The American University in Cairo

School of Business Department of Accounting

1st Mid Term Exam 305 Auditing Fall 2014
Dr Mohamed Hegazy
Question 1: The following are parts of a typical audit for a company for year-end of July 31.
1. Confirm accounts payable.
2. Do tests of controls and substantive tests of transactions for the acquisition and
payment and payroll and personnel cycles.
3. Do other tests of details of balances for accounts payable.
4. Do tests for review of subsequent events.
5. Accept the client.
6. Issue the audit report.
7. Understand internal control and assess control risk.
8. Do analytical procedures for accounts payable.
9. Decide planning materiality and tolerable misstatement for each account balance.
Required
a. Put parts 1 through 9 of the audit in the sequential order in which you will expect
them to be performed in a typical audit.
b. Identify those parts that will frequently be done before July 31.

Question 2:
Footnotes are important in determining whether the financial statements give a true and fair
value. Following are two sets of statements concerning footnotes.
1. Auditor A says that the primary responsibility for the adequacy of disclosure in the
financial statements and footnotes rests with the auditor staff member in charge of the
audit. Auditor B says that the partner in charge of the engagement has the primary
responsibility. Auditor C says that the staff person who drafts the statements and
footnotes has the primary responsibility. Auditor D contends that it is the client's
responsibility. Required: Which auditor is correct?
2. It is important to read the footnotes to financial statements, even though they are often
presented in technical language and are incomprehensible. The auditors may reduce their
exposure to third party liability by stating something in the footnotes that completely
contradicts what they have presented in the balance sheet or profit and loss statement.
Required (AICPA adapted):
Evaluate the above statements and indicate:
a. Those you agree with, if any;
b. Those whose reasoning is misconceived, incomplete or misleading, if any.

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

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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.

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 .

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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 statement & footnotes are the
responsibility of management, auditors are only required to include their remarks and
qualifications in their prime source of communication with users which is the auditors
report.

Answers question 3:
Brief Description of GAAS
- General Standards:
1. The audit is to be performed by a
person or persons having adequate
technical training and proficiency
as an auditor.
2. In all matters relating to the
assignment, independence in
mental attitude is to be maintained
by the auditor or auditors.
3. Due professional care is to be
exercised in the performance of
the audit and the preparation of the
report.
Sally Jones' Actions Resulting in Failure
to Comply with GAAS
1. It was inappropriate for Sally Jones to hire
the two students to conduct the audit. The
audit must be conducted by persons with
proper education and experience in the field
of auditing. Although a junior assistant has
not completed his formal education, he may
help in the conduct of the audit as long as
there is proper supervision and review.
2. To satisfy the second general standard,
Sally must be without bias with respect to
the client under audit. Sally has an
obligation for fairness to the owners,
management, and creditors who may rely on
the report. Because of the financial interest

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- Standards of Field Work:
1. The work is to be adequately
planned and assistants, if any, are
to be properly supervised.
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.
in whether the bank loan is granted to
Boucher, Sally is independent in neither fact
nor appearance with respect to the
assignment undertaken.
3. This standard requires Sally to perform the
audit with due care, which imposes on Sally
Jones and everyone in Sally organization a
responsibility to observe the standards of
field work and reporting. Exercise of due
care requires critical review at every level
of supervision of the work done and the
judgments exercised by those assisting in
the audit. Sally did not review the work or
the judgments of the assistants and clearly
failed to adhere to this standard.
1. This standard recognizes that early
appointment of the auditor has advantages
for the auditor and the client. Sally accepted
the engagement without considering the
availability of competent staff. In addition,
Sally failed to supervise the assistants. The
work performed was not adequately
planned.
2. Sally did not obtain an understanding of
internal control, nor did the assistants obtain
such an understanding. There appears to
have been no audit at all. The work
performed was more an accounting service
than it was an auditing service.
3. Sally acquired no evidence that would
support the financial statements. Sally
merely checked the mathematical accuracy
of the records and summarized the accounts .
Standard audit procedures and techniques
were not performed.
1. Sally report made no reference to generally
accepted accounting principles or GAAS.
Because Sally did not conduct a proper
audit, the report should state that no opinion
can be expressed as to the fair presentation
of the financial statements in accordance
with generally accepted accounting
principles.
2. Sally improper audit would not enable her
to determine whether generally accepted
accounting principles were consistently
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 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 with financial
statements, the report should
contain a clear- cut indication of
the character of the auditors work,
if any, and the degree of
responsibility the auditor is taking.
applied her report should make no reference
to the consistent application of accounting
principles.
3. Management is primarily responsible for
adequate disclosures in the financial
statements, but when the statements do not
contain adequate disclosures the auditor
should make disclosures in the auditors
report. In this case both the statements and
the auditor's report lack adequate
disclosures.
4. Although Sally report contains an
expression of opinion, such opinion is based
on the results of a proper audit. She should
disclaim an opinion because he failed to
conduct an audit in accordance with
generally accepted auditing standards.

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.