This sample essay on Zzzz Best Case provides important aspects of the issue and arguments for and against as well as the needed facts. Read on this essay’s introduction, body paragraphs, and conclusion.
Auditing Concepts ZZZZ Best Company, Inc Case Solutions: 1. A review is performed to obtain a reasonable basis for providing limited assurance that the client’s financial statements have been prepared in conformity with generally accepted accounting principles.
An independent audit is designed to provide a reasonable basis for expressing an opinion concerning whether or not a client’s financial statements have been prepared in accordance with generally accepted accounting principles.
There is also a major difference between a review and an audit in terms of the scope of work performed. When a review is done, the main evidence collection techniques are analytical procedures and inquiries of client personnel. Whereas, in an audit, the full range of evidence collection techniques available to an auditor is likely to be used.
A review does not assess control risk, tests of accounting records and responses to inquiries by obtaining validating evidence through inspection, observation or any other audit procedure.
It can point out significant matters of the financial statements but does not provide assurance of their accuracy. Because reviews are generally not as rigorous as audits, considerably less evidence is typically collected in a review than in a comparable audit engagement. The issue with ZZZZ Best case is that the auditors review was not sufficient enough to review any material misstatements on the financial statements.
2. Third party confirmations should give consistent evidence in support of assertions made by management.
Usually the truthfulness of the evidence depends on the relationship between the client and the third party. In accordance to AU Section 326. 25 “To the extend the auditor remains in substantial doubt about any assertion of material significance, he or she must refrain from forming an opinion until he or she has obtain sufficient competent evidential matter to remove such substantial doubt, or the auditor must express a qualified opinion or a disclaimer of opinion. ” In evaluating the proficiency of evidence, an auditor should consider whether the ocuments are internally or externally prepared. In order for evidence to be treated as proof it must come from a third party outside the entity. In this case, auditors failed to obtain supporting confirmations from the third parties which caused the limitations of the evidence. Externally prepared documents, which in ZZZZ Best’s case, were insurance restoration contracts, provide a lower value of audit evidence than documents obtained from an outside source. Additionally internally prepared documents are regarded as lower value evidence.
With ZZZZ Best, all review documentation was internally produced, any confirmation was obtain from only one person (Thomas Padgett), and even the visit to the restoration site was not corroborated by contacting the building’s owners to confirm that an insurance claim was filed. Consequently, the auditors were relying on all internal documents, and did not have sufficient competent evidential matter to form an opinion of ZZZZ Best’s financial statements. 3. In the ZZZZ Best’s fraud, management generated fake receivables and then arranged for payments on those receivables to make it appear that a normal flow of transactions was occurring.
As stated in AU Section 326. 21 “When evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity. ” Mr. Greenspan failed to validate the job payments with the payer and this caused an improper conclusion in the audit. The payment receipts were not sufficient proof of existence of the restoration contracts neither if the job was performed. George Greenspan should have been more skeptical about such a large part of the company’s revenue and used more reliable and competent sources. . According to AU Section 315, a successor auditor is responsible for communication between predecessor and successor auditors. Whether the communication is oral or written, it should be held in confidence whether or not the successor accepts the engagement. Even after making a proposal for an audit engagement, the successor should not accept the position until the communication required by AU Section 315 takes place. The purpose of communication between these two parties is for determination by successor auditor whether to take on a new client or not.
The predecessor is an invaluable source of information about acceptability of the client. The successor auditor should ask permission from the prospective client to make inquiries of the predecessor before the engagement is accepted. As stated in PA 97-3, predecessors should respond fully to the inquiries of the successor. However because of various circumstances the predecessor may not respond to the successor’s inquiries and then the successor auditor should carefully consider these circumstances in deciding whether to accept the engagement.
The successor auditor should obtain the following information from the predecessor: * Any disputes the predecessor had with the client over accounting principle, auditing principles or other audit related matters * Discussions the predecessor had with the client’s audit committee, board of directors, board of trustees, or the owner about fraud or illegal acts of the client. * Communication with management and those charged with governance regarding significant deficiencies and material weaknesses in internal control. Matters relating to the integrity of management * The predecessor analysis of what circumstances precipitated the change of auditors * Matters relating to the integrity of management * Any other reasonable inquiries that the potential successor might consider helpful in making a decision about the engagement. 5. Many companies are concerned that confidential information may be leaked to external parties, competitors in particular, as a result of an independent audit. Therefore the confidentiality agreement is very important and may affect an independent audit.
Auditors have to follow the Code of Professional Conduct, which does not allow them to disclose such information to third parties. To avoid any leakage of internal information, the client should request a limited number of people accessing its internal information. In this case, the confidentiality agreement, that Minkow required Ernst ; Whinney to sign, limited the scope of the ZZZZ Best’ audit. The agreement does not allow the auditors to contact third parties to corroborate that the entity had a restoration contract, and that there was an insurance claim for ZZZZ Best to restore that particular building.
In reference to GAAS, the auditors are obligated to obtain competent and reliable evidence to corroborate the client’s management assertions. The confidentiality agreement prohibited auditors to do so and limited the scope of the audit. In many cases the limitation of the scope of an audit by the confidentiality agreement is a subject of professional judgment. 6. Professional standards do not require any course of actions regarding pre-audit but post-year-end earnings press releases.
However, it is customary that client executives consult with their independent auditors before making such announcements. Works Cited: Guy, Dan M. , D. R. Carmichael, and Linda Lach. “97-3 Changes In Auditors And Related Topics. ” Wiley Practitioner’s Guide to GAAS 2003: Covering All SASs, SSAEs, SSARs, and Interpretations. Somerset, NJ: Wiley, 2003. Print. Louwers, Timothy J. Selected Material from Auditing and Assurance Services, Fourth Edition. Boston: McGraw-Hill Learning Solutions, 2011. Print. SAS. AU Section 315 Communications Between Predecessor and Successor Auditors. ” Public Company Accounting Oversight Board. PCAOB, 31 Mar. 1998. Web. 01 Oct. 2011. <http://pcaobus. org/Standards/Auditing/Pages/AU315. aspx>. SAS. “AU Section 326 Evidential Matter. ” Public Company Accounting Oversight Board. PCAOB, Aug. 1980. Web. 01 Oct. 2011. <http://pcaobus. org/Standards/Auditing/Pages/AU326. aspx>. “Statements on Auditing Standards. ” AICPA. Web. 01 Oct. 2011. <http://www. aicpa. org/Research/Standards/AuditAttest/Pages/SAS. aspx>.