THE PUBLIC ACCOUNTANTS EXAMINATIONS BOARD

A Committee of the Council of ICPAU

CPA(U) EXAMINATIONS

LEVEL ONE

AUDIT THEORY PAPER 7

SATURDAY, 7 JUNE 2014

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. This examination contains Sections A, B and C.

3. Section A is bound separately from Sections B and C.

4. Attempt all the 20 multiple-choice questions in Section A. Each question carries 1 mark.

5. Attempt the compulsory question in Section B carrying 30 marks.

6. Attempt two of the three questions in Section C. Each question carries 25 marks.

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

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

2014 Public Accountants Examinations Board

Audit Theory Paper 7

7 June 2014 Page 2 of 4

SECTION B

This section has one compulsory question to be attempted.

Question 2

Kampala Garbage Collection Company Ltd (KGCCL) has been in this service industry for over 10 years. KGCCL has it offices in Kampala and operates around the city. It collects garbage from its customers (commercial and residential premises) and dumps it at Kitenzi dumping site owned by the City Garbage Management Authority (CGMA). The companys license is renewable annually by CGMA.

KGCCL uses an accounting package that is accessed by the finance and credit/ sales departments but there are no strict restrictions of access of the accounting package by other company staff.

The marketing department looks for customers and on agreeing on the terms, contract agreements are signed between the company and the clients. Upon the collection of garbage from a client, an invoice is raised and delivered by a credit officer to the clients premises. The challenge, however, is that there is no clear credit policy at the company. Each credit officer controls a number of clients and he/ she acts as a point of contact between the company and the client. The credit officer collects cash and cheques from customers when they pay and remits these to the finance department for recording in the garbage fees ledger.

Accounts receivable are another challenge. Some accounts receivable are as old as three years and in fact some debtors are not even aware that they owe the company money. Record keeping at KGCCL is also poor and records cannot easily be traced.

During the year ended December 2013, KGCCL had a dispute with a client whereby the client claimed to have paid the due bills to the credit officer but the company kept on sending reminders to the client to clear their bills. The client was irritated by the reminders and notified the company that he intended to sue. The company has neither made any provision for nor disclosed the pending suit because they are confident that the claim has no merit.

Required:

(a) Identify and explain the audit risks at the planning stage of the audit of KGCCL.

(12 marks) (b) State the objectives of internal controls over sales that can be adopted

to streamline the revenue at KGCCL. (3 marks)

Audit Theory Paper 7

7 June 2014 Page 3 of 4

(c) Identify and explain substantive tests that should be carried out by the auditor to verify the accuracy of revenue at KGCCL.

(12 marks) (d) International Standard on Auditing (ISA) 560: Subsequent Events

defines adjusting and non-adjusting events. Give at least 3 examples of non-adjusting events.

(3 marks) (Total 30 marks)

SECTION C

Attempt two of the three questions in this section.

Question 3

You are an audit senior at PAT & Co., a firm of Certified Public Accountants, and it is your first time to work on one of the firms long time clients of over five years, Quick Shipping Company Ltd (QSCL). The main business of QSCL is transportation of all kinds of goods, and the company owns a fleet of truckers/ trailers.

You have been asked to embark on the audit planning for QSCL by Tong Sam, the engagement partner. Mr. Tong has been the engagement partner for the past three audits of QSCL and therefore has excellent knowledge of the client. He has informed you that he would like his nephew, Tom to be part of the audit team this year. Tom has just completed level 1 of the Certified Public Accountants of Uganda [CPA(U)] course. Mr. Tong has also informed you that he had just shipped his car from Mombasa to Kampala using the services of QSCL and he intends to do the same for his friend, Peace.

In the Pre-audit meeting with the finance director of QSCL, you learnt that the audit team will be given free lunch and transport allowance. The director also stated that the audit fees will be based on a percentage of revenue and trusted that the firm will accept a fixed fee for representing QSCL in a tax dispute with the National Revenue Authority.

Required:

(a) Explain the ethical threats which may affect the auditors of PAT & Co. (10 marks)

(b) For each of the threats, explain how it may be mitigated. (5 marks)

(c) Explain what would be the benefit of having an internal audit department at QSCL.

(10 marks) (Total 25 marks)

Audit Theory Paper 7

7 June 2014 Page 4 of 4

Question 4

Help the Children Uganda is a non-governmental organisation (NGO) established in 2005 with an aim of providing education and sports support to orphaned children. The NGO has a detailed constitution which explains how the NGOs income can be spent. The constitution also states that administration expenses cannot exceed 15% of income in any given financial year and that its fund can be spent in accordance with the constitution.

Help the Children Ugandas income is derived wholly from voluntary donations. The sources of donation include:

remittances from donors overseas to the NGOs account. fundraisings organized by the NGO. donations from generous individuals and organisations.

Required:

(a) Explain the term audit risk and the three elements of risk that contribute to total audit risk.

(7 marks) (b) Identify areas of inherent risk at Help the Children Uganda and explain

the effects of each of these risks on the audit approach. (10 marks)

(c) Explain why the control environment may be weak at Help the Children Uganda.

(8 marks) (Total 25 marks)

Question 5

(a) The objective of International Standard on Auditing (ISA) 500: Audit Evidence, is to design and perform audit procedures to enable the auditor to obtain sufficient appropriate audit evidence to enable reasonable conclusions on which to base an audit opinion.

Required:

Explain the key types of procedures that the auditor can adopt to obtain audit evidence.

(10 marks) (b) ISA 700: Forming an Opinion and Reporting on Financial Statements

explains the form and content of audit reports.

Required:

Explain briefly the three forms in which an auditors report may be modified.

(6 marks) (c) Explain the benefits and limitations of a statutory audit.

(9 marks) (Total 25 marks)