ZZZZ Best Company: How Does a Review Differ from an Audit?
ZZZZ Best Company Case
Ernst and Whitney never issued an audit opinion on financial statements of ZZZZ Best but did issue a review report on the company’s quarterly statements for the three months ended July 31, 1986. How does a review differ from an audit, particularly in terms of the level of assurance implied by the auditor’s report?
While both a review and an audit are attestation services provided by CPAs. A review and an audit differ in that a review does not offer the level of assurance that an audit does, auditors do not look at as much evidence for a review as they would for an audit, and reviews cost less than an audit.
SAS No106, “Audit Evidence”, identifies the principal “management assertions” that underlie a set of financial statements. The occurrence assertion was particularly critical for ZZZZ Best’s insurance restoration contracts. ZZZZ Best’s auditors obtained third party confirmations to support the contracts, reviewed available documentation, performed analytical procedures to evaluate the reasonableness of the revenues recorded on the contracts, and visited selected restoration sites. Comment on the limitations of the evidence that these procedures provide with regard to the management assertion of occurrence.
According to SAS 106: Occurrence- Transactions and events that have been recorded have occurred and pertain to the entity. From the case that we have read it seems the Auditor George Greenspan claims to have followed standard auditing procedures in regard to “Occurrence” and even claims to have seen payment but in retrospect there could not have been any payment as the job did not exist. He should have determined that Tom Padgett was a co-conspirator in this fraud, as he was a friend at the health club making him a related party, the company that Padgett and Minkow created did not exist and probably could have been found out with some effort. He also admitted he did not inspect any of the restoration sites, he should have spoken to
Ernst and Whitney never issued an audit opinion on financial statements of ZZZZ Best but did issue a review report on the company’s quarterly statements for the three months ended July 31, 1986. How does a review differ from an audit, particularly in terms of the level of assurance implied by the auditor’s report?
While both a review and an audit are attestation services provided by CPAs. A review and an audit differ in that a review does not offer the level of assurance that an audit does, auditors do not look at as much evidence for a review as they would for an audit, and reviews cost less than an audit.
SAS No106, “Audit Evidence”, identifies the principal “management assertions” that underlie a set of financial statements. The occurrence assertion was particularly critical for ZZZZ Best’s insurance restoration contracts. ZZZZ Best’s auditors obtained third party confirmations to support the contracts, reviewed available documentation, performed analytical procedures to evaluate the reasonableness of the revenues recorded on the contracts, and visited selected restoration sites. Comment on the limitations of the evidence that these procedures provide with regard to the management assertion of occurrence.
According to SAS 106: Occurrence- Transactions and events that have been recorded have occurred and pertain to the entity. From the case that we have read it seems the Auditor George Greenspan claims to have followed standard auditing procedures in regard to “Occurrence” and even claims to have seen payment but in retrospect there could not have been any payment as the job did not exist. He should have determined that Tom Padgett was a co-conspirator in this fraud, as he was a friend at the health club making him a related party, the company that Padgett and Minkow created did not exist and probably could have been found out with some effort. He also admitted he did not inspect any of the restoration sites, he should have spoken to