A summary of an internal audit engagement performed at the request of executive management is presented below.

The claims department of XYZ Insurance Company has instituted new claims procedures for local offices. The new procedures were 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 the audit engagement. Management told the internal auditors that 20 complaints had been received recently about the excessive time it took to receive the insurance proceeds for their claims. The company advertises 48-hour claim service. Each of the 20 claims that generated the 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 the claims took too long to process, many clients would switch to another company. The internal auditors decided to find out if processing time had really increased, and if so, whether this was because of the new procedures.

The internal auditors decided to test 25 randomly selected claims made since the change in the procedures and 25 claims from before the procedures and compare them. The tests revealed that the new process had caused an increase in the processing time for two reasons. First, there was a learning effect with the new required forms. The headquarters claims department often had to correct the forms and request additional information before claims could be processed. Second, the new process required 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 companys claims adjusters.

The internal auditors estimated that the delayed disposition of the claims seriously eroded the marketability of the companys insurance policies, perhaps decreasing sales by as much as 10 percent the first year and up to 25 percent in subsequent years. The new procedure also increased the cost of servicing claims by 5 percent to 10 percent, depending on 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.

There were significant differences of opinion within the audit team as to the appropriate course of action. After much debate within the audit team, the final audit report recommended returning to the previous claims service procedures, with minor modifications, to avoid the problems associated with the revised procedures. The additional review procedure recommended in the report was a computer scan of company records to ascertain any previous claims by the 20 claimants and the nature as well as the number of prior claims.

Required:

1. Describe some alternative internal audit procedures the audit team might have chosen to those procedures the team performed. Do you consider your procedures to be superior to the ones chosen? If so, why?

2. Write an alternative internal audit recommendation to the one in the final audit report. You should include two specific actions in your recommendation.