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 BigFour firm. It is a financial services conglomerate with almost 1,000 offices inthe United States and Canada, as well as correspondent offices overseas.The company’s records contain more than a million accounts receivable andit processes millions of sales and other transactions annually.The company’s computer data center is in a large, environmentally controlledroom that contains several large computer servers and a great deal ofancillary equipment. There are two complete online systems, one serving asa backup for the other, as systems failure would preclude operations in all ofthe company’s branches.The company has an unusual system of checks and balances in whichbranch office trans action records are reconciled to data processing controlsdaily, 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 resolvethe 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 oninternal control over financial reporting on Form 10-K with the Securities and Exchange Commission within 60 days afterits fiscal year-end. In addition, the company likes to announce annual earnings and issue its annual report as soon afteryear-end as reasonably feasible. Under these circumstances, there is always a great deal of pressure on the CPA firm tocomplete the audit quickly.The CPA firm must conduct an integrated audit of the financial statements and internal control over financial reporting inaccordance with PCAOB Standard 5. In the case of City Finance, there is no question that the auditor must relyextensively on internal control in the integrated audit and extensively test internal control over financial reporting. Evenif the auditing standards requirements did not exist, it would be difficult to complete the audit within the reportingdeadlines without extensively relying on key controls. In all honesty, if City Finance did not have excellent internalcontrols, the CPA firm admits that an audit of the financial statements just could not be done.