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 clients 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 documents 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
Bests 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
buildings 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
Bests financial statements.
3. In the ZZZZ Bests 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 companys revenue and used more reliable and
competent sources.
4. 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 successors 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 clients 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 clients 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