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.

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

Each

Audit Theory Paper 7

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)

(b)

Identify and explain the audit risks at the planning stage of the audit of
KGCCL.
(12 marks)
State the objectives of internal controls over sales that can be adopted
to streamline the revenue at KGCCL.
(3 marks)

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Audit Theory Paper 7

(c)

(d)

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

Explain the ethical threats which may affect the auditors of PAT & Co.
(10 marks)
For each of the threats, explain how it may be mitigated.
(5 marks)
Explain what would be the benefit of having an internal audit
department at QSCL.
(10 marks)
(Total 25 marks)

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Audit Theory Paper 7

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:

(b)

(c)

Explain the key types of procedures that the auditor can adopt to obtain
audit evidence.
(10 marks)
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)
Explain the benefits and limitations of a statutory audit.
(9 marks)
(Total 25 marks)

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