Case Study – ZZZ Best, Inc.
1. Ernst & Whinney never issued an audit opinion on financial statements of ZZZZ Best but did issue a review report on the company's quarterly statements for three months ended July 31, 1986. How does a review differ from an audit particularly in terms of the level of assurance implied by auditor's report? A quarterly review report is issued by a CPA and reviewed by an auditor to provide assurance that the financial statements are fair and follow the GAAP standards. Quarterly reports only provide limited assurance because an external auditor does not perform auditing tests to detect control weaknesses, misstatements or fraud. Quarterly reviews are less detailed and less rigorous than annual audits due to the absence of the external auditor.
2. SAS No. 106 "Audit Evidence," identifies the principal "management assertions" that underlie a set of
financial statements. The occurrence assertion was particularly critical for ZZZZ Best's insurance restoration contracts. ZZZZ Best's auditors obtained third-party confirmations to support the contracts, reviewed available documentation, performed analytical procedures to evaluate the reasonableness of the revenues recorded on the contracts, and visited selected restoration sites. Comment on the limitations of the evidence that these procedures provide with regard to the management assertion of occurrence. Analytical review procedures that reveal the reasonableness of revenues is a good lower quality type of evidence to use as a starting point and identify the level of risk. Typically, outside knowledgeable third parties provide the highest quality evidence for audits. In this particular case, the evidence was faked from a third party involved in collusion, which made the fraud harder to detect. The auditor’s in this case went as far as insisting on seeing a large renovation, but were fooled when the renovation was faked. 3. In testimony before Congress, George Greenspan reported that one...
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