The Choice Is Simple

Rely On Internal Control Or Resign From The Audit

City Finance is the largest client managed out of the Pittsburgh office of a Big
Four firm. It is a financial services conglomerate with almost 1,000 offices in
the United States and Canada, as well as correspondent offices overseas.
The companys records contain more than a million accounts receivable and
it processes millions of sales and other transactions annually.
The companys computer data center is in a large, environmentally controlled
room that contains several large computer servers and a great deal of
ancillary equipment. There are two complete online systems, one serving as
a backup for the other, as systems failure would preclude operations in all of
the companys branches.
The company has an unusual system of checks and balances in which
branch office trans action records are reconciled to data processing controls
daily, which, in turn, are reconciled to outside bank account records monthly.
Whenever this reconciliation process indicates a significant out-of-balance condition,
procedures are initiated to resolve
the problem as quickly as possible. A large internal audit staff oversees any special
investigative efforts.
Because City Finance is a large public company, it must file its annual financial report
including managements report on
internal control over financial reporting on Form 10-K with the Securities and Exchange
Commission within 60 days after
its fiscal year-end. In addition, the company likes to announce annual earnings and issue
its annual report as soon after
year-end as reasonably feasible. Under these circumstances, there is always a great
deal of pressure on the CPA firm to
complete the audit quickly.
The CPA firm must conduct an integrated audit of the financial statements and internal
control over financial reporting in
accordance with PCAOB Standard 5. In the case of City Finance, there is no question
that the auditor must rely
extensively on internal control in the integrated audit and extensively test internal
control over financial reporting. Even
if the auditing standards requirements did not exist, it would be difficult to complete the
audit within the reporting
deadlines without extensively relying on key controls. In all honesty, if City Finance did
not have excellent internal
controls, the CPA firm admits that an audit of the financial statements just could not be
done.