you are an experienced audit manager at samway baker fitzgerald sbf an accounting fi 3819138


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:

Test Result Conclusion
1 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.
2 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 andthe 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:

  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 to Acuity Vison’s sale 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:

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 anda detective internal control that would directly address the risk.

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