ZZZZ Best Company: The Backlash
Case 1.9 ZZZZ Best Company, Inc,
1. Ernst & Whinney audit firm suffered tremendously from the backlash of ZZZZ Best’s case. One of the issues stemming from ZZZZ Best’s case is the difference between a review and an audit as evidence by civil suit filed by a California bank against the firm. The bank claimed that its decision to grant ZZZZ Best’s loan was based on the opinion of Ernst & Whinney review of ZZZZ Best’s financial statements period ending July 31, 1986. The case was ruled in favor of Ernst & Whinney as the audit firm had expressly stated in their report that it was not issuing an opinion and the bank should not have rely heavily on the review report. Also, ZZZZ Best was a public company at the time, a review of its financial statements should not have been used as a basis for granting a loan. Reviews only offer a limited assurance at a much cheaper fee, and are usually used by private companies. As stated in the report, Ernst & Whinney had only performed “analytical procedures and making inquiries of persons responsible for financial and accounting matters”. This is another difference between a review and an audit. An auditor cannot accumulate enough evidence through a review to issue an opinion. In order to express an opinion on the financial statements through an audit, an auditor has to get additional types of evidence such as physical counting of inventory, observation of assets, confirmations of bank statements and account receivables, etc…
2. Managerial assertions play a big role in ZZZZ Best’s case, particularly the occurrence assertions of the insurance restoration contracts. The evidence obtained by ZZZZ Best’s auditors through confirmations to support the contract, reviewing contract documents, analytical procedures to evaluate the reasonableness of revenue recorded on the contracts, and observation of selected sites was limited due to the fraudulent nature of the company. Although confirmations are usually a very reliable
1. Ernst & Whinney audit firm suffered tremendously from the backlash of ZZZZ Best’s case. One of the issues stemming from ZZZZ Best’s case is the difference between a review and an audit as evidence by civil suit filed by a California bank against the firm. The bank claimed that its decision to grant ZZZZ Best’s loan was based on the opinion of Ernst & Whinney review of ZZZZ Best’s financial statements period ending July 31, 1986. The case was ruled in favor of Ernst & Whinney as the audit firm had expressly stated in their report that it was not issuing an opinion and the bank should not have rely heavily on the review report. Also, ZZZZ Best was a public company at the time, a review of its financial statements should not have been used as a basis for granting a loan. Reviews only offer a limited assurance at a much cheaper fee, and are usually used by private companies. As stated in the report, Ernst & Whinney had only performed “analytical procedures and making inquiries of persons responsible for financial and accounting matters”. This is another difference between a review and an audit. An auditor cannot accumulate enough evidence through a review to issue an opinion. In order to express an opinion on the financial statements through an audit, an auditor has to get additional types of evidence such as physical counting of inventory, observation of assets, confirmations of bank statements and account receivables, etc…
2. Managerial assertions play a big role in ZZZZ Best’s case, particularly the occurrence assertions of the insurance restoration contracts. The evidence obtained by ZZZZ Best’s auditors through confirmations to support the contract, reviewing contract documents, analytical procedures to evaluate the reasonableness of revenue recorded on the contracts, and observation of selected sites was limited due to the fraudulent nature of the company. Although confirmations are usually a very reliable