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Zzzz Best

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Ernst & Whinney had an obligation to be independent, objective and with due care.Objectivity requires that an auditor should be skeptical and obtain independent evidence to verify information from the client. Ernst & Whinney failed to meet this obligation when they did not require corroboration of the insurance restoration contracts from independent third parties. When Ernst & Whinney resigned from the audit engagement,they had a professional obligation to disclose the reason for the withdrawal.
Due care requires that an auditor discharges professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of the auditor’s ability with concern for the best interest of the public. The sole proprietor-auditor and Ernst & Whinney did not gather enough evidence on the restoration contracts, nor viewed the evidence gathered with skepticism.

Between 1985 and 1986 there is a 390% increase in Revenue and 350% increase in Cost of goods sold. The auditors should question the increase in accounts receivable, which was 33% of sales and represents four months on an annualized basis. The auditors should question where the cash is from the collection of sales (Sales of $4,845 less A/R of $693 less Cost of goods sold of$2,050). The company should have approximately $2 million to pay down liabilities or invest in assets. With the cash flow with borrowings of current liabilities and notes payable, the company had approximately $6.5 million before paying cost of goods sold or approximately $4.5 to pay down liabilities or invest in the company, yet cash only increased $50,000 for the year. Where was the cash used?
1. ZZZZ Best Company, which was initially a small rug-cleaning business, was founded by Barry Minkow when he was sixteen years old.
2. Minkow transformed ZZZZ Best into a leading company in…...

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