2022 TOPIC 2 - Regulation of Auditing

TOPIC 2 THE REGULATION OF AUDITING IN UGANDA
2.1. The need for regulation

Need for regulation
There is need to regulate auditing especially statutory audits in order to:
 Protect the public that rely on audited financial statements to make decisions.
 Maintain the dignity of the auditing profession in society.
 Ensure the independence and competence of auditors.
 Harmonise audit procedures in a country and in some cases, globally.
Forms of regulation
Statutory audits in Uganda are regulated by the following, among others:
 National laws e.g. the Companies Act 2012, the Public Finance and Management Act 2015, the National Audit
Act 2008 (for the public sector), the Accountants Act 2013.
 Institute of Certified Public Accountants of Uganda (ICPAU).
 Corporate governance principles.
 International Standards on Auditing.
 Professional code of ethics for accountants.
2.2 The external audit report

The report as a means of communication to stakeholders
 The Uganda Companies Act 2012 requires all companies in Uganda to have annual statutory audits.
 An audit report is a means of communication to various stakeholders
 The report is used by shareholders, lenders and suppliers etc in making decisions about the entity.
Opinion in the audit report

The Companies Act requires external auditors to give an opinion in an audit report stating clearly whether:
 The financial statements show a true and fair view of (or fairly represents) the affairs of the entity audited.
 Proper accounting records (books of account) have been kept.
 The financial statements agree with the accounting records (books of account).
 All information and explanations necessary for the audit have been received.
 The financial statements comply with the IFRSs and the Uganda Companies Act.
An example of an unmodified audit report as per ISA 700 (Revised) effective for the audits of financial statements
for unlisted companies for periods ending on or after December 15 2016:
INDEPENDENT AUDITOR’S REPORT

To the Shareholders of ABC Company (or other appropriate addressee)
Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the statement of
financial position as at December 31, 2016, and the statement of comprehensive income, statement of changes
in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a
summary of significant accounting policies.
1 Auditing notes 2022
In our opinion, the accompanying financial statements present fairly, in all material respects, (or give a true and
fair view of) the financial position of the Company as at December 31, 2016, and (of) its financial performance and
its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).
Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements
section of our report. We are independent of the Company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Uganda, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Responsibilities of management and those charged with governance for the financial statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance
with IFRSs, and for such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis
of accounting unless management either intends to liquidate the Company or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these financial statements.
A further description of the auditor’s responsibilities for the audit of the financial statements is located in the
Appendix to the auditor’s report. This description forms part of our auditor’s report.
Signature in the name of the audit firm, the personal name of the auditor, or both
Auditor address
Date
Appendix to the auditor’s report – More auditors’ responsibilities*
We also:
 Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.

 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control.
 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
 Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions
may cause the Company to cease to continue as a going concern.
 Evaluate the overall presentation, structure and content of the financial statements, including the disclosures,
and whether the financial statements represent the underlying transactions and events in a manner that
achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of
most significance in the audit of the financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure
about the matter or when, in extremely rare circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.
*The auditor may include the description of the auditor’s responsibility on a website of an appropriate authority
The meaning of true and fair view

 An external auditor expressed an opinion whether the financial statements present fairly, in all material
respects, (or give a true and fair view of) the financial position, financial performance and its cash flows
 Present fairly, in all material respects is equivalent to a true and fair view.
 True and fair view means that the financial statements:
- Comply with the relevant IFRSs, laws and regulations.
- Including the related notes, represent the underlying transactions and events on the entity.
- Are free from material misstatement arising from fraud or error.
- Contain information that is relevant, reliable, verifiable, neutral, comparable and understandable.
 True and fair does not mean the financial statements are correct due to the limitations of an audit.
 The auditors’ opinion does not assure the entity’s future viability nor the efficiency of management.

Form of audit opinion
Auditors may express an unmodified opinion or a modified opinion in an audit report.
Auditors express:
 An unmodified opinion when the financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework. An unmodified opinion is given when auditors have:
- Not detected any material misstatements and the financial statements comply with the relevant IFRSs
and laws.
- Collected sufficient appropriate evidence on the financial statements during the audit.
 A modified opinion if they:

- Have detected material misstatements and the financial statements do not comply with the relevant IFRSs
and laws.
- Have been unable to obtain sufficient appropriate audit evidence to conclude that the financial statements
as a whole are free from material misstatement (called limitation on the scope of the audit).
An unmodified opinion is given in an unmodified report (also called an unqualified audit report) which is clean
report. Details on the audit report are covered in Topic 6.
2.3 The Accountants Act and the ICPAU

The ICPAU and its functions
The Accountants Act created the ICPAU in 1992 to regulate accountants in Uganda.
The ICPAU is an autonomous corporate national body for accountants in Uganda.
The Institute is a member of the International Federation of Accountants (IFAC), which is a non-profit, non-
governmental international accountancy body based in New York.
The functions of ICPAU are to:

 Regulate and maintain the standard of accountancy in Uganda.
 Prescribe and regulate the conduct of accountants and practising accountants in Uganda.
Requirements to practice accountancy

The following are the requirements of the Accountants Act to practice accountancy in Uganda:
 A practising accountant is an accountant registered and issued with a practicing certificate by the ICPAU.
 A person practises accountancy if he or she performs services involving the use of accounting or auditing
skills for payment.
 To practice accountancy in Uganda, a practicing accountant must be issued with a practicing certificate and
an accounting firm must be licensed annually by the ICPAU.
Accountancy services according to the ICPAU

Assurance and advisory services listed as accountancy services by the Institute include the following:
 External audit and related review services.
 Preparation of management or financial accounts, cash flows and budgets.
 Internal audit of accounting and internal control systems.
 Consultancy on accounting and financial reporting systems.
 Preparation of tax returns, provision of advice on tax matters
 Working as liquidators of companies (Insolvency practice).
 Preparation of business plans.
 Management consulting on accountancy activities.
 Forensic accounting.
 Financial due diligence.
 Valuation of businesses and assets.
Activities of the ICPAU

In order to fulfill its functions, the Institute carries out various activities including the following:
 Conducts courses like CPA Uganda and the Accounting Technician’s Certificate of Uganda (ATC, U).
 Registers accountants and accounting firms and issues annual practicing certificates to practicing
accountants and licenses to accounting firms.
 Promotes the usage of internationally accepted accounting and auditing standards.
 Inspects accounting firms to ensure that services are performed in accordance with the applicable
professional, legal and other regulatory requirements like charging appropriate audit fees.
 Ensures compliance with the professional code of ethics for accountants.
 Disciplines accountants for professional misconduct. For example, its Disciplinary Committee member may
impose any or a combination of the following sanctions:
- Caution the accountant
- Suspension of the registration and the certificate for a period not exceeding two years
- Suspension of the accountant from membership for a period not exceeding two years
- Imposition of a fine determined by the disciplinary committee
- Payment of compensation to any person who may have suffered loss as a result of the misconduct
- Removal of the accountant from the ICPAU register of accountants e.g. the former NSSF MD.
 Conducts continuing professional development (CPD) programs for members and other interested parties to
keep them abreast with developments in financial reporting, auditing, taxation, management and IT.
Membership of the ICPAU

The Institute has the following categories of members:
 Full members – one is eligible to be a full member if he/she:
- Passes the qualifying CPA(U) examinations and completes practical training of three years or
- Is a member of an accountancy body approved by the ICPAU Council.
Full members use the title CPA (U), Certified Public Accountant of Uganda.
 Associate members – these are persons:

- Who were in audit practice by August, 7 1992 when the Accountants Act came into force, but were not
professional accountants at that time.
- Who have passed CPA(U) examinations but do not have practical training prescribed by the Council.
Associate members may use the title, Associate Accountant of Uganda (AAU).
 Retired members.
 Any other category of members, as may be determined by the Council of the Institute.
Disqualification from enrolment and membership

A person is not enrolled or to continue to be a member of the Institute if he or she:
 Is adjudged by a competent court to be of unsound mind.
 Is an undischarged bankrupt.
 Is convicted of a serious criminal offence or an offence involving fraud or dishonesty by a competent court.
 Has been deregistered following a decision of the Disciplinary Committee of the ICPAU.
 Has not renewed his or her membership for two consecutive years without reasonable or justifiable cause.
These requirements ensure that accountants are people of integrity who are competent to do their work.
The structure of an accounting firm

An accounting firm may be a sole proprietorship or a partnership of qualified practicing accountants licensed by
the ICPAU. Accounting firms may be local or international like the ’Big four’, the largest global firms, namely
PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte.
An accounting firm has four main categories of staff on an audit engagement (see diagram). Audit partners must
be licenced CPAs, usually with at least ten years of experience, managers are CPAs usually with more than five
years of experience, senior auditors are usually CPAs with at least two to five years of experience and audit
assistants may be CPAs with limited or no experience. Apart from the audit partner(s), the other categories of staff
are employees of accounting firms. In case of a partnership, the Managing Partner (MP) is responsible for the
management of an accounting firm on behalf of the other partners. To promote competence, individuals at each
audit level supervise and review the work of those below them.
Staff and key duties in an accounting firm
Audit Partner
 Owns the audit firm & has overall responsibility for
the audit
 Discusses terms & signs the engagement letter
 Ensures compliance with the code of ethics,
Auditing standards & financial reporting standards
 Conducts the final audit review & makes major audit
decisions
 Signs an audit report on behalf of the firm
Audit manager
 Manages the overall audit engagement & may
manage more than one audit engagement
 Detailed review of the work of the senior auditors
 Manages relations with the client
Senior auditor/Audit supervisor

 Performs & supervises field audit work daily
 Supervises and review work of Audit assistants
Audit assistants
 Perform most detailed audit work in low risk areas

2.4 The Companies Act
The Companies Act regulates the appointment, removal, duties and rights of an external auditor of a company in
Uganda in order to enhance his/her independence and protect the company and its shareholders.
Appointment (S167)
An external auditor of a company is appointed by:
 Shareholders:
- At each annual general meeting (AGM) of a company to hold office from the end of that AGM until the
end of the next one. Special notice is required for a resolution at the AGM.
- At a general meeting when the directors have failed to appoint the first auditor of a company.
- At a general meeting to replace the first auditor appointed by directors with another auditor nominated for
appointment by any shareholder of the company and of whose nomination notice has been given to the
shareholders of the company not less than fourteen days before the date of the meeting.
 Directors in the following situations:

- In case of the first auditor of a new company before the first AGM.
- To fill a casual vacancy in the office of auditor e.g. after the resignation of one auditor partner.
 The Registrar of Companies to fill a casual vacancy when no auditor has been appointed by shareholders
or directors.
The appointment by shareholders ensures that company auditors are independent of directors and management
whose financial statements are audited.
Disqualification for appointment (S169)

The following persons are disqualified from being appointed as external auditor of a company:
 Persons who are not registered and licenced by the ICPAU or accounting firms not licensed by the Institute.
 An officer (e.g. a director) of the company.
 An employee of the company.
 A person who is a business partner or an employee of the above in the case of a public company.
 A subsidiary or holding company.
 A body corporate as limited liability of companies would expose audit clients to more risk.
If a disqualified person is appointed as auditor, that person and the company and every officer in default are liable
to a fine of Shs. 500,000 to ensure that the auditors are independent of the company being audited.
Duties
In preparing the audit report, the auditors consider whether in their opinion:
 The financial statements show a true and fair view of the company’s affairs.
 Proper books of account have been kept.
 The financial statements are in agreement with the books of account.
 The directors’ report is consistent with the financial statements.
 The directors’ benefits are in accordance with the Companies Act.
 The financial statements have been prepared in accordance with the Companies Act, the IFRSs and other
relevant laws and regulations.

Rights (S170)
An external auditor has a right to:
 Access at all times the books and accounts and vouchers of the company.
 Require from the officers of the company such information and explanation necessary for the audit.
 Attend any general meeting or receive all notices of any general meeting of the company and to be heard
at any general meeting on any company business concerning the auditor.
 Receive a copy of any written resolution of the company regarding the affairs of the auditor.
Remuneration (S167)
Remuneration of an external auditor is fixed by:
 Directors or the Registrar for an auditor appointed by the directors or by the Registrar.
 The company in a general meeting or in a way determined by the company in a general meeting. Usually
shareholders delegate the responsibility of fixing the fees to directors who negotiate with auditors.
Removal (S168)
The external auditor can be removed from office by shareholders through the following procedures which
safeguards their independence and the interests of the company:
 Special notice (at least twenty eight days) is required for a resolution at a company’s annual general.
 The company sends a copy of the notice to the retiring auditor, if any.
 The retiring auditor has the right to make written representations to the company stating why he/she should
not be removed from office and may request that the representations be sent shareholders.
 If the representations are not sent, they should be read out in the meeting, unless court has ruled that they
should not be sent or read out.
 The auditors have the right to attend and defend themselves at the general meeting.
 Shareholders vote at the annual general meeting on the resolution to remove the auditor from office.
2.5 International Standards on Auditing

The International Auditing and Assurance Standards Board (IAASB)
The IAASB is an independent body supported by IFAC whose objective is to serve public interest by:
 Setting international standards for auditing, assurance, and other related standards.
 Facilitating the convergence of international and national auditing and assurance standards.
The IAASB issues ISAs that contain the basic principles and essential procedures used when conducting an audit.
Most countries use ISAs or consider ISAs when developing their own national auditing standards. The ICPAU that
is a member of IFAC has adopted ISAs as the auditing standards of Uganda.
Standards issued by the IAASB

The IAASB has issued the following standards used in assurance and advisory services:
 Internal Standards on Auditing (ISAs) – are used in the audit of historical financial statements (see a list of
38 ISAs in the appendix at the end of the topic).
 International Standards on Review Engagements (ISREs) – are used in the review of historical financial
information.
 International Standards on Assurance Engagements (ISAE) – are used in assurance engagements
dealing with matters other than historical information.

 International Standards on Related Services (ISRSs) – are used in compilation engagements, agreed upon
procedures to information and other related services.
 International Standard on Quality Control (ISQLs) – is used in all IAASB’s engagement services.
The IAASB also issues International Auditing Practice (IAPNs). IAPNs provide practical assistance to auditors
and are non-authoritative material that is not part of ISAs. Only one IAPN on Accounting for financial instruments
had been issued by 2016.
The process of developing the IAASB standards
1. Research & consultation – a task force is established to develop a draft standard

based on research and consultation.
2. Transparent debate – the draft standard is discussed and debated at an IAASB

meeting that is open to the public.
3. Exposure for public comment – an exposure draft (ED) is placed on the IAASB
website and is widely distributed for public comment for a period not shorter than 120 days.
4. Consideration of comments received on the ED – comments on the ED are considered

n an IAASB meeting which is open to the public and the ED is revised as necessary. If the
changes are considered substantial, the revised ED may be reissued for further comment.
5. Affirmative approval – approval of the standard is made by affirmative vote of least two-
thirds of the IAASB members.
ISA 200 Overall objectives of the independent auditor and the conduct of an audit in accordance with international
standards on auditing requires an auditor to comply with all relevant ISAs to an audit. ISAs do not override laws
governing an entity and an auditor is required to comply with them when auditing.
Advantages of auditing standards

 ISAs give principles to be followed in the conduct of a particular audit.
 They help to standardize the audit approach so that the audit report can provide reasonable assurance.
 They assist court in determining whether the auditors are negligent in their work and also help auditors in
their defense against complaints by clients.
 They increase public awareness in the work auditors.
2.6 The Code of ethics

Requirement of the code of ethics
ISQC 1 requires that an audit firm establish policies and procedures designed to provide it with reasonable
assurance that there is compliance with relevant ethical requirements. ISA 220 requires the engagement partner
to consider whether members of the engagement team have complied with ethical requirements. The engagement
partner must remain alert to evidence of non-compliance with ethical requirements and take appropriate course
of action.
Accountants in Uganda are required to comply with the Codes of ethics issued by the International Ethics
Standards Board for Accountants (IESBA) and the ICPAU. The IESBA is an independent board of IFAC
responsible for developing the code of ethics used by national accountancy organizations around the world. The
The ICPAU Code complies with the IESBA code, unless the matter is prohibited by law or regulation in Uganda.
The Code has rules to:

 Guide accountants when performing their duties and also provides the basis for sanctions against them.
 Ensure accountants serve public interest.
 Increase confidence in the accounting profession.
Structure
The codes are divided into three sections:
 Part A – applies to all professional accountants and is the conceptual framework that establishes the
fundamental principles, identifies threats to compliance with the fundamental principles and provides
safeguards to reduce or eliminate the threats to acceptable levels (See diagram below).
 Part B – applies to accountants in public practice.
 Part C – applies to accountants in business and may be relevant to practicing accountants.
Fundamental principles, threats and safeguards
Fundamental principles Threats to the principles Safeguards

 Integrity  Self interest threats
 Objectivity  Self review threats Created:
 Professional  Advocacy threats  By the profession,
competence & due care  Familiarity threats legislation or regulation
 Confidentiality  Intimidation threats  In the work environment
 Professional behavior
Fundamental principles
Professional accountants must comply with the following five fundamental principles:
 Integrity means to be honest and straight forward in all professional and business relationships. A
professional accountant should not knowingly provide information that is materially false or misleading in
reports, returns or statements.
 Objectivity means not to allow bias, conflict of interest and undue influence of others to override professional
or business judgments. A professional accountant should not provide a service if there is a circumstance or
relationship that is likely to bias or unduly influence his/her professional judgement.
 Professional competence and due care means to:

- Maintain knowledge and skill based on based on current developments in practice, legislation to ensure
that a client or employer receives competent professional service.
- Act diligently in accordance with the requirements of an assignment, carefully, thoroughly and timely. Staff
working under the accountant should be trained and properly supervised.

 Confidentiality means not:
- Disclose information acquired as a result of professional and business relationships to third parties without
proper authority, unless there is a legal or professional right or duty to disclose.
- Use the information to their personal advantage or the advantage of third parties.
The obligation of confidentiality continues even after the professional relationship has ended.
An accountant may disclose a client’s confidential information in the following circumstances:

- When disclosure is authorized by a client or employer.
- When disclosure is required by law (obligatory disclosures), e.g. where auditors are required to:
 Produce documents or provide evidence during court proceedings.
 Disclose information to appropriate public authorities of the violation of the law by the client, for
example, where the client is suspected to have committed treason, terrorism, drug trafficking or
money laundering offences.
- Where there is a professional duty or right to disclose client’s information when not prohibited by law
(voluntary disclosures) in order to:
 To comply with the quality review of a member body or professional body like the ICPAU.
 To respond to an investigation of a regulatory body e.g. by bank supervision of Bank of Uganda.
 To protect the accountant’s interests in legal proceedings against a client e.g. when defending
himself/herself against a negligence action, disciplinary proceedings or if suing for unpaid fees.
 To comply with technical standards and ethics requirements.
However, members are advised to seek legal advice before giving information to third parties.
 Professional behavior means to comply with relevant laws and regulations and avoid any action that may
discredit the profession. Professional accountants should not make:
- Exaggerated claims on the services they may offer, the qualifications they possess or the experience they
have gained
- Unsubstantiated comparisons with the work of others.
Threats
Compliance with the fundamental principles may be threatened by the following five threats:
 Self-interest threat is the threat that a financial or other interest in a client may inappropriately influence the
accountant’s judgment or behavior. Examples include:
 Self-review threat is the threat that an accountant will not properly evaluate his or her previous work or that
of another individual in his/her firm or employer when performing subsequent work.
 Advocacy threat is the threat that an accountant will promote a client’s or employer’s position to the point of
compromising his or her objectivity.
 Familiarity threat is the threat that a long or close relationship with a client or employer will make an
accountant too sympathetic to their interests or easily accept their work.
 Intimidation threat is the threat that an accountant will not be objective in his/her work due to actual or
perceived pressures from a client or employer.
Circumstances that create threats for a professional accountant in public practice include:
Threats Circumstances
 A member of the assurance team having a direct financial interest in the assurance
client.
 A firm having undue dependence on total fees from a client.

Self-  A member of the assurance team having a significant close business relationship with a
interest client.
threats  A firm being concerned about the possibility of losing a significant client.
 A member of the audit team entering into employment negotiations with the audit client.
 A firm entering into a contingent fee arrangement relating to an assurance engagement.
 An accountant discovering a significant error when evaluating a service performed by a
staff.
Self-review  A firm issuing a report on the effectiveness of financial systems after designing the
threats systems.
 A member of the team being, or having recently been, a director or officer of the client.
 A member of the assurance team being, or having recently been, employed by the client
in a position to exert significant influence over the subject matter of the engagement.
Advocacy  The firm promoting shares in an audit client.

threats  An accountant acting as an advocate for an audit client in disputes with third parties.
 A member of the audit team having a close or immediate family member who is a
director or officer of the client.
 A member of the audit team having a close or immediate family member who is an
employee of the client in a position that has significant influence over the audit.
Familiarity  A director or officer of the client or an employee in a position that has significant
threats influence over the audit having recently served as the audit partner.
 An accountant accepting gifts or preferential treatment from a client, unless the value is
trivial or inconsequential.
 Senior audit personnel having a long association with the assurance client.
 A firm being threatened with dismissal from a client engagement.

 An audit client threatening not to award a non-assurance contract to the firm if the firm
Intimidation continues to disagree with their accounting for a particular transaction.
threats  A firm being threatened with litigation by the client.
 A firm under pressure to reduce the extent of work in order to reduce fees.
 An accountant being informed by an audit partner that he/she will not be promoted
unless he/she agrees with the client's inappropriate accounting treatment.
Safeguards
These are measures that are used to eliminate or reduce threats when performing services and are divided into
two categories:
 Safeguards created by the profession, legislation or regulation include:
- Educational, training and experience requirements for entry into the profession.
- Continuing professional development requirements by accountancy bodies like the ICPAU.
- Corporate governance regulations.
- Professional standards.
- Professional or regulatory monitoring and disciplinary procedures.
- External review by a third party of the reports, returns or information produced by an accountant.
 Safeguards in the work environment include

- Policies to identify and evaluate the threats to eliminate or reduce them to an acceptable level or when
appropriate safeguards are not available, terminate or decline the relevant engagement.

- Using different partners and teams to provide non-assurance services to an assurance client.
- Disciplinary mechanism to promote compliance with policies and procedures.
- Disclosing to those charged with governance of the client the nature of services and the fees charged.
- Rotating senior audit team personnel
Some threats, rules and safeguards for accountants (auditors) in public practice
Professional appointment – Client acceptance
 Threats to professional competence and due care.
 Before accepting a new client, check whether the owners, management or activities have no questionable
issues like such as money laundering or questionable financial reporting practices.
 Safeguards include:
- Understanding of the client, its owners, managers and those responsible for its governance
- Periodically review acceptance decisions for recurring client engagements.
- Reject the client where the threats cannot be reduced to an acceptable level,.
Professional appointment – Engagement acceptance

 Provide only services that you are competent to perform.
- Understanding the client's business and specific requirements
- Acquiring knowledge of the relevant industry or subject matter.
- Assigning staff with the necessary competencies.
- Using experts where necessary.
Professional appointment – Changes in a professional appointment

 Before replacing another accountant, determine whether there are any reasons, professional or otherwise, for
not accepting the engagement.
 Safeguards include direct communication with the existing accountant to establish whether there are any
reasons why the appointment should not be accepted. More is covered under 2.8.
Conflicts of Interest
 A conflict of interest may be created when:
- The accountant provides a service to two or more clients with conflicting interests, or
- The interests of the accountant conflict with those the client.
 Threats to objectivity
 An accountant should not allow a conflict of interest to compromise professional or business judgment.
- Maintaining confidentiality of the clients’ information.
- Consulting third parties, such as a professional body, lawyers.
- Not:
 Advising two clients competing to acquire the same company
 Preparing valuations of assets for two.
 Representing two clients in a legal dispute with each other.
 Advising a client on the acquisition of a business which the firm is also interested in acquiring.
 accepting or continuing with an engagement under
Fees and other types of remuneration

 An accountant should not quote a fee not deemed appropriate for the service offered as it may be difficult to
perform work in accordance with the applicable for a low price.
 Fees should be based on:
- The knowledge, skills and expertise needed for the work.
- The seniority of the persons involved in the audit.
- The time required to carry out the service.
- The nature of the responsibility which the work entails.
 Quoting a fee lower than another accountant (low-balling) is not in itself unethical, although it may create a
self interest threat to professional competence and due care if the fee quoted is so low that it may be difficult
to perform the engagement in accordance with applicable technical and professional standards for that price.
- Inform the client of the basis on which fees are charged and make an advance written agreement with the
client as to the basis of remuneration.
- The fees should not be dependent on the provision of future audits or other services.
- Disclose to the client any arrangements to pay or receive a referral fee to or from another accountant for
work referred.
- Obtain advance agreement from the client for a commission from the sale by a third party of goods or
services to the client.
- Review by an independent third party of the work performed by the accountant.
Second opinion
 Threats to professional competence and due care etc.
 An accountant should not give a second opinion not based on facts that were available to the existing
accountant or based on inadequate evidence.
- Seek client permission to contact the existing accountant, describing the limitations surrounding any
opinion and providing the existing accountant with a copy of the opinion.
- When permission to communicate with the existing accountant is not given, determine whether, it is
appropriate to provide the opinion sought.
Marketing professional services

 Threats to professional behavior.
 An accountant should not bring the profession into disrepute when marketing professional services.
- Be honest and truthful when marketing services.
- When in doubt about whether a proposed form of marketing is appropriate, consult the ICPAU.
Gifts and hospitality

 Accepting gifts or hospitality from an assurance client may create self-interest and familiarity threats.
 An audit firm or a member of the audit team should not accept gifts or hospitality from clients, unless their
value is trivial, inconsequential and made in the normal course of business.
 A firm or a member of the assurance team should not accept such gifts or hospitality.
Custody of client assets

 Self-interest threats to professional behavior and objectivity.
 An accountant should not assume custody of client money or other assets unless permitted to do so by law
and, if so, in compliance with legal duties.
- Keep such assets separately from personal or firm assets.
- Use such assets only for the purpose for which they are intended.
- At all times be ready to account for those assets and any income, dividends, or gains generated, to any
persons entitled to such accounting.
- Comply with all relevant laws and regulations relevant to the holding of and accounting for such assets.
Independence – Audit & review engagements

Audit firms & members of audit teams should be and should appear to be independent of audit clients.
Independence comprises:
 Independence of mind – the state of mind that enables a person to make a conclusion without being
influenced and compromising professional judgment, thereby allowing an individual to act with integrity and
exercise objectivity and professional skepticism.
 Independence in appearance – the avoidance of significant circumstances that would make a third party
likely to conclude that a firm's or a member of the audit team's, integrity, objectivity or professional skepticism
has been compromised.
Financial interests
 Create self-interest threat like being reluctant to raise any issue reducing the client profit as this would reduce
the expected dividends.
 A member of the audit team, a member of that individual's immediate family or audit firm should not hold a
direct financial interest or a material indirect financial interest in the client.
- Disposing of the financial interest as soon as possible.
- Removing the individual with financial interest from the audit team.
- Having an independent review of the work of the member of the audit team.
Loans and guarantees to or from a client

 Creates self-interest as the loans or guarantees on more favourable terms or a waiver of the loan may be
seen as more important than giving an appropriate opinion
 A member of the audit team or his/her immediate family or audit firm should not accept a loan from or a loan
guarantee by an audit client that is not a financial institution.
- Loans and guarantees on normal lending terms from financial institutions are acceptable.
- But if the loans are material, the work should be reviewed by an accountant from a network firm e.g. PWC
Nairobi.
- Immaterial loans & guarantees to both parties may not be a threat
 A member of the audit team or his/her immediate family or audit firm should not give a loan or loan guarantee
to an audit client.
Close business relationships

 Between a firm or a member of the audit team or his/her immediate family and the audit client or its
management may create self-interest or intimidation threats as the person with interest in the joint venture or
who is a marketing agent of the client may not be objective.
 Unless the relationship is insignificant, the individual with interest should be removed from the audit team or
the relationship should be terminated.
Family and personal relationships

 Between a member of the audit team and a director, officer or employee of the audit client, (depending on
their role) of the audit client may create self-interest, familiarity or intimidation threats.

 An employee in a position to exert significant influence over the preparation of the client's accounting
records or the financial statements on which the firm will express an opinion,
- Removing the individual from the audit team.
- Structuring the audit team so that the accountant does not deal with matters related to the close family
member.
- Having an independent review of the audit work performed.
Employment with an audit client

 May create familiarity or intimidation threats if a director or officer of the audit client, or an employee in a
position to exert significant influence over the preparation of the client's accounting records or the financial
statements on which the firm will express an opinion, has been a member of the audit team or partner of the
firm.
 A self-interest threat is created when a member of the audit team participates in the audit engagement while
knowing that the member of the audit team will, or may, join the client sometime in future.
- Modifying the audit plan
- Assigning individuals to the audit team who have sufficient experience in relation to the individual who
has joined the client
- Having an independent review the work of the former member of the audit team.
- Firm policies and procedures should require members of an audit team to notify the firm when entering
employment negotiations with the client.
- Removing the individual from the audit team; or
Recent employment with an audit client

 May create self-interest, self-review or familiarity threats may be created if a member of the audit team has
recently served as a director, officer, or employee of the audit client as the member of the audit team has to
evaluate financial statements prepared from accounting records kept while with the client.
 A safeguard is to conduct a review of the work performed by the individual as a member of the audit team.
Serving as a director or officer of an audit client

If a partner or employee of the firm serves as a director or officer of an audit client, the self-review and self-interest
threats created would be so significant that no safeguards could reduce the threats to an acceptable level.
Accordingly, no partner or employee shall serve as a director or officer of an audit client.
Temporary staff assignments

 The lending of staff by a firm to an audit client may create a self-review threat. Such assistance may be given,
but only for a short period of time and the firm's personnel should not be involved in:
- Providing non-assurance services that would not be permitted under this section; or
- Assuming management responsibilities.
- Conducting an additional review of the work performed by the loaned staff.
- Not giving the loaned staff audit responsibility for any function or activity that the staff performed during
the temporary staff assignment.
- Not including the loaned staff as a member of the audit team.
Long association of senior personnel (Including partner rotation)

 Familiarity and self-interest threats are created by using the same senior personnel on an audit engagement
over a long period of time.

- Rotating the senior personnel off the audit team. In respect of an audit of a public interest entity, an
individual should not be a key audit partner for more than seven years.
- Having a professional accountant who was not a member of the audit team review the work of the senior
personnel.
- Regular independent internal or external quality reviews of the engagement.
High percentage of fees

 When the total fees from an assurance client represent a large percentage of the total fees of the firm, the
dependence on that client and concern about losing the client creates a self-interest or intimidation threat.
- Reducing the dependency on the client
- External quality control reviews.
- Consulting a third party, such as the ICPAU on key assurance judgments.
Overdue fees
 A self-interest threat may be created if fees due from an assurance client remain unpaid for a long time, after
issuing the assurance report. The overdue fees may be regarded as to a loan to the client
- Demand payment of fees before the second audit report is issued.
- Having another partner who did not take part in the audit engagement to provide advice or review the
work performed.
- Threaten delaying new work or not seeking re-appointment before payment is made or consider resigning.
Contingent Fees
 A firm should not enter into any contingent fees calculated on a predetermined basis relating to the outcome
of a transaction or the result of the services performed by the firm as if creates a self-interest threat. Fees are
not regarded as being contingent if established by a court or other public authority.
- Having an independent partner review of the non-assurance services.
- Using personnel who are not members of the audit team to perform the non-assurance service.
Actual or threatened litigation

 When litigation takes place, or appears likely, between the firm or a member of the assurance team and the
assurance client, self-interest and intimidation threats are created.
- Removing the individual involved from the assurance team
- Having a professional review the work performed.
- Withdrawing from or declining the assurance engagement if the threats are not reduced to an
acceptable level.
Independence – Other assurance engagements

Provision of non-assurance services to an assurance client
 Management responsibility:
- A firm providing assurance services to an assurance client should not assume a management
responsibility.

- Management responsibility includes setting policies and strategic direction, hiring or dismissing
employees, authorizing transactions, managing bank accounts or investments, deciding which
recommendations of the firm or other third parties to implement, reporting to those charged with
governance on behalf of management, taking responsibility for the preparation of financial statements,
and designing, implementing and monitoring or maintaining internal controls.
- Deciding which recommendations of the firm to implement creates self-review and self-interest threats.
Assuming a management responsibility creates a familiarity threat because the firm becomes too closely
aligned with the views and interests of management.
- A firm may provide administrative services involve assisting clients with their routine or mechanical
tasks within the normal course of operations like filing tax returns as instructed by the client.
 Preparing accounting records and financial statements

- A firm may provide services related to the preparation of accounting records and financial statements to
an audit client that is not a public interest entity where the services are of a routine or mechanical nature
and require little to no professional judgment from the professional accountant. Such services include
preparing payroll calculations, recording recurring transactions, calculating depreciation when the client
determines the accounting policy and estimates of useful life and residual values, posting client-approved
entries to the trial balance, preparing financial statements based on information in the client-approved trial
balance and preparing the related notes based on client-approved records.
- Management should be responsible for the preparation of the financial statements by determining
accounting policies, preparing source documents, originating journal entries and approving the account
classifications of transactions.
- Providing an audit client with accounting and bookkeeping services, such as preparing accounting records
or financial statements, creates a self-review threat when the firm subsequently audits the financial
statements.
- Safeguards for such threats include:

 Such services should be performed by an individual who is not a member of the audit team.
 If such services are performed by a member of the audit team, using a partner or senior staff member
with appropriate expertise who is not a member of the audit team to review the work performed.
- A firm should not provide to an audit client that is a public interest entity accounting and bookkeeping
services, including payroll services, or prepare financial statements on which the firm will express an
opinion or financial information which forms the basis of the financial statements.
- A firm should not prepare tax calculations of current and deferred tax liabilities (or assets) for public
interest entities that are to be used the preparation of accounting entries that are material to the financial
statements on which it will express an opinion.
Public interest entities include listed entities, any entity defined by regulation or legislation as a public
interest entity like financial institutions like banks and insurance companies, and pension funds.
Example
You are a manager in Precise Auditors and Co (PAC) who are the external auditors for Makerere Microfinance
Ltd (MML). MML provides loans to the general public and is regulated by Bank of Uganda.
You have been asked to start the audit planning for MML by Mr Bebi, a partner in PAC. Mr Bebi has been the
engagement partner for MML for the previous nine years and therefore has good knowledge of this client. Mr Bebi
has informed you that he would like his son Cool to be part of the audit team this year. Cool is at present pursuing
a Bachelor of Commerce Degree at Mukono University and did his previous internship in MML. Mr Bebi also
informs you that Sale, the auditor senior, received a loan from MML.
In an initial meeting with the financial controller, you learn that the audit team will be offered loans at interest rates
lower than the commercial ones. The financial controller has also promised you a fee for your taxation services
this year based on a percentage of tax saved and hopes that your firm will accept a fixed fee for representing MML
in a dispute regarding the amount of income tax payable to Uganda Revenue Authority.
Required:
i) Explain FIVE ethical threats that may affect the independence of PAC during the audit of MML.
ii) For each of the threat, explain how the threat may be avoided.
Solution
Ethical threat How the threat may be avoided/

Mr Bebi has been the engagement partner for the client for the Mr Bebi should be rotated from being the
last nine years and may be too familiar to remain objective - reporting partner
there is likely a familiarity threat
There is no rule stopping Mr Bebi recommending his son Cool To have complete independence, Cool should
for the audit not be part of the audit team when Mr Bebi is
still the reporting partner
As a relative of the partner, Cool may not appear to be As above
independent of Mr Bebi. He may be tempted not to report
errors that may jeorpadise his father’s relationship with the
client
Cool having done internship at MML may lead to a familiarity He can be part of the audit team after several
threat years
As long as the terms for Sale’s loans are similar to those of To have complete independence, Sale
other members of the public, there would be no threat. should get the loans from other financial
institutions
Loans at concessionary interest rates would lead to self The loans should not be accepted.
interest
Accepting taxation work on the percentage of tax saved is The fee should be based on time and
accepting a contingent fee experience required for the job
There will be pressure to have a high tax saving and this could As above
lead to illegal tax schemes
Representing MML in court could lead to advocacy threat – The audit firm should not represent MML in
promoting the interests of the client court
2.7 Corporate governance

Definition and importance of corporate governance
Corporate governance is the way the company is directed and controlled. It promotes accountability, ethics,
integrity, responsibility and transparency. Good corporate governance improves company performance,
maximizes shareholders wealth and protects the interests of other stakeholders.

Corporate governance in Uganda is promoted, among others, by the Institute of Corporate Governance of Uganda
(ICGU) and the Capital Markets Authority (CMA). The ICGU is a not-for-profit organization and the CMA is a
parastatal that oversees the operations of listed companies in Uganda.
Principles of corporate governance

Corporate governance principles issued by the CMA for listed companies in Uganda that are of key importance to
the auditor include the following:
 The board of directors:

- Every company should be headed by an effective board of directors to offer strategic guidance, control
the company and that is accountable to its shareholders and responsible to its stakeholders.
- The board should be balanced in terms non-executive directors (NED) and executive directors of
diverse skills or expertise to ensure that no individual or group dominates the board decision-making
processes. The independent and non-executive directors should form at least one-third of the board. A
NED is a member of the board who does not form part of the executive management team. He or she is
not an employee of the company or affiliated with it in any other way or previously served as executive
managers of the company.
- The board should appoint a Nominating Committee composed of majority non-executive directors with
the responsibility of proposing new nominees for the board and for assessing the performance of directors.
- The board should appoint a Remuneration Committee or assign a mandate to the Nominating
Committee consisting mainly of independent and non-executive Directors to recommend to the Board the
remuneration of the executive Directors and the structure of their compensation package.
- The remuneration of executive directors should be linked to corporate performance including a share
option scheme so as to ensure the maximization of shareholder value.
- All directors should be required to submit themselves for re-election at regular intervals or at least every
three years.
 Position of chairperson and chief executive:

- The two should be held by different people to ensure a balance of power of authority and provide for
checks and balances so that no individual has a lot powers of decision-making.
- The chairperson of a public listed company should be an independent or non-executive director.
- No person shall be chairperson of more than two public listed companies at any one time.
 Rights of shareholders:
- All shareholders should receive relevant information on the company’s performance through distribution
of regular quarterly, half yearly and annual reports and accounts.
- There should be shareholder’s participation in all major decisions of the company. The board should
therefore provide the shareholders with information on matters that include but are not limited to major
disposal of company assets, restructuring, takeovers, mergers, acquisitions or reorganizations.
 Accountability and the role of audit committees:

- The board should maintain a sound system of internal control to safeguard the shareholders investments
and assets.

- The board should establish a formal and transparent arrangement for shareholders to effect the
appointment of independent external auditors at each annual general meeting.
- The board must establish an audit committee with a majority of independent and non-executive directors
who report to the board. The chairperson of the audit committee should be an independent or non-
executive director, and the board should disclose in the annual report, whether it has an audit committee
and the mandate of that committee.
- The board should establish an independent and effective internal audit function.
Functions of an Audit Committee

They include the following:
 Monitoring the integrity of financial statements e.g. reviewing:
- Changes in accounting policies.
- Significant adjustments arising from the audit
- The going concern assumption.
- Compliance with IFRSs and other legal and regulatory requirements.
 Reviewing the company’s internal control and risk management systems.
 Monitoring and reviewing the effectiveness of the company’s internal audit function.
 Making recommendations to the board, for submission to the shareholders for approval, in relation to the
appointment and removal of the external auditors and their remuneration.
 Reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the
audit process.
 Reviewing the external auditor’s management letter(s) and management’s response.
 Developing and implementing policy on the engagement of the external auditor to supply non-audit services.
 Promoting whistle-blowing in the company i.e. reviewing arrangements for reporting confidential information
on fraud and wrong doing by staff, any related party transactions and investigating such matters.
Advantages of an Audit Committee

An Audit committee:
 Improves the quality of financial reporting by overseeing the company’s accounting and financial reporting
and reviewing financial statements for compliance with the financial reporting framework.
 Improves the effectiveness of internal audit by increasing its independence from management.
 Improves internal control systems.
 Strengthens the independence of the external auditors as it monitors their appointment and reviews the
reasonableness of their audit fees and considers how the provision of non-audit services affects auditor
independence.
 Improves communication between the directors, external auditors and management.
 Increases public confidence in the credibility of financial statements as they are reviewed by an independent
committee.
 Helps directors fulfill their corporate governance requirements like having an appropriate internal control
system and risk management.
Disadvantages of an audit committee

An Audit committee may have the following setbacks:
 Lack of understanding of its role may make the executive directors feel that it undermines their authority
 It creates a two-tier board of directors, the main board and the executive committee.
 May increase costs as the non-executive directors have to be paid for the additional work.

2.8 Client acceptance and continuation procedures
Methods of obtaining audit engagements
The common methods of obtaining new audit engagements include the following:
 Direct client requests after recommendations by your existing clients and other parties. This is the
commonest method used.
 Tendering where auditors are invited to tender by the large companies and directors select the most suitable
firm. Factors that should be considered in tender evaluations include the following:
- The expertise of the audit firm in the industry.
- The audit firm profile – similar entities audited by each audit firm – this is good for experience but bad for
confidentiality.
- Whether local or international – many big companies prefer the Big Four.
- The proposed audit fee – this is usually the most determining factor.
Procedures before accepting appointment

The International standard on quality control (ISQL1) requires an audit firm as part of its quality control to have
policies for:
 Investigating potential clients before acceptance of audit engagements
 Periodically reviewing the continuance of clients.
An auditor should determine whether there are any threats to compliance with the fundamental principles. The
process to accept an audit engagement involves the following (See diagram):
 Establish whether the audit firm has the competence, resources and time i.e. whether:
- The firm has the personnel with the necessary competences.
- The staff has knowledge of the industry.
- Experts are available when needed.
- The firm and available staff can complete the work within the reporting deadline, given the other clients.
 Evaluate whether the audit firm and the engagement team comply with ethical requirements e.g.
independence and conflicts of interest.
The process of accepting an audit client
Does the firm Compliance Is communication Are the client NO – Reject the client
have the with ethical with predecessor risks
competence? requirements? auditor allowed? acceptable? YES – Accept
resources & appointment
time?
Are Any audit Agreed with the
Prepare & sign an Evaluate client on
preconditions scope client on terms of
engagement a continuous basis
for an audit limitation? the
letter
present? engagement?
 Obtain permission from the prospective client to communicate with the predecessor auditor where there
has been a change of auditors. Permission to discuss client matters is needed because of confidentiality. The
predecessor auditor reveals whether there are any reasons for not accepting the engagement. The
communication protects the company shareholders, the predecessor and incoming auditors as important
information about the client is made available to the new auditor. When permission is granted, the incoming

auditor asks the previous auditor in writing for all information necessary to decide whether appointment should
be accepted.
Such information is provided in an etiquette letter and may include the following:
- Reasons for the change of the auditor advanced by the client.
- If the auditor’s replacement is due to opposition or evasion by the client.
- Any unlawful act or default by the client, directors or employees e.g. when under investigation.
- Defrauding the tax authorities like Uganda Revenue Authority.
- Any serious doubts regarding the integrity and competence of the directors and/or senior managers.
- Withholding information from the auditors as this may limit the audit scope.
- The financial strength and the ability to pay audit fees.
- Where the auditors intend to report to shareholders or creditors the proposed change of auditors.
 Assess whether the client risks are acceptable by getting information from the client, the predecessor
auditor, previous financial statements, income tax returns, credit reports, the internet and other third parties.
This includes factors like:
- Management’s integrity.
- Competency of the entity’s senior management and staff.
- High level public scrutiny like investigation by parliament and media interest.
- Ability of the client to pay the fees.
An auditor should accept appointment for a new engagement if:

 The auditor is competent to handle the client and has time available to complete work on time.
 The auditor is independent of the client and they are no conflicts of interest which would violate the code of
conduct.
 Permission is granted by the client to the incoming and retiring auditors to communicate.
 Willing to accept the risks involved in performing the audit.
The auditor should also check whether the board of directors are not opinion shopping. This is a practice where
the board interviews several audit firms in order to get one that it may work with comfortably. This should not be
accepted as it would compromise the auditor’s independence and objectivity.
When asked to undertake work that is complementary or additional to that of the existing auditor, the new auditor
should notify the existing auditor of the proposed work as this gives the existing auditor the opportunity to provide
relevant information for the proper conduct of the work, if the client gives the permission to both parties.
Procedures after appointment

After accepting appointment, the auditor should:
 Check that the outgoing auditors’ removal or resignation is in accordance with the law; for example, confirm
that the auditor was properly removed by reviewing the removal procedures.
 Ensure that the new auditors’ appointment is valid by obtaining a copy of the resolution passed at the
shareholders’ general meeting.
 Check that the preconditions for an audit are present (See section below).
 Check whether there is any limitation on the scope of the audit.
 Prepare and submit to the client an engagement letter showing the terms of the audit for signing.
Preconditions for an audit

Preconditions for an audit means the use by management of an acceptable financial reporting framework in the
preparation of the financial statements and the agreement of management and, where appropriate, those charged
with governance to the basis on which an audit is conducted.
The auditor should therefore:

 Determine whether the financial reporting framework is acceptable – one should consider factors like the
nature of the entity, the purpose of the financial statements and the applicable laws.
 Obtain management’s agreement that it acknowledges and understands its responsibility:

- For the preparation of the financial statements that comply with the applicable financial reporting
framework and show a true and fair their fair view.
- For internal control that will enable them to prepare financial statements that are free from material
misstatement whether due to fraud or error.
- To provide the auditor with:
o Access to all information relevant to the preparation of the financial statements.
o Additional information necessary for the audit.
o Unrestricted access to the entity staff that is necessary for the auditor to obtain audit evidence
An auditor should not accept the audit engagement if the above preconditions for an audit are not present, unless
the audit is required by law or regulation as in the case of public sector audit.
Limitation on the scope of the audit

The auditor should check whether management or those charged with governance have imposed any type of limitation on
the scope of the audit. This may include unrealistic deadlines, not accepting certain firm’s staff to perform the work and
denial of access to a facility, key personnel or relevant documents. If such a limitation would make the auditor not to issue
an opinion, the firm would decline the engagement, unless the firm is required by law or regulation to proceed with the
engagement.
The firm should document the procedures performed and how the threats and issues were resolved. The
engagement partner should be satisfied that appropriate procedures have been followed and appropriate
conclusions reached in determining what engagements to accept. The engagement partner then completes a
client’s acceptance form that is submitted together with other relevant documents to the managing partner or
the partner responsible for accepting clients.
The engagement letter
Definition and purpose

An engagement letter contains written terms of an engagement.
The engagement letter:

 Provides written terms of the audit engagement agreed between the auditor and management.
 Confirms agreement of terms of the audit engagement which minimises misunderstandings between the
auditor and management.
ISA 210 Agreeing the terms of audit engagements requires the auditor to accept or continue an audit engagement
only when the auditor has:
 Established whether the preconditions for an audit are present.
 Agreed with management on the terms of the engagement.

Contents
The engagement letter must include the following (see details in Appendix 2):
Main contents Description

The objective and  Audit objective is to determine whether they show a true and fair view.
scope of the audit of  Audit scope refers to the applicable legislation, regulations, ISAs, and ethical and
the financial other pronouncements of professional bodies to which the auditor adheres.
statements
The responsibilities  To conduct the audit in accordance with ISAs.
of the auditor e.g.  To form and express an opinion on whether the financial statements prepared by
management show a true and fair view and comply with the IFRSs and laws.
 To communicate to management internal control weaknesses in a management
letter.
The responsibilities  To keep accounting records.
of management  To have an internal control system to prevent and detect fraud and error,
e.g. safeguard the entity’s assets and enable them prepare financial statements.
 To prepare financial statements in accordance with the appropriate financial
reporting standards and laws.
 To disclose all matters required by relevant IFRS and laws.
 To provide the auditor with access to all information necessary for the audit.
The applicable IFRSs, Companies Act etc.

financial reporting
framework for
financial statements
The expected form A report stating whether the financial statements show a true and fair view of the
& content reports entity’s affairs.
Other matters that may be included in the engagement letter:

Although the content of the audit engagement letter may vary for each entity, it may include the following:
 A description of the audit procedures including their inherent limitations.
 Use of the work of internal audit and other staff of the entity.
 Arrangements to be made with the predecessor auditor in the case of an initial audit.
 The auditor’s use of specialists and other auditors in the audit.
 The audit timetable showing deadlines.
 Communications between the auditor and the client e.g. the management letter etc.
 Any restriction of the auditor’s liability when such possibility exists.
• A reference to any further agreements for other services between the auditor and the entity that may require
other letters.
 Any obligations to provide audit working papers to other parties.
 The basis of charging audit fees and billing arrangements.
 Complaints procedures and jurisdiction e.g. a statement that neither party has the right to object to any
action in the courts.
 The agreement of terms e.g. a request that the directors accept the terms and sign the letter.
ISA 210 guidance on the letter

The standard gives the following guidance on the engagement letter:
 For recurring audits, the auditor should assess whether circumstances require revised terms and whether
there is need to remind the entity of the existing terms of the audit engagement.
 The auditor must not agree to change the terms of the audit engagement where there is no reasonable
justification for doing so, e.g. if it restricts the scope of the audit.
 If, before completing the audit, there is a request to change the engagement to one that conveys a lower
level of assurance like a review service, the auditor should determine whether there is reasonable
justification for doing so and the legal implications of the change.
 If the terms of the audit are changed, another engagement letter should be made.
 If the auditor is unable to agree to a change of the terms of the audit and is not permitted by management to
continue the original audit engagement, the auditor should:
- Withdraw from the audit engagement where allowed by law, and
- Determine whether there is any obligation, to report the circumstances to other parties, such as those
charged with governance, owners or regulators.
 The letter covers audit work and separate letters are needed for non-audit work. It is usually written by the
auditors, sent to the client for approval, agreement and signature by a senior person in the client firm. The
auditor should not perform the audit if the letter is not signed by the directors of the company.
Changes in recurring audits

An auditor is required to assess whether there is need to remind the entity of the existing terms of the audit
engagement. The terms may be reconfirmed at the auditor’s reappointment without the need to obtain a new letter
each year. The letter should be revised when the circumstances change. The matters that may require a revised
letter include the following:
• Any revised or special terms of the engagement.
• A recent change in senior management.
• A significant change in ownership.
• A significant change in the nature or size of the entity’s business.
• A change in legal or regulatory requirements.
• A change in the financial reporting framework adopted in the preparation of the financial statements.
• A change in other reporting requirements.
• Some indication that management misunderstands the objective and scope of the audit.
The auditors should carry out continuing assessment of the engagement in order to review client risks, their
independence and the firm’s ability to continue with an old client. The engagement process or the decision whether
to continue with a client should be properly done as a poor engagement decision may lead to unpaid fees, loss of
reputation by associating with very risky clients and worst of all, potential lawsuits.
2.9 Objectives and the general principles of an audit

The overall objectives of the external auditor
The overall objectives of the auditor of financial statements according to ISA 200 are:
 To obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, to enable the auditor to express an opinion on whether they are
prepared, in all material respects, in accordance with an applicable financial reporting framework.
 To report on the financial statements, and communicate the result of the audit, in accordance with the
auditor’s findings.

The external auditor is responsible for only detecting material misstatements in financial statements as they are
the ones that influence decisions of users of the statements. The auditor obtains reasonable and not absolute
assurance about material misstatements and therefore the audit report does not guarantee the correctness of
financial statements.
These objectives are achieved by the auditor following the general objectives of an audit.
The general principles of an audit

Planning ensures the audit is performed in accordance with following general principles of an audit in ISA 200:
 Compliance with code of ethics for accountants. This requires an auditor to comply with the fundamental
principles, namely, integrity, objectivity, professional competence and due care, confidentiality and
professional behavior.
 Perform an audit in accordance with the ISAs – an auditor should comply with all ISAs relevant to the audit.
An auditor is required to state whether the audit complies with ISAs which means compliance with only
relevant ISAs and not all of them. However, an audit that is conducted in accordance with ISAs may fail to
detect a material misstatement due to inherent limitations of an audit.
 Professional scepticism – an auditor should perform the audit with an attitude of professional scepticism
that the financial statements may contain material misstatements. Professional scepticism means the auditor:
- Recognising that management can always commit fraud despite their honesty and integrity in the past as
they can override any good internal control.
- Having a questioning mind – this means making critical assessment of the audit evidence obtained.
- Being careful to avoid overlooking unusual circumstances that may indicate possible error or fraud.
 Professional judgment – an auditor should exercise professional judgment throughout the audit.
Professional judgement is the application of relevant training, knowledge and experience. It is used, for
example, in:
- Assessing materiality and risk.
- Deciding the nature, timing and extent of audit procedures.
- Evaluating whether sufficient appropriate audit evidence has been obtained.
- Evaluating management’s judgments in applying financial reporting standards, laws and regulations.
- Forming an audit opinion.
 Sufficient appropriate audit evidence – the auditor should obtain sufficient appropriate audit evidence in
order to obtain reasonable assurance that the financial statements are free from material misstatements.
In-order to obtain sufficient appropriate audit evidence, the auditor uses assertions when auditing.
2.10 Revision questions

1) (a) Explain the need for regulation of auditing and state THREE forms of regulation in Uganda.
(b) The Companies Act requires an external auditor to state whether the financial statements show a true
and fair view of the company affairs. You are required to explain the meaning of true and fair view.
(c) ISA 700 – Forming an opinion and reporting on financial statements provides guidance on the audit
report.
Required:
(i) Distinguish between an unmodified opinion and a modified opinion.
(ii) State the TWO major factors that may lead the auditor to issue a modified audit opinion.
2) The Institute of Certified Accountants of Uganda (ICPAU) is an autonomous corporate national body for
professional accountants in Uganda.
Required:
(a) State the TWO functions of the ICPAU.
(b) State FOUR activities that are normally carried out by the ICPAU to fulfill its functions.
(c) State the requirements of the Accountants Act to practice accountancy in Uganda:
(d) Distinguish between a full member and an associate member of the ICPAU.
(e) State persons who are not qualified to be members or to continue to be members of the ICPAU.
3) The Uganda Companies Act sets out the requirements for an external auditor of a company in Uganda.
You are required to state:
(a) How a company auditor is appointed.
(b) Persons who are disqualified from appointment an external auditor of a company.
(c) FOUR duties of an external auditor of a company.
(d) FOUR rights of an external auditor of a company.
(e) How an auditor of a company is remunerated.
(f) The procedures that should be followed to remove an external auditor of a company and THREE
reasons that may lead to the removal.
4) The Institute of Certified Public Accountants of Uganda adopted the International Standards of Auditing
(ISAs) produced by the International Audit Assurance Standards Board (IAASB) as the auditing
standards for Uganda.
You are required to state the:

(a) Process of developing the IAASB standards.
(b) Authority of ISAs.
(c) Advantages of auditing standards.
(d) General principles of an audit.
5) (a) Briefly explain the meaning of corporate governance and its importance to companies.
(b) The Capital Markets Authority has issued corporate guidelines to listed companies in Uganda on the
following areas:
(i) The board of directors.
(ii) Rights of shareholders.
(iii) Position of chairperson and chief executive.
(iv) Accountability and the role of audit committees.
Required:
For each of the above areas, briefly explain the guidelines that are of major importance to the auditor.
(c) Listed companies in Uganda are required to have Audit Committees.
Required:
(i) State the functions of an Audit Committee.
(ii) State the advantages and disadvantages of having an Audit Committee in a company.
6) All accountants in Uganda must abide with the codes of ethics of the Institute of Certified Public
Accountants of Uganda (ICPAU) and the International Ethics Standards Board for Accountants (IESBA):
Required:
(a) Explain any FIVE fundamental principles of these codes of ethics.
(b) Explain the importance of independence to the auditor and what is meant by the phrase, ‘the auditor
must be and must appear to be independent of the client’.
(c) State the FIVE threats to independence and objectivity and for EACH threat identify ONE example of a
circumstance that may create the threat.
(d) The code requires all accountants to keep information of clients or employers confidential:
You are required to explain:
(i) The importance of confidentiality to the auditor and the client.
(ii) Circumstances when an accountant may disclose a client’s confidential information.
(e) Explain the basis for charging audit fees by an external auditor.
7) ISA 210 Agreeing the terms of audit engagements provides guidance on the content of engagement
letters and the auditor agreeing with the terms of the audit engagement with management.
Required:
(a) State the factors that should be considered in tender evaluations.
(b) Explain the procedures an auditor should consider before accepting a new audit engagement.
(c) State the circumstances that may lead an auditor to reject appointment for a new audit engagement.
(d) State FIVE matters that may be included in an etiquette letter by a predecessor auditor.
(e) State the procedures that should be carried out by an auditor after accepting appointment.
(f) What is the purpose of an audit engagement letter?
(g) State FIVE items that may be included in an audit engagement letter.
(h) Sate the responsibilities of management for an audit.
(i) State FOUR circumstances that may lead another audit engagement letter to an existing client.
8) ISA 200 Overall objectives of the independent auditor and the conduct of an audit in accordance with
international standards on auditing requires an auditor to comply with all relevant auditing standards
to an audit.
Required:
(a) State the overall objectives of the auditor of financial statements according to ISA 200.
(b) State the preconditions for an audit that should be present before an audit engagement is accepted.

Scenario-based questions (see answers at the end of the book)
1) (a) You are the audit manager of JJ & Co (JJC) and you are planning the audit of Victoria Computers Ltd
(VCL), which has been an audit client for four years and sells laptops. During the planning stage of
the audit you have obtained the following information. The employees of VCL are entitled to purchase
laptops at a discount of 50%. The audit team has in previous years been offered the same level of
staff discount.
During the year, the finance manager of VCL died during the world cup bomb blast in Kampala. The
company had no other staff capable of replacing him and requested an audit senior of JJC to be
seconded to the client for six months. The audit partner has recommended that the audit senior works
on the audit as he has good knowledge of the client. The income earned from VCL was boosted by this
engagement and along with the audit and tax fee, now accounts for 30% of the firm’s total income.
From a review of the correspondence files you note that the partner and the finance manager have
been very close friends for many years and even went on holiday to Bwindi National Park together to
see mountain gorillas. As a result of this friendship, the partner has not yet requested the client to pay
20% of the audit fees outstanding.
Required:
Explain FIVE ethical threats which may affect the independence of JJ & Co’s audit of Victoria
Computers Ltd and for each threat, explain how it might be avoided. (10 marks)
b) Soba Hotel Ltd (SHL) has been trading for over 20 years and was listed on the Uganda Stock
Exchange five years ago. It provides accommodation to university students.
The listing rules of the Uganda Stock Exchange (USE) require compliance with the corporate
governance guidelines issued by the Capital Markets Authority (CMA). The directors are confident that
they are complying with these principles. However, they recently received a letter from a major
shareholder complaining of non-compliance with the CMA corporate governance principles.
SHL’s board has six directors, five executives who originally set up the company and one non- executive
director who joined just prior to the listing. Each director has a specific responsibility and only the finance
director reviews the financial statements and budgets.
The chief executive officer, Dick Bata, set up the audit committee on which he sits together with the
finance director and the non-executive directors. Given that the board is small and in-order to save
costs, Dick Bata recently took over the role of the board chairman. The finance director and the
chairman make decisions on the appointment and remuneration of the external auditors. The hotel has
no internal audit function to monitor internal controls.
The executive directors’ remuneration is proposed by the finance director and approved by the
chairman. They are paid an annual salary as well as a generous annual revenue related bonus. Since
the company listed its shares, the directors have remained unchanged and none have been subject to
re-election by shareholders.
Required:
Describe FIVE corporate governance weaknesses faced by Soba Hotel Co and suggest
recommendations to address each weakness to ensure compliance with the CMA corporate
governance principles. (15 marks)
Appendix 1 International Standards on Auditing as on 1.1.2016
ISA Category/Title
200–299 General principles and responsibilities
200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with
International standards on Auditing
210 Agreeing the Terms of Audit Engagements
220 Quality Control for an Audit of Financial Statements*
230 Audit Documentation
240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
250 Consideration of Laws and Regulations in an Audit of Financial Statements
260 Communication with Those Charged with Governance (Revised)
265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management
300–499 Risk assessment and response to assessed risks
300 Planning an Audit of Financial Statements
315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its
Environment (Revised)
320 Materiality in Planning and Performing an Audit
330 The Auditor’s Responses to Assessed Risks
402 Audit Considerations Relating to an Entity Using a Service Organization
450 Evaluation of Misstatements Identified during the Audit
500–599 Audit evidence
500 Audit Evidence
501 Audit Evidence – Specific Considerations for Selected Items
505 External Confirmations
510 Initial Audit Engagements – Opening Balances
520 Analytical Procedures
530 Audit Sampling
540 Auditing Accounting Estimates, Including Fair Value Estimates and Related Disclosures
545 Auditing Fair Value Measurements and Disclosures
550 Related Parties
560 Subsequent Events
570 Going Concern (Revised)
580 Written Representations
600–699 Using the work of others
600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)*
610 Using the work of Internal Auditors (Revised 2013)
620 Using the Work of an Auditor’s Expert
700–799 Audit conclusions and reporting
700 Forming an Opinion and reporting on Financial Statements (Revised)
701 Communicating key audit matters in the independent auditor’s report
705 Modifications to the Opinion in the Independent Auditor’s Report (Revised)
706 Emphasis of Matter Paragraphs and other Matter Paragraphs in the Independent Auditor’s Report (Revised)
710 Comparative Information – Corresponding figures and Comparative Financial Statements
720 The Auditor’s Responsibility Relating to Other Information in Documents Containing Audited Financial
Statements (Revised)
800–899 Specialized areas
800 Special Considerations – Audits of financial Statements Prepared in accordance with Special Purpose
Frameworks*
805 Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts, or Items of
Financial Statements*
810 Engagements to Report on Summary Financial Statements*
* ISAs not covered in this course.
Appendix 2 Example of an audit engagement letter
The following letter is from the Appendix of ISA 210 but it may be varied according to individual requirements and
circumstances. Although you will not be required to produce it in the exam, you need to know its contents.
To the Board of Directors (or the appropriate representative of senior management)
Dear Sir
You have requested that we audit the balance sheet of ……as of…...and the related statements of income and cash flows
for the year then ending. We are pleased to confirm our acceptance and our understanding of this engagement by means
of this letter. Our audit will be made with the objective of our expressing an opinion on the financial statements.
We will conduct our audit in accordance with International Standard on Auditing (or relevant national standards or practices).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall financial statement presentation.
Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting
and internal control system, there is unavoidable risk that even some material misstatements may remain undiscovered.
In addition to our report on the financial statements, we expect to provide you with a separate letter concerning any material
weaknesses in accounting and internal control systems which come to our notice.
We remind you that the responsibility for the preparation of financial statements including adequate disclosure is that of the
management of the company. This includes the maintenance of adequate accounting records and internal controls, the
selection and application of accounting policies, and the safeguarding of the assets of the company. As part of our audit
process, we will request from management written confirmation concerning representations made to us in connection with
the audit.
We look forward to full cooperation with your staff and we trust that they will make available to us whatever records,
documentation and other information that are requested in connection with our audit. Our fees, which will be billed as work
progresses, are based on the time required by the individuals assigned to the engagement plus out-of-pocket expenses.
Individual hourly rates vary according to the degree of responsibility involved and the experiences and skill required.
This letter will be effective for future years unless it is terminated, amended or superseded.
Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the
arrangements for our audit of the financial statements.
XYZ & Co
Acknowledged on behalf of ABC Company by
(Signed)
Name and Title
Date


2022 TOPIC 2 - Regulation of Auditing

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TOPIC 2 THE REGULATION OF AUDITING IN UGANDA

2.1. The need for regulation

2.2 The external audit report

Opinion in the audit report

INDEPENDENT AUDITOR’S REPORT

Basis for opinion

Auditor’s responsibilities for the audit of the financial statements

2 Auditing notes 2022

The meaning of true and fair view

3 Auditing notes 2022

 A modified opinion if they:

2.3 The Accountants Act and the ICPAU

The functions of ICPAU are to:

Requirements to practice accountancy

Accountancy services according to the ICPAU

Activities of the ICPAU

Membership of the ICPAU

 Associate members – these are persons:

Disqualification from enrolment and membership

The structure of an accounting firm

Staff and key duties in an accounting firm

Senior auditor/Audit supervisor

6 Auditing notes 2022

 Directors in the following situations:

Disqualification for appointment (S169)

7 Auditing notes 2022

2.5 International Standards on Auditing

Standards issued by the IAASB

8 Auditing notes 2022

The process of developing the IAASB standards

1. Research & consultation – a task force is established to develop a draft standard

2. Transparent debate – the draft standard is discussed and debated at an IAASB

4. Consideration of comments received on the ED – comments on the ED are considered

Advantages of auditing standards

2.6 The Code of ethics

The Code has rules to:

Fundamental principles, threats and safeguards

Fundamental principles Threats to the principles Safeguards

 Professional competence and due care means to:

10 Auditing notes 2022

An accountant may disclose a client’s confidential information in the following circumstances:

11 Auditing notes 2022

Advocacy  The firm promoting shares in an audit client.

 A firm being threatened with dismissal from a client engagement.

 Safeguards in the work environment include

12 Auditing notes 2022

Professional appointment – Engagement acceptance

Professional appointment – Changes in a professional appointment

Fees and other types of remuneration

Marketing professional services

Gifts and hospitality

Custody of client assets

Independence – Audit & review engagements

Loans and guarantees to or from a client

Close business relationships

Family and personal relationships

15 Auditing notes 2022

Employment with an audit client

Recent employment with an audit client

Serving as a director or officer of an audit client