The Zzz Best Incorporated

1. Ernst & Whinney never issued an audit opinion on financial statements of ZZZZ Best but did issue a review report on the company's quarterly statements for three months ended July 31, 1986. How does a review differ from an audit particularly in terms of the level of assurance implied by auditor's report?

CPA’s and auditors review the quarterly reports to provide assurance that the financial statements follow GAAP standards. Quarterly reports only provide limited assurance because an external auditor does not perform audit testing to detect control weaknesses, misstatements or fraud. Quarterly reviews are less detailed and less rigorous than annual audits due to the absence of the external auditor.

A review report does not assess the control risk of a company, which means Ernst & Whinney could not have known the risk that a material misstatement could occur within a relevant assertion. The report could have pointed out problems in the financial statements but would not give the audit teams assurance of their accuracy. Ernst & Whinney never investigated ZZZZ Best’s internal control but if they did, they may have caught onto some of the fraudulent acts that were being committed. The main difference between an audit opinion and a review is an audit opinion provides assurance on the financial statements that they are accurate.

2. SAS No. 106 "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.

Obtaining third-party...