Solutions to Zzzz Best Company

1. According to ISA 210 (2009), the elements of an engagement letter are following, (a) The objective and scope of the audit of the financial statements; (b) The responsibilities of the auditor; (c) The responsibilities of management; (d) Identification of the applicable financial reporting framework for the preparation of the financial statements; and (e) Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content.

The engagement letter signed by E&W and Barry Minkow in 1986 contained elements of (a), (b), (d) and (e). To be detail, E&W promised to review of the July 31, 1986 financial statements, assistance the preparation of the Registration Statement and audit of financial statements. However, there was no identification of the responsibilities of management. According to this case, there was a confidentiality agreement which even restricted the responsibilities of auditors.

1. “Audited financial statements provide the user with the auditor’s opinion that the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework.” (Brock, no date). Auditors issue a written report with generally accepted accounting principles based on certain evidence. Then external users make business decisions based on financial statement and believe the auditor's report as an evaluation of the statements' reliability.

“Reviewed financial statements provide the user with comfort that, based on the accountant’s review, the accountant is not aware of any material modifications that should be made to the financial statements for the statements to be in conformity with the applicable financial reporting framework.” (Brock, no date). As for review service, less evidence is necessary to support this level of assurance, compared with audit.

According to E&W’s ZZZZ Best engagement letter, E&W suggested that review was less in scope than an examination in accordance with generally accepted auditing standards. As a result, E&W did not express opinion on financial statements. In addition, the period of review was less than audit. To be detail, E&W promised to review for three month, but audit for whole year.

1. In accordance with ISA 200, the auditor shall maintain professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist. According to ISA 240, the possible procedures to investigate by auditors may be confirming directly with the third party, and using the work of an expert to assess the document’s authenticity.

ZZZZ Best’s auditors, Mr. Greenspan, obtained third-party confirmations to support the contracts, reviewed available documents, but not visited selected restoration sites, which was considered as no necessity. As a result, there are two questions for me: