Zzzz Best

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.

that was twice the amount of their auditing fee in order to have magazines and toilets

When auditing a publicly held company, auditors need to observe principles. The ethical principles of the American Institute of Certified Public Accountants (AICPA) Code of

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.

1. There are numerous differences between performing a review and actual audit on the financial statements, but the major one is that the review does not contemplate obtaining an understanding of internal control structure. Also, a review does not assess control risk, tests of accounting records and responses to inquiries by obtaining corroborating 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. The issue with ZZZZ Best case is that the auditors review was not sufficient enough to review any misstatements on the financial statements. Ernst & Whinney never questioned the internal control, reviewed

Accountants are held to a higher ethical standards and they must performed their duties in compliance with standards or ethical values of honesty, integrity, objectivity, due care, confidentiality, which must be fully committed to. They must put clients or public interest first before their own. They must have and ethical values and maintain those values way beyond what the society or the company’s code of ethic. It is important that accountants’ behavior or ethical values is in conformity with the

This case established that an auditor could be sued by a primary beneficiary for damages from negligence. A primary beneficiary is a party that has a direct benefit from the audit. Non-privity parties could also sue for gross negligence. This increased the auditor’s legal exposure to third parties. The SEC of 1934 reflected these changes and many others; one significant change was that auditor’s had a much higher litigation risk due to their new responsibility to third parties.

1) Identify audit procedures that, if employed by Ernst & Whinney during the 1981 USSC audit, might have detected the overstatement of the leased and loaned assets account that resulted from the improper accounting for asset retirements.

Did the confidentiality agreement that Minkow required Ernst and Whitney to sign improperly limit the scope of the ZZZZ Best audit? Why or why not? Discuss general circumstances under which confidentiality concerns on the part of a client may properly affect audit planning decisions. At what point do client imposed audit scope limitations affect the type of audit opinion issued?

1. What audit procedures that, if employed by Ernst & Whinney during the 1981 USSC audit, might have detected the overstatement of the leased and loaned assets account that resulted from the improper accounting for asset retirements?

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

For purposes of this question, assume that the excerpts from the Powers Report shown in Exhibit 3 provide accurate descriptions of Andersen’s involvement in Enron’s accounting and financial reporting decisions. Given this assumption, do you believe that Andersen’s involvement in those decisions violated any professional auditing standards? If so, list those standards and briefly explain your rationale.

In our opinion, with proper use of analytical procedures Ernst & Whinney should have detected the overstatement of the leased assets. The following analytical procedures should have been used, at least at the planning and overall review stages of the audit.

Assigned auditors were more than aware of the accounting misrepresentation of financial statements, overstating net income. Still instead of walking away from the client and resign, Andersen in pursuing short-term goals stayed with the company and moreover played by the Giant’s rules. More and more accounting firms at that time started to provide consulting services along with auditing to the same companies which always indicates a conflict of interests. Auditors are the guardians and rules players where consultants are giving advices and showing how to avoid some accounting oversights. Andersen also in order to make good profits stepped on the side of combining two contradicting to each other services. Waste Management had lots of former Arthur Andersen employees which also led to close ties between two companies. That situation undoubtedly led to inability to turn down fraudulent accounting practices Waste Management was exercising at that time for a long period of time.