accounts receivable are considered material. Id. Nevertheless, this testing, as well as most of the auditor's testing, is done on a sample basis which requires that the auditor examine only a portion of the population of interest.
In Bily v. Arthur Young & Co., 271 Cal. Rptr. 470 (Cal. Ct. App. 1991) rev'd on other grounds, 834 P.2d 745 (Cal. 1992), one issue was whether an auditor that had followed GAAS could be held liable to a third party for negligent misrepresentation. The court stated:
Under the general rule GAAS and GAAP, as compilations of custom and practice will be relevant and thus admissible as 'evidence to be considered in determining the proper standard of care' [citation ommitted] and in many if not most cases an accountant who has complied with GAAS and found compliance with GAAP will be found, in turn, to have satisfied the applicable standard. But this is not to say that GAAS and GAAP define the the standard of care. Certified public accountants ... must meet the standards of expertise and diligence common to their profession as proved with respect to the facts of particular cases by the testimony of suitably qualified expert witnesses.
Id. at 475-76 (emphasis in the original). Accord Maduff Mortgage v. Deloitte, Haskins & Sells, 779 P.2d 1083 (Or. Ct. App. 1988).
Reviews of Financial Statements: Another attest service performed by CPAs is the review service. Its execution is guided by the Accounting and Review Services pronouncements issued by the AICPA. See 2 AICPA POFESSIONAL STANDARDS, Accounting and Review Services, all sections at 3311-4107 (Am. Inst. of Certified Pub. Accountants (CCH) 1990). The outcome of the review service is negative assurance about the fairness of the financial statements of the entity being reviewed. See id. AR Section 100.35, at 3320 (". .. I am (we are) not aware of any modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.").
In conjunction with a review service, the CPA performs some limited procedures including detailed management inquiries and analytical review procedures. Overall, the inquiries are intended to determine that the financial statements are materially correct and have been prepared in accordance with GAAP. The analytical review procedures are intended to determine that the financial statements do not show any unusual relationships and trends.
Reviews of Interim Financial Statements: As part of their responsibilities to large clients who usually have reporting requirements with the SEC, auditors typically perform reviews of their clients" interim financial statements. These statements are filed with the SEC as part of the required 10Q filing. Although the audit procedures are very similar to those of annual reviews, the professional standards that guide the performance of interim reviews are different. 1 AICPA PROFESSIONAL STANDARDS, U.S. Auditing Standards Section 722 (Am. Inst. Certified Pub. Accountants (CCH) 1990).
In Union Bank v. Ernst & Whinney, 278 Cal. Rptr. 490 (Cal. Ct. App. 1991) (the "Z Best" case), the court held that a review report of this type could not be the basis for a negligence or fraud claim against an independent accountant. The court noted: