1. An Audit differs from a review, particularly in terms of the level of assurance by an auditor. An Auditor’s report must obtain reasonable assurance about whether the financial statements as a whole, are free of material misstatement, whether it’s due to fraud or error. An Auditor expresses his opinion on whether the financial statements are prepared in accordance with an applicable financial reporting framework. As well as, to report on the financial statements and Auditors findings that relates to GAAS.
When an Auditor obtains the financial statements, he begins to evaluate the evidence, by checking if the assets exist, recorded revenue transaction have occurred, the lists of liabilities is complete, he assert that the statements are fairly presented. When an Auditor chooses to issue a review report, he may choose not to give an opinion in regards to the financial statements.
An Auditor will collect the financial statements but will not investigate further and gather evidence in order to support the numbers given in the financial statements.
This type of review report does not provide enough assurance that is needed in order to have a better understanding made by management. In the case of ZZZZ Best, Minkow retained Ernst & Whinney to perform the following year’s audit. However, instead of performing an Audit, they decided to provide a review of the company’s financial statements for the three-month period ending July 31, 1986. They chose not to perform an audit because they did not want to provide an opinion regarding the financial statements as a whole. 2.
In order for Minkow to convince Ernest & Whinney that his insurance restoration contracts were real, he decided to bring in a third party. The third party posed as leasing agents of a Property Management Firm, which allowed them access to the building. They were able to set up a “stage,” on the building’s site to look like ZZZZ Best was the contractor for the building renovation. So when, ZZZZ Best’s Auditor obtained documents pertaining to the contracts, he failed to exercise due care. He failed to exercise and question all material assertions made by management.
The auditor wasn’t sufficient in gathering more evidence or enough evidence in order to support the information given to him by management. He accepted management’s explanations and failed to seek more facts. Auditors need to gather evidence necessary to reach reasonable and supportable conclusions. 3. Due to management’s false financial statements, and lack of evidence, the auditor believed and relied on management’s testimony of financial statements. In order to test the assertion, an Auditor must provide viable information by gathering actual account receivables from customers and confirming receivables with the customers.
This information allows the auditor to establish whether the amounts represented on the financial statements match one another. Also, will provide evidence that the transactions that were made have been recorded accurately and account balances have been valued correctly. In the case of ZZZZ Best, Minkow persisted in having a confidentiality agreement done with the auditors that said, they would not make any follow up telephone calls to any contractors, insurance companies, the building owner or other individuals involved in the restoration contract.
However, with this confidentiality agreement being done, warning bells should have gone off, knowing that something was terribly wrong. 4. The purpose of the Predecessor-Successor Auditor communications is to help understand and examine a new client. This allows both the predecessor (Old Auditor of a client) and successor (Possible new auditor of a client) Auditors to communicate with one another, and discuss a client’s background history. The communication between both the predecessor and the successor auditors is necessary in obtaining information that will help the successor decide whether or not to accept the client into its firm.
The successor is allowed to ask the predecessor questions related to the client such as: A. Information that might bear on the integrity of management. B. Disagreements with management as to accounting principles, auditing procedures or other similarly significant matters. C. Communications to those charged with governance regarding fraud and illegal acts by clients. D. Communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control. E. The predecessor’s auditor understands as to the reasons for the change of auditors.
The predecessor must respond to all the questions, however, if threat is involved or potential litigation and is not able to answer questions, then the predecessor must make note of this. He must clearly state that he is not able to speak of certain matters. This will allow the successor Auditor to base his decision on whether or not to take upon this client. The initiative for communicating rests with the successor auditor. The communication may be either written or oral. However, both the predecessor and successor auditors should hold in confidence information obtained from each other.
This obligation applies whether or not the successor auditor accepts the engagement. 5. Yes, it did limit the scope of ZZZZ Best’s audit, because they relied on the reasonable assurance of managers to organize their business and provide the necessary documents to be valid. Limited scope prevented the Auditor from voicing an opinion in regards to an effective business, due to missing components this led to a great deal of inefficient information. In the case of ZZZZ Best, Minkow required Ernest and Whinney to sign a confidentiality agreement that would limit the scope of ZZZZ Best audit.
The contract stated that the auditors would not contact the third parties to confirm whether there was a restoration contract on the building. This contract also stated that there was an insurance claim for ZZZZ Best, to restore that particular building. An auditor must recognize and Inherent risk, which is more likely to happen in certain areas. As an auditor comes across these accounts that are inclined to material misstatement, the auditor must fix the audit plan in order to show the inherent risk. An auditor must also be aware of control risk, which will show items to be recorded and not detected on the ordinary course of processing.
Some scope limitations can prevent the auditor from gaining evidence to support an unqualified opinion. If that happens in a certain area, the audit opinion may have to be a “disclaimer. ” 6. When an auditor performs a review of a client, he must perform analytical procedures by investigating not only his client but also management, who are responsible for the financial statements. An auditor must first investigate accounting records; then must evaluate and confirm the validity of the financial statements. This is done by gathering evidence, and performing an examination done in auditing.
During this review, information may be brought up to the Accountants regarding certain matters affecting the financial statements. If there is a problem with certain facts found, the accountant must be aware that the evidence provided does not agree with Generally Accepted Accounting Principles. Auditor’s responsibility is related to management’s quarterly documents on internal control over financial reporting is different from the auditor’s responsibility as it relates to management’s annual estimate of internal control over financial reporting.
An auditor must carry out routines quarterly in order to determine whether management is aware of any documents or materials that need to be fixed, according to an auditor’s judgment. This act of judgment allows changes to be made to disclosures in an internal control over financial reporting, in order to correct documents and adjust them to comply with the requirements of Section 302 of the Act.
Cite this Audit Reviews: Ernst and Whinney and ZZZZ Best Company
Audit Reviews: Ernst and Whinney and ZZZZ Best Company. (2016, Oct 06). Retrieved from https://graduateway.com/audit-reviews-ernst-and-whinney-and-zzzz-best-company/