Question

You are a senior auditor working on the audit of HealthyGlow for the year ended 30 June 2015. You are in the planning stage of the audit. It is April 2015 and you discover that HealthyGlow has recently acquired two new, full-body scanning machines, representing the very latest in technology, at a cost of more than $10 million each. The machine enables a full 360 degree scan of the body with the ability to identify tumours, cysts and other abnormal internal growths which currently have a 50% probability of being detected with other scanning devices on the market.

Recent studies have shown there may be potential long-term side effects to patients who are scanned by the new technologically advanced machine. However, given the machine has only just arrived on the market, the results will not be known for many more years. This uncertainty and the potential high risk associated with the machine have caused bad press for both the scanning machine and HealthyGlow.

HealthyGlow charges patients a premium price for the scanning machine due to its advanced technological abilities. As a result of high demand, the hospital has decided to reserve the use of the machine for pre-paid patients only. All scans must be paid for in full by patients at the time of booking. Payments are immediately recognised as revenue by the hospital.

Demand for the scanners has been extremely high and HealthyGlow now has bookings for four months in advance. You note that even though it is only April 2015, the hospital has bookings for July and August 2015.

The Medical Association of NSW is currently reviewing the use of the scanning machines and may ban their use within Australia until the issue is resolved. The decision is expected to be communicated on 1 August 2015. Management have indicated there is an 80% chance the scanners will be given the go ahead.

Required

1. Assess the main business risks for HealthyGlow.
2. Identify two key account balances likely to be affected by the above information.
3. For each account balance identified in (b), identify and explain the key assertion most at risk.

Answer 1

a.

Business risk is any factor which causes uncertainity as to the ability of the company to earn its targeted profit. Thus, business risk is any risk which can cause potential decline in profits of an entity in future.

Some of the business risks for HealthyGlow are -

i. The machine is a high risk machine. There is uncertainity as to its impact to the patients who have been tested using this machine. Due to this, the company has received bad press which can cause decline in profits of the HealthyGlow.

ii. Potential ban - At present, the Medical Association of NSW is reviewing the use of the scanning machines. It may possibly ban their use within Australia. Hence the company faces potential ban if the order goes against them. It will have to return the advances already received.

b.

The following two accounts are likely to be affected if the business risks as mentioned above materializes -

- Unearned revenue A/c - If the Australian Medical Association bans the test machines, then HealthyGlow would be required to return the advances it has received. Thus, Unearned Revenue account will be negatively affected.

- Cash Account - Return of cash already received will also impact the Cash account negatively

- Sales Account - The future sales of the company will be affected. Hence, Sales A/c will also be affected to the business risks faced by Healthy Glow.

c. The following asertions are at risk for each individual accounts -

a. Unearned Revenue A/c => Cutoff Assertion - Whether the transaction have been recorded in the period to which it corresponds

b. Cash A/c - Valuation assertion - Is the amount valued and recorded correctly

c. Sales Account - Occurence assertion - Whether the recorded sales actually took place

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