A Case Study on the Breakdown of Internal Control at Ruihua Certified Public Accountants: Evidence from Beijing Kangde Xin Composite Material Co., Ltd.

Abstract

Using a COSO-based case approach and drawing on regulatory enforcement evidence and auditing standards, this paper examines
Ruihua's audit failure in the Kangdexin fraud case. The findings indicate that: (1) a long-term client relationship, economic dependence, and
a "business-first" orientation weakened independence and professional skepticism; (2) salient red flags (e.g., high deposits alongside high
borrowings and persistent profitcash flow divergence) were not translated into adequate risk responses or resourcing; (3) key procedures, including external confirmations and analytical procedures, were insufficiently performed, weakening audit evidence; (4) deficient information
and communicationlack of graded escalation, closed-loop follow-up, and effective transmission of key judgments and working papersimpaired review and remediation; and (5) monitoring prioritized formal compliance over substantive gatekeeping. These deficiencies produced
an inappropriate audit opinion and audit failure. The evidence supports strengthening independence safeguards, resourcing and quality reviews
for high-risk engagements, and traceable controls with escalation-and-remediation mechanisms, alongside more penetrating inspections and
higher expected sanctions to curb gatekeeper failure.