Case B (risk, planning, controls and testing) Value: 25% Due Date: 13-Sep-2019 Length: 2,500 words Background You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm...

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Case B (risk, planning, controls and testing)

Value:25%Due Date:13-Sep-2019Length:2,500 words


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 teamDuring 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 payableWhilst on site at DHL's Head Office in early July, Jek Porkins undertook two accounts payable tests:
115 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.
2Selected 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 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:

  1. the associated audit risks
  2. two key questions to ask internal audit
  3. 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:

  1. the key account balance(s) and associated assertions at risk due to Acuity Vision's arrangements for paying its sales team
  2. the implications for the control environment within DHL, including specific issues management would need to consider
  3. the effectiveness of his customer payments testing

Question 4 (5%)

Both accounts payable tests he has undertaken. Specifically:

  1. whether each is a test of control or substantive test
  2. the key assertion addressed by each test
  3. the reasonableness of the conclusion reached for each test
  4. additional audit procedures, if any, that need to be performed.

Answer this question using the following table:

Testtype of testkey assertionreasonableness of conclusionadditional audit procedures


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.
Answered Same DaySep 08, 2021ACC568Charles Sturt University

Answer To: Case B (risk, planning, controls and testing) Value: 25% Due Date: 13-Sep-2019 Length: 2,500 words...

Preeta answered on Sep 13 2021
68 Votes
Samway Baker Fitzgerald (SBF).
To: Jek Porkins.
Subject: Audit of Dudley Health Limited (DHL).
    The purpose of this memo is to discuss the audit of Dudley Health Limited (DHL). The preliminary work has already been done and details will be made.
At first Pellegrino Shores needs to be considered and discussion will be made on audit of that entity. Fraud was found at Pellegrino Shores where a senior staff had to be dismissed after it was found that
she was reducing the fees of some residents in return of some payments. She had the responsibility of only updating the room location charges but she had access to the whole database of the resident and so she could reduce the staying period of the residents and value of the services. A fellow employee discovered that and she was caught.
The type of fraud committed by the staff was fraud in financial reporting. Frauds cause high business risk for any organization (Rittenberg, Johnstone & Gramling, 2010). The kind of fraud which the staff committed has caused financial loss for the company. The staff reduced the service charges for some residents leading to monitory loss for the company. This is a typ of billing fraud. The accounts which might have been affected by the fraud are sale account and so ultimately profit was also affected. Often it is noticed that other employees are influenced by the act of one employee. So, there are possibilities that other employees can get the same idea by seeing the staff committing fraud and they might also be influenced to commit fraud.
Another business risk is the blow to the reputation of the company for the external factors that is the customers. This type of behavior of the employees will harm the image of the
and. Public trust on the organization is reduced. In fact business partners might also lose their interest in the company due to such frauds. The company needs to follow up in the future to avoid such kind of fraud. No opportunity should be given for the commitment of such fraud in future. It is to be seen that the staffs are being paid enough so that they do not need to indulge into frauds (Dorminey, 2012). It has been noticed that in Pellegrino Shores staffs have often worked overtime due to shortage of staffs and they might feel that they are not getting enough for the work they put and this might have been the cause of such fraud. So, the company should take care of such things and should try to keep their staffs satisfied in order to avoid such frauds in future.
    Next the discussion will be made on St Neville's patient revenue system, which has been changed recently. Some audit risk always pertain (Chang, 2008). The revenue system of the company has recently been changed. The billing system, patient data base and rates database everything was improved. Due to some problems the database was changed later, moreover there were high number of complaints from the patients regarding wrong billing and wrong details. Although it has been said that the bugs were fixed yet it is not possible to fully be satisfied with the information given. Due to the newness of the revenue system the misstatements might not be identified and the risks will remain that the audit opinion might not be free from material misstatement. Due to power shortage every patient invoice was later entered manually. Although cross check will be done yet some invoices might have been missed and there remains audit risk. There are also still some existing problems with the revenue system since like some invoices have been made in the name of the past patients, many patients companied that medical fund and pensioner subsidy rates are not well lined up, in some cases lower room rates were charged for some patients. There can be huge impact of all these facts on the revenue of the company. This information was collected from the staffs of the company, so the authenticity of the information can be assured of. Although it has been mentioned that the bugs have been fixed yet there is no authenticity about that and so totally cannot be relied upon. It is difficult to assess the accumulated misstatements from all the causes on the revenue system of the company and so audit risk can pertain in the end.
    It is very important for companies to maintain their internal audit (Prawitt, Smith & Wood, 2009), it shows the credibility and integrity level of the company. There are a few questions which should definitely be asked to internal auditor. The first question should be what procedure is followed by the internal auditor for the successful internal audit. The next important question should be regarding the parties who are involved in the process of internal audit to ensure that the top level management is not...

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