Question

Springtown Pediatric Association is a partnership of six pediatrician owners, two nurse practitioners, ten nurses, three accounting clerks, two receptionists, and an office manager. The office manager and all of the accounting clerks have their own PCs, and the receptionists share a PC. These PCs are connected through a local area network. They are password protected, and the managing partner keeps a record of all passwords. The practice uses a standard medical-services software package that cannot be modified. Following is a description of the revenues and cash collections processes used in this medical practice: Most patients receive medical attention after insurance coverage has been verified by the office manager. Upon entering the medical office, the patient presents proof of insurance to a receptionist. The insurance documentation is photocopied and immediately forwarded to the office manager for verification (while the patient is in the waiting room). In some situations, the office manager may extend credit on the basis of special circumstances. Approximately 20 percent of the patients pay for services with cash or check at the time of the appointment. The attending physician must prepare a prenumbered service report at the time services are rendered to patients. Completed service reports are immediately forwarded to the first accounting clerk, who updates the report with pricing information. One copy of this report is given to the patient, and the other copy is retained by the second accounting clerk. Depending upon the patient’s form of payment, the second accounting clerk will perform one of the following for each service report: File an insurance claim and record the related insurance company receivable for any reports that are signed by the office manager as a verification of the patient’s insurance coverage. Record a patient receivable for any reports that are designated by the office manager as approved credit. Receive the cash or check from the patient and record the related cash collection in a cash receipts listing. The second accounting clerk prepares a daily summary of patient revenues. The first accounting clerk opens the mail each day and handles insurance company correspondences. When collections are received in the mail from insurance companies and patients, they are forwarded to the second accounting clerk for deposit. The second clerk stamps each check “For Deposit Only” and prepares a daily cash receipts listing (which also includes collections from patients who received services that day). One copy of this list is retained, and a copy is sent to the third accounting clerk. The third clerk prepares the daily bank deposit slip and retains a copy in a chronological file. This clerk also handles patient correspondences and scheduling and maintains a list of patients whose insurance coverage has been approved by the office manager. When patient accounts are not collected within 60 days, the second clerk notifies the office manager, who analyzes the reasons for all instance of nonpayment. When the insurance company rejects the claim, the office manager reclassifies the receivable from an insurance account to a patient account. The second clerk adjusts the insurance company and patient account files for reclassifications and write-offs. This clerk maintains a listing of patients with uncollectible balances and provides an updated copy each week to the third clerk, who will not allow patients with this status to schedule new appointments. Springtown Pediatrics Association uses a local CPA firm to perform various accounting functions. On a monthly basis, the firm posts the daily revenues summaries to the general ledger and prepares a trial balance and monthly financial statements. In addition, this firm accounts for the numerical sequence of service reports, files tax returns and payroll forms, and performs the monthly bank reconciliations. The CPA firm reports directly to the managing partner of the practice. Required: Evaluate the information in each of the following situations as being either an internal control (1) strength, (2) weakness or (3) not a strength or weakness.

1. None of the employees who generate revenues or record revenues are able to write checks.

2. Computer passwords are known only by the individual employees and the managing partner, who has no record-keeping responsibilities.

3. Individual pediatricians document the services they perform on pre-numbered reports that are used for both recording revenues and patient receipts.

4. Insurance coverage is verified by the office manager before medical services are rendered.

5. The bank reconciliation is prepared by an independent CPA firm.

6. The sequence of prenumbered service reports is accounted for on a monthly basis by an independent CPA firm.

7. The second accounting clerk receives cash and checks and prepares the daily deposit.

8. The second accounting clerk maintains the accounts receivable records and can add or delete receivables information on the PC.

9. The second clerk receives the cash and checks and also records cash receipts.

10. Springtown Pediatrics Association is involved only in medical services and does not have diversified business operations.

Answer 1

1. None of the employees who generate revenues or record revenues are able to write checks.

Internal Control : Strength. Because it implies not single person has dual responsibility.

2. Computer passwords are known only by the individual employees and the managing partner, who has no record-keeping responsibilities.

Internal Control : Strength.

3. Individual pediatricians document the services they perform on pre-numbered reports that are used for both recording revenues and patient receipts.

Internal Control: Not a strength or weakness.

4. Insurance coverage is verified by the office manager before medical services are rendered.

Internal Control : Strength.

5. The bank reconciliation is prepared by an independent CPA firm.

Internal Control : Strength.

6. The sequence of prenumbered service reports is accounted for on a monthly basis by an independent CPA firm.

Internal Control : Strength.

7. The second accounting clerk receives cash and checks and prepares the daily deposit.

Internal Control : Strength.

8. The second accounting clerk maintains the accounts receivable records and can add or delete receivables information on the PC.

Internal Control : Weakness

9. The second clerk receives the cash and checks and also records cash receipts.

Internal Control: Not a strength or weakness.

10. Springtown Pediatrics Association is involved only in medical services and does not have diversified business operations.

Internal Control: Not a strength or weakness.