CPA(U) AEA Exam 1

Benchmark ranges (Shs million)

• Revenue: 0.5% × 57800 = 289 to 1% × 57800 = 578.
• Profit before tax: 5% × 3960 = 198 to 10% × 3960 = 396.
• Total assets: 1% × 44300 = 443 to 2% × 44300 = 886.

Recommendation. Profit is the measure the parent group watches most closely, but this is an initial engagement with a qualified prior-year opinion, a related-party supplier and several judgemental balances, so the risk is high. Overall materiality should therefore sit at the lower end of the ranges: about Shs 289 million, which lies inside both the revenue and the profit ranges. Performance materiality should be set lower again, at about 60% of overall materiality because of the high risk: 60% × 289 = 173.4, about Shs 173 million. Under ISA 320 these are matters of professional judgement and must be revisited when the actual year-end figures are known.

📋 Objective: 3.6 (Professional judgement, scepticism and materiality)

1. Purchases from the parent in US dollars. The group sets the prices, so these are related party transactions that need disclosure under IAS 24, and the payable must be retranslated at the closing rate under IAS 21 with exchange differences in profit or loss (accuracy, valuation). Response: obtain a confirmation of the balance from the parent, recompute the retranslation using the 31 December 2026 rate and review the related party note.
2. New galvanising line. Training and launch costs of Shs 340 million cannot be capitalised under IAS 16 and should be expensed, so plant may be overstated and profit overstated (valuation, classification). Response: analyse the capital additions to invoices, remove non-directly attributable costs and check depreciation starts from July 2026.
3. Zinc discharge notice. The company may have a present obligation to clean up or pay a penalty, requiring a provision or a contingent liability disclosure under IAS 37 (completeness). Response: read the notice and correspondence with the regulator, ask the company's lawyers for their assessment and obtain any engineer's estimate of the clean-up cost.
4. Distributor rebates. Rebates are variable consideration under IFRS 15, so revenue must be reduced and a rebate accrual recognised at the year end; an understated accrual overstates revenue (accuracy, completeness of liabilities). Response: recalculate the rebate accrual for a sample of distributors from their annual purchases and agree to the rebates actually paid in March 2027.
5. Barbed wire from the cancelled contract. With falling prices the wire may be worth less than cost and must be written down to net realisable value under IAS 2 (valuation). Response: compare cost with post year-end selling prices and review the ageing of slow-moving lines.
6. Initial engagement. The opening inventory could not be verified last year, so opening balances may be misstated, which also affects cost of sales for 2026 (ISA 510). Response: review the predecessor's working papers, perform extra work such as rolling back from the 2026 count, and consider the effect on the auditor's report.

📋 Objective: 3.7 (Risk assessment)

ISA 210 requires the terms to be agreed in an engagement letter so that both parties understand the work and there is no misunderstanding about responsibilities; it also confirms the preconditions for an audit and forms the contract that limits disputes later. The letter should cover: (1) the objective and scope of the audit under the ISAs and the Companies Act 2012; (2) the responsibilities of management for preparing financial statements under IFRS, for internal control and for giving the auditor access to all records; (3) the form of the expected report, the fees and billing basis, and the inherent limitations of an audit, meaning some material misstatements may not be detected.

📋 Objective: 3.1 (Objectives of the auditor and terms of engagement)

1. Fee dependence. Fees of 19% of total income for two years create a self-interest threat: the firm may fear losing the client and so accept doubtful treatments. For a client that is not a public interest entity the firm should assess the threat and apply safeguards, such as a pre-issuance review by an engagement quality reviewer from outside the team, and work to reduce the dependence.
2. Free health screenings. Gifts worth Shs 1.2 million per person are not trivial and inconsequential, so they create self-interest and familiarity threats. The offer should be declined and staff reminded of the firm's gifts and hospitality policy.
3. Valuing the imaging equipment. The firm would later audit its own valuation of a material balance, a self-review threat that safeguards cannot reduce to an acceptable level. The valuation service should be declined; the hospital should use an independent valuer.
4. Presenting the tax case. Acting for the hospital in a public hearing makes the firm a promoter of the client's position, an advocacy threat. Where the amount is material to the financial statements the firm should decline; otherwise the work must be done by a separate team, not the engagement partner.
5. Seat on the investment committee. Deciding which equipment to buy would be taking on management responsibilities, which creates self-review and familiarity threats that no safeguard can address. Mr Ssali must refuse the invitation.

📋 Objective: 2.5 (Ethical requirements for auditors)

Who decides. Under the Companies Act 2012 an auditor appointed at an AGM holds office until the end of the next AGM, and a retiring auditor is deemed re-appointed unless the members resolve otherwise. A resolution appointing another firm, or providing that the retiring auditor shall not be re-appointed, is an ordinary resolution passed by the members in general meeting; the directors cannot make the change by themselves, even though Dr Mukasa's 62% holding means he can carry the vote.

Notice. Special notice is needed: Dr Mukasa must give the company notice of his intention to move the resolution at least 28 days before the meeting. The company must then send a copy of the notice to the retiring auditor straight away.

Putting its case. The firm may make written representations of reasonable length and ask the company to notify the members of them. The company must say in its notice of the resolution that representations have been made and send a copy to every member to whom notice of the meeting is sent. If they are not sent, because they arrived too late or through the company's default, the firm may require them to be read out at the meeting, unless the court is satisfied the right is being abused to obtain needless publicity for defamatory matter.

Attendance. The firm is entitled to receive notice of the meeting, to attend and to be heard on any business that concerns it as auditor.

Professional clearance. When the proposed successor writes for professional clearance, the firm should reply openly, explaining the disagreement over the dialysis impairment, so the successor can decide whether to accept.

📋 Objective: 2.3 (Resignation, removal and rotation of auditors)

1. No vetting of new customers. Accounts are opened without assessing credit worthiness, so sales may be made to institutions that cannot pay, leading to bad debts. Recommendation: a central credit controller should carry out a credit check, using a credit reference bureau report and recent financial statements, and approve each account and its limit.
2. Limit override by a shared code. Supervisors can exceed limits at will and the override cannot be traced to a person. Recommendation: the system should block orders above the limit; only the credit controller, using an individual password, may release them, and an exception report of overrides should be reviewed weekly.
3. Unnumbered delivery notes and weekly invoicing. Deliveries may never be invoiced, so revenue and receivables are understated and goods lost. Recommendation: use pre-numbered goods dispatch notes generated by the system, invoice daily and perform a sequence check matching every dispatch note to an invoice.
4. Credit notes raised by cashiers. Cashiers could issue fictitious credits to conceal theft of cash received from customers. Recommendation: every credit note should be authorised by the branch manager and supported by a goods returned note signed by the storekeeper.
5. No control account reconciliation. Errors or fraud in the individual ledgers would not be detected. Recommendation: reconcile the receivables ledger to the receivables control account every month, with the finance manager reviewing and signing the reconciliation.
6. No statements and no review of ageing. Disputed or doubtful balances, like the Shs 1,240 million, are not followed up, which hurts cash flow and may require an allowance. Recommendation: send monthly statements, review an aged receivables analysis monthly, chase overdue accounts and stop supplies to customers beyond terms.

📋 Objective: 4.2 (Controls over the main transaction cycles)

1. Inspect a sample of new customer files for a credit reference bureau report and the credit controller's signed approval of the account and its limit. Objective: goods are sold on account only to customers of acceptable credit worthiness.
2. Use test data to enter an order that exceeds a customer's limit and observe whether the system blocks it; inspect the exception report of overrides for evidence of weekly review. Objective: sales above approved limits are prevented.
3. Select a sample of pre-numbered dispatch notes and trace each to a sales invoice, and inspect the sequence check for evidence of review. Objective: all goods dispatched are invoiced (completeness of revenue).
4. Inspect a sample of credit notes for the branch manager's authorisation and a matching goods returned note. Objective: credit notes are issued only for genuine returns.
5. Inspect the monthly ledger reconciliations and reperform one, checking for the finance manager's signature. Objective: the ledger is complete and accurate and errors are corrected promptly.

📋 Objective: 4.4 (Tests of control and control deficiencies)

Pipe leak. The tests in August give evidence about conditions that existed at the reporting date, because the leak began in April 2026, so this is an adjusting event. The contamination is a past event creating a present obligation, so a provision should be recognised under IAS 37. Materiality: 680 / 5440 = 12.5% of profit before tax, so it is material and Mr Mwakyusa's view is wrong. Procedures under ISA 560: obtain the regulator's order and the engineers' report, assess the engineers' competence and objectivity as experts, recompute the estimate and check whether any clean-up costs have been paid since.

Flood damage. The flood happened after the year end and the gantry was undamaged at 30 June 2026, so it is a non-adjusting event; its carrying amount is not reduced in these financial statements. Materiality: 930 / 5440 = 17.1% of profit before tax (2.3% of total assets), so it is material and must be disclosed, giving the nature of the event and an estimate of its financial effect, including the absence of insurance cover. Procedures: inspect damage reports and photographs, agree the carrying amount to the fixed asset register, read the policy wording on flood exclusion and review board minutes after the year end. The ISA 560 duty to identify such events runs up to the date the report is signed.

📋 Objective: 6.2 (Events after the reporting period)

Indicators. Current liabilities exceed current assets by 12150 − 9850 = Shs 2300 million, so the company has net current liabilities and relies on borrowing to pay suppliers. The facility expires within twelve months of the year end, the parent has withdrawn its guarantee and renewal is uncertain, while the uninsured flood loss and the clean-up add to cash needs. Together these point to a material uncertainty about going concern.

Procedures (ISA 570).

• Obtain management's cash flow forecast for at least twelve months from the report date, test its assumptions on fuel volumes and margins against post year-end trading, and include the clean-up and gantry repair costs.
• Write to the bank for a bank confirmation of the facility and read all correspondence about renewal without the guarantee.
• Read board minutes and post year-end management accounts for management's plans, such as new lenders or an injection of capital.
• Obtain written representations from the directors on their plans and evaluate the adequacy of the going concern disclosures.

📋 Objective: 6.3 (Going concern review)

Adequate disclosure. The opinion remains unmodified, but ISA 570 requires a separate section headed "Material Uncertainty Related to Going Concern" drawing attention to the note.

Inadequate disclosure. The financial statements are materially misstated, so the auditor issues a qualified opinion, or an adverse opinion if the omission is pervasive (ISA 705).

Unrecorded clean-up provision. The Shs 680 million (12.5% of profit before tax) is material but confined to provisions and profit, so it is not pervasive. The opinion would be qualified on an "except for" basis, with a basis for qualified opinion paragraph quantifying the misstatement.

📋 Objective: 5.11 (The auditor's report and audit opinion)

1. One person as chairperson and managing director. Combining the roles gives Mr Kasozi unfettered power over the board and the business. The roles should be split, with an independent non-executive chairperson; if they remain combined, Table F requires either an independent deputy chairperson or a strong independent element on the board, with the combined roles justified in each year's annual report.
2. Too few independent directors. Only three of nine directors are non-executive, and neither the cousin nor the partner of the retained law firm is independent, because of the family tie and the material business relationship. Non-executive directors should form the majority of the board, with enough truly independent members to challenge management.
3. Audit committee of directors chaired by the finance director. Table F requires an audit committee of a chairperson and at least three other persons of reputable integrity who are not members of the board; a committee chaired by an executive reviewing his own work has no objectivity. It should be reconstituted with non-board members who have financial expertise.
4. Executive pay set by the managing director. This is a conflict of interest and may reward loyalty rather than performance. A remuneration committee made up mainly of independent directors, chaired by an independent non-executive director, should recommend executive pay, and directors' remuneration should be disclosed.
5. Informal appointments. New directors chosen by Mr Kasozi alone will tend to support him. A nomination committee should run a formal and transparent procedure, based on the skills the board needs, and members should vote on each appointment.

📋 Objective: 17.4 (Board independence and board committees)

Whistle blowing is the disclosure, in good faith and in the public interest, of an impropriety such as a danger to public health, a criminal offence or a breach of law by an employer or its staff. Posting on social media is not the protected route. Ms Nalwoga should disclose to an authorised officer, for example an officer of the Inspectorate of Government or a police officer of the rank of Assistant Inspector of Police or above, or to her employer through a senior person not involved, such as the board or the audit committee. She may disclose orally or in writing; an oral disclosure is reduced into writing by the person receiving it, and she may use electronic means such as email or a hotline.

📋 Objective: 19.1 (Meaning of whistle blowing and disclosure procedures)

• Victimisation: she is protected from victimisation by her employer, such as dismissal, suspension, demotion or harassment, because of a protected disclosure.
• No legal action: she is not liable to civil or criminal proceedings for a disclosure made in good faith, even if it breaches a duty of confidentiality.
• State protection: where she has reasonable cause to believe that her life or property, or that of her family, is endangered, she may request state protection, which the State must provide (for example police protection).
• Redress: if victimised she may complain to the Inspectorate of Government or the Uganda Human Rights Commission, or bring a civil action in court, seeking remedies such as compensation or reinstatement.
• Void terms: any term in her contract of employment that stops her from making a protected disclosure is void.
• Offences: it is an offence to victimise a whistleblower, and a person who knowingly makes a false disclosure also commits an offence and is liable on conviction to a fine or imprisonment.

📋 Objective: 19.3 (Protection of whistleblowers, offences and penalties)