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ZZZ Best Company, Inc.
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Case Study 2
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Due Date: March 30,2010

ZZZ Best, Case 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 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?
There are numerous differences between performing a review and actual audit on the financial statements, but the major one is that the
The fact that the firm had to sign a confidentiality agreement should have been a red flag causing Larry Gray to be more vigilant during the building inspection. As a result he should have been more suspicious and question the validity of the million dollars claim for this particular location. At a minimum he should have tried to visit at least one more site.

3. In testimony before Congress, George Greenspan reported that one method 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?
George Greenspan was mislead by the confirmations given by the insurance adjustor Tom Padgett because of collusion between Tom Padgett and Barry Minkow. He believed they are two independent parties. According to SAS 1 Section 320, collusion can cause the auditor who has “properly performed the audit to conclude the evidence is persuasive when it is, in fact, false.” Mr. Greenspan stated he was performed various analytical procedure to detect unusual relationship in financial data including comparing key financial rations against industry norms. He should have question ZZZ Best’s net income that surged from less than $200,000 to more than $5 million in a three year period. Moreover, he never visited any of the sites for an inspection.

4. What is the purpose of predecessor-successor