Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities:
•Shady Oaks Centre, a private treatment centre
•Gardens Nursing Home Ltd., a private nursing home
•Total Laser Care Limited (TLCL), a private clinic that specializes in the laser treatment of skin defects
Year end for all HCHG entities is June 30.
You are an audit senior on the Shady Oaks Hospital engagement. Your initial review of the business has highlighted the following significant risks.
1. Payroll expense. Shady Oaks employs, in addition to its full-time staff, a significant number of casual professional, 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.
2. Accounts payable. Shady Oaks also has a large number of suppliers for various medical supplies. Paying the supplier twice for the same purchase has been a continuing problem.
In addition, your business risk assessment procedures indicate there is a risk that payments to suppliers are made prior to goods being received. As part of your evaluation of the potential mitigating internal controls, you note that accounting staff perform the following procedures:
1. A pre-numbered cheque requisition is prepared for all payments.
2. The details on the supplier's invoice are matched to the appropriate receiving report.
3. The details on the supplier's invoice and receiving report are matched to an authorized purchase order.
4. The cheque requisition is stapled to the authorized purchase order, receiving report, and supplier's invoice and forwarded to the appropriate senior staff member for review and authorization.
5. The authorized cheque requisition, together with the supporting documents, is passed to accounts payable for payment.
Required
(a) Identify the key assertion at risk for payables in relation to payments made prior to receipt of goods.
(b) For the control procedures (1) to (5) above for payables:
(i) Identify the key preventive internal control that directly addresses the risk of payments being made by Shady Oaks to its suppliers before the goods are received.
(ii) Outline how your choice of the internal control in (i) will prevent payment to suppliers prior to receipt of goods.
(iii) Design and describe in detail an appropriate test of control that you would use to
satisfy yourself that this internal control is effective.