Auditing and Other Assurance Services - Paper 15 CPA

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THE PUBLIC ACCOUNTANTS EXAMINATIONS BOARD
A Committee of the Council of ICPAU
CPA(U) EXAMINATIONS
LEVEL THREE
AUDITING & OTHER ASSURANCE SERVICES – PAPER 15
WEDNESDAY, 26 AUGUST 2015
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.
 2015 Public Accountants Examinations Board
Auditing & Other Assurance Services - Paper 15
26 August 2015 Page 2 of 7
SECTION A
This section has one compulsory question to be attempted
Question 1
Buwaya Institute of Science and Technology (BIST) was established in 2001 as a
vocational training institute. The Institute is located in northern Uganda and has
grown into the largest regional Institute. There are over ten vocational training
Institutes in the region providing the same services. BIST was set up to cater for
formerly abducted child soldiers to enable their reintegration back into the
community. At the time of establishing the Institute, the Government was and
still encourages vocational training. This was also to help students who failed to
join higher institutions of learning. The Institute purchases workshop tools,
equipment, computers and accessories without paying taxes as these are all tax
exempt.
The Institute collaborates with many likeminded Institutes implementing a donor
funded project. The project is implemented through Skills International
Development Organisation (SIDO); an international non-governmental
organisation (INGO). This project is to help ensure that the unemployed youths
are skilled and able to start small businesses. It is hoped that it would reduce on
youth unemployment. It provides technical and business skills training as well as
tools to help start workshops to serve their communities. SIDO set up a grants
management team with sub-grant officers stationed in each of the implementing
Technical Institutes.
BIST admits both students that are self sponsored as well as government and
donor funded. This requires tracking of the fees separately. During the course of
the project implementation, the sub-grant officers were advanced funds to
conduct activities with BIST by SIDO. One of the challenges was noted as being
lack of proper financial management system. The Institute is headed by a
charismatic principal. The Principal was part of the recruitment team of the subgrant
officers. He ensured that his brother was appointed.
The current student population is not sufficient to meet all the expenses of the
Institute. This has led to BIST inflating the government and donor sponsored
students to increase the grant support. The current economic situation is rapidly
changing with high inflation and foreign exchange fluctuations. The key suppliers
to the Institute are complaining of delayed payments. The tutors and instructors
are threatening to go on strike. BIST borrowed funds to build a new block on
assumption of students’ population growth. Three heads of departments have
left due to various reasons including allegations of financial mismanagement and
sexual harassment.
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The Institute is struggling to pay its suppliers as well as the loan repayments.
The students after completing their studies have not been able to get sufficient
contracts and work. This has discouraged potential future students.
The following are extracts of financial statements that were submitted to their
auditors for the audit for the year ended 30 June:
Statement of Financial Position as at 30 June
2015 2014
Shs ‘000’ Shs ‘000’
Assets:
Non-current assets:
Property, plant and equipment 30,500 25,600
Current assets:
Inventory 1,300 1,820
Trade and other receivables 2,600 2,000
Cash and bank balances 1,000 1,200
Total current assets 4,900 5,020
Total assets 35,400 30,620
Equity and liabilities:
Equity:
Share capital 8,000 8,000
Revaluation reserve 1,200 1,200
Retained earnings 2,300 3,800
Total equity 11,500 13,000
Non-current liabilities:
Long-term loan 10,000 12,000
Current liabilities:
Trade and other payables 200 310
Taxation 4,200 2,000
Bank loan 4,000 1,200
Overdraft 5,500 2,110
Total current liabilities 13,900 5,620
Total equity and liabilities 35,400 30,620
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Required:
(a) Examine the current business and financial risks that BIST is facing.
(10 marks)
(b) As the audit manager, recommend the strategies to be undertaken by the
client (BIST) to mitigate the financial risks.
(10 marks)
(c) Identify and show how the conflict of interest in the scenario would be
avoided.
(4 marks)
(d) Discuss the various ways of reducing the audit firm’s liability while
expressing their opinion in respect of this client.
(10 marks)
(e) Evaluate the audit procedures you would perform when testing for:
(i) unrecorded liabilities. (10 marks)
(ii) long-term loans. (6 marks)
(Total 50 marks)
SECTION B
Attempt two of the four questions in this section
Question 2
During the recent audit of the financial statements of Mzuzu Investment Ltd, it
was revealed that a total of Shs 686,661,000 was advanced to staff as
accountable funds for the period between January 2015 to May 2015 for various
activities including estates management, drivers’ upkeep, fuel for the pool
vehicles and imprest for upcountry stations. Preliminary information gathered
suggests that there was possible falsification of accountability receipts and
vouchers by staff. The suppliers were contacted through telephone calls and emails
but most of them are denying this. It was also revealed that the purported
suppliers denied the receipts that were presented and the handwriting thereon.
The carbon copies of the receipts indicate different dates, items bought and
amounts paid. The suppliers suspected that their receipts had been forged by
unknown persons.
You recently attended a conference organised by the Association of Certified
Fraud Examiners Uganda Chapter where such occurrences were described as
occupational fraud involving asset misappropriation, corruption and financial
statement fraud schemes. One of the participants commented that such acts are
capable of rendering financial statements misleading and call for a forensic audit.
You have been hired to carry out a forensic audit of imprest management at
Mzuzu Investments Ltd.
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Required:
(a) With the help of examples, discuss the following terms as used in forensic
investigations:
(i) Asset misappropriation schemes (6 marks)
(ii) Corruption schemes (3 marks)
(iii) Financial statement fraud schemes (3 marks)
(iv) Forensic audit (3 marks)
(b) Discuss the general procedures you would carry out before undertaking a
forensic audit of Mzuzu Investments Ltd.
(10 marks)
(Total 25 marks)
Question 3
In professional audit practice, it is important to agree the terms of engagement
before any assignments are taken up. This ensures a clear understanding
between the auditor and the client.
Required:
(a) Examine the key components of an audit engagement letter.
(10 marks)
(b) Evaluate the factors to be considered during the assignment of the audit
engagement team.
(5 marks)
(c) Critically assess the considerations undertaken by the engagement partner
while undertaking reviews.
(5 marks)
(d) There is always need to communicate with outgoing auditors, and thus
permission should be granted by the client in this regard. If not granted,
there are high chances of not taking up the assignment. Discuss the
reasons why this is a very important process.
(5 marks)
(Total 25 marks)
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Question 4
Denja Ltd is a manufacturing company, located in the city centre and is involved
in the production of a range of home care products. The company has always
been at loggerheads with the neighboring community due to the matters below:
(i) There is excessive noise during production.
(ii) Air pollution due to industrial fumes.
(iii) Waste products disposal in the nearby stream.
(iv) Underpayment of the employees especially casual labourers within the
community.
It was discovered that the managers favor some employees and this has caused
divisions among the company staff. The company has had two strikes in the
recent past due to such treatment.
In addition, the community is threatening to sue the company regarding the
environmental degradation it is facing due to the operations of the company.
‘After all, they even do not get involved in any corporate social responsibility’,
one of the residents argued. He further noted that; ‘environmental and social
auditing are a growing concern in the private sector. Industrial developments
have come along with environmental destruction. Water resources have been
contaminated, forests have been depleted, noise pollution has affected the
community and the air has also faced serious pollution among others’.
You have been approached by one of the managers regarding the issues facing
the company. Among the issues for which he requires advice is to assess the
various uses of environmental audits to the company.
Required:
(a) Explain the following terms:
(i) environmental audits. (3 marks)
(ii) social audits. (2 marks)
(b) Advise the managers of Denja Ltd on the uses of environmental audits.
(8 marks)
(c) Discuss the main areas you would review as possibilities for the
misstatement of the financial statements in relation to environmental
issues.
(12 marks)
(Total 25 marks)
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Question 5
By February 2015, there were 18 million registered users of mobile money, an emoney
financial service in Uganda. Bank of Uganda conceded that there is need
for a law to streamline the bank’s supervisory role over mobile money services
operated by telecom companies.
“Believe me, the risks in this business are there but they are minimum” Executive
Director Bank Supervision.
The New Vision, 26 February 2015.
You are the engagement manager on an audit assignment of a telecom
company.
Required:
(a) Discuss the risks that telecom companies are exposed to by providing emoney
financial services.
(12 marks)
(b) Assess the key issues that an auditor should take into account while
auditing telecom companies running e-money platforms.
(6 marks)
(c) Discuss the mitigating factors that you would expect the client to institute
in order to avert the risks of cyber crime.
(7 marks)
(Total 25 marks)