Case Study: ZZZZ Best Company, 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? Although a review is similar to an audit, it differs from an audit in its limited scope and assurances. The objective of an audit is to provide a reasonable basis for expressing an opinion regarding the financial statements taken as a whole. An audit gives you reasonable assurances that no material errors or illegal activities were detected, a review does not. A review does not involve obtaining an understanding of the internal control structure or assess control risk, tests of accounting records and of responses to inquiries by obtaining corroborating evidential matter through inspection, observation or confirmation, and certain other procedures ordinarily performed during an audit. Therefore, a review is not something you can rely on. 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. 3. In testimony before Congress, George Greenspan reported that one means he used to audit the insurance restoration contracts was to verify that his client actually received payment on those jobs. How can such apparently reliable evidence lead an auditor to an improper conclusion?...
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