay. No specific provision has been made in respect of this.

4. The Finance Department is under staffed. It has only three staff instead of the required six.

5. Sarah, a former employee of GLS, joined KYC on 1 March, 2018. She is slated be part of the audit team because, it is felt, that her experience of working with GLS will be of great value to the audit team.

6. An analytical review carried out on GLS’s financial statements showed a material variance which was due to an increase in finance costs by over 50% in the current year.

7. GLS intends to list on the Uganda Securities Exchange. However, one of the requirements is to have an independent Board in place. KYC is tasked with the responsibility of recommending to GLS members to serve on the board.

8. GLS has significant outstanding audit fees but YK & Co is not worried as GLS has always endeavoured to pay.

Required:

 (a) Discuss, with the Audit Manager:

(i) The possible financial statements risks the audit team is likely to face during the audit of GLS. (5 marks)

(ii) (ii) How the financial statements risks in (a) (i) above can be mitigated to an acceptably low level. (5 marks)

(b) Examine the actual and possible ethical threats that may arise in relation to the audit of GLS, and the safeguards to reduce them. (6 marks)

(c) Describe the assertions made by GLS’ management in relation to the trade and other receivables balance. (4marks)

d) Explain the substantive audit procedures the audit team should perform on:

(i) trade and other receivables. (6 marks)

(ii) bad debts. (4 marks)