Reference no: EM132803885

Crenshaw Properties was a real estate developer that specialized in apartment buildings that it sold to limited partner investors. Crenshaw's role was to identify projects, serve as general partner with a small investment, and raise capital from pension funds. Crenshaw had an extensive network of people who marketed these investments on a commission basis. As general partner, Crenshaw earned significant fees for related activities, including promotional fees, investment management fees, and real estate commissions.

• As long as the investments were successful, Crenshaw prospered. Because the investments were reasonably long-term, the underlying investors did not pay careful attention to them. However, in the late-2000s, the market for real estate in many parts of the country became oversaturated. Occupancy rates, rental rates, and market values declined.

• Ralph Smalley, of Hambusch, Robinson & Co., did the annual audit of Crenshaw. As part of the audit, Smalley obtained financial statements for all of the partnerships in which Crenshaw was the general partner. He traced amounts back to the original partnership documents and determined that amounts agreed with partnership records. Smalley also determined that they were mathematically accurate. The purpose of doing these tests was to determine that the partnership assets, at original cost, exceeded liabilities, including the mortgage on the property and loans from investors.

• Under the law, Crenshaw, as general partner, was liable for any deficiency. Every year, Smalley concluded that there were no significant deficiencies in partnership net assets for which Crenshaw would be liable. What Smalley failed to recognize, however, was that current market prices had declined significantly because cash flows were lower than those projected in the original partnership offering documents. As a result, he failed to perform tests of the impairment of the asset values. In fact, Crenshaw went bankrupt in 2010, and Hambusch, Robinson & Co. was named in a suit to recover damages filed by the bankruptcy trustee.

• The foundation of any audit is the evidence obtained and evaluated by the auditor. The auditor must have the knowledge and skill to accumulate sufficient appropriate evidence on every audit to meet the standards of the profession. As described in this opening story, Ralph Smalley learned the effect of not accumulating the appropriate evidence after being sued over his audit of Crenshaw Properties. This chapter deals with the types of evidence decisions auditors make, the evidence available to auditors, and the use of that evidence in performing audits and documenting the results.

Please assist me to answer auditing question in this case

Problem 1: Explain the types of evidence and procedures that are applicable to the case

Problem 2: Describe alternative procedures and evidence that would be more persuasive to achieve the audit objective.

Problem 3: Explain the weaknesses in the control system and its impact on control risk.