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Case B (Risk, Planning, Controls and Testing)
Length: 2,500 words
Submission method options: EASTS (online)
You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm with offices in Orange, 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
It’s 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:
- 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.
- Patient database: a master file containing personal patient details as well as the period of stay, services provided and client medical insurance details.
- 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:
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.|
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.
Write a memo to Jek Porkins, the audit senior on the DHL assignment that advises him on:
Question 1 (4%)
The business risk impact and the accounts (as well as related audit assertions) most likely affected by the fraud at Pellegrino Shores.
Question 2 (6%)
Additional audit work to be undertaken in relation to the switchover of the new patient revenue system at St Neville’s. Specifically:
- the associated audit risks
- two key questions to ask internal audit
- 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 to Acuity Vison’s sale of medical supplies. Specifically:
- the key account balance(s) and associated assertions at risk due to Acuity Vision’s arrangements for paying its sales team
- the implications for the control environment within DHL, including specific issues management would need to consider
- the effectiveness of his customer payments testing
Question 4 (5%)
Both accounts payable tests he has undertaken. Specifically:
- Whether each is a test of control or substantive test
- The key assertion addressed by each test
- The reasonableness of the conclusion reached for each test
- Additional audit procedures, if any, that needs to be performed.
Answer this question using the following table:
|Test||type of test||key assertion||reasonableness of conclusion||additional audit procedures|
Question 5 (4%)
The key assertion at risk in relation to the payment of overtime at Pellegrino Shores, a preventative internal control and a detective internal control that would directly address the risk.
Subject learning outcomes
This assessment task will assess the following learning outcome/s:
- Be able to demonstrate risk management methodologies and the role of internal controls in an audit context.
- Be able to design an audit plan and select and apply appropriate audit procedures for a financial statement audit.
- Be able to exercise critical and reflective judgement and appreciate the value of ethical practice.
Graduate learning outcomes
This task also contributes to the assessment of the following CSU Graduate Learning Outcome/s:
- Academic Literacy and Numeracy (Application) – CSU Graduates consider the context, purpose, and audience when gathering, interpreting, constructing, and presenting information.
- Professional Practice (Knowledge) – CSU Graduates possess the knowledge and understanding of the discipline and the nature of professionalism required for the given profession or discipline in contemporary societies.
- Professional Practice (Skill) – CSU Graduates demonstrate discipline-specific technical capabilities and self-appraisal required for a beginning practitioner or professional.
Marking criteria and standards
|Analysis of the client’s business risk and application to the audit risk model(4 marks).
|Comprehensive and coherent explanation of the impact of fraud on business risk, demonstrating an insightful understanding of its relationship to audit risk.||Comprehensive explanation of the impact of fraud on business risk and its relationship to audit risk.||Coherent explanation of the impact of fraud on business risk and audit risk.||Limited explanation of the impact of fraud on business risk, minimal connection to audit risk.|
|Identification of an audit strategy that minimises identified audit risk(6 marks).
|Comprehensive and articulate identification of all risks associated with the new patient revenue system. Demonstrates an insightful audit strategy to minimise audit risk.||Accurate identification of most risks associated with the new patient revenue system and demonstrates a thorough audit strategy to minimise audit risk.||Most risks associated with the new patient revenue system identified and demonstrates an effective audit strategy to minimise audit risk.||Most risks associated with the new patient revenue system identified. Demonstrates a limited audit strategy to minimise audit risk.|
|Appraisal of the client’s internal control environment, the effectiveness of audit procedures, and application to the audit risk model(6 marks).||Comprehensive and coherent appraisal of the internal control weaknesses in relation to the sales team. Demonstrates an insightful understanding of audit procedures that most effectively minimise audit risk||Comprehensive appraisal of the internal control weaknesses in relation to the sales team. Demonstrates a thorough understanding of audit procedures that most effectively minimise audit risk.||Coherent appraisal of the internal control weaknesses in relation to the sales team. Demonstrates an understanding of audit procedures that most effectively minimise audit risk.||Limited appraisal of the internal control weaknesses in relation to the sales team. Demonstrates a limited understanding of the audit procedures.|
|Identification and appraisal of tests of control and substantive tests of balances(5 marks).||Comprehensive and coherent appraisal of the audit procedures undertaken on accounts payable. Demonstrates an insightful understanding of audit procedures that most effectively minimise audit risk.||Comprehensive appraisal of the audit procedures undertaken on accounts payable. Demonstrates a thorough understanding of audit procedures that most effectively minimise audit risk.||Coherent appraisal of the audit procedures undertaken on accounts payable. Demonstrates an understanding of audit procedures that most effectively minimise audit risk.||Limited appraisal of the audit procedures undertaken on accounts payable. Demonstrates a limited understanding of the audit procedures.|
|Appraisal of the client’s internal control environment and development of audit procedures to overcome audit risk(4 marks).||Comprehensive and coherent development tests of control in relation to payroll that demonstrates an insightful understanding of audit procedures most effectively minimise audit risk.||Comprehensive development tests of control in relation to payroll. Demonstrates a thorough understanding of audit procedures that most effectively minimise audit risk.||Coherent development of tests of control in relation to payroll. Demonstrates an understanding of audit procedures that most effectively minimise audit risk.||Limited development of tests of control in relation to payroll. Demonstrates a limited understanding of the audit procedures that most effectively minimise audit risk.|
|These last two criteria relate to the whole of the case study. NB. Although these criteria are not given a separate mark, they will be taken into account when marking each of the previous three criteria.|
|Professional communication * Arial 10pt or TNR 12 pt. font;* 1.5 or double line spacing;
* accurate spelling, grammar, punctuation, and word choice.
|Focused, intelligible, accurate, and concise statements are structured and organised in a manner that facilitates the reader’s understanding.||Focused and intelligible statements with minimal errors are
structured and organised in a manner that facilitates the reader’s understanding.
|Intelligible statements are organised into paragraphs which convey a single idea or argument and a coherent perspective despite minor spelling, grammar and punctuation errors.||Intelligible statements are structured into a response that may contain spelling, grammar and punctuation errors|
|Appropriate resources and correct referencing
|Seamlessly and articulately integrated evidence from at least three credible, relevant sources.
All work has been referenced correctly as per APA (6th ed.) requirements.
|Integrated evidence from two or more credible, relevant sources.
All work has been referenced correctly as per APA (6th ed.) requirements.
|Supported arguments with evidence from one or more credible, relevant sources.
All work has been referenced within the body of the answer and in the reference list. Occasional formatting errors and/or omissions of information do not comply with APA (6th ed.) but do not affect transparency or traceability of source material.
|Supported argument with evidence from the text. Others’ work is always acknowledged. Frequent formatting errors and/or omissions of information do not comply with APA (6th ed.) but do not affect transparency or traceability of source material.|
Assessment tasks should be submitted on EASTS as a Microsoft Word document. Do not submit as a PDF document.
- The first page should contain your name, student number, subject code, word count and due date. Please use 12 point font and avoid the use of fancy templates with added colour or graphics.
- Lines should be double spaced.
- The assessment tasks should be within +/- 10% of the word limit. The word count is taken from the first word to the last word and includes quotes. Quotes must comprise less than 10% of the total word count.
- Proof-read your work so that it is free of spelling, grammar and punctuation mistakes. Use language that is appropriate to academic and professional tasks. Ensure you use respectful and appropriate terminology. For assistance, see Learning Skills: http://www.csu.edu.au/division/studserv/learning
- Your reference list should contain all source documents that you refer to, quote or paraphrase from. It must conform to the APA referencing style: http://student.csu.edu.au/__data/assets/pdf_file/0011/294977/APAReferencingSummary2013.pdf