PUBLIC ACCOUNTANTS EXAMINATIONS BOARD

A Committee of the Council of ICPAU

CPA(U) EXAMINATIONS

LEVEL THREE

AUDIT PRACTICE AND ASSURANCE – PAPER 16

THURSDAY 23 MAY, 2024

INSTRUCTIONS TO CANDIDATES
1. Time allowed: 3 hours 15 minutes.

The first 15 minutes of this examination have been designated for reading
time. You may not start to write your answer during this time.

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

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

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

booklet.

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

any question.

© 2024 Public Accountants Examinations Board

 Audit Practice & Assurance – Paper 16

SECTION A

This Section has one compulsory question to be attempted

Question 1
You are the audit manager at KLP & Co., in charge of the audit of News Printing
and Publishing Company Limited (NPPC) for the year ended 30 June 2023. NPPC
has a board of directors and is listed on the Uganda Stock Exchange. NPPC is in
the business of electronic and print media with the following segments.
 Print media which comprises newspapers in five different languages, that
is, English, Luganda, Ateso, Rukyakole, and Acholi with a distribution all
over Uganda and East Africa for english newspaper.
 Electronic media which comprises of online newspapers, five radio stations
and three television stations.
 Commercial printing which comprises printing of educational materials for
the education sector and related commercial services.
 Publishing which comprises of publishing biographies of clients and text
books for educational purposes.
 Others which includes incomes earned from other sources.
NPPC’s financial statements are prepared in according with International
Financial Reporting Standards (IFRS).
The extracts of NPPC’s draft financial statements presented to KLP & Co is as
indicated below:
Statement of profit and loss and other comprehensive income
2023 2022
Shs ‘000’ Shs ‘000’
Revenue from contracts with customers 90,000,000 120,000,000
Cost of sales (75,000,000) (95,000,000)
Gross profit 15,000,000 25,000,000
Other operating income 2,500,000 1,700,000
Expected credit losses on financial assets (1,800,000) (700,000)
Distribution costs (2,400,000) (1,800,000)
Administrative expenses (17,500,000) (16,000,000)
Other operating expenses (1,900,000) (1,900,000)
Operating (loss)/profit (6,100,000) 6,300,000
Finance costs (1,050,000) (2,300,000)
(Loss)/profit before taxation (8,150,000) 4,000,000
Income tax 1,200,000 (1,180,000)
(Loss)/profit for the year (6,950,000) 2,820,000
Other comprehensive income (1,100,000) (400,000)
Total comprehensive (loss)/income for the year, net of tax (8,050,000) 2,420,000

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Statement of financial position as at 30 June 2023

2023 2022
Shs ‘000’ Shs ‘000’
Capital Employed:
Share capital 1,500,000 1,500,000
Share premium 25,000,000 25,000,000
Revaluation reserves 1,500,000 3,000,000
Retained earnings 27,180,000 34,000,000
Proposed dividend - 450,000
Equity attributable to shareholders 55,180,000 63,950,000
Non-current liability
Deferred tax 3,500,000 4,500,000
Lease liability - 100,000
3,500,000 4,600,000
58,680,000 68,550,000
Represented by:
Non-current assets:
Property, plant and equipment 39,000,000 34,500,000
Right of use assets 2,800,000 3,000,000
Intangible assets 11,000,000 10,000,000
Other financial assets 4,490,000 4,500,000
57,290,000 52,000,000
Current assets:
Inventory 20,000,000 10,000,000
Trade and other receivables 27,000,000 32,000,000
Cash and cash equivalents 2,200,000 2,500,000
Right of use of asset 2,500 6,500
Deposits with commercial banks 190,000 1,500,000
Tax recoverable 2,500,000 2,300,000
51,892,500 48,306,500
Current Liabilities:
Lease liability 80,000 250,000
Provision for litigation 2,500,000 2,000,000
Trade & other payables 36,719,500 13,664,500
Refund liability 3,000 8,000
Grant liability - 34,000
Pension obligations 400,000 -
Contract liabilities 1,800,000 2,300,000
Dividends payable 4,000,000 3,500,000
Borrowings 5,000,000 10,000,000
50,502,500 31,756,500

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 Audit Practice & Assurance – Paper 16

Net current assets 1,390,000 16,550,000

58,680,000 68,550,000
Notes to the financial statements.
1. Income split per segment is as follows:
2023 2022
Shs ‘000’ Shs ‘000’
Print media 35,000,000 40,000,000
Electronic Media 26,000,000 30,000,000
Commercial printing 17,000,000 16,000,000
Publishing 8,000,000 30,500,000
Others 4,000,000 3,500,000
Total 90,000,000 120,000,000
Total credit sales in 2023 and 2022 are 50 billion and 60 billion
respectively.
2. The key ratios for NPPC are:
 Gross profit margin
 Net profit
 Receivable days
 Inventory turn over
 Current ratio
3. The statutory corporation tax rate for NPPC is 30% as per the Uganda
Income Tax Act (as amended).
4. Property, plant and equipment comprises of 5 heavy printing machinery,
motor vehicles, land and buildings, office furniture and fittings, generators
and office equipment.
5. Right of use of assets are 10 brand new motor vehicles acquired on lease
from Vivo Motors Limited acquired 4 years ago.
6. Trade and other payables includes trade payables arising from normal
business transactions with NNPC suppliers and other payables include
accrued expenses incurred during the year.
7. On 4 August, there was a fire that gutted one of the heavy printing
machinery worth Shs 2 billion.

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 Audit Practice & Assurance – Paper 16

8. Inventory breakdown is as follows:

2023 2022
Shs ‘000’ Shs ‘000’
Opening balance 10,000,000 5,000,000
Purchases 40,000,000 50,000,000
Closing inventory (20,000,000) (10,000,000)
Cost of sales 30,000,000 45,000,000
9. Materiality at planning stage is set at Shs 1.5 billion.
10. At the end of the audit, the auditor, KLP & Co. shall be required to issue
either a unmodified or modified audit opinion.
Required:
(a) Using analytical procedures identify key audit areas that need KLP’s
attention in regard to NPPC’s transactions and account balances.
(14 marks)
(b) Discuss with your engagement team the disclosures to look out for in
NPPC’s financial statements in regard to its operating segments.
(8 marks)
(c) Propose to your engagement team audit procedures for the following
account balances:
(i) right of use of assets. (8 marks)
(ii) trade payables. (8 marks)
(d) Suggest audit procedures to be adopted by the engagement team in
regard to the fire that gutted one of the heavy printing machinery and
similar events.
(6 marks)
(e) Explain the circumstances under which KLP shall either issue unmodified or
a modified audit opinion.
(6 marks)
(Total 50 marks)

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 Audit Practice & Assurance – Paper 16

SECTION B
Attempt two of the three questions in this section
Question 2
PMC Insurance Limited (PMC) is a registered insurance company in Uganda
regulated by the Insurance Regulatory Authority (IRA). PMC has been in
existence for the last 7 years and has 5 branches across the country in Jinja,
Arua, Fort portal, Masaka and Lira.
PMC prepares financial statements in accordance with International Financial
Reporting Standards (IFRS) and has also adopted the Integrated financial
reporting as prescribed by the International Integrated reporting framework.
The insurance sector faces challenges of non-compliance to laws and regulations
and many insurers have been argued to ensure compliance. Some of the laws
IRA requires insurers to follow include:
 Preparing their financial statements in accordance with International
Financial Reporting Standards, especially IFRS 17, Insurance contracts.
 Requirements of the Income Tax Act and Value Added Tax Act.
 Requirements of Uganda Registration Services Bureau.
 Requirements of the National Social Security Act.
 Insurance Act, 2017.
 Anti-Money Laundering Act.
PMC has been flagged by IRA as non-compliant to laws and regulations. PMC has
appointed ABA associates to audit its financial statements for the year ending 30
June 2023. ABA associates shall also be required to review any instances of
PMC’s non compliance to laws and regulations and you are to lead the team as
the audit manager.
Required:
(a) Highlight to your engagement team some the possible indicators of non-
compliance to laws and regulations to look out for during the audit of PMC.
(7 marks)
(b) Suggest mechanisms to be implemented by PMC aimed at ensuring
prevention and detection of non-compliance with laws and regulations in
PMC.
(8 marks)
(c) Explain to your engagement team the various contents expected in PMC’s
integrated report.
(10 marks)
(Total 25 marks)

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Question 3
Africa Telecommunication Company (ATC) is a firm specialising in providing a
range of telecommunication services, including call services, internet data, and
mobile money services in Uganda. ATC operates as a subsidiary of ATC- United
Kingdom.
You are a member of the internal audit department at ATC. Unfortunately, the
department appears to be facing challenges in effectively addressing the growing
levels of fraudulent activities within the company, as outlined below:
1. Managers are approving inflated expenses submitted by staff members
who have close affiliations with them. These expenses pertain to goods
and services provided to ATC.
2. There are rumors of financial department staff accepting bribes to overlook
irregularities in budget manipulation that benefits personnel in other
departments.
3. Allegations exist of the procurement department soliciting bribes from
suppliers.
4. Incidents of misappropriation of client funds within the mobile money
division, along with efforts to conceal customer complaints, have come to
light.
5. The procurement unit has been implicated in procuring fictitious goods and
services, and concerns have arisen regarding the presence of individuals
on the company payroll who were not formally contracted or have been
terminated by ATC.
6. Company vehicles are being utilised for personal tasks by employees,
incurring costs to ATC, which is evident in the high vehicle maintenance
expenses.
7. The management of ATC's inventory is substandard, necessitating the
outsourcing of some goods.
8. The Ugandan Revenue Authority (URA) has raised objections to the
revenue and profit figures declared by ATC over time. URA has officially
informed ATC of its intent to conduct a tax audit next month.
In response to these serious issues, the board of ATC has directed the internal
audit department to conduct a comprehensive forensic investigation with a
particular emphasis on addressing the concerns raised.

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Required:
(a) Explain the objectives of the forensic investigation to be carried out by
internal audit department of ATC.
(5 marks)
(b) Discuss with your team the various techniques you shall use to gather
evidence during the forensic investigations.
(4 marks)
(c) Discuss the various types of corruption and fraud at ATC as highlighted.
(6 marks)
(d) Advise the Head of Internal Audit at ATC on the factors that influence the
effectiveness of an internal audit function.
(10 marks)
(Total 25 marks)
Question 4
Bucks Microfinance Limited (BML) is a registered Microfinance Deposit taking
institution operating in Uganda and is regulated by the Bank of Uganda. With a
network of over 20 branches across Uganda, BML has faced financial challenges
in recent years, prompting concerns from the Bank of Uganda.
The Bank of Uganda has expressed reservations regarding both the quality of
external and internal audits and various aspects of risk management within BML.
As a result, they have initiated a standard evaluation process to assess BML's
governance, risk management practices, and internal control systems.
Consequently, the Bank of Uganda has made the following recommendations to
BML's board:
1. Engage new auditors to audit BML's financial statements for the year
ending on 31 December, 2023.
2. Develop a comprehensive risk management framework. BML faces
substantial business risks, yet it lacks a well-defined Risk Management
Framework to guide day-to-day operations and decision-making. The
existing components of the current risk management framework are in
need of systematic improvement.
QAE and associates, your firm, has been approached by BML to provide auditing
services and to assist in creating a new risk management framework. The
partner at QAE and associates has informed you about BML's interest in
becoming a client, and QAE and associates intends to accept the audit proposal
and the proposal for developing a new risk management framework for BML.

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Required:
As an audit manager at QAE and associates, the firm partner has requested you
to write a report to her on the following matters:
(a) The key attributes in regard to values, ethics and attitudes necessary to
support audit quality of Bucks Microfinance Limited at engagement team
level.
(5 marks)
(b) The safeguards QAE needs to put in place to eliminate or reduce to an
acceptable level any threats to compliance with the fundamental ethical
principles in regard to the audit of BML.
(10 marks)
(c) The various components of a risk management framework to be developed
for BML.
(10 marks)
(Total 25 marks)

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