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Zzzz Best Company Case

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Submitted By dingl
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ZZZZ Best Company, Inc. Shiqi Hu, Lin Ding, Trang Mai, Yi Wang
ACCT3309 Audit, O’Hara 11/03/2014

Background
Barry Minkow, who is a young entrepreneur with history of credit card fraud as a teenager, was convicted on 57 counts of securities fraud. He started ZZZZ Best Company in carpet cleaning business in 1982 when he was only 16 years old. ZZZZ Best Company was turned into insurance restoration business that Minkow recognized the benefits with his own “innovative” way to finance his business. Minkow used fake restoration contracts to generate the paper profits and fake information to convince bankers to loan him money with help from his friend, Tom Padgett. The company focused on insurance restoration business and went public in 1986. First full-scope audit was completed by George Greenspan in April 1986. Ernst & Whinney was hired in 1987 after George was dismissed by Minkow. Larry Gary, auditor from Ernst & Whinney, required to visit a restoration site in a multimillion-dollar contract but was discouraged by Minkow. Minkow also required auditors to sign a confidentiality agreement that not to make any follow-up phone calls to any contractors and owners of the buildings before the visit to these phony sites. In May 1987, the Los Angeles Times published article on ZZZZ Best Company fraud accusations. Audit firms resigned after confirmations of the fraud and Ernst & Whinney received an anonymous letter that contains several allegations of fraudulent information in ZZZZ Best’s financial statements and forwarded it to the SEC.

Question 1:
An audit for historical financial statements is an audit in which the certified public accountant determines whether financial statements present fairly, in all material respects, financial position, results of operations, and cash flows in accordance with GAAP. An audit provides positive assurance. Auditors

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