THE REPUBLIC OF UGANDA

REPORT AND OPINION OF THE AUDITOR GENERAL ON THE

FINANCIAL STATEMENTS OF

NEC CONSTRUCTION, WORKS AND ENGINEERING LTD

FOR THE YEAR ENDED 30TH JUNE, 2014

OFFICE OF THE AUDITOR GENERAL

UGANDA

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TABLE OF CONTENTS

LIST OF ACRONYMS ................................................................................................ 2

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF

NEC CONSTRUCTION, WORKS AND ENGINEERING LTD FOR THE YEAR ENDED

30TH JUNE, 2014 ...................................................................................................... 3

1.0 INTRODUCTION ............................................................................................ 5

2.0 BACKGROUND INFORMATION ........................................................................ 5

3.0 ENTITY FINANCING ....................................................................................... 5

4.0 OBJECTIVES OF THE NEC CONSTRUCTION, WORKS AND ENGINEERING LTD. .... 5

5.0 AUDIT SCOPE ................................................................................................ 6

6.0 AUDIT PROCEDURES PERFORMED .................................................................. 6

7.0 FINDINGS ..................................................................................................... 7

7.1 Non remittance of statutory deductions ........................................................... 7

7.2 Accrued gratuity ............................................................................................ 7

7.3 Outstanding debtors....................................................................................... 8

7.4 Outstanding payables ..................................................................................... 8

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LIST OF ACRONYMS

Acronym Meaning

NSSF National Social Security Fund

PFAA Public Finance and Accountability Act, 2003

PPDA Public Procurement and Disposal of Public Assets Authority

Shs. Uganda Shillings

URA Uganda Revenue Authority

NEC National Enterprise Corporation

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REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF

NEC CONSTRUCTION, WORKS AND ENGINEERING LTD

FOR THE YEAR ENDED 30TH JUNE, 2014

THE RT. HON. SPEAKER OF PARLIAMENT

I have audited the financial statements of NEC Construction, Works and Engineering Ltd

for the year ended 30th June 2014, as set out on page 1 to 12. These financial

statements comprise of the Statement of Financial Position as at 30th June 2014,

Statement of Financial Performance, Statement of Changes in Equity and Cash Flow

Statement together with other accompanying schedules and accounting policies.

Management Responsibility

The Directors are responsible for the fair presentation of the financial statements in

accordance with the International Financial Reporting Standards and the National

Enterprise Corporation Act and for such internal control as management determines is

necessary to enable the preparation of financial statements that are free from material

misstatement whether due to fraud or error.

Auditor’s Responsibility

My responsibility as required by Article 163 of the Constitution of the Republic of

Uganda, National Enterprise Corporation Act (Cap.312) and Sections 13 and 19 of the

National Audit Act, 2008 is to audit and express an opinion on these statements based

on my audit. I conducted the audit in accordance with International Standards on

Auditing. Those standards require that I comply with the ethical requirements and plan

and perform the audit to obtain reasonable assurance whether the financial statements

are free from material misstatement. An audit involves performing audit procedures to

obtain evidence about the amounts and disclosures in the financial statements as well as

evidence supporting compliance with relevant laws and regulations. The procedures

selected depend on the Auditor’s judgment including the assessment of risks of material

misstatement of financial statements whether due to fraud or error. In making those risk

assessments, the Auditor considers internal control relevant to the entity’s preparation

and fair presentation of financial statements in order to design audit procedures that are

appropriate in the circumstances but not for purposes of expressing an opinion on the

effectiveness of the entity’s internal control. An audit also includes evaluating the

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appropriateness of accounting policies used and the reasonableness of accounting

estimates made by management as well as evaluating the overall presentation of the

financial statements. I believe that the audit evidence I have obtained is sufficient and

appropriate to provide a basis for my opinion.

Part ‘‘A’’ of this report sets out my opinion on the financial statements. Part ‘‘B’’ which

forms an integral part of this report presents in detail all the significant audit findings

made during the audit which have been brought to the attention of management and

will form part of my Annual Report to Parliament.

PART A

Opinion

In my opinion, the Financial Statements present fairly in all material respects the

financial position of NEC Construction, Works and Engineering Ltd as at 30th June, 2014

and its financial performance and cash flows for the year then ended in accordance with

the International Financial Reporting Standards and the National Enterprise Corporation

Act (Cap 312).

Report on other legal requirements

As required by the National Enterprise Corporation Act and the National Audit Act, I

report to you, based on my audit, that:

i. I have obtained all the information and explanations, which to the best of my

knowledge and belief were necessary for the purpose of my audit.

ii. In my opinion, proper books of account have been kept by the Company, so far as

appears from my examination of those books; and

iii. The statement of financial position and statement of financial performance are in

agreement with the books of account.

John F.S. Muwanga

AUDITOR GENERAL

KAMPALA

9th February, 2015

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PART "B"

DETAILED REPORT OF THE AUDITOR GENERAL

This Section outlines the detailed introduction, backgroud information, entity financing,

audit findings, management responses, and my recommendations in respect thereof.

1.0 INTRODUCTION

In accordance with Article 163(3), of the Constitution of the Republic of Uganda

and National Enterprise Corporation Act (Cap.312), I am required to audit and

report on the public accounts of Uganda that is to say, all public offices including

the courts, the central and the local government administrations, universities and

public institutions of the like nature and any public corporation or other bodies or

organizations established by an Act of Parliament. Section 64 of the National

Enterprise Corporation Act (Cap.312) further mandates me to specifically carry

out audits of all Public institutions. Accordingly, I carried out the audit of NEC

Construction, Works and Engineering Ltd to enable me report to Parliament.

2.0 BACKGROUND INFORMATION

NEC Construction, Works and Engineering Limited is a subsidiary of the National

Enterprise Corporation which was incorporated in 1989. The subsidiary offices

are located at 6th Street, Industrial Area where the Corporation main offices are

also located.

3.0 ENTITY FINANCING

The company is fully owned by government and managed by professionally

qualified Engineers. The company does not receive funding from government but

generates its own revenue through various works. During the year, the entity

generated gross income of Shs.1,709,196,925 that was used to finance its

activities.

4.0 OBJECTIVES OF THE NEC CONSTRUCTION, WORKS AND ENGINEERING

LTD

The company main objectives are;-

To provide quality construction services in the atmosphere of mutual trust.

To impact techinical, managerial and service skills to personnel of the armed

forces so that they can improve their welfare.

To equip forces with skills that can be gainfully used upon retairement.

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To create direct and indirect employment in the country.

5.0 AUDIT SCOPE

The audit was carried out in accordance with International Standards on Auditing

and accordingly included a review of the accounting records and agreed

procedures as was considered necessary. In conducting my reviews, special

attention was paid to establish whether:-

a. The financial statements have been prepared in accordance with consistently

applied Accounting Policies and fairly present the revenues and expenditures

for the period and of the financial position as at the end of the period.

b. All company funds were utilized with due attention to economy and

efficiency and only for the purposes for which the funds were provided.

c. Goods and services financed have been procured in accordance with the

Government of Uganda procurement regulations.

d. There were adequate internal controls in the structure of the NEC

Construction, Works and Engineering Ltd, and in assessing risks and identify

reportable conditions, including material internal control weaknesses.

e. The NEC Construction, Works and Engineering management was in

compliance with the Government of Uganda financial regulations.

f. All necessary supporting documents, records and accounts have been kept in

respect of all NEC Construction, Works and Engineering activities, and are in

agreement with the financial statements presented.

6.0 AUDIT PROCEDURES PERFORMED

The following audit procedures were undertaken:-

a. Revenue

Obtained all schedules of all revenues collected and reconciled the amounts

to the NEC Construction, Works and Engineering cashbooks and bank

statements.

b. Expenditure

NEC Construction, Works and Engineering payments vouchers were

examined for proper authorization, eligibility and budgetary provision,

accountability and support documentation.

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c. Internal Control System

Reviewed the internal control system and its operations to establish whether

sound controls were applied throughout the period audited.

d. Procurement

Reviewed the procurement of goods and services under NEC Construction,

Works and Engineering during the period under review and reconciled with

the approved procurement plan.

e. Fixed Assets Management

Reviewed the use and management of the company assets during the period

audited.

f. NEC Construction Works and Engineering’s Financial Statements

Examined, on a test basis, evidence supporting the amounts and disclosures

in the financial statements; assessed the accounting principles used and

significant estimates made by management; as well as evaluating the overall

financial statement presentation.

7.0 FINDINGS

7.1 Non remittance of statutory deductions-Shs.91,986,299

During the year, records availed revealed that management did not remit PAYE

and NSSF deductions of Shs.58,447,959 and Shs.33,538,340 respectively to the

statutory bodies. It was noted that the failure to remit statutory deductions is a

recurrent problem as these arrears were noted to have been outstanding for

several months. Non remittance of statutory deductions may result in payment

of penalties which is nugatory.

Management explained that the failure to remit the deductions was due to

insufficient funds however arrangements have been made with the concerned

statutory bodies to avoid eventual penalties and fines.

I advised management to ensure that the statutory deductions are remitted

without delay.

7.2 Accrued gratuity-Shs.217,401,511

It was noted that gratuity amounting to Shs.217,401,511 was still outstanding as

at the time of audit. This amount is supposed to have been paid to a pension

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fund account in preparation for retiring employees. However todate, no pension

fund account has been opened and this is likely to escalate the problem once

staff start retiring. It is also likely that employees who have retired did not

receive their entitlement contrary to regulations.

Management explained that poor cash inflows have derailed the gratuity

payment. Management however promised that once the funds inflows improve,

the account will be opened and commit the beneficiaries.

I urged management to devise ways and means and ensure this provision is

implemented in line with employment terms of service and ensure that gratuity is

committed and paid as and when staff retire.

7.3 Outstanding debtors-Shs. 46,761,594

It was noted that the receivables aging report had long outstanding amounts

that have existed for more than five years. Failure to recover from debtors

denies the entity funds to undertake planned activities. I explained to

management that there seems to be laxity in following up of the debtors and

ensuring their recovery. At the time of audit management had also not put in

place a mechanism for writing off the debts that are likely not to be recovered.

Management explained that the affected debtors had been presented to the

Board for write off.

Management was advised to ensure adequate efforts for recovery have been

made before write off.

7.4 Outstanding payables-Shs.224,297,396

The entity had an outstanding payable to the tune of Shs.224,297,396 as at the

close of the year. Some of the creditors had been outstanding for more than 5

years. I explained to management that failure to settle creditors for such long

periods could lead to litigation costs and could impact on the going concern of

the entity.

Management explained that the history of some of the creditors cannot be traced

however, this issue was presented to the Board of Directors who advised the

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legal team to write to the various creditors to provide evidence in form of

documentation before action can be taken.

I advised management to expedite the process and have this issue resolved.

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APPENDIX 1 FINANCIAL STATEMENTS