You are undertaking the fieldwork for the audit of the financial statements of CAREFREE Limited for the year ended 31 December 2020. CAREFREE owns and operates a network of six private nursing homes, each with facilities for up to 50 patients. In each home some of the patients are temporary patients recuperating from acute illness, while others are long term. The company has expanded rapidly, following a change in ownership and management in March 2019, prior to which it had only two nursing homes in operation for several years.

Each home is under the control of a matron, who authorizes all admissions;
the staff consists of part time and full time nursing staff, as well as part time employees dealing with areas such as catering, cleaning and maintenance.
Before the change in ownership and management, each of the two homes arranged the billing of its own clients (usually relatives of the patients have responsibility for payment) and dealt with all queries and collections. As the business expanded, it was considered necessary to recruit an accountant/administrator who, as well as dealing with payroll matters, has implemented a centralized PC-based billing system for income and trade receivables.
You have noted the following aspects of the billing system:
●● There is a standard daily residential charge (which may differ from home to home), which is used as a basis for monthly bills. Each matron has a limited discretion to allow reductions from the standard charge in cases of exceptional hardship.
●● Matrons are expected to notify the accountant/administrator by telephone on a daily basis of all changes in occupancy.
●● The accountant/administrator should be notified by telephone on a weekly basis of all costs for medical attendance or prescription medicines.
The accountant/administrator has found it difficult to ensure that the necessary information is received from the matrons within the appropriate timeframe. She/
he has also found that there has been an increasing number of complaints from clients, concerning such matters as:
1 Rates used for billing residential charges differing from rates advised by the relevant matron to the patients’ relatives.
2 Fees for medical attendance not coinciding with information about doctors’
visits supplied to the patients’ relatives.
In most cases, complaints are received by the accountant/administrator, who frequently has difficulty in ensuring that the matrons investigate the complaints and report any adjustments to the bills which may be required. Most queries are resolved eventually, but one of the side effects of the problems experienced is that bill are outstanding on average for 50 days as opposed to 22 days in 2019. In a small number of cases, the period of arrears is substantial, but CAREFREE finds it virtually impossible to have patients removed, and very difficult to press too hard for payment given the recent history of errors in the billing procedure.

Required:
1 Draft a management letter for the Board of CAREFREE and to the head of the Audit Committee, making suggestions as to how the billing system might be improved, both from the point of view of control and to increase operational efficiency.

2 Specify two aspects of the audit of trade receivables in the financial statements for the year ended 31 December 2020 which will require particular attention in view of any weakness that you have identified.