AUDIT AND ASSURANCE SERVICES - PAPER 15

ANSWERS NOVEMBER 2013

Answer 1 Dokolo Shoe Leathers Ltd
(a)

Assessing the key risks in the general and application controls operated by
the computer department of DLTIL.
The main weaknesses in general controls and application controls in the data
processing department are described below;

General controls
(i)
Organizational controls.
There is a lack of segregation of duties between systems analysts,
Programmers and computer operators.
There is the possibility that Ms. Alele and Mr Ssewanonda could both corrupt
data since both of them are skilled computer programmers and operators.
They could do this by creating fictitious purchase ledger balances which
might then be paid by the company. The purchase ledger record could then
be eliminated from the ledger.
There is evidence that the programmers and operators are rotated or go for
annual leave.
Duties should be rotated and the duties of programming and operating
should be segregated.
(ii)

Developmental controls.
Angola modifies the computer software without consultation with user
departments and without authority for the modifications made.
Results of tests on modified programs are not reviewed by someone
independent of Angola. These weaknesses raise the possibility that Angola
could corrupt programs without the knowledge of anyone else in the
organization
With a computerized debtors system, he could program the computer in
such a way that certain debtor account details are not printed outcomputerised debtors system could be corrupted by the programmer.
There is a risk of fictitious invoicing through shell companies, i.e. via a
fictitious company he could order goods for himself but avoid paying for
them by preventing the relevant balances being printed out.
There is evidently been a lack of consultation with user departments to
ensure that their needs are met.

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(iii)

Data security.
There is a risk of unauthorised and unrestricted access to the computer
room.
The computer should be situated in a separate computer room in order to
ensure inaccessibility by unauthorised person to computer installation.
Lack of procedure restricting access to the computer installation.
Access to data and programs should be controlled with different users
having the necessary level of access according to their needs for example
for particular data, a user might have no access, read only access, or
read and amend access according to their legitimate requirements.
The securities of copies of disks made in the process of dumping data is
limited if both disks are stored in the same location. Both disks could be
destroyed in a fire.

Copies of disks could be both destroyed and stolen without noticing.

Besides, there is a risk of the CDs being corrupted.
Copies of disks should be kept in fireproof cabinets. It will be a good idea to
keep a second backup disk as well as using the grandfather- father-son
method, so that if the copy disk becomes corrupted, another disk is
available.

Application controls
Input controls.
Lack of validation check on data input before files are updated.
There should be validation checks of data input before disk files are updated.
Although exception reports are produced, they are produced too late to
prevent corruption data.

There is no evidence that editing is done on master files.

Edit checks should take place to ensure that the master files, customer number
stock item codes and ranges of values are tested by the validation program.
Exceptions would be printed out and input again as appropriate.

Lack of evidence on control total when processing record accounts, value total
and harsh total.
Control totals should be calculated prior to processing record counts, value
total and harsh total may be taken. Such controls serve to check that all valid
transactions are input.

Lack of continuity as control totals are not generated when disks are dumped.
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Processing controls should include run to run controls. Control totals could be
generated when the contents of a disk are dumped, in order to ensure
continuity of processing. Father and son records should be compared and the
differences checked.
Output controls.
There is no evidence that output control is agreed with those recorded by the
user department.
Output control totals should be agreed with those recorded by user
department. For these to be meaningful, proper input controls are necessary.

(b)

Discussing the improvements that could be made to the purchases and

creditors system of DLTIL.
The weaknesses in the purchases are creditors system and the improvements
which could be made to the system as described below.

Mr Okello has an excess amount of control over the activities of his

department. He has authority to place orders.

He receives goods received notes and authorizes purchases invoices.

He also checks output of the purchase ledger and exception reports, and
decides which creditors should be paid.
Okellos access control over his department activities should be limited
The system could be improved by the introduction of a greater degree of
segregation of duties. The routine job of agreeing purchases invoices to
GRNs and orders could be carried out by another member of staff in the
department.
Authorisation of payments to suppliers could then be carried by another
responsible official in the accounts department.
The purchase ledger printout and exception report can also be sent to the
accounts department for processing of any amendments.

The current system whereby Angola has authority to set up new purchase
ledger accounts is unsatisfactory and increases the possibility that Angola
could create fictitious accounts and defalcate payments made in respect of
such an account.
Angola should not be solely responsible for the creation of rejected account
and re-inputting data
Any request for new purchase; made by Okello should be authorised at least
by a director

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The current system of telephoning orders being confirmed by fax is not

wholly satisfactory, since no sequential written records of orders is
available for setting disputes with suppliers and checking orders with
invoice.
Sequential numbered records of orders should be introduced for settling
any disputes that might arise with suppliers/ checking orders with
invoice.
Orders should be recorded on pre-numbered Local purchase order sets,
with copies to the suppliers should be distributed to the supplier, the
warehouse and the accounts department.
Rejected payment should be referred to accounts other than to okello.

The procedure of updating the stock file from a weekly listing of orders
is unsatisfactory and will clearly lead to inaccuracies in the stock file.
The stock records will be largely meaningless and for audit purposes the
records of a full physical stock count will have to be relied upon
exclusively.

The procedure of updating the stock file from a weekly listing of orders
should be done physically; physical stock count should be carried out
Accurate information about stock levels is an important form of
management information. GRNs should be authorized by a responsible
official, probably the stock officer and not Okello.
Improvements to the stock recording system should be implemented
before the final audit. This is because stock has a direct effect on the
profit, accurate valuation should be carried out.

There appears to be no procedure to ensure that goods received are as

ordered and are of acceptable quality. Currently goods received are not
checked until the accounts department receives the invoice and sends to
Okello. Okello then checks the invoice to the order and to the GRN. By
this time, it is likely to be too late to rectify any problem.

Procedure to ensure that goods received are as ordered and are of

acceptable quality.
A copy of the pre-numbered order should be sent to the stores officer.
The stores officer should inspect goods to LPO on receipt and should
agree goods received to the orders in respect of quality, type of goods
and quantity.
Okello should not alter invoices by hand. Any alteration to invoices
should be checked/ authorised by independent/ responsible officer

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Invoices should be numbered sequentially on receipt before processing

by the accounts department. That department should contact suppliers
to request credit notes where necessary.

Under the current system, the credit notes received from suppliers are
received by Okello. Besides, at present, the accounts department
maintains no records for the goods returned for which credit notes are
expected.

Instead, credit notes together with copies of goods returned notes (GRN)
should be received in the accounts department for control purposes
before being sent to Okello for approval.

The listing of payments sent to the cashier and reviewed by the cheque
signatories is not sufficient to check whether payments made are valid.

Directors should review authorised invoices, orders and GRNs when

signing suppliers cheques.
Rejections of cheque payments should be referred back to accounts
department.
Control totals should be recorded by the accounts department of records
input. The value of invoiced amounts input together with the harsh
total, when input is sent to the data processing department.

The purchase ledger balances should be reconciled with supplier

statements periodically. This procedure will highlight errors and many
irregularities.
Control account will assist in ensuring that all input is processed
completely and accurately.

The accounts department should consider maintaining a manual control

account as well.

It is unsatisfactory that purchase ledger is only printed once a month,

and as a result audit trail will be lost. The auditor will lack information
on many settled transactions on items purchased and paid for within the
month.

The monthly purchase ledger print out should detail all transactions
occurring in the month, rather than just consisting of an analysis of the
balance outstanding for creditors.

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(c) (i) Drafting a memo to the engagement partner outlining the key points to be
discussed at the planning meeting.
Key points for discussion at the planning meeting
To: The Engagement Partner
From: Audit Manager
Date: 30 November 2013
Subject: Engagement Planning Meeting
The purpose of the meeting is to brainstorm the susceptibility of the entitys
financial statements to material misstatements due to fraud and other factors
(a)
(b)
(c)
(d)
(e)
(f)

Emphasis of the importance of professional skepticism and the need to

incorporate unpredictability into the audit procedures.
Exchange of ideas about how and where the entitys financial
statements may be susceptible to material misstatement.
Consideration of industry and economic changes.
Consideration of internal and external factors affecting the entity
Discuss prior period experience with clients, other client in similar
industry the results of acceptance and continuance procedures.
Consider risk based approach

Consideration of factors that may create and incentive or exert

pressure on management.

Staffing - Unusual or unexplained changes in behaviour or

lifestyles of employees

Management involvement in overseeing employees.

Circumstances that could be indicative of fraudulent financial

reporting

Opportunities to perpetrate fraud

Attitudes in the organisation

Risks of management override of controls

Any allegations of fraud in the organisation

(g)

Review of PAF/ points forward if its a continuing client,

Letter of professional clearance if its a new engagement,
Review of a engagement letter/ drafting the Engagement letter,

Brainstorm possible responses to the fraud risks.

High risk areas will be documented and followed up during the audit.

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(ii)

Using non-statistical sampling in selecting the audit sample:

This means selecting a sample of appropriate size on the basis of the auditors
judgment of what is desirable.
Advantages of Non- Statistical sampling are;
The approach has been used for many years. It is well understood and
refined by experience
The auditors can bring their judgement and expertise into play
No special knowledge of statistics is required
No time is spent on struggling with mathematics.
There are however serious disadvantages which are;

(d)

It is unrealistic
Often sample sizes are too large, which can be wasteful, or too small, which
renders the test invalid.
There is no consistency of results- two different auditors will produce two
different samples.
No quantitative results are obtained
Personal bias in the selection of the sample is unavoidable
There is no logic to the selection of the sample or its size
The sample selection can be slanted to the auditors needs, e.g. selection
of items near the year end to help with cut off evaluation, may invalidate
the test if it is to be used to validate transactions for the entire period.

How Auditors and accountants can minimize their potential liabilities for
professional negligence.
Auditors and accountants can minimize their potential liabilities for
professional negligence in the following ways:

By not being negligent i.e. having a effective quality control system

Ensuring that the audit procedures are in accordance with IAS 315:Identifying
and assessing the risks of material misstatements through understanding the
entity and its environment are carried out properly
Carrying out audit work in accordance with the international standards on
auditing
Agreeing the duties and responsibilities in the engagement letter.
o
This should specify tasks to be undertaken and exclude specifically those
that are not to be undertaken. It should also define the responsibilities to
be undertaken by the client and specify any limitations on the work to be
carried out.
o
The engagement letter should state the purpose for which the report has
been prepared and that the client may not use it for any purpose.
o
By identifying the authorized recipient of reports in the engagement letter
and in the auditors report.
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By limiting or excluding liability by a term in the engagement letter or to

third parties, by a disclaimer in the auditors report. This requires any
auditors report to state the purpose of the report and that it may not be
relied on for any other purpose (the so called Bannerman wording).
Defining in their audit report the precise work undertaken, the work not
undertaken and any limitations to the work. This is so that any third party will
have knowledge of the responsibility accepted by the auditor for the work
done.
By operating as a limited liability partnership
By making an agreement with the directors and approved by the shareholders
as to the extent of any damages which may be claimed- a liability limitation
agreement.
Having professional indemnity insurance just in case they are sued as required
by ICPAU.
o

Answer 2 Mpoma Thermal Power Ltd (MTPL)

(a)

Describing the audit evidence one would expect to find in undertaking the
review of the audit working papers and financial statements of MTPL

(i)

Intangible Assets.
Matters
However true it may be that money is spent in the hope of future benefits,
staffs training costs do not usually meet the definition of an asset as there is
insufficient control over them (IAS 38 Intangible Assets) they cannot therefore
be intangible assets.
Control might be claimed if Mpoma had legal rights over the staff trained, to
use and obtain future benefits expected from them. However, whilst this might
apply to key individuals it would not apply to its entire technical staff.
Whether any of the Shs 120 million is a cost which can be deferred, for
example:

Pre-payments for any part of the training program both run until after the
year end.

Training manuals (bound volumes or software programs) which can be used

over a future period of time.

The audit evidence

A breakdown of 120 million analysed between external and internal

training costs
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(ii)

Test checking the largest invoices for training

Physical inspection and review of training report or training records,

certificates, or course content.

The standard terms of the contracts with technical staff confirming that
Mpoma Thermal does not have sufficient control over them

Details of leavers contrary to argument to the chief executive officers

claims that future benefits are not protected as Mpoma Thermal cannot
prevent technical staff from taking up alternative employment
elsewhere.

Details of facilitators/ consultants who delivered the training.

Review of training requirements in line with the companys strategic

plan,

Selection procedures for facilitators/ consultants.

Provision for decommissioning

Matters
Mpoma Thermal has a legal obligation to incur Shs 920 million in dismantling/
decommissioning costs should be recognized, in full, as a liability (IAS 37
Provisions, Contingent Liabilities and Contingent Assets) and as part of the cost
of the laboratory(IAS 16 Property, Plant and Equipment).
The audit evidence
The terms of Mpoma municipal council grant as documented in the
permanent audit file
Physical inspection of the site to confirm the contraction of the
laboratory was done during the year and the obligation, for settling in
2041, thereby created.
Breakdown and calculation of the Shs 920 million by PTPLs management
or an independent consultant.
Assumptions made in estimating the future cost (e.g. concerning degree
of contamination), whether they are reasonable, appropriate and are
applied consistently.
An appropriate discount rate to calculate the adjustment that
management should make (or quantify the impact of disagreement if the
financial statement are not adjusted).

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(b)

Methods used in making the accounting estimate & reasonableness of the

estimate
Review disclosures related to the accounting estimate to determine
whether they comply with IAS 37.

The issues that the auditor of MTPL would consider in establishing the liability of
the figure taken as work in progress by management, before one can rely on it
include;

Examination of contracts to ensure that salient features such as time scales and
penalty clauses are known.
Enquiry into the costing system from which work in progress is ascertained.
Review the reliability of the costing system. In particular a costing system
integrated with the financial accounting system will prima facie be more reliable
because of the discipline of double entry and the inherent checks imposed by
external data such as creditors statements.
Enquiry into statistical data concerning input of materials and output products and
expectations e.g. for given tonnages of, materials purchased there should be some
identifiable outcome in the contract. Actual progress can be matched with
theoretical models.
Enquiry into the system of inspection and reporting to enable due allowance to be
made for scrapping and rectification work.
Enquiry into the basis on which overheads are included in costs. This should be
based on IAS 2.
Enquiry into the basis on which any element of profit is dealt with. Profit should be
eliminated from work in progress. The calculation of the amount of profit to be
taken should be treated with extreme caution.
Any losses identified on contracts in progress must be recognized immediately in
the valuation. This is to reduce the valuation of work in progress to its estimated
realizable value. Auditors have to review not only the costs already included in the
calculation of work in progress but also to complete the particular contract. This
requires them to form a judgement on the assumptions used by management to
calculate such costs.
Auditors should where possible inspect the work in progress in order to familiarize
and to provide basic evidence that the items exist.
Need for written representation from management.
Documentation of indicators of potential management bias identified during the
audit.
Evidence of technical supervision
Provision on spoilage during manufacturing,
Confirmation of materials used to standard specification,
Sample job card details and composition to product/ WIP value,
Estimate of staff time and costs.
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Answer 3

Kayanja Group Ltd

(a)
(i)

Why intra-group balances should agree and the consequences of not

agreeing.
Intra group balances should agree, in the preparation of consolidated accounts,
If not cancel them out. If they do not cancel out then the group accounts will
be displaying an item which has no value outside of the group and profits may
be correspondingly under or overstated.

(ii)

The audit work I would perform to check that intra-group balances agree is as
follows.

(iii)

Obtain and review a copy of the holding companys instructions to all group
members relating to the procedures for reconciliation and agreement of year
end intra-group balances. Particular attention should be paid to the treatment
in transit items to ensure that there is a proper cut off.
Obtain a schedule of intra- group balances from all group companies and check
the details therein to the summary prepared by the parent company. The
details on these schedules should also be independently confirmed in writing by
the other auditors involved.
The details on the schedules should also be agreed to the details in the
financial statements of the individual group companies which are submitted to
the parent company for consolidation purposes.
Nil balances should be confirmed by both the group companies concerned and
their respective auditors.
The audit work I would perform to verify that intra-group profit in inventory
has been correctly accounted for in group accounts.
Where one company in group supplies goods to another company at cost plus a
percentage, and such goods remain in inventory at the year end, the group
inventory will contain an element of unrealised profit. In the preparation of the
group accounts, best accounting practice requires that a provision should be
made for this unrealised profit.
In order to verify that intra-group profit in inventory has been correctly
accounted for in the group accounts, the audit work required would be as
follows.

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Confirm the groups procedure for identification of such inventory and their
notification to the parent company that will be responsible for making the
required provision.
Obtain and review schedules of intra- group inventory from group
companies and confirm that the same categories of inventory have been
included as in previous years.
Select a sample of invoices for goods purchased from group companies and
check to see that where necessary, these have been included in yearend
intra- group inventory.
Obtain confirmation from other auditors that they have satisfactorily
completed a similar exercise.
check that the calculation of the provision for unrealised profit has been
arrived at on a consistent basis with that used in earlier years, after making
due allowance for any known changes in the profit margins operated by
various group companies.
Check the schedules of intra-group inventory against the various inventory
sheets and consider whether the level of intra-group inventory appears to
be reasonable in comparison with previous years, ensuring that satisfactory
explanations are obtained for any material differences.

(b)
(i)

Stating why the group auditors of Kayanja Group Ltd would wish to review
the work of the auditors of the subsidiaries of the group
The main consideration which concerns the audit of all group accounts is that
the holding companys auditors are responsible to the members of that
company for the audit opinion on the whole of the group accounts.

To ensure notes to the financial statements state that the financial statements
of certain subsidiaries have been audited by other firms
To ensure that the Audited financial statements show a true and fair view. The
auditors of a holding company have to report to its members on the truth and
fairness of the view given by the financial statements for the company and its
subsidiaries dealt with in the group accounts.
Group auditors have to confirm that information and explanations reasonably
required from the subsidiary companies and their auditors have been obtained.
The group engagement team should have powers to obtain such information
and explanations as they are reasonably require from the subsidiary companies
and their auditors, or from the parent company in the case of overseas

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subsidiaries, in order that they can discharge their responsibilities as holding

company auditors.
Group auditors have to confirm that attention was paid to the requirements of
International Auditing Standard, ISA 600 Special Considerations - Audit of
Group Financial Statements (including the work of component auditors) .This
standard clarifies how the group auditors can carry out a review of the audit of
components including subsidiaries in order to satisfy themselves that, with the
inclusion of figures not audited by themselves, the group accounts give a true
and fair view.
To ensure that the scope, standard and independence of the work carried out
by the auditors of subsidiary companies (the component auditors) are the most
important matters which need to be examined by the group auditors before
relying on financial statements audited by them.
The group auditors need to be satisfied that sufficient appropriate audit
evidence has been obtained and that all material areas of the financial
statements of subsidiaries have been audited satisfactorily and in a manner
compatible with that of the group auditors themselves.

(b) (ii) Describing the procedures the group auditors would carry out in performing
a review of the work of the auditors of the subsidiaries. Audit procedures
the group auditor would carry out:

Send a questionnaire to all other auditors requesting detailed information on

other work including, an explanation on the general approach, details of
accounting policies, the component auditors opinion, limitation placed on the
scope of auditors work and any qualifications and reasons for them made or
likely to be made on their reports.
Carry out a detailed review of the component auditors working papers on each
subsidiary whose results materially affect the view given by the group financial
statements
Establish whether an up-to-date permanent file exists with details of the
nature of the subsidiarys business, its staff organization, its accounting
records, previous years financial statements and copies of important legal
documents
Establish that a system of examination has been properly completed,
documented and reports to management after discussion
Establish that tests of controls and substantive procedures have been properly
and appropriately carried out, and audit programmes properly completed and
signed.
Establish that all working papers are comprehensive and explicit
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Establish that the overall review of the financial statements has been
adequately carried out, as adequate use of analytical procedures has been
undertaken throughout the audit.
That the financial statements agree in all respects with the accounting records
and concur with all relevant legal requirements and accounting standards
Confirm that minutes of the board and general meetings have been scrutinized
and important matters noted.
The audit work has been carried out in accordance with approved auditing
standards.
The financial statements agree in all respects with the accounting records and
comply with all relevant legal and professional requirements.
The audit work has been properly reviewed within the firm of auditors and any
laid down quality control procedures adhered to.
Any points requiring discussions with the holding companys financial
statements have been done/ documented.
Adequate audit evidence has been obtained to form a basis for the audit
opinion on both the subsidiaries financial statements and those of the group.

If the engagement partner is not satisfied as a result of the above review, he should
arrange for further audit work to be carried out either by the component auditors
on their behalf, or join with them. The component auditors are fully responsible for
their own work, any additional tests are those required for the purpose of the audit
of the group financial statements.
Answer 4 Clarity Project
(a) (i) Describing the risks that the paper referred to in the scenario points to;

Problems of alignment with the underlying assumptions implicit in the

standards- in some countries values and norms may not be fully aligned with
those on which the standards are based, for example there may be an
exception that certain audit procedures are carried out regardless of assessed
risk because that is how we do it here.
Quality of economic governance. Basically the legal and political environment
and its attitude to matters such as property rights and corporate governance.
In some countries rules based systems may make it appear that auditing should
be confined to simple box ticking for compliance and the role does not attract
individuals with the right qualities. Political consideration and the willingness
of countries to accede to demands to limit corporate disclosure can discourage
questioning and enquiry, as can corrupt regimes and those dominated by one
party politics.
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The nature of business relationships: In some countries, business relationships

may be complex and built on trust. Employment of family members and
relationships with related parties may be beneficial for trading purposes but
may present auditors with huge problems in complying with the standards.
Strength of the legal system. In particular, property ownership rights of the
right of the government to seize property may be an issue, as well as the
liability of the legal system to act as a regulator for audit purposes.
Quality of record keeping. Not all countries have the quality of accounting and
audit staff in depth or the ability to distinguish substance over form in the
recording of transactions.
Extent of management authority. There are cultural differences between
countries in managements ability to communicate at all levels in an
organization and also in the ability of an auditor to challenge management
decisions or actions. It may be difficult for members of an audit team to
question senior management as any challenge to management may be
interpreted as criticism of their ability to do their job rather than as a process
of an audit review.
Expectations of secrecy. Some cultures have an expectation that financial and
other matters should be kept secret and there is unwillingness to adopt
measures which might lead to greater transparency of reporting.
Professionalisation of auditing. Auditing is an art not a science and in some
countries with poor education systems, lack of opportunity to develop financial
expertise or limitations on cross boarder experience, it may be difficult to
recruit a sufficient number of auditors to the profession, particularly if there is
a poor perception of what auditors actually do.
However these risks should not detract from the intentions behind ISA
standardisation as global businesses need global standards and this is a big step
in that direction.

(ii)

Why attitude of Professional scepticism is important in an audit of financial

statements.
Professional scepticism is an attitude that includes a questioning mind, being
alert to conditions which may indicate possible misstatement due to error or
fraud and a critical assessment of audit evidence.
Professional scepticism is necessary to reduce the risks of:
(a) Overlooking unusual circumstance
(b) Over generalising when drawing conclusion from audit observation
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(c) Using appropriate assumptions in determining the nature, timing and

extent of audit procedures and evaluating results thereof.
(b) (i) Describing the matters I would consider and action I will take to ensure my
firm remains independent as the external auditor of the financial
statements while providing an internal audit service
The auditor should consider the following factors when assessing their
independence.

The level of fee income from Nyamuranga Grain millers should not exceed say
15% of the practice total income. This figure would be so material and make
independence of the firm impaired.
As external auditor, the firm will be reviewing the work of internal audit. If the
same staff were acting as external and internal auditors, they would be judging
their own work. This is an obvious threat to objectivity. This obvious threat to
objectivity can be lessened by different staff carrying out the detailed work,
and different partners and managers being in charge of providing both services.
If Nyamuranga Grain Millers is a listed company, the audit firms staff should
not be involved in providing internal audit services.
If Nyamuranga Grain Millers is not listed, it must accept responsibility for its
accounts and accounting records, and the practice must carry out sufficient
audit work on the accounting records.
Similarly there is a threat to independence if the internal auditors become
involved in the management of the company, because as external auditor the
audit firm is reporting on the stewardship of management. However part of the
internal audit service could be making recommendations about the design of
systems and controls. The audit firm should thus ensure that the directors take
responsibility for implementation of any recommendations and their decisions
are clearly recorded in board minutes.
Internal audit staff may breach other independence guidelines that are
applicable to them as employees for the firm carrying out the external audit.
They should be reminded that they should not own shares in the client, accept
a loan from the client and obtain goods or services on more favourable terms
than offered to Nyamuranga Grain millers own staff.
If Nyamuranga Grain Millers does fail to pay fees, there may be greater danger
of the amounts owing being akin to a loan because of their size and because
they are amounts owed for continuing service rather than an annual audit.
The engagement letter should set out clearly the respective responsibilities of
the audit firm and Nyamuranga Grain Millers. It should separately identify the
work that the audit firm should carry out as external and internal auditors and
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(ii)

how fees will be calculated for each service. It should make clear to whom the
audit firms internal audit team will report.
The firm should consider as part of its annual review of independence whether
it is still sufficiently independent to be able to continue to act as external
auditors.
The advantages for Nyamuranga Grain Millers of having the external auditor
providing internal audit services are as follows;

(c)

Independence of audit firms.

Using audit firm would be less costly than establishing and maintaining an
internal audit function.
The audit staff will be qualified or partly qualified accountants who are
subject to professional standards and guidelines
Training costs will be saved as the audit firm not NGM will be responsible
for staff training.
The audit firm may be able to provide a range or expertise which would not
be available to NGM without incurring considerable extra costs.
The efficiency of external audit would be enhanced and hence its costs
lowered, because external auditors can be able to rely on the work
performed by the internal auditors.

Describing the benefits to the audit firm of using electronic audit systems.
The benefits are;

Previous years files are stored electronically, audit teams do not have to
carry large amounts of paper with them.
You can create a backups so audit files are not lost
You can link auditor files to accounts production software so that lead
schedules can be updated automatically.
Data can be rolled forward into next year.
Pre-set audit manuals and forms have to be completed properly and this
aids compliance.
Files can be reviewed remotely if they are recorded on the firms network.

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Answer 5 Audit Committees

(a) (i) Describing the role of an audit committee in an organisation as a result of
increasing fraud cases.
The role includes to;

monitor the integrity of the financial statements of the company and any
formal announcements relating to the companys financial performance,
reviewing significant reporting judgements contained in them;
review the companys internal financial controls and unless expressly
addressed by a separate board risk committee composed of independent
directors or by the board itself, the companys internal control and risk
management systems.
monitor and review the effectiveness of the companys internal audit
function.
make recommendations to the board for it to put the shareholders for their
approval in general meeting, in relation to the appointment of the external
auditor and to approve the remuneration and terms of engagement of
external auditor.
review and monitor the external auditor independence and objectivity and
the effectiveness of the audit process, taking into consideration relevant
legal and regulatory and other company guidelines.
develop and implement policy on the engagement of the external auditor,
supply non audit services, taking into account relevant ethical guidance
regarding the provision of non-audit services by the external audit firm.
report to the board identifying any matters in respect of which it considers
that action or improvement is needed and making recommendations as to
the steps to be taken.

(ii) The advantages of having audit committee in an organisation:

Audit committee can;
improve quality of management accounting as they are able to
internal reporting which is not necessarily the responsibility of the
auditors.
facilitate communication between the directors, internal and
auditors and management.
help minimise any conflicts between management and the auditors
facilitate the independence of the internal audit role if the
auditors report is made to the audit committee directly.

criticise
external
external

internal

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(c) (i)

Comments on suitability of the unqualified report.

Going concern is an underlying assumption of the conceptual framework. Hence it
is assumed, unless an alternative basis of preparation is disclosed.
As Kitgum women cotton growers has liquidated certain assets and commenced a
systematic winding down its operations, it appears that is no longer a going
concern.
An adverse opinion should be expressed as required by ISA 570.
All remaining assets and liabilities expected to be settled in the next 12 month
should be classified as current.
However, the valuation of assets and liabilities may not be significantly affected
(especially if trade receivables and payables are stated at amounts expected to be
settled in the normal course of business).
Financial statements should be prepared on an alternative authoritative basis
An alternative (e.g. break-up) basis for the preparation and presentation of the
financial statements appears to be appropriate (as trading has ceased).
The basis of preparation is not disclosed and in the absence of disclosure to the
contrary, users of KWCGs financial statements might assume that they have been
prepared on a going concern basis.
In conclusion, KWCGs directors should be advised to disclose the basis in the notes
to the financial statements.

(ii) Drafting an appropriate opinion paragraph for the auditors report on Kitgum Cotton
Growers Group for the year ended 30 June 2013
Adverse Opinion:

As explained in note 1 and 2 to the financial statements, the ability of the entity
to continue as a going concern is in doubt. In note 2 the directors have prepared
the financial statements in accordance with the International Financial Reporting
Standards which assume a going concern status.

In opinion, however, the going concern basis should not have been used. Had the
going concern basis not been used, adjustments would be needed to the
classification of recorded asset amounts, with these assets being written down to
their recoverable amounts and classification of liabilities to reflect the fact that
the company may be required to realise its assets and extinguish its liabilities
other than in the normal course of business, additional assets may crystallise and
the resulting amounts may differ materially from those stated in the financial
statements.

In view of the significance of the matters referred to above, in our opinion the
financial statements do not reflect true and fair view of the financial position of
the company as at 30 June 2013 and of its financial performance and its cashflows
for the year then ended.

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