Audit,’Homework’Assignment’3?
36’Points’Possible’ Critical’Reasoning’Required’ Submit’Your’Answers’on’the’Answer’Sheet’in’Doc’Sharing’
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QUESTION’1:’Chapter’7.’Revenue’and’Collection’Cycle.”14’POINTS’
An auditor’s working papers include the following narrative description of the cash receipts and billing portions of Northeast Medical Center’s internal control. Northeast is a healthcare provider owned by a partnership of twelve physicians. There are 20 nurses, five lab techs, and four office workers. The office workers perform such tasks as reception, correspondence, cash receipts, billing, accounts receivable, bank deposits, and appointment scheduling. These office workers are referred to as office manager, clerk #1, clerk #2, and clerk #3.
About 2/3 of Northeast’s patients receive medical services only after insurance coverage is verified by the office manager and communicated to the clerks. Most of the other patients pay for services by cash or check when services are rendered, although the office manager extends credit on a caseGbyGcase basis to about 5% of the patients.

When services are rendered, the attending physician prepares a preGnumbered service slip for each patient and gives the slip to clerk #1 for pricing. Clerk #1 completes the slip and gives the completed slip to clerk #2 and a copy to the patient. Using the information on the completed slip, clerk #2 performs one of the following three procedures for each patient:
• Clerk #2 files an insurance claim and records a receivable from the insurance company if the office manager has verified the patient’s coverage, or
• Clerk #2 posts a receivable from the patient on clerk #2’s computer if the office manager has approved the patient’s credit, or
• Clerk #2 receives cash or a check from the patient as the patient leaves the medical center, and clerk #2 records the cash receipt.
At the end of each day, clerk #2 prepares a revenue summary. Clerk #1 performs correspondence functions and opens the incoming mail. Clerk #1 gives checks from insurance companies and patients to clerk #2 for deposit. Clerk #2 posts the receipt of patients’ checks on clerk #2’s computer patient receivable
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records and insurance companies’ checks to the receivables from the applicable insurance companies. Clerk #1 gives mail requiring correspondence to clerk #3. Clerk #2 stamps all checks “for deposit only” and each day prepares a list of checks and cash to be deposited in the bank. Clerk #2 keeps a copy of the deposit list and gives the original to clerk #3.
Clerk #3 personally makes the daily bank deposit and maintains a file of the daily bank deposits. Clerk #3 also performs appointment scheduling for all of the doctors and various correspondence functions. Clerk #3 also maintains a list of patients whose insurance coverage the office manager has verified. When insurance claims or patient receivables are not settled within 60 days, clerk #2 notifies the office manager. The office manager personally inspects the details of ach instance of nonpayment. The office manager converts insurance claims that have been rejected by insurance companies into patient receivables. Clerk #2 records these patient receivables on clerk #2’s computer and deletes these receivables from the applicable insurance companies. Clerk #2 prepares a list of patients with uncollectible balances and gives a copy of the list to clerk #3, who will not allow these patients to make appointments for future services. Once a month an outside accountant posts clerk #2’s daily revenue summaries to the general ledger, prepares a monthly trial balance and monthly financial statements, accounts for preGnumbered service slips, files payroll forms and tax returns, and reconciles the monthly bank statements to the general ledger. This accountant reports directly to the physician who is managing partner. All four clerical employees perform their tasks on computers that are connected through a local area network. Each computer is accessible with a password that is known only to the individual employee and the managing partner. Northeast uses a standard software package that was acquired from a software company and that cannot be modified by Northeast’s employees. None of the clerical employees are able to write checks on the company’s account. For each of the following conditions, indicate whether they represent an internal control “strength” or “deficiency.” If the condition is not an internal strength or deficiency, respond that the condition is “neither.”
1. Northeast is involved only in medical services and has not diversified its operations.
2. Insurance coverage for patients is verified and communicated to the clerks
by the office manager before medical services are rendered.
2 3. The physician who renders the medical services documents the services on a preGnumbered slip that is used for recording revenue and as a receipt for the patient.
4. Cash collection is centralized. Clerk #2 receives the cash and checks from patients and records the cash and checks receipts.
5. Northeast extends credit rather than requiring cash or insurance in all cases.
6. The office manager extends credit on a caseGbyGcase basis rather than using a formal credit search and established credit limits.
7. The office manager approves the extension of credit to patients and also approves the writeGoffs of uncollectible patient receivables.
8. Clerk #2 receives cash and checks and prepares the daily bank deposit.
9. Clerk #2 maintains the AR records and can add or delete information on the computer.
10. PreGnumbered service slips are accounted for on a monthly basis by the
outside accountant who is independent of the revenue generating and revenue recording functions.
11. The bank reconciliation is prepared monthly by the outside accountant who is independent of the revenue generating and revenue recording functions.
12. Computer passwords are only known to the individual employees and the managing partner, who has no duties in the revenue recording functions.
13. Computer software cannot be modified by Northeast’s employees.
14. None of the employees who perform duties in the revenue generating and revenue recoding are able to write checks.
QUESTION’2:’Chapter’8.’Acquisition’and’Expenditure’Cycle.”3’POINTS’
There are three items below that are management assertions about PP&E. Following them are several substantive procedures for obtaining evidence about management’s assertions.
Assertions 1. The entity has a legal right to PP&E acquired during the year. 2. Recorded PP&E represent assets that actually exist at the balanceGsheet date.
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3. Net property and equipment are properly valued at the balanceGsheet date.
Substantive Procedures
A. Review the provision for depreciation expense and determine whether depreciable lives and methods used in the current year are consistent with those used in the prior year.
B. Vouch a sample of charges in the repairs account and determine whether they are proper repairs and not capital items.
C. Perform cutoff tests to verify that property and equipment additions are recorded in the proper period.
D. Determine whether the responsibility for maintaining the property and equipment records is separated from the responsibility for custody of property and equipment.
E. Trace opening balances in the summary schedules to the priorGyear audit documentation.
F. Perform cutoff tests to verify that property and equipment are adequately insured.
G. Examine deeds and title insurance certificates H. Physically examine all major property and equipment additions.
REQUIRED: For each of the three assertions, select the ONE BEST substantive audit procedure (AGH) for obtaining competent evidence. A procedure may be selected only once or not at all.
QUESTION’3:’Chapter’9.’Production’Cycle.’8’POINTS’
You have been engagement by the management of Boscoe, Inc. to review its controls over the purchase, receipt, storage, and issue of raw materials. You have prepared the following comments describing Boscoe’s procedures.
1. Raw materials, which consist mainly of highGcost electronic components, are kept in a locked storeroom. Storeroom personnel include a supervisor and four clerks. All are wellGtrained, competent, and adequately bonded. Raw materials are removed from the storeroom only upon written or oral authorization of one of the production supervisors.
2. There are non perpetualGinventory records. The storeroom clerks therefore do not keep records of good received or issued. To compensate for the lack of perpetual records, a physical inventory count is taken monthly by the storeroom clerks, who are well supervised. Appropriate procedures are followed in making the inventory count.
3. After the physical count the storeroom supervisor matches quantities counted against a predetermined reorder level. If the count for a given part is below the reorder level, the supervisor enters the part number on a
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materials requisition list and sends this list to the accounts payable clerk. The accounts payable clerk prepares a purchase order for a predetermined reorder quantity for each part and mails the purchase order to the vendor from whom the part was last purchased.
4. When ordered materials arrive at Boscoe, they are received by the storeroom clerks. The clerks count the merchandise and agree the counts to the carrier’s bill of lading. All bills of lading are initialed, dated, and filed in the storeroom to serve as receiving reports.
REQUIRED: Describe the weaknesses in internal control and recommend improvements in Boscoe’s procedures for the purchase, receipt, storage, and issuance of raw materials. Your answer sheet requires your answer to be organized as follows:

QUESTION’4:’Chapter’10.’Finance’and’Investment’Cycle.’4’POINTS’ ‘
**”No”more”than”200?words”**”
Interest expense related to interestGbearing liabilities could be audited using analytical procedures. Describe how this might be done and how the results would be used. ????
QUESTION’5:’Chapter’10.’Finance’and’Investment’Cycle.’1.5’POINTS’ An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion of:
a. Presentation and disclosure b. Valuation or allocation c. Existence or occurrence d. Completeness

QUESTION’6:’Chapter’10.’Finance’and’Investment’Cycle.’1.5’POINTS’
An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the entity’s:
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Weakness
Recommended Improvements

 

 

 
A. Minutes of board of directors meetings B. Transfer agent’s records C. Canceled stock certificates D. Treasury stock certificate book
QUESTION’7:’Chapter’10.’Finance’and’Investment’Cycle.’1.5’POINTS’
In performing tests concerning the granting of stock options, and auditor should

A. Confirm the transaction with the Secretary of State in the state of incorporation
B. Verify the existence of option holders in the entity’s payroll records or stock ledgers
C. Determine that sufficient treasury stock is available to cover any new stock issued.
D. Trace the authorization for the transaction to a vote of the board of directors.
QUESTION’8:’Chapter’10.’Finance’and’Investment’Cycle.”1.5’POINTS’
An auditor most likely would perform substantive tests of details on payroll transactions and balances when

 

A. B. C.
D.
Cutoff tests indicate a substantial amount of accrued payroll expense. The assessed level of control risk relative to payroll transactions is low. Analytical procedures indicate unusual fluctuations in recurring payroll entries. Accrued payroll expense consists primarily of unpaid commissions.
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QUESTION 1: 14 POINTS

Your choices are “strength,” “deficiency,” or “neither.” One word for each answer.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
QUESTION 2: 3 POINTS

You may select ONE answer (A-H) for each of the following. If you select more than one answer, only your first selection will be counted.

1.
2.
3.

QUESTION 3: 8 POINTS

Word limit (I will not read beyond word limit)

For each weakness: 100 words

For each of the recommended improvements: 250 words (though you will not need it)

1. Weakness:

Recommended improvements:

2. Weakness:

Recommended improvements:

3. Weakness:

Recommended improvements:

4. Weakness:

Recommended improvements:
QUESTION 4: 4 POINTS

** No more than 200 words **

 

QUESTION 5. 1.5 POINTS

A, B, C, or D

QUESTION 6: 1.5 POINTS

A, B, C, or D

QUESTION 7: 1.5 POINTS

A, B, C, or D

QUESTION 8: 1.5 POINTS

A, B, C, or D

 

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