Loopholes in the Audit Procedure: ZZZZ Best Company, Inc
The claim that Larry Gray lacked sufficient knowledge of the client’s business or industry is evident in several scenarios. First, Gray did not perform an analysis of the industry. Paragraph five of AS No.9 states that “planning the audit includes establishing the overall audit strategy for the engagement and developing an audit plan, which includes, in particular, planned risk assessment procedures and planned responses to the risks of material misstatement.” Planned risk assessment procedures include performing analytical procedures to determine whether the company’s key financial ratios were consistent with industry averages. In addition, Gray should have compared revenues from insurance restoration contracts across several companies in the same industry. If he would have performed these routine procedures, Gray would have realized that ZZZZ Bests reported insurance restoration revenue was grossly overstated.
Furthermore, AS No.9.7 states that the auditor should have knowledge of the “company’s internal control over financial reporting obtained during other engagements performed by the auditor.” Larry Gray did obtain any information regarding ZZZZ Bests internal control over financial reporting during other engagements and took a rather standardized approach to the audit plan, which is evident in the engagement letter. This allowed him to make serious mistakes when planning and executing the audit procedure. Furthermore, Larry Gray did not do sufficient research on Barry Minkow and ZZZZ Best prior to accepting the engagement. If he would have, he may have realized that Barry Minkow was fraudulent and that the strength of the internal controls was weak. This would have made Gray more inclined to physically inspect the “confirmations” of the restorations contracts and other evidence that was provided to him.
The above mentioned influenced the events associated with the tour of the restoration site in Sacramento, California. Assured Property Management Inc.
Furthermore, AS No.9.7 states that the auditor should have knowledge of the “company’s internal control over financial reporting obtained during other engagements performed by the auditor.” Larry Gray did obtain any information regarding ZZZZ Bests internal control over financial reporting during other engagements and took a rather standardized approach to the audit plan, which is evident in the engagement letter. This allowed him to make serious mistakes when planning and executing the audit procedure. Furthermore, Larry Gray did not do sufficient research on Barry Minkow and ZZZZ Best prior to accepting the engagement. If he would have, he may have realized that Barry Minkow was fraudulent and that the strength of the internal controls was weak. This would have made Gray more inclined to physically inspect the “confirmations” of the restorations contracts and other evidence that was provided to him.
The above mentioned influenced the events associated with the tour of the restoration site in Sacramento, California. Assured Property Management Inc.