German University in Cairo

Faculty of Management Technology

Department of Accounting and Management Control
Dr. Hassan Ouda

Bar Code

Instructions: Read carefully before proceeding

1) The use of a financial calculator is recommended.
2) No books or other aids are permitted for this exam.
3) Write your solutions in the space provided. If you need more space, write on the back of
sheet.
4) This exam booklet contains 16 pages, including this cover page, and the last page shows
END. Note that if pages are missing, you will lose the points! Thus, you must check
whether your exam booklet is complete!
5) See the table below for the grading scheme.
6) The maximum working time is two hours.
Good Luck!

Question

Total

Possible Marks

15

10

2.25

45

(Bonus)
Final Marks

Question 1: Open Questions (Essays) (25 min. marks)

1- There are four decisions about what evidence to gather and how much of it to
accumulate. List in details the four major evidence decisions that must be made
on every audit.
The four major audit evidence decisions that must be made on every audit are:

1.
2.
3.
4.

Which audit procedures to use.

What sample size to select for a given procedure.
Which items to select from the population.
When to perform the procedure.
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2- Responsibilities for internal controls differ between the management and the
auditor. What are the responsibilities of both management and auditor with
respect to internal control?
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Materiality is important because if financial statements are materially misstated,

users' decisions may be affected, and thereby cause financial loss to them.
Materiality is difficult to apply because it is a relative concept. The professional
auditing standards offer little specific guidance regarding the application of
materiality. The auditor must, therefore, exercise considerable professional
judgment in the application of materiality.

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1- Why do auditors establish a preliminary judgment about materiality?

a. To help the auditor plan the appropriate evidence to accumulate.
b. So that the client can know what records to make available to the
auditor.
c. To determine what level of staffing (i.e., work experience) is required
for the audit.
d. None of the above.

2- Which of the following is least likely to be appropriate as the basis

for determining the preliminary judgment about materiality in the
audit of a set of financial statements?
a. Net income before taxes.
b. Current assets.
c. Owners equity.
d. Inventory.
3- When an auditor calculates the gross margin as a percent of sales
and compares it with previous periods, this type of evidence is called
a. physical examination.
b. analytical procedures.
c. observation.
d. inquiry
4- Fraudulent financial reporting is most likely to be committed by
whom?
a. Line employees of the company.
b. Outside members of the companys board of directors.

c. Company management.
d. The companys auditors.
5- In comparing management fraud with employee fraud, the
auditors risk of failing to discover the fraud is
a. greater for management fraud because managers are inherently smarter
than employees.
b. greater for management fraud because of managements ability to
override existing internal controls.
c. greater for employee fraud because of the higher crime rate among blue
collar workers.
d. greater for employee fraud because of the larger number of employees
in the organization.
6- When the auditor examines the clients documents and records to
substantiate the information on the financial statements, it is
commonly referred to as
a. inquiry.
b. confirmation.
c. Documentation.
d. physical examination.

7- When the auditor believes an illegal act may have occurred, it is

necessary to
a. inquire of management, at a level above those likely to be involved with
the illegality.
b. consult with the clients legal counsel.
c. consider accumulating additional evidence to determine if there is

actually an illegal act.

d. do all three of the above.

8- Regardless of how the allocation of the preliminary judgment about

materiality was done, when the audit is complete the auditor must
be confident that the combined errors in all accounts are
a. less than the preliminary judgment.
b. equal to the preliminary judgment.
c. more than the preliminary judgment.
d.

less than or equal to the preliminary judgment.

9- When the auditor is attempting to determine the extent to which

external users rely on a clients financial statements, they may
consider several factors including
a. client size.
b. concentration of ownership.
c. types and amounts of liabilities.
d. all of the above.

10 The least severe type of report for disclosing departures from generally
accepted accounting principles is the
a.

qualified opinion.

b.

disclaimer of opinion.

c.

adverse opinion.

d.

report on unaudited financial statements.

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Question 3: True/False
Required: For each one of the following statements, indicate whether the
statement is True or False, and Correct the False statements
1-

When an auditor decides that adherence to generally accepted accounting principles

would result in misleading financial statements, the auditor should issue an unqualified
audit report with an explanatory paragraph which explains the departure from GAAP and

why generally accepted accounting principles would have resulted in misleading financial
statements.
a.

True

b.

False

2- The phrase The audit is designed to obtain reasonable assurance about whether the
statements are free of material misstatements is included in the introductory paragraph of
an audit report.
a.

True

b.

False

3- The objective of the audit of financial statements by an independent auditor is to verify

that the financial statements are free of misstatements and accurately present the
companys financial position and results of operations.
a. True
b.

False

4- Auditors have a higher degree of responsibility for detecting direct-effect illegal acts
than indirect-effect illegal acts.
a.

True

b.

False

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5- Auditors have found that the most efficient way to conduct audits is to focus primarily
on testing classes of transactions and performing minimal or no tests of ending account
balances.
a.

True

b.

False

6- Physical examination is more expensive than documentation and less expensive than
confirmation.
a.

True

b.

False

7- If the preliminary judgment of materiality increases, the amount of audit evidence

required will also increase.
a.

True

b.

False

8- If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he or she

would need to obtain more audit evidence for that account than if $100,000 had been
assigned.
a.

True

b.

False

9- Acceptable audit risk and the amount of substantive evidence required are inversely
related; i.e., as acceptable audit risk increases, the amount of substantive evidence the
auditor plans to accumulate should decrease.
a.

True

b.

False

10- The auditors preliminary judgment about materiality is the maximum amount by
which the auditor believes the financial statements could be misstated and still not affect
the decisions of reasonable users.
a.

True

b.

False

11- The effect of a violation of the completeness transaction-related audit

objective for cash disbursements transactions would be an understatement
of cash disbursements.
a.

True

b.

False

12- The transaction-related audit objective that deals with whether

recorded transactions have actually occurred is the completeness objective.
a.

True

b.

False

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of Audit Procedures

Evidence
1.

Count inventory items and record the amount in the audit files.

2.

Trace postings from the sales journal to the general ledger accounts.

3.

Calculate the ratio of gross margin to sales as a test of overall

reasonableness of gross margin relative to the preceding year.

4.

Obtain information about the clients internal controls by asking questions

of client personnel.

5.

Trace column totals from the cash disbursements journal to the general
ledger.

6.

Examine a piece of equipment to make sure a recent purchase of equipment

was actually received and is in operation.

7.

Review the total of repairs and maintenance for each month to determine
whether any months total was unusually large.

8.

Compare vendor names and amounts on purchases invoices with entries in

the purchases journal.

9.

Foot entries in the sales journal to determine whether they were correctly
totaled by the client.

10. Make a surprise count of petty cash to verify that the amount of the petty
cash fund is intact.

Answer:
1.

Physical examination

2.

Reperformance

3.

Analytical procedure

4.

Inquiry of the client

5.

Reperformance

6.

Physical examination

7.

Analytical procedure

8.

Documentation

9.

Reperformance

10. Physical examination

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