THE PUBLIC ACCOUNTANTS EXAMINATIONS BOARD

A Committee of the Council of ICPAU

CPA(U) EXAMINATIONS

LEVEL THREE

AUDITING & OTHER ASSURANCE SERVICES – PAPER 15

THURSDAY, 6 JUNE 2013

INSTRUCTIONS TO CANDIDATES:

1. Time allowed: 3 hours 15 minutes.

The first 15 minutes of this examination have been designated for

reading time. You may not start to write your answer during this time.

2. Section A has one compulsory case study question carrying 50 marks.

3. Section B has four questions and only two are to be attempted. Each
question carries 25 marks.

4. Write your answer to each question on a fresh page in your answer

booklet.
5. Please, read further instructions on the answer booklet, before
attempting any question.

 2013 Public Accountants Examinations Board

 Auditing and Other Assurance Services – Paper 15

SECTION A
This section has one compulsory question to be attempted.
Question 1
Kimalako Bakery Ltd (KBL) is located 15 km from Kampala along the Kampala
– Masaka highway, and specialises in the making of bread and biscuits. The
company has a branch in Mitiyana, which has four other bakeries. The
audited financial statements for the year ended 31 May 2013 revealed a profit
of Shs 500 million down from Shs 1,123 million in 2012, while the total assets
of the company were Shs 6,236 million. In order to expand its operations, the
company purchased Buliika Bank Ltd whose head office is located at Ndeeba,
near Kampala at a purchase consideration of Shs 5,000 million. The net
assets of Buliika Bank Ltd were Shs 3,000 million. The bank was partly
purchased through a loan of Shs 4,500 million from Njuba Bank Ltd and the
balance from retained earnings.
The Bank of Uganda report arising from its examination of Buliika Bank Ltd in
2012, revealed the following issues.
Buliika Bank Ltd had a loan delinquency (non-performing loans) of about Shs
1,800 million as at 31 May 2012 which was about 20 percent of the total loan
portfolio. This amount accounted for all the loans that were in delinquency of
over 365 days. This amount had not been provided for in the financial
statements for the year ended 31 May 2012. The Bank of Uganda report
rated Buliika Bank Ltd’s earnings as ‘poor’ and was in fact on the verge of
taking over the management of the bank as one of the ways of salvaging it.
Buliika Bank Ltd had also recently acquired banking software to do internet
banking. The staff had failed to operate the system effectively due to
inadequate training while customers could not access their accounts using the
software over the internet.
KBL was also facing cash flow problems as it could not effectively service its
loans and meet its current operations.
One of the company’s major customers had switched to another supplier
because the customer was supplied with substandard products at a high price
compared to better quality products offered by competitors.
In order to expand the bakery business, KBL had placed orders for more
machinery at a cost of Shs 800 million. The company, however, was not sure
whether this machinery would be received by the year end. The company
had spent an estimated Shs 250 million on servicing its existing machinery. In
order to fund the expansion, KBL had applied for an additional loan of Shs
1,000 million from Njuba Bank Ltd. By 31May 2013, the company was yet to
hear from the bank as to whether the loan would be extended to them

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 Auditing and Other Assurance Services – Paper 15

considering that they had just borrowed from the same bank to purchase
Buliika Bank Ltd.
The company receives bookings for bakery products through its agents and its
website. The agents are normally given a 60 day credit period to pay KBL,
but because of the difficult trading conditions, a number of customers were
struggling to pay. The website was launched at the beginning of July 2012
but had consistently encountered difficulties with customers complaining that
orders had been made and paid for online but KBL had no record of them and
that such customers had not received their products, which allegedly had
been supplied to other customers.
KBL used to sell its main bakery products at one of its largest outlets in
Nateete. However, in April 2013 it closed the outlet which made a large
workforce redundant.
You are the senior manager of Kwikiriza and Co. Certified Public Accountants
who is in charge of the audit of KBL for the year ended 31 May 2013.
Required:
(a) Identify and explain the business risks in the audit of KBL for the year
ended 31 May 2013 including the risks that are facing Buliika Bank Ltd
(20 marks)
(b) During your planning meeting for the audit, you were asked, using the
information provided, to describe five financial statement risks and
explain the work that the auditor will need to perform to respond to
each risk.
(10 marks)
(c) The senior partner has also told you that you are responsible for the
audit planning of the financial statements of KBL for the year ended 31
May 2013. Describe the factors that you as the auditor will need to
consider in planning for the audit so that is performed in an effective
manner.
(10 marks)
(d) Explain the factors, with examples where appropriate, that the auditor
should consider when deciding whether to use analytical procedures as
substantive procedures.
(10 marks)
(Total 50 marks)

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 Auditing and Other Assurance Services – Paper 15

SECTION B
Attempt two of the three questions in this section.
Question 2
(a) You are auditing the financial statements of Masooli Growers Ltd (MGL)
for the year ended 31 May 2013. The partner in charge of the audit has
entrusted you to carry out a review of the company’s activities since the
financial year end. Mr Ambrose Tugume, the managing director of MGL,
happens to get a copy of an e-mail to that effect and is surprised that
you are examining accounting information that relates to the next
accounting period. Mr Tugume Ambrose had been appointed on 1
December 2012 as a result of which the contract of the previous
managing director Mr. Moses Baryamureeba was terminated. Mr.
Baryamureeba was paid a compensation package of about Shs 250
million on 2 December 2012.
As a result of your investigations you found out that the company is
planning to institute legal proceedings against Mr Baryamureeba for the
recovery of the payment of Shs 250 million to him as it has come to
light that 3 months prior to his dismissal he had contractually agreed to
join the board of directors of Gayaza Grain Millers Ltd, a rival company.
The company’s lawyer had informed MGL that Mr. Baryamureeba’s
action constituted a breach of his contract with them and an action be
brought against him for the recovery of the money paid to him.
Required:
(i) Explain the nature and purpose of a subsequent events review.
(4 marks)
(ii) Describe the audit procedures which would be carried out in
order to identify any material subsequent events.
(8 marks)
(iii) Discuss the audit implications of the company’s decision to sue
Mr Baryamureeba Moses for the recovery of the compensation
paid to him.
(6 marks)
(b) Auditors have no obligation to perform procedures or make enquiries
regarding the financial statements after they have been issued.
However, after the financial statements have been issued the auditor
becomes aware of the fact that, had it been known to the auditor at the
date of the auditor’s report, the auditor would have amended the audit
report.

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 Auditing and Other Assurance Services – Paper 15

Required:
(i) Outline the procedures that the auditor would perform in the
given scenario above
(3 marks)
(ii) Highlight the appropriate procedures which the auditor should
undertake when management revises the financial statements.
(4 marks)
(Total 25 marks)
Question 3
(a) You are the partner in charge of quality control review in your firm.
After the completion of the audit of Baseruka Investments Ltd (BIL)
which floated its shares on the Uganda Stock Exchange three years
ago, you are handled the audit report of the company for the year
ended 31 May 2013. With the recent hard economic times, the
company has undergone a lot of restructuring with closing three of its
shops in Masaka, Ntungamo and Kisoro. The extracts of its draft
independent opinion were as follows
Adverse opinion arising from disagreement about application of IAS 37:
Provisions, Contingent Liabilities and Contingent Assets:
The directors have not recognised a provision in relation to the legal
fees plus redundancy costs for a suit brought about by staff that were
laid off and not paid. The reason is that the directors do not feel that a
reliable estimate of the amount can be made and so the recognition
criteria under IAS 37 have not been met.
We feel that the estimate can be made as it has been fully explained in
the notes to the financial statements. We feel that it is a material
misstatement as the profit for the year is overstated.
In our opinion, the financial statements do not show a true and fair
view of the financial position of the company as of 31 May 2013 and its
financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards.
Emphasis of matter paragraph:
The directors have decided not to disclose the earnings per share for
2013 as they feel that the figure could materially be distorted by
significant discontinued operations in the year. Our opinion is not
qualified in respect of this matter.

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 Auditing and Other Assurance Services – Paper 15

Required:
(i) Critically appraise the proposed audit report of BIL for the year
ended 31 May 2013.
Note: you are not required to redraft the extracts from the audit report.
(9 marks)
(ii) Explain the matters to be considered in deciding who is eligible to
perform an engagement quality control review for a listed client
like BIL.
(4 marks)
(b) A senior manager of your firm has been approached by the chief
finance officer (CFO) of BIL to investigate a fraud. The CFO had
identified a number of discrepancies between the inventory records and
the monthly physical inventory counts which are performed. His
suspicion has been increased by the fact that discrepancies relate to the
same production line unit and approximately the same quantities and
item descriptions of items appear to be missing each time.
Required:
(i) Explain the procedures you would perform to determine whether
a fraud has taken place and to quantify the loss.
(8 marks)
(ii) Many forensic investigations involve investigating potential fraud.
Outline the objectives of a fraud investigation.
(4 marks)
(Total 25 marks)
Question 4
(a) You are the manager of Mpiima Bazira and Associates, CertifiedPublic
Accountants. The firm has 4 partners and one office. About 40 percent
of the firm’s clients are audit clients while the rest are tax, accounting
and business advisory. There has been pressure to increase revenue of
the firm and during the meeting with the partners, you have been
requested to evaluate the following proposals for growing the firm’s
clientele and revenue base:
1. To place an advert in both the New newspapers as well as the
firm’s website to attract clients. The advert to be placed should
read as follows; “Mpiima Bazira and Associates Certified Public
Accountants is the largest and most professional accountancy and
audit firm in Uganda and offers a range of services in addition to
audit, which are guaranteed to improve your business efficiency
and tax. If you are unhappy with your auditors we can offer a
second opinion on the report that has been issued by them. We
shall offer to all new clients 25 percent discount when both audit

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 Auditing and Other Assurance Services – Paper 15

and tax services are provided. Our range of fees is approved by

the Institute of Certified Public Accountants of Uganda”.
(8 marks)
2. A new partner with experience in the banking industry, having
worked with Standard Chartered Bank, has joined your firm
Mpiima Bazira and Associates, Certified Public Accountants. It has
been suggested that the partner specialises in offering corporate
financial services to clients. In particular the partner could advise
clients on raising debt finance and would even assist them in
negotiating with the client’s bank or other financial institutions on
behalf of the client in availing the credit facility. The fee charged
for the service would be contingent on the client obtaining the
finance with a borrowing cost below market rate.
(5 marks)
Required:
Evaluate each of the suggestions made above commenting on the
ethical and professional issues raised.
(b) You have recently attended a continuous professional development
workshop organised by the Institute of Certified Public Accountants of
Uganda and one of the topics was about auditor rotation. The partners
are now taking such issues seriously regarding the compulsory rotation
of the audit firm, where a firm must resign from office and replaced by
another firm.
Required:
(i) Explain the ethical threats created by a long association with an
audit client.
(3 marks)
(ii) Evaluate the advantages and disadvantages of compulsory audit
firm rotation.
(4 marks)
(c) You are the engagement partner of Bulambuzzi Microfinance Limited.
The directors are developing a company website and have intimated
that they would like to provide access to the full financial statements
including the auditor’s report through the site.
Required:
Comment briefly on the issues this raises for the auditor.
(5 marks)
(Total 25 marks)

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 Auditing and Other Assurance Services – Paper 15

Question 5
(a) Your audit client, Lwera Diary Industries Ltd (LDIL), produces milk,
cheese and other related products, and is located at Lwera, along
Kampala - Masaka highway. The company makes emphasis on the
natural elements of the products and the fact that they do not contain
any artificial preservatives.
During the year 2012, the directors decided that it would benefit the
company’s public image to produce a social and environmental report
as part of their annual report. There are three key assertions which
they wish to make as part of their report:
(i) Goods/ ingredients of products for sale at LDIL have not been
tested on animals.
(ii) None of the LDIL’s suppliers of use child labour which is against
the Ugandan and international labour laws.
(iii) All LDIL’s packaging uses recycled materials.
The directors have asked the audit engagement partner whether the
firm would be able to produce a verification report in relation to the
social and environmental report.
Required:
(i) Identify and explain the matters the audit engagement partner
should consider in relation to whether the firm can accept the
engagement to report on the social and environmental report.
(9 marks)
(ii) Comment on the same matters to consider and the evidence to
seek in relation to the three assertions.
(6 marks)
(b) You are the audit senior of Kawundo Associates, Certified Public
Accountants. As part of your audit assignment exercise you are
required to carry out substantive audit procedures on the social or
environmental issues of the financial statements when designing the
audit procedures.
Required:
(i) Describe the key issues that the auditor would consider when
undertaking the substantive procedures as highlighted above.
(6 marks)
(ii) Briefly explain the contents of an assurance report on
environmental issues.
(4 marks)
(Total marks 25 marks)

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