What do you think of Karen’s approach to dealing with Weezo’s lack of internal controls?
Karen Winkler is the senior partner in Three Rivers International Public Accounting firm, whose office is in Pittsburg. She is the partner in charge of a first-time audit of the financials for Weezo Beverage Company, which bottles and distributes soft drinks throughout the United States and Latin America.
After about two weeks into the audit, Dick Clemens, the senior audit manager assigned to the engagement, comes to Karen with some bad news: Weezo’s internal controls are a total mess.
“They don’t even do bank reconciliations,” says Dick. “I don’t see any way you’re going to be able to give this company a clean opinion.”
“Don’t worry about it,” said Karen. “It’s a private company.”
“Yes,” says Dick, “but because there are no controls, we’re going to need to quadruple our sample sizes, and when we find irregularities in an account, we’ll probably need to audit every single transaction in it.”
Karen does some quick math in her head. She had originally quoted Weezo $800,000 for the audit, but if Dick is correct, the cost will soar to several million dollars.
“Again, don’t worry about it,” says Karen. “We’ll do our usual audit assuming a good internal control system. Then we’ll look at our sampling results and estimate any errors in the accounts. If the errors are material, we’ll simply ask the company to make a corresponding adjustment to earnings. That way we’ll be covered from liability. Remember, we’re dealing with a private company here. We don’t have to worry about Sarbanes-Oxley and SEC reports. The main thing is that the bottom line is good.” Dick walks away scratching his head.