Discuss the steps that Ralph Smalley could have taken to pre

See attached files.

Auditing and Assurance

Discuss the steps that Ralph Smalley could have taken to prevent the bankruptcy of Crenshaw.
Do you believe these steps would have been reasonable and logical to have taken at that time. Why or why not?

AUDIT EVIDENCE
CHAPTER 7

7-1 Contrast audit evidence with evidence used by other professions.
7-2 Identify the four audit evidence decisions that are needed to create an audit program.
7-3 Specify the characteristics that determine the persuasiveness of evidence.
7-4 Identify and apply the seven types of evidence used in auditing.
7-5 Understand the purposes of audit documentation.
7-6 Prepare organized audit documentation.
7-7 Describe how e-commerce affects audit evidence and audit documentation.

SOMETIMES THE MOST IMPORTANT EVIDENCE IS NOT FOUND IN THE ACCOUNTING RECORDS

Crenshaw Properties was a real estate developer that specialized in self-storage facilities that it
sold to limited partner investors. Crenshaw's role was to identify projects, serve as general partner
with a small investment, and raise capital from pension funds. Crenshaw had an extensive
network of people who marketed these investments on a commission basis. As general partner,
Crenshaw earned significant fees for related activities, including promotional fees, investment
management fees, and real estate commissions.

As long as the investments were successful, Crenshaw prospered. Because the investments
were reasonably long-term, the underlying investors did not pay careful attention to them.
However, in the mid-1980s, the market for self-storage units in many parts of the country
became oversaturated. Occupancy rates, rental rates, and market values declined.

Ralph Smalley, of Hambusch, Robinson & Co., did the annual audit of Crenshaw. As part of the
audit, Smalley obtained financial statements for all of the partnerships in which Crenshaw was
the general partner. He traced amounts back to the original partnership documents and determined
that amounts agreed with partnership records. Smalley also determined that they were
mathematically accurate. The purpose of doing these tests was to determine that the partnership
assets, at original cost, exceeded liabilities, including the mortgage on the property and
loans from investors. Under the law, Crenshaw, as general partner, was liable for any deficiency.

Every year, Smalley concluded that there were no significant deficiencies in partnership net
assets for which Crenshaw would be liable. What Smalley failed to recognize in the late 1980s,
however, was that current market prices had declined significantly because cash flows were
lower than those projected in the original partnership offering documents. In fact, Crenshaw
went bankrupt in 1989, and Hambusch, Robinson & Co. was named in a suit to recover damages
filed by the bankruptcy trustee.