Knapp free essay sample

A review consists of an auditor performing analytical procedures and inquiries to provide a reasonable basis for obtaining limited assurance. In a review, the auditor does not give an opinion on the financial statements. He/she merely looks over the statements for any material misstatements or modifications that need to be made. Contrarily, in terms of the level of assurance, during an audit an auditor obtains a high level of assurance, expresses an opinion on accuracy and level of assurance, and tests for misstatements and the client’s internal controls. 2. The occurrence assertion is very important, especially in this case, to ensure that the financial statements of a company faithfully represent actual transactions, assets, and liabilities of the company. There were certain limitations of the evidence gathered by the procedures performed in the ZZZZ Best case with regard to the assertion of occurrence: a. Confirmations- The information obtained through George Greenspan’s confirmation seems invaluable to me based on the fact that the confirmation was only sent to Tom Padgett, especially since Tom Padgett was paid by Minkow to confirm contracts. Even though there was no way for Mr. Greenspan to know that Mr. Padgett was being paid off, I believe that he should have found more valuable information through his confirmations by sending them out to more than one person involved in the company. b. Analytical Procedures- According to the case, the analytical procedures Mr. Greenspan performed included: comparing ZZZZ Best’s key financial ratios with industry norms and inspecting key documents pertaining to the jobs contracted. Assuming that these are the only two procedures performed prior to audit planning, I do not think that there were enough analytical procedures performed to identify potential problem areas. There are five steps to be performed when completing analytical procedures: 1. Develop an expectation, 2. Define a significant difference, 3. Compare expectations with recorded amounts, 4. Investigate significant differences, and 5. Document steps. It appears that Mr. Greenspan did not complete all of the necessary procedures and should further his analytical inquiries on ZZZZ Best. A red flag that I noticed, and could have been investigated with appropriate analytical procedures, was the sudden jump in revenues. Under the develop an expectation step in analytical procedures, the auditors/engagement partner could have compared current year account balances to previous year balances (vertical and horizontal analysis) and noticed the rapid increase of revenue from 1984-1987, which would raise questions that might have lead to the discovery of the fraud earlier on. c. Visitation of Restoration Sites- It is hard to elaborate on the limitations of the physical visit to the restoration sites due to the fact that everyone who the auditors made contact with were paid off and part of Minkow’s scheme, and they had no way of knowing. However, I think, like Congressman Lent drew attention to, the auditors could have gathered and investigated the site for permits and questioned workers they came in contact with about what happened to the site for it to need repairs from damage. The auditors may have gotten different answers from different workers, raising a red flag. It also would have been beneficial to make a surprise visit instead of calling ahead. 3. The client receiving payments does not prove the existence of contracts. It may have appeared that ZZZZ Best received payments from customers on paper, but Mr. Greenspan probably should have more thoroughly followed up on those transactions by calling a â€Å"customer† to verify the transaction or looked at bank statements to see where different deposits came from. It seems especially important to pay close attention to receivables considering that there is a high risk associated with a receivables’ existence/occurrence. Seeing as how Minkow devised schemes with third parties, it would not be surprising if someone like Tom Padgett was also posing as a customer (another reason looking at deposits and account numbers would be beneficial). 4. The purpose of predecessor-successor audit communications is to reduce the risk of accepting a client with problems, and to determine whether or not to accept a potential client. The prospective/successor auditor is responsible for initiating contact with the predecessor auditor, as long as the audit client grants its approval to communications. The information that should be obtained from the predecessor auditor includes: information on management’s integrity, disagreements with management on accounting principles, fraud/illegal acts by the client, significant deficiencies and material weaknesses in internal controls, and reasons for the change in auditors (AU Section 315). 5. Yes, the confidentiality agreement that Minkow required Ernst Whinney to sign improperly limited the scope of the ZZZZ Best audit. The stipulation of the confidentiality agreement that stated â€Å"We will not make any follow-up telephone calls to any contractors, insurance companies, the building owner, or other individuals involved in the restoration contract† definitely restricts the auditors from performing certain procedures that are necessary. According to AS 5, â€Å"If there are restrictions on the scope of an engagement, the auditor should withdraw from the engagement or issue a disclaimer of opinion†. Auditors are responsible for gathering enough evidence to support an opinion on the financial statements, and Ernst Whinney should have used their professional judgment to notice that, with the stipulations in the agreement signed, there would not be enough evidence to satisfy the matter of sufficiency. 6. No procedures are required when reviewing a client’s pre-audit but post-year-end earnings press release.