Can any amount of audit procedures make up for a lack of internal controls?
No! For example, (as noted in the 1986 fraud above) we inflated our sales and cash balance by $2,000,000 by depositing previously skimmed funds into the Crazy Eddie bank balances. The bank accounts were reconciled. However, there were no controls over sales invoices, inventory, and cash by Crazy Eddie. The auditors did not perform sales and cut-off testing and they did not review deposits in transit. Crazy Eddie’s comparable store sales, earnings, and cash were overstated in 1986. The money was in the bank and the auditors assumed that it came from legitimate sales. However, the auditors never considered that even if the company had such money in its accounts, there was a possibility that such funds could come from sources used to manipulate earnings. A credible audit cannot be made in the absence good internal controls. A so called strong audit and strong internal controls are not mutually exclusive.
