The audit tests in P-1 revealed that the new procedures had indeed caused an increase in claims processing time for two reasons. First, there was a learning effect with the new forms required. The headquarters’ claims department often had to correct the forms and request additional information before a claim could be processed. Also, the new procedures require a more extensive review than before, sometimes even including a field visit by one of the claims staff in addition to the regular inquiry by one of the company’s claims adjusters. The auditors estimated that the delayed disposition of claims seriously eroded the marketability of the company’s policies, perhaps decreasing sales by as much as 10 percent the first year and up to 25 percent in subsequent years. The new procedures also would increase the cost of servicing claims by 5 percent to 10 percent, depending upon whether an additional inquiry is conducted by one of the claims department staff members.

The estimated savings on payment of improper claims was equivalent to a maximum of 10 percent of total expenditures in any one year. The company’s internal auditors determined that returning to the previous claims service procedures, with minor review modifications, would serve the intended purpose and avoid the problems associated with the revised procedures. The additional review procedure recommended by the auditors was a computer scan of company records to ascertain any previous claims by the claimant and the nature as well as the amount of the prior claims.

Required:

Prepare a Summary Findings Sheet from the information given in P-1 and P-2.

P-1

The claims department of National Insurance Company has instituted some new claims procedures for local offices. The new procedures have been designed to improve the review of claims and to prevent both overpayment and payment of false claims. Management mentioned concern about the new procedures at the opening conference of an audit.

Management told the auditors that three complaints had been received recently about the excessive time it took to receive the insurance proceeds for their claims. The company advertises 48-hour claims service. Each of the three claims that generated complaints took seven days. Management said these were the first complaints of this type and were received only after the new procedures were implemented. Management feared that if claims took too long to process, many clients would switch to another company. The auditors decided to find out if processing time really had increased, and if so, whether it was because of the new procedures. The auditors decided to test 25 randomly selected claims made since the change in procedures and 25 claims from before the changes and compare them statistically. If the claims since the change were taking significantly longer, the auditors decided to walk through both processes — before the change and after the change — and stay alert for differences in time requirements. If there were no significant differences in the two samples, the auditors decided to find out why the particular claims responsible for the complaints had been delayed.

Required:

Prepare a schedule showing the development of the expanded audit procedures from the result of the opening conference.