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1st Mid Term Exam Fall 2014 Auditing
1st Mid Term Exam Fall 2014 Auditing
Question 3:
Dale Boucher, the owner of a small electronics firm, asked Sally Jones,
Independent auditor, to conduct an audit of the company's records.
Boucher Told Jones that audit was to be completed in time to submit
audited financial statements to a bank as part of a loan application. Jones
immediately accepted the engagement and agreed to provide an auditor's
report within one month. Boucher agreed to pay Jones her normal audit
fee plus a percentage of the loan if it was granted. Jones hired two recent
accounting graduates to conduct the audit, and spent several hours telling
them exactly what to do. She told the new hires not to spend time
considering the internal control but to concentrate on proving the
mathematical accuracy of the general and subsidiary ledgers and
summarizing the data in the accounting records that supported Boucher's
financial statements. The new hires followed Jones's instructions and after
two weeks gave Jones the financial statements excluding notes. Jones
reviewed the statements and prepared an audit report with an unmodified
opinion. The report did not refer to any auditing Standards, and no audit
procedures were conducted to evaluate the appropriateness of accounting
policies used and the reasonableness of accounting estimates made.
Required: Indicate how the action (s) of Jones resulted in failure to
comply with auditing standards and ethical requirements (AICPA, adapted)
Question 4:
Various types of auditors offer and perform a wide range of assurance
services such as audit of financial statements, review of financial
information, and assurance on compliance with laws and regulations,
assurance on financial forecasts, assurance on the effectiveness of
internal control, forensic audit and operational audits.
Required:For each of the following descriptions, indicate which type of
assurance service best characterizes the nature of the service being
conducted. Also indicate which type of auditor (external auditor, internal
auditor, government auditor, or forensic auditor is likely to perform the
engagement.
a. Evaluate the policies and procedures of the Medical Control Agency
in terms of bringing new drugs to market.
b. Determine the fair presentation of Ajax Chemical's balance sheet,
income statement and statement of cash flows.
c. Review the payment procedures of the Accounts Payable
Department for a large manufacturer.
d. Evaluate if the internal controls of the entity comply with the criteria
of COSO (Committee of Sponsoring Organizations of the Treadway
Commission) framework.
e. Evaluate the feasibility of forecasted rental income for a planned
student housing project.
f. Evaluate a company's computer services department in terms of the
efficient and effective use of corporate resources.
g. Control the partnership tax return of a real estate development
company.
h. Investigate the possibility of payroll fraud in a pension fund.
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Question 5:
The following are some of the remarks identified by the auditors Sherif
and karim Hegazy during the audit of a clients financial statements.
Determine the type of the auditor report and explain reasons behind
choosing such report:
a The companys management has charged an amount of L.E 21,000,000
to machines and equipment account. This amount was capitalized as
deferred revenue expenditures including preopening revenues as an
amount of L.E 78,000,000 taking into consideration that the company
has achieved net profit after taxes of L.E 56,000,0000 its total assets
was equal to L.E 691,000,000
b Auditor Sherif has discovered that the memorandum of the clubs legal
consultant did not include the situation of the legal claims against the
club at 30/6/2002, his technical opinion about the expected results of
these cases and payments expected to be paid by the clubs
management in case of losing these cases
c The auditor Karim Hegazy discovered the clubs management violation
of article no. 96 of the sporting clubs executive regulations which
states that rent period cannot exceed three years, and the clubs
management has signed contracts to utilize the food court and the
kitchen in the social building and the restaurants and buffet of the
swimming compound for a period exceeding three years .
Answers question 1:
A.
5. Accept the client.
9. Set acceptable audit risk and decide preliminary judgment about
materiality and tolerable misstatement.
7. Understand internal control and assess control risk.
2. Do tests of controls and substantive tests of transactions.
1. Confirm accounts payable.
8. Do analytical procedures for accounts payable.
3. Do other tests of details of balances for accounts payable.
4. Do other tests for review of subsequent events.
6. Issue the audit report.
B.
1. Confirm accounts payable.
4. Do other tests for review of subsequent events.
8. Do analytical procedures for accounts payable.
Answers Question 2:
1. I accept Auditor D opinion who contends that it is the client
responsibility for the adequacy of disclosure in the financial statements
& footnotes. Management are responsible for the preparation of the
financial statements and assessing the adequacy of footnotes.
2. Auditors are not permitted to include remarks in the footnotes that
contradict issues presented in the financial statements. As the financial
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2. A sufficient understanding of
internal Control is to be
obtained to plan the audit and
to determine the nature, timing,
and extent of tests to be
performed.
3. Sufficient, competent evidential
matter is to be obtained
through inspection, observation,
inquiries, and confirmations to
afford a reasonable basis for an
opinion regarding the financial
statements under audit.
Standards of Reporting:
1. The report shall state whether
the financial statements are
presented in accordance with
generally accepted accounting
principles.
2. The report shall identify those
circumstances in which such
principles have not been
consistently observed in the
current period in relation to the
preceding period.
3. Informative disclosures in the
financial statements are to be
regarded as reasonably
adequate unless otherwise
stated in the report.
4. The report shall either contain
an expression of opinion
regarding the financial
statements taken as a whole or
an assertion to the effect that
an opinion cannot be
expressed. When an overall
opinion cannot be expressed,
the reasons therefore should be
stated. In all cases where an
auditors name is associated
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Answers question 4:
a. Assurance on compliance with laws and regulations external
auditor/internal auditor
b. Audit of financial statements external auditor
c. Review of financial information external auditor.
d. Assurance on the effectiveness of internal control external auditor/
internal auditor.
e. Assurance on financial forecasts external auditor
f. Operational audit external auditors/ internal auditors
g. Assurance on compliance with laws external auditors
h. Forensic audit forensic auditors
Answers question 5:
1 Non compliance with GAAP highly Material adverse opinion
2 Scope restriction Material qualified opinion.
3 Non compliance with laws Material Qualified report.