The American University in Cairo

School of Business Department of Accounting

1st Mid Term Exam 305 Auditing Spring 2013
Dr Mohamed Hegazy

Question 1: Each of the following quality control policies and procedures is

typical of ones that can be found in CPA firms systems of quality control. Identify
each of them with one of the elements of quality control:
a- Assign management responsibilities in such a manner that commercial
considerations do not override the quality of work performed.
b- Establish policies and procedures for resolving differences of opinion among
firm personnel that arise during professional engagements.
c- Develop policies and procedures to ensure that professionals are provided
with appropriate professional development opportunities.
d- Review engagement documentation, reports, and the clients financial
statements.
e- Developing effective performance evaluation, compensation, and
advancement procedures.
f- Identify circumstances and relationships that create threats to independence
and take appropriate action to eliminate those threats or reduce them to an
acceptable level.
g- Identify whether the firm possesses the competency, capability, and
resources to serve a specific client.
h- Devote sufficient resources to develop, communicate, and support the firms
quality control procedures.
i- Retain engagement documentation for a sufficient period of time to satisfy
the needs of the firm, professional standards, laws and regulations.
Question 2: The National Company for investments was
established on 30/6/2008 and you were assigned as an
auditor to audit the companys financial statements for the
financial period ended 31/12/2009. During this financial
period the company had a deal of acquisition to have a
group of companies with a percentage not less than 90%.
Most of these companies you were auditing for several years
except three companies are audited by another office, the
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revenues of those three companies represent 20% of the

total groups revenues, also the assets of those companies
represent 15% of the total groups assets (it was coordinated
to check out the working papers). The acquisition deal was
amounted LE 150 million while the companies net assets LE
100 million, and by examining the acquisition contracts and
the studies concerned evaluating the current value of the
assets when acquired amounted LE 120 million, the trade
marks value was estimated as LE 10 million and it is
expected to use the trade mark for 4 years, if you know that
the fair value of the net assets of the companies amounted
LE 140 million as of 31/12/2006.
Required: In the light of the available information and based on
your previous experience in auditing the affiliates, prepare
the following:
a) The main components of the audit plan of the combined
financial statements of the holding company with
determining the important items according to the available
information.
b) The audit procedures concerned to each of the goodwill
and the trade mark.
c) The most important points that you want to audit and the
inquiries that you have when you read the file of the
engagement in the colleagues office auditing the other
firms (only 5 important points are enough).
Question 3: As an auditor of the different following cases that you
encountered during your audit:
a- During your audit of company (E) for year 2010, you
discovered that the company started constructing a building
for its new headquarters that will cost around $ 25 million
and will be finished in two years, the company in the last two
years used to capitalize the cost of borrowing for the amount
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of $20 million that the company borrowed especially for this

building, the capitalized interests for year 2010 amounted to
$ 3 million. When you asked the manufacturer why the
building was not yet finished, the manufacturer replied that
the work stopped from the beginning of year 2010 because
there is a problem in having sufficient funds.
b- You discovered during the audit of company (A) of year 2009
that the company purchased 1 million shares from its shares
in the market by $ 8 per share and in July 2009 it sold those
shares by $ 12 per share, and made the following entry on
the sale:
12 000 000

Bank
8 000 000
Treasury stocks
4 000 000
Investments profits
Knowing that the par value of the share is LE 10.

c- You were assigned the audit of company (B) in 2011 and it is

a large retail company, replacing the former companys
auditor (deceased) who audited the companys accounts till
the end of year 2010, and he issued an unqualified report on
the companys financial statements for that year. At 31 st of
December 2011 you performed a physical examination of
the inventory, pricing and evaluating it which amounted $
120 million and you found it fairly presented in all aspects.
When you demanded the working papers of the deceased
accountant to check the inventory beginning balance, you
were told that there is no person replacing the auditor after
his death and that the working papers are not available.
Required: In the light of the standards and laws applied, study
and comment on each of the previous cases:
a) The different point of view that could be mentioned in each
case.
b) Your opinion as the auditor of the companys accounts.
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c) The type of the audit report to be issued about the financial

statements.
Question 4:
a- The chairman of the board of Loveboat Corporation proposed that the board
hire as controller a CPA who had been the manager of the team that
conducted Loveboat Corporations audit engagement. The chairman though
that hiring this person would make the annual audit unnecessary and would
consequently result in saving the professional fee paid to the auditors. The
chairman proposed to give this new controller a full staff to conduct such
investigations of accounting and operating data as necessary. Evaluate this
proposal.
b- Big deal Corporation manufactures paper and paper products and is trying to
decide whether to purchase Smalltek Company. Smalltek has developed a
process for manufacturing boxes that can replace containers that use
fluorocarbons for expelling a liquid product. The price may be as high as
445 million. Big deal prefers to buy Smalltek and integrate its products
while leaving the Smalltek management in charge of day to day operations.
A major consideration is the efficiency and effectiveness of Smallteks
operations. Big Deal wants to obtain a report on the operational efficiency
and effectiveness of the smalltek sales, production, and research and
development departments. Who can Big Deal engage to produce the report
resulting from this operational audit? Several possibilities exist. Are there
any particular advantages or disadvantages in choosing from among them?

c-

Your neighbor Ibrahim Sarhan invited you to lunch yesterday. Sure enough,
it was no free lunch because Ibrahim wanted to discuss the annual report of
Marsa Alam Company. He owns Marsa Alam and just received the annual
report. Ibrahim says Our auditors prepared the audited financial statements
and gave an unqualified opinion, so my investment must be safe. What
misconceptions does Ibrahim seem to have about the auditors role with
respect to Marsa Alam Company?
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