11-39. Simulation

An auditor's working papers include the following narrative description of the cash receipts and

billing portions of Southwest Medical Center's internal control. Evaluate each condition following

the narrative as being either (1) a strength, (2) a deficiency, or (3) not a strength or a deficiency.

Southwest is a health care provider that is owned by a partnership of five physicians.

It employs 11 physicians, including the five owners; 20 nurses; five laboratory and X-ray

technicians; and four clerical workers. The clerical workers perform such tasks as reception,

correspondence, cash receipts, billing, accounts receivable, bank deposits, and appointment

scheduling. These clerical workers are referred to as office manager, clerk #1, clerk #2, and

clerk #3. Assume that the narrative is a complete description of the system.

About two-thirds of Southwest'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 case-by-case basis to about 5 percent of the patients.

When services are rendered, the attending physician prepares a prenumbered 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 PC 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 PC patient receivable 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. (This list also includes the cash and checks personally given to

clerk #2 by patients.) 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 each 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 PC

and deletes these receivables from the applicable insurance companies. Clerk #2 deletes the

patient receivables that appear to be uncollectible from clerk #2's PC when authorized by the

office manager. 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

prenumbered 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

the managing partner.

All four clerical employees perform their tasks on PCs that are connected through a local

area network. Each PC is accessible with a password that is known only to the individual

employee and the managing partner. Southwest uses a standard software package that was

acquired from a software company and that cannot be modified by Southwest'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."

Conditions

a. Southwest is involved only in medical services and has not diversified its operations.

b. Insurance coverage for patients is verified and communicated to the clerks by the office

manager before medical services are rendered.

c. The physician who renders the medical services documents the services on a prenumbered

slip that is used for recording revenue and as a receipt for the patient.

d. Cash collection is centralized in that clerk #2 receives the cash (checks) from patients and

records the cash receipt.

e. Southwest extends credit rather than requiring cash or insurance in all cases.

f. The office manager extends credit on a case-by-case basis rather than using a formal credit

search and established credit limits.

g. The office manager approves the extension of credit to patients and also approves the

write-offs of uncollectible patient receivables.

h. Clerk #2 receives cash and checks and prepares the daily bank deposit.

i. Clerk #2 maintains the accounts receivable records and can add or delete information on the PC.

j. Prenumbered service slips are accounted for on a monthly basis by the outside accountant,

who is independent of the revenue-generating and revenue-recording functions.

k. The bank reconciliation is prepared monthly by the outside accountant, who is independent

of the revenue-generating and revenue-recording functions.

l. Computer passwords are only known to the individual employees and the managing partner,

who has no duties in the revenue-recording functions.

m. Computer software cannot be modified by Southwest's employees.

n. None of the employees who perform duties in the revenue-generating and revenuerecording

functions are able to write checks.