RESUME AUDITING CH 14

AUDIT OF THE SALES AND COLLECTION CYCLE TESTS OF CONTROLS AND SUBSTANTIVE
TESTS OF TRANSACTIONS

Rely On Internal Control Or Resign From The Audit

The company’s 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 backupfor the other, as systems failure would preclude operations in all of
the uncollectible accounts receivable company’s branches.
The company has an unusual system of checks and balances in which branch office transaction
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
management‘s report on internal control over financial reporting on Form T0-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 oot be done.