In: Finance
Background You are an experienced audit manager at Samway Baker
Fitzgerald (SBF), an accounting firm with offices in Orange, Wagga
Wagga, Tamworth, Port Macquarie and Albury in NSW, Toowoomba in
Queensland and Ballarat in Victoria. Although a medium-sized firm
by national standards, SBF includes Australia’s largest
regionally-based auditing practice. Most of SBF’s audit clients are
in the manufacturing and service industries. SBF recently acquired
a major new audit client, Dudley Health Limited (DHL), which fully
owns:
• St Neville's, a highly regarded private hospital located in
Tamworth • Acuity Vision, a network of day surgery clinics across
NSW and Queensland • Pellegrino Shores, a retirement village
located in Port Macquarie
Its a chilly evening in early July 2019 and you are meeting with
your audit senior, Jek Porkins, to discuss the findings of his
preliminary work for the 30 June 2019 audit of DHL.
Fraud at Pellegrino Shores Last month a senior staff member at
Pellegrino Shores was dismissed after it was discovered that she
had worked in collusion with a number of residents to reduce their
fees and receive secret payments from them in return. The senior
staff member had access to the resident database. Whilst she was
only supposed to update room location changes for residents, she
was able to reduce the resident's period of stay and the value of
other services provided. The fraud was detected by a fellow
employee who overheard the senior staff member discussing the
'scam' with a resident.
St Neville's patient revenue system On Sunday 10 March 2019 St
Neville's switched from its 'homegrown' patient revenue system to
the DHL 'off the shelf' revenue system. The DHL internal audit unit
was involved throughout the switchover. DHL was confident that its
revenue system would perform all of the functions that the St
Neville's patient system had performed. The 'homegrown' St
Neville's revenue system consisted of:
1. Billing system: produces the invoice to charge the patient for
services provided such as accommodation, medications, and medical
services. This software includes a complex formula to calculate the
patient bill after allowing for government subsidies, pensioner
benefits and private medical insurance benefits. 2. Patient
database: a master file containing personal patient details as well
as the period of stay, services provided and client medical
insurance details. 3. Rates database: a master file that shows all
accommodation billing rates, rebate discounts, and government
assistance benefits.
Jek Porkins spoke with a number of St Neville's administration
staff about the impact of switching to the DHL patient revenue
system:
• 'There was some sort of power surge last Friday and we had to
re-enter every patient invoice that we processed in the last two
weeks'. • 'Lately, we've had an unusually high number of complaints
from recently discharged patients that the fee invoice we sent them
does not line up with the agreed medical fund and pensioner subsidy
rates. We found out that halfway through last month someone from
the IT team made a software change to fix a bug in the billing
calculation formula'. • 'There were some occasions where we
invoiced people that were past patients. This seems to have
happened when they shared the same surname as a current patient'. •
'We seem to have some patient fee invoices where for no reason we
have billed patients at a lower room rate than we hold on the rates
database'.
Acuity Vision sales team During the financial year, Acuity Vision
released its own range of medical supplies which are sold via
direct marketing by a sales team employed by Acuity. The sales team
receive a fairly low base salary plus a bonus based on the dollar
value of the sales they generate. Jek Porkins selected a sample of
customer payments received by Acuity just after year end and traced
them back to the general ledger and customer account balance.
DHL accounts payable Whilst on site at DHL's Head Office in early
July, Jek Porkins undertook two accounts payable tests: Test Result
Conclusion
1
15 suppliers were selected from the list of trade creditors at
year-end. Balances were traced to supplier invoices and goods
received notes to ensure goods were received prior to year-end. For
two creditors out of 15 tested the balance was only marginally
overstated.
Accepted as no material errors were located.
2
Selected 20 suppliers' invoices and checked that the pricing and
discount terms have been reviewed and authorised by the purchase
manager. Three out of the 20 invoices tested had not been
authorised and incorrect discounts had been applied to them. A
follow up of the three samples with deviations did not highlight a
pattern or specific reason for the errors.
Accepted as the errors in discounts claimed were immaterial.
Pellegrino Shores payroll
In addition to full-time staff, Pellegrino Shores employs a
significant number of casual nursing, cleaning and administrative
staff. Overtime is often worked on weekends and night shifts due to
a shortage of staff. Payment at overtime rates for standard weekend
and night shifts has been a common occurrence.
Required
Write a memo to Jek Porkins, the audit senior on the DHL
assignment, that advises him on: Question 1 (4%) The business risk
impactandthe accounts (as well as related audit assertions) most
likely affected by the fraud atPellegrino Shores.
Question 2 (6%)
Additional audit work to be undertaken in relation to the
switchover of the new patient revenue system atSt Neville's.
Specifically:
a. the associated audit risks b. two key questions to ask internal
audit c. a justification for the audit strategy to be adopted for
the audit of patient revenue at St Neville's
Question 3 (6%)
Additional information required in relation toAcuity Vison'ssale of
medical supplies. Specifically:
a. the key account balance(s) and associated assertions at risk due
to Acuity Vision's arrangements for paying its sales team b. the
implications for the control environment within DHL, including
specific issues management would need to consider c. the
effectiveness of his customer payments testing
Question 4 (5%)
Both accounts payable tests he has undertaken. Specifically:
a. whether each is a test of control or substantive test b. the key
assertion addressed by each test c. the reasonableness of the
conclusion reached for each test d. additional audit procedures, if
any, that need to be performed.
Answer this question using the following table: Test type of test
keyassertion reasonableness of conclusion additional audit
procedures 1 2
Question 5 (4%)
The key assertion at risk in relation to the payment of overtime
atPellegrino Shores, a preventative internal controlanda detective
internal control that would directly address the risk.
1. The Business Risk involved is the Leakage of the Revenue which impacts the overall profit of the company and also the creating for other employees to follow the same fraud.
The accounts which will get impacted are the Income Ledger and the Bank / Cash Ledger.
In view of Audit Assertions it asserts that the Internal Control adopted by the company is not strong and also this need to be strengthened in the future keeping in view the expanding the usage of the same software in the other companies of the company.
2. Additional Audit Work which needs to be taken care of
a. Editing of the bills / transaction needs to be stopped at what so ever case. In case the company / management decides to give discount / charge less, only Credit note to be issued rather than changing / editing the invoice.
b. Audit team needs to ensure that no editing is allowed to be done by anyone.
3. The audit team needs to be find out the difference in the balances of the creditors and study / examine the reasons for deviation and suggest the Management for the necessary internal controls / actions to be taken and make sure that the same is not repeated in the future. Also the management needs to rectify the findings of the Internal Audit.