Review vs. Audit & Other Questions
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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?
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?
4. What is the purpose of predecessor-successor auditor communications? Which party, the predecessor or successor auditor, has the responsibility for initiating these communications? Briefly summarize the information that a successor auditor should obtain from the predecessor auditor.
5. Did the confidentiality agreement that Minkow required Ernst &Whinney to sign improperly limit the scope of the ZZZZ Best audit? Why or why not? Discuss general circumstances under which confidentiality concerns on the part of a client may properly affect audit planning decisions. At what point do client-imposed audit scope limitations affect the type of audit opinion issued?
6. What procedures, if any, do professional standards require auditors to perform when reviewing a client's pre-audit but post-year-end earnings press release?
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Your tutorial is 538 words plus a reference and discusses the ZZZZ Best case.
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Case 1.9 ZZZZ BEST COMPANY, Inc. (Knapp, W. 8e. PP. 109-122)
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?
There is a big difference between a quarterly review and an annual audit. Quarterly reviews are usually just questions about the business, any changes, any large transactions and an analytical review (fluctuation analysis and ratios to see if there are any strange or unexpected shifts). They are less rigorous and rarely include looking at detailed transactions, sampling documents, examining evidence and so forth, unless there is a large particular transaction that has a material impact that was brought to their attention, such as a merger or large sale.
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, ...
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