In: Accounting
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities:
•Shady Oaks Centre, a private treatment centre
•Gardens Nursing Home Ltd., a private nursing home
•Total Laser Care Limited (TLCL), a private clinic that specializes in the laser treatment of skin defects
Year end for all HCHG entities is June 30.
You are an audit senior on the Shady Oaks Hospital engagement. Your initial review of the business has highlighted the following significant risks.
1. Payroll expense. Shady Oaks employs, in addition to its full-time staff, a significant number of casual professional, 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.
2. Accounts payable. Shady Oaks also has a large number of suppliers for various medical supplies. Paying the supplier twice for the same purchase has been a continuing problem.
In addition, your business risk assessment procedures indicate there is a risk that payments to suppliers are made prior to goods being received. As part of your evaluation of the potential mitigating internal controls, you note that accounting staff perform the following procedures:
1. A pre-numbered cheque requisition is prepared for all payments.
2. The details on the supplier's invoice are matched to the appropriate receiving report.
3. The details on the supplier's invoice and receiving report are matched to an authorized purchase order.
4. The cheque requisition is stapled to the authorized purchase order, receiving report, and supplier's invoice and forwarded to the appropriate senior staff member for review and authorization.
5. The authorized cheque requisition, together with the supporting documents, is passed to accounts payable for payment.
Required
(a) Identify the key assertion at risk for payables in relation to payments made prior to receipt of goods.
(b) For the control procedures (1) to (5) above for payables:
(i) Identify the key preventive internal control that directly addresses the risk of payments being made by Shady Oaks to its suppliers before the goods are received.
(ii) Outline how your choice of the internal control in (i) will prevent payment to suppliers prior to receipt of goods.
(iii) Design and describe in detail an appropriate test of control that you would use to
satisfy yourself that this internal control is effective.
(a) Payment to suppliers before goods are received creates the risk that the payment is for goods that may never be received, or not received in the relevant period at the price quoted. The assertions at risk are the occurrence of the payment of payables. The cheque has been drawn against the bank account, but the payment is not for a liability owing for goods purchased.
(b) i, ii, iii
Requiring a receiving report before payment (with appropriately verified details of date, amount, unit price, total price and supplier) mitigates the risk of payment before receipt of goods. The receiving department will not prepare the receiving report until the goods are received. The senior staff member will review the package of documents for evidence of receipt, thus ensuring that the receiving report is included, and it matches the other documents.
I would review authorized packages of documents for evidence of the existence of the receiving report and verify that the details on the receiving report match the other documents (i.e., the number of goods received is the same as the number of goods on the supplier’s invoice and purchase order).
I would review authorized packages of documents for evidence of the existence of the receiving report and verify that the details on the receiving report match the other documents (i.e., the number of goods received is the same as the number of goods on the supplier’s invoice and purchase order).