ZZZZ Best Case Assignment #2 Question 1: 15 points AU Section 315 Communications Between Predecessor and Successor Auditors .01-.13Using the facts from the ZZZZ Best case and professional guidance from AU Section 315, explain the following: A. As the successor auditor, what was E&W supposed to do before they accepted ZZZZ Best as an audit client in regards to Greenspan? Summarize in enough detail AU 315.03-.06. In your answer give and support your opinion as to whether or not E&W violated these paragraphs and if you can prove it as a fact. The first thing E&W should have done, as the successor auditor, was to postpone accepting the engagement until the communications in paragraphs .07 through .10 have been evaluated. (AU …show more content…
There is no record that ZZZZ Best management forced Greenspan to sign a confidentiality agreement, so this would not be a factor in E&W’s ultimate decision to work with ZZZZ Best. AU 315 .09 specifies the type of information inquiries that a successor auditor would make to a predecessor auditor. This type of information would help the successor auditor access the overall integrity of the potential client. Referring to the ZZZZ Best Case, there was no information that E&W could have gathered from Greenspan that would have shown a negative light on the integrity of ZZZZ Best Management. Overall, it is clear from reading the case that E&W did not put much emphasis on gathering information from Greenspan since, at that particular time, the company had a good reputation. Greenspan had been deceived by his former client, so the potential information would have been highly unreliable. C. As the predecessor auditor to Price Waterhouse, did E&W follow the professional standards in paragraphs .03-.10 in their communications with Price Waterhouse? In your answer using guidance and details from the case, explain what E&W was supposed to do and what they did do (did they follow the standard or violate a part of the standard guidance? If so, then which part?). Especially address under what circumstances is a predecessor auditor
Overall, there were three “red flags” E&Y was not aware of during the audit. First, they neglected the 500% net income increase from 1999-2001. This should have raised awareness because revenues only increased by 5% during that same period. Second, the internal auditors were denied access to some of the corporate ledgers. E&Y should have seen this as being one of the largest red flags. Third, the audit team failed to properly investigate employee complaints.
There were two external auditors mentioned in the case that dealt with ZZZZ Best. The first was not a firm that was included in the Big Eight accounting firms at the time. George Greenspan was the sole practitioner who performed the first full-scope independent audit for ZZZZ Best. Greenspan insisted that he had properly audited Minkow’s company, and testified that while planning the audit he had performed various analytical procedures to identify unusual relationships in ZZZZ Best’s financial data. Greenspan’s procedures reportedly included comparing ZZZZ Best’s key financial ratios with its industry norms. Greenspan identifies “unusual relationships” but does not go into detail in order to explain these unusual relationships. This shows that Greenspan did not show enough professional skepticism while conducting the audit and just blew off these unusual relationships. Also Greenspan testified that he had obtained and reviewed copies of all key documents that pertained to the false insurance restoration contracts. It would have been hard for Greenspan to uncover the fraud through the contract paperwork because Minkow and Morze went through such great detail in creating false documents in order to cover the false contracts, but finer details were overlooked by Greenspan. A journalist found one of these finer details which caused the domino effect leading to the destruction of ZZZZ Best. This shows that the first auditor,
As indicated by PCAOB, the written representation cannot be a substitute for substantive procedures. Thus, auditors did not perform adequate procedures to test the management’s estimates. What’s more, inquires were heavily relied on the management’s integrity. Auditors ignored the professional skepticism. Finally, the 30 years and 15 years useful lives, which were adopted previously by Little Drummer, were not appropriately audited. Since the engagement team did not contact the predecessor auditors, the team did not get any audit documents from predecessor auditors regarding the assumptions of 30 years and 15 years. There was no evidence to show the reasonableness of these two assumptions.
Without a question the BOD should have placed a high degree of reliance on Andersen, which at the time was one of the most prestigious worldwide accounting firms. The auditors should have known the kind of accounting taking place in Enron. In my opinion, Andersen knew, at least to some extent, the company’s financial condition. However, Enron was already too deep under water that blowing the whistle so late would have created problems for Andersen as well. According to the case, on 02/05/01, Andersen held internal meeting during which it addressed the company’s accounting from and oversight of the LJM partnership. Andersen never discussed these concerns with the Audit and Compliance Committee. Although the BOD has its faults, it should have been able to rely on Andersen’s work.
3) What was the prime motivation behind the decisions of Arthur Andersen’s audit partners of the Enron, WorldCom, Waste Management and Sunbeam UDITS: Cite examples that reveal this motivation?
b. With blemishes on the accounting profession the size of the Enron, Worldcom, and Freddie Mac scandals, among many others, who wouldn’t think that accountants were all ‘crooked’
e. Who are General Mills external auditors? Describe the two "opinion" letters that General Mills received in 2006. In your own words, what do these opinions mean? Why are both opinions dated several months after General Mills' year end?
3. Considering your response to questions 1 and 2, do you believe that the going- concern uncertainty was warranted? Do you believe that Deloitte & Touche should have issued a going- concern opinion prior to 2008?
With this particular case study I will discuss several questions and facts regarding audit client considerations. 1) A brief summary of the case. 2) Identify key behaviors, attitudes and ethical dilemmas (if any) faced by the auditors. 3) Assess the philosophical and practical alternatives summarized in the case questions and evaluations of those solutions. 4) Briefly summarize what I would do faced with this situation in real life.
3. In testimony before Congress, George Greenspan reported that one means he used to audit the insurance restoration contracts was to verify that his client actually received payment on those jobs. How can such apparently reliable evidence lead an auditor to an improper conclusion?
And in the ZZZZ Best case the predecessor Greenspan was not contacted by the successor Ernst and Whitney, although Ernst and Whitney said they tried but wouldn’t disclose what they learned.
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
E&Y auditors violated their responsibility to the public and to their profession. The auditing standards that were violated were AU 15 responsibility of the auditor to obtain sufficient evidence to provide a reasonable basis for his opinion, AU section 339 preparation and maintenance of working papers, AU 339.01 Principle record of work contains information and conclusions the auditors have reached concerning significant matters in the working papers, AU 339.08 the auditor is required to “adopt reasonable procedures for safe custody of his working papers and retain them for a period, AU 15 was violated when Trauger requested revisions to the workpapers. AU 339, AU 339.01 and AU 339.08 were violated with the
d. Does the firm appear to have an effective corporate governance structure? Explain any shortcomings.