AUDIT PLANNING MEMORANDUM
- Introduction: This memorandum sets out our proposed strategy for auditing the Nationa water and sewerage corporation for the year ended 31 March 2017.
- Background of the entity:
The National Water and Sewerage Corporation was set up as a government owned parastatal under decree No. 34 of 1972, and its legislative framework was strengthened by the NWSC Statute, Statute No 7 of 1995. The NWSC operations have grown from 3 towns in 1972 to 15 towns at present. These towns include Kampala, Jinja, Entebbe, Tororo, Mbale, Lira, Gulu, Masaka, Mbarara, Kabale, Kasese and Fort Portal, Bushenyi/Ishaka, Soroti and Arua. The NWSC has moved from efficiency with funds for investment t available in the early 70’s, to dilapidation of the Water and Sewerage systems in the later part of the 1970’s and early 80’s. The mid 1980’s and early 1990’s were characterized by rehabilitation of the Water and Sewerage systems. With the infrastructure in place, the later part of the 1990’s was devoted to improved efficiency and performance enhancement so as to effectively deliver services to the people. The performance enhancement programmes have included both strategic internal reforms, and the involvement of the Private Sector in service delivery, (NWSC, 2015).
- Respective Responsibilities: The CEO is ultimately responsible for maintaining proper accounting records; preparing annual Accounts that give a true and fair view of the state of affairs of the Board; and ensuring that these Accounts have been properly prepared in such manner as prescribed under the National water and sewerage law. He is also responsible for ensuring that the expenditure and income presented in the annual Accounts has been applied to the purposes intended by the government and the funding agencies and that the financial transactions conform to the authorities which govern them.
- Objectives of audit: Our work is constructed around producing, for the NWSC consideration, an “audit certificate” that NWSC will then address to the Legislature through the Government. The audit certificate follows a standard form (based on auditing standards) in which the NWSC provides Legislature with an opinion on two matters. First, the C&AG will state whether, in his opinion, the Accounts give a true and fair view of the state of affairs of the Board and of its income and expenditure, total recognised gains and losses for the relevant year. This part of the opinion will also indicate whether the Accounts have been properly prepared in such manner as prescribed under the NWSC code of conduct.
Second, the NWSC will also indicate whether, in his opinion, the expenditure and income presented in the Accounts have, in all material respects, been applied to the purposes intended by the Legislature and funding agencies and whether the financial transactions conform to the authorities which govern them.
In arriving at this two part opinion, we will consider the following matters:
- whether the Department has kept proper accounting records and whether proper returns adequate for the audit have been received from any third parties;
- whether effective systems of internal control are in place;
- whether the Accounts are in agreement with the accounting records and returns; and
- whether we have obtained all the information and explanations which we consider necessary for the purposes of our audit.
Where we are not satisfied with any of the above matters, then we will consider how our audit conclusion might impact upon the NWSC audit certificate.
- Risk Assessment: Based on the assessment of external and control environment of the Board, the overall inherent risk assessment of the account areas is made as high, medium or low and significant audit areas identified are as follows
- Non-plan expenditure – salary: There is a specific risk that the expenditure incurred during the year may exceed the budget and thus there may be the risk that salary component of non-plan expenditure is met out of plan grants, ie expenditure without specific approval of government as Board cannot reappropriate from plan heads.
- Debtors: The main activities of the Board are to plan for NWSC and ensure that if it needs financing it gets it from appropriate organizations. The risk is that debt will become bad as the loan recovery period is over in the NWSC which are closed schemes. Further the risk also lies in the possibility that there could be delays in remittance of loan amount to the financial institutions by the NWSC.
- Provisions for depreciation, bad and doubtful debts: There may be the risk of the Board not providing for depreciation, as a result leading to misstatement of assets. Further if the Board provides, whether it provides sufficiently for bad and doubtful debts is another area to be examined.
- Recovery of amount of NWSC money which the customers haven’t paid: Repayment of money by customers may not be as per the guidelines. In addition to this, there may be delay in repayment of NWSC money.
- Pension: Whether the Board is providing enough to meet its pension liability. Inability to do so may impact on the discharge of its pension liability. Further whether the Board is remitting the pension contribution to government is another risk area.
- Plan grant: The risk is that the grants may not have been discharged as per the terms and conditions and may not have been utilized for the purpose and within the period for which they were sanctioned and that they may have been lapsed.
- Materiality: Since the main business of the Board is to ensure that the water and the revenue comply with the laws of Uganda . Further, public interest is also low. Hence the accounts of the Board can be considered as ‘not sensitive’ account.
Therefore 2% of GROSS EXPENDITURE is set as materiality for the Board.
The term ASSURANCE FACTOR refers to the level of assurance required from sampling .The assurance Factors for different levels of substantive testing are:-
Level of Testing Assurance Factor
Focused 3.0
Standard 2.0
Minimum 0.7
As a general rule, the risk factor is proposed to be taken as 0.7, which may be subject to revision for specific account areas based on the results of substantive testing. This may also depend on the time available.
The formula for calculating sample size :-
Sample size = (Account area population / Precision) X Assurance Factor.
The sample sizes is calculated as follows:
Gross Expenditure
Materiality Base x
Materiality (2% of Materiality Base) 0.02x
Less Most likely Error (10% of Materiality) 0.002x
0.018x
Precision is 90% 0.0162x
Sample size =(account area population X 0.7)/ 0.0162x
- Audit Approach for each account area: Our audit approach is a risk based one, informed by our understanding of the Board’s business and the accounting and the internal control systems as well as our assessment of the risks associated with the financial statements. As a part of our audit, we will determine the extent to which we can rely on detailed control procedures and management’s monitoring activities to prevent or detect specific material misstatements and address all potential errors by conducting walk through tests of all the identified significant audit areas. Where it is found that the accounting systems and controls are sound, we will seek to take audit assurance from them. In respect of those significant audit areas where either the controls don’t exist or are weak, further substantive procedures are designed.
- Resources and timing: The audit is to be completed in a period of 4 weeks. The audit team will comprise the following members
- MWEBAZA PRISCA, AG – Team leader
- KEVIN BABIRYE, Sr. DAG
- OKETCHO WILBROAD, Sr. DAG
- JULIET , Sr. DAG
- Key contacts at the entity: The key contacts include Namutebi priscilla, Chief Executive Officer and Zaker Ochieng, the FA & CEO.
