The claim that Larry Gray lacked sufficient knowledge of the clients business or

industry is evident in several scenarios. First, Gray did not perform an analysis of
the industry. Paragraph five of AS No.9 states that planning the audit includes
establishing the overall audit strategy for the engagement and developing an audit
plan, which includes, in particular, planned risk assessment procedures and planned
responses to the risks of material misstatement. Planned risk assessment
procedures include performing analytical procedures to determine whether the
companys key financial ratios were consistent with industry averages. In addition,
Gray should have compared revenues from insurance restoration contracts across
several companies in the same industry. If he would have performed these routine
procedures, Gray would have realized that ZZZZ Bests reported insurance
restoration revenue was grossly overstated.
Furthermore, AS No.9.7 states that the auditor should have knowledge of
the companys internal control over financial reporting obtained during
other engagements performed by the auditor. Larry Gray did obtain any
information regarding ZZZZ Bests internal control over financial reporting
during other engagements and took a rather standardized approach to the
audit plan, which is evident in the engagement letter. This allowed him to
make serious mistakes when planning and executing the audit procedure.
Furthermore, Larry Gray did not do sufficient research on Barry Minkow and ZZZZ
Best prior to accepting the engagement. If he would have, he may have realized
that Barry Minkow was fraudulent and that the strength of the internal controls was
weak. This would have made Gray more inclined to physically inspect the
confirmations of the restorations contracts and other evidence that was provided
to him.
The above mentioned influenced the events associated with the tour of the
restoration site in Sacramento, California. Assured Property Management Inc. and
Interstate Appraisal Services had been established by Minkow for the sole purpose
of generating fake restoration contracts for ZZZZ Best. If Gray had done more
research on the ZZZZ Best Company and its associates, he would have learned that
these companies were affiliated with ZZZZ Best. In addition, Gray should have been
alarmed that most of the transactions occurred with the same two parties.
Consequently, he violated Paragraph 16 of Auditing Standard No.9 which states that
the auditor should determine whether specialized skill or knowledge is needed to
perform appropriate risk assessments, plan or perform audit procedures, or
evaluate audit results. If Gray had more knowledge regarding ZZZZ Best, he would
have realized that this was an evident situation where an independent specialist
should have been used to perform the audit procedure.

These problems hindered the gathering of several types of audit evidence. Because
Larry Gray did not do an adequate job getting to know Barry Minkow and ZZZZ Best,

the evidence gathered through client inquiry was not reliable. This type of
evidence is acquired through Written and oral representations made by
management or client personnel to answer the auditors questions. Because Gray
did not do enough research, he did not reveal the fact that Minkow was fraudulent
and dishonest. Client inquiry is rarely adequate as the only supporting piece of
evidence for an audit objective and usually must be backed up by additional
evidence. However, because Minkows and ZZZZ Bests integrity were such a
problem, basically every other piece of evidence gathered was untrustworthy.

The evidence gathered through confirmation was greatly impacted as well. This
evidence is obtained with questions asked by the auditor, either written or oral, to a
third party and the answers are given directly to the auditor. However, this evidence
was made useless because Assured Property Management Inc. and Interstate
Appraisal Services directly affiliated with ZZZZ Best for the sole purpose of
generating fake restoration contracts. However, Gray did not do enough research to
figure this out. Furthermore, evidence gathered through physical examination of
tangible assets and documentation or inspection of records and documents were
rendered useless because they were fraudulent and not independent of the
provider.

The management assertions relating to this evidence is existence/occurrence and

rights and obligations. Rights and Obligations is how management asserts that the
recorded and disclosed assets are the rights of the entity and the liabilities are the
obligations of the entity at a given date. Existence/Occurrence is when management
asserts that the recorded assets or liabilities of the entity that are disclosed on the
balance sheet exist at a given date and that the recorded transactions disclosed on
the income statement have actually occurred during a given period. The fabricated
occurrence of the restoration activity, and the rights and obligations to the building
could have been uncovered if Gray had done more research on ZZZZ Bests internal
controls and Minkows integrity.

The evidence obtained during their visit to the restoration site was unreliable due to
independence of the provider, a factor of competent evidence. When information is
obtained from someone independent of the company and transactions being
investigated, the evidence is more reliable. Assured Property Management Inc. and
Interstate Appraisal Services were created by Minkow for the sole purpose of
generating fake restoration contracts. However, Gray did not do enough research to
figure this out. This influenced the tour of the restoration site in Sacramento, CA
because they were not independent of the provider. Another problem that lacked
independence of the provider was the evidence Gray obtained regarding

documents. Because these three companies were directly associated to each

others fraudulent activity, none of the documents received were reliable. Evidently,
independence of the provider is a crucial factor and this was lacking in this audit
procedure.