ACCT6006 Auditing Theory and Practice

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:
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 what we hold on the rates database.’ 
'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 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.’
‘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.
 
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

Identify the audit risks associated with the installation of the new IT system for patient revenue

When Gardens Nursing Home Pty Ltd switched from its ‘home grown’ patient revenue system to the MSHG equivalent system, there are various audit risks that it could face.  The inherent risk of an area is its susceptibility to a material error in the new IT system for patient revenue-by itself, or in combination with others-assuming there are no corresponding internal controls (Hargie & Tourish, 2009). Using IT based approach, the auditor begins with assessing inherent risks of the MSHG equivalent system. Although the audit risks are dependent on the nature of the business , the risks that Gardens Nursing Home Pty Ltd face may include;

• Data transferring between information systems
• Risks associated with performing customized work
• Control risk associated with using the new revenue system

The identification, management and mitigation of such risks, and many other associated with the use of Information Technologies, constitute, by definition, a fundamental pillar -although not exclusive- of any approach, generally accepted, to IT Governance (Dunn, 2006).In our case, probably the most important risk is that which runs the generalized customer-the audited company itself, interested third parties (shareholders, customers, suppliers) to take for good a bad report (Higson, 2003). That is the so-called risk of the audit: that of giving an incorrect opinion, thus inducing error to others.

The risk of control in an area is that a material error could occur which - by itself, or in combination with other systems- was not prevented / detected / corrected, opportunely, by the Internal Control system. The risk of detection is that the substantive tests of the system do not detect an error that could be material - by itself, or in combination with others (Van Peursem, Pratt & Cordery, 2011).

Comment on the audit strategy likely to be adopted for the audit of patient revenue for Gardens Nursing Home.

The objective of developing an effective audit strategy is to effectively allocate resources to the audit team. The audit strategy likely to be used is by using specialists in the information system revenue system for hospitals to carry out the audit. This will make them notice changes that should be rectified to improve the new system easily (Holtzman, 2008).

To obtain optimal results in any project, it requires a strategy and a constant effort, full of difficulties, triumphs and lessons learned, which generate a cycle of growth and evolution day by day. Therefore, an audit to implement or adopt Best Practices is not the exception and requires the same approach, strategy and clearly defined plan.

It is necessary to clearly define a scope and carry out the audit planning according to the phases on which the processes in the organization will be introduced. For example, these scopes may be based on  functional IT areas, services, systems or applications; for global organizations we must bear in mind that the scope may be associated with cultural differences, language, time zone, etc.

While it is true that the fact of not having to register or follow up, apparently gives a sense of speed, this does not mean that the work done has been efficient or that true value to the business, finally work smart  in the same due to recurrent failures, poorly evaluated changes, poorly planned releases, etc., falls on times that affect the stability of services, in addition to customer perception.

1. Discuss Susan’s comment that they have already started the audit. What Evidence have they gathered so far?

The term audit is the process in which financial records are examined for accuracy and checking of fraud perpetrated in the system by some staff. When Susan says that they have already started the audit, it means the pre audit analysis of the company. It is the process of familiarizing yourself with the company and the financial reports of the company. It is the initial part of the audit process. A pre-audit ensures that the financial reports of a company and all the related information is correct and verifiable before the official audit process commences.It may be undertaken by the employees of the company that is being audited. Starting an audit process means that Max and Susan all the relevant information needed for auditing is already available. In pre audit analysis, the company may also hire an independent company or organization to be able to examine the information required for the audit process. Pre audit process is used in both continuous process of finance monitoring and reviewing the proceedings directly preceding the official audit process.

When Susan tells max that the audit process has already began, it is important to note that pre audit process gives the company an opportunity to correct the basic accounting errors before they are noticed by independent tax agencies. The independent auditing agencies will likely examine and presume that the errors are intentional and therefore deemed illegal and punishable under the law. In knowing the company, the auditor may ask several internal controls procedures and notice what may be done in the process. It is important for every procedure to be followed in checks and controls. For example, the auditor may want to know how the process of finance handling, recording and verification is done by the auditor. Max, as a fairly new person in the auditing sphere should realize that it is not only about verification process in the audit but a comprehensive process that begins with knowing the company to producing an audit report after the audit process.

1. Importance of spreadsheets for financial data.

The spreadsheets of financial data are important in collecting data that is required in the spreadsheets are supposed to help the auditor in verifications of authentic documents.The importance of the spreadsheets is to show the correct valuation of the liabilities and assets of the company. Is also shows whether the balance sheet shows a true and fair value of the affairs of the business, while also trying to find the actual ownership of the assets in the company (Hayes & Schilder, 2000).Example,the spreadsheets also verify the authenticity and actual accuracy of the financial reports. They are also used to ensure that the assets and liabilities are properly recorded.It is also used for verification and if the controls in the company are properly executed. It is also supposed to ensure that the assets are recorded properly in the financial systems and also to detect systematic fraud and errors that may be reported in the financial system  (International standards on auditing, 2003).

1. 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?

Susan is recording assets that may be new or used so as to authenticate their usability in the company. Recording of new assets will ensure that depreciation is not taken into consideration for a new asset. Alternatively, for an old or used asset, the auditor is recording the asset to be able to determine the assets book value. It is also to authenticate if the assets have been recorded in the asset register of the company for purposes of the balance sheet (Hawker, 2000).

(A) Explain your responsibilities with respect to the cafeteria fire.

The responsibility of the auditor is to ascertain if indeed the company was affected by the fire both financially and also other aspects. Thus, the first task of the auditor is to go at the cafeteria and check the extent of the damage caused by the fire.  The auditor will then ask for the previous years financial statements and the asset register to verify the assets that may have been burned down (Van Greuning, Scott & Terblanche, 2011). The importance of this is to calculate the true and fair value of company Gardens Nursing Home Pty Ltd in terms of assets and liabilities. Second, as an auditor, I will ask for the insurance contract that was given when insuring for the cafeteria to know the type of insurance that the cafeteria had been insured for. It is also important to ask for the receipts issued when the insurance premiums were paid (Roode & Leith, 2009).  The auditor should also call the insurance company to verify the facts and the documents produced by the accountant. The auditors should also indicate if there are any assets that have not been lost due to fire and indicate their status of usability in his report.  In his report regarding the fire, the auditor can indicate the cause of the fire, all the assets used and the status of insurance cover.

(B) How will this event be handled in the financial report and the audit report?  

The event will be covered in the notes of the financial report, the auditor indicates the day that the fire occurred , the affected business including the assets that were lost during the event. He will reduce the asset value of the cafeteria from the balance sheet and all the relevant financial statements and also indicate that revenues for the coming year might be affected as a result of the cafeteria fire.

In the audit report the auditor will indicate the insurance status of the company in regards to the cafeteria and if they expect to be paid or not.  He should also indicate the correspondence with the insurance agents and the value of the cafeteria.

1. C) Are there any going concern issues for MSHG? Explain. If so, what are the mitigating circumstances?

Going concern issues are the issues that may affect the business and force it to halt operations and liquidate its assets in the foreseeable future. For MSHG, the following are the going concern issues for the company;

The fixed-term borrowings totaling $75 million that MSHG are approaching maturity and MSHG does not seem to have renegotiated any terms of refinancing. This may affect the operations of the company and if the date of maturity reaches then the company will be forced to liquidate its assets in order to repay the loan (WAHLEN, 2017).  The mitigating circumstance for this is to renegotiate the terms of payment to be more lenient and the management can also negotiate for the maturity date to be pushed in a future date.

Another going concern issue is the fact that company does not 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  (Melville, 2017).  This may be solved by the company opting for an out of court settlement with the litigants to agree on terms that are favorable to the MSHG.

1. d) How will you recommend the issue be handled in the financial report and the audit report?

The issue should be recorded in the footnotes part of the financial reports so as to explain the importance of the borrowings that are almost maturing. It is important to note that the footnotes explain what can’t be shown in the financial reports and are the contingent issues to note (Insights into IFRS, 2016). 

References

Dunn, J. (2006). Auditing. London: Financial Times Prentice Hall.

Hargie, O., & Tourish, D. (2009). Auditing organizational communication. Hove: Routledge.

Hayes, R., & Schilder, A. (2000). Principles of auditing. London: McGraw-Hill.

Higson, A. (2003). Corporate financial reporting. London: Sage Publications.

Holtzman, M. (2008). What's new in financial reporting. Florham Park, N.J.: Financial Executives Research Foundation.

Insights into IFRS. (2016). London.

International standards on auditing. (2003). Stuttgart.

Melville, A. (2017). International financial reporting. Harlow, England: Pearson.

Roode, M., & Leith, K. (2009). Financial reporting. [Pretoria]: [Salt and Pepper].

Shim, J., Shim, J., Qureshi, A., & Siegel, J. (2000). The international handbook of computer security. Chicago, Ill.: Glenlake Pub.

Van Greuning, H., Scott, D., & Terblanche, S. (2011). International financial reporting standards. Washington D.C.: World Bank.

Van Peursem, K., Pratt, M., & Cordery, C. (2011). Auditing. Auckland, N.Z.: Pearson.

WAHLEN, J. (2017). FINANCIAL REPORTING, FINANCIAL STATEMENT ANALYSIS AND VALUATION. [S.l.]: CENGAGE LEARNING.