ZZZZ Best Case Questions (40 points)
1. Identify the primary audit objectives that auditors hope to accomplish by: * Confirming a client’s year-end accounts receivable, and (Balance related existence) * Performing year-end sales cutoff tests. (transaction-related objective timing) (5 points)
2. 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 the three months ended July 31, 1986. * What are the important differences between an audit and a review, particularly with regard to the level of assurance implied by the report issued by the auditor and the type of evidence gathered? (8 points)
When a review is done, the evidence is gathered through analytical procedures and inquiries of client personnel. Whereas, in an audit, all evidence techniques available to an auditor is likely to be used. A review does not assess control risk, tests of accounting records and responses to inquiries by obtaining validating evidence through inspection, observation or any other audit procedure. It can point out significant matters of the financial statements but does not provide assurance of their accuracy. Because reviews are generally not as rigorous as audits, considerably less evidence is typically collected in a review than in a comparable audit engagement. The issue with ZZZZ Best case is that the auditors review was not sufficient enough to review any material misstatements on the financial statements.
3. SAS 106 (AU 326), Audit Evidence, specifically identifies the principal management assertions that underlie financial statements. The existence/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...