Acct6006: Auditing Theory & Assessment Answer

IAH177

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Task:

Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017-year Chan and Partners gained a new client, Medical Services Holdings Group (MSHG), which owns 100 per cent of the following entities:
1. Shady Oaks Hospital, a private hospital group
2. Gardens Nursing Home Pty Ltd, a private nursing home
3. Total Cancer Specialists Limited (TCSL), a private oncology clinic that specialises in the treatment of cancer.

Year-end for all MSHG entities is 30 June.
On 1 April 2017, Gardens Nursing Home Pty Ltd switched from its ‘home grown’ patient revenue system to the MSHG equivalent system. MSHG is confident that its ‘off the shelf’ enterprise system would perform all of the functions that Gardens Nursing Home’s home grown system performed.

Gardens Nursing Home’s home grown patient revenue system comprised the following.

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 allowing for
government subsidies, pensioner benefits and private medical insurance company benefits plans.

2. Patient database — a master file containing personal details about the patient as well as the period of stay, services provided and patient’s medical insurance details.

3. Rates database — a master file that shows all accommodation billing rates, rebate discounts and government assistance benefits. At the request of the board, the group’s internal audit unit was involved throughout the entire switchover process. The objective of its engagement, as the board stated, is to ‘make sure the switch-over worked without any problems’.

As part of the planning arrangement for the 2017 financial report audit, the audit partner Tania Fellowes asked her team to speak with a number of Gardens Nursing Home staff about the impact of the switching to the MSHG patient revenue system. Set out below is an extract of the staff feedback comments:
1. 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.’
2. ‘We seem to have some patient fee invoices where for no reason we have billed patients at a lower room rate than what we hold on the rates database.’
3. ‘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.
4. We then found out that halfway during last month someone from the IT team made a software change to fix a bug in the billing calculation formula.’
5. ‘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’.

REQUIRED
(A) Identify the audit risks associated with the installation of the new IT system for patient revenue.
(B) Comment on the audit strategy likely to be adopted for the audit of patient revenue for Gardens Nursing Home.

Max Crowe is a junior auditor who has just started with the team conducting the audit of a new client in the construction industry. Susan Wong is trying to teach Max about the benefits of getting to know the client. Susan is also trying to help Max develop experience in picking up subtle signals about the client’s problems and what the client might be trying to hide from the auditor.

Max is getting a little frustrated with the time he is required to spend in training. He can’t understand why Susan is spending so much time talking to the client’s staff and touring the various construction sites and offices. When Susan is not doing this, she is working on a spreadsheet of the client’s previous financial report and unaudited interim data. Max wants to know when they are going to do some ‘real’ work and start gathering audit evidence. Susan tells Max that they have already started.

REQUIRED
(A) Discuss Susan’s comment that they have already started the audit. What evidence have they gathered so far?
(B) Explain what work is being done with the spreadsheets of financial data.
Give some specific examples for this client. How is this type of work relevant to all stages of the audit?
(C) When Susan is touring the client’s premises, she is taking notes of equipment and furniture items she sees, especially anything that looks either newly purchased or older and unused. Why might she be doing this? Explain.

Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year, Chan and Partners gained a new client, Medical Services Holdings Group (MSHG), which owns 100 per cent of the following entities:
1. Shady Oaks Hospital, a private hospital group
2. Gardens Nursing Home Pty Ltd, a private nursing home
3. Total Cancer Specialists Limited (TCSL), a private oncology clinic that specialises in the treatment of cancer.

Year-end for all MSHG entities is 30 June.
You are the audit partner reviewing the audit work papers for MSHG for the year ended 30 June 2017.
Today is 13 July 2017 and the audit report is due to be signed in three weeks’ time.

During your review you note that the fixed-term borrowings of MSHG totalling $75 million are approaching maturity and MSHG does not seem to have renegotiated any terms of refinancing. You are aware, from your experience with other clients, that banks are reluctant to extend financing on the same terms in the current market. The financing of MSHG was historically managed by the group’s treasurer who left the group six months ago and has not been replaced.

MSHG’s financial controller, who has been with the group for nine months, has advised you that he has been busy renegotiating with some of MSHG’s key suppliers who recently requested cash on delivery for all orders rather than extending the normal credit terms.

You are also aware that a fire that occurred in the hospital cafeteria last week was not adequately covered by insurance. Fortunately, no one was seriously injured in the fire, but the cafeteria was so badly damaged it had to be closed. While discussing this matter with MSHG’s law firm, they reveal that the hospital is unlikely to have adequate
professional indemnity insurance to meet the current demands of several malpractice cases that have been brought against the hospital in the last 12 months.

REQUIRED
(A) Explain your responsibilities with respect to the cafeteria fire.
(B) How will this event be handled in the financial report and the audit report?
(C) Are there any going concern issues for MSHG? Explain. If so, what are the mitigating circumstances?
(D) How will you recommend the issue be handled in the financial report and the audit report?