LO 11-4,6 11-35. Hale Nelson, CPA, is engaged to edit the financial statements of Hollis Manufacturing, Inc. Hollis engages in very complex sales agreements that create issues with respect to revenue recognition. As a result, Nelson has identified revence recognition as an audit area of sipi- cant risk that requires special sadit consideration Describe the implications of Nelson's identification of revenue recognition as an area of significant risk. Describe how Nelson might decide to react to the significant risk related to revenue roogmation Required: LCTR $ 11-39. Simulation An auditor's working papers include the following arrative description of the cash ripe od billing portions of Southwest Medical Center's mal control. Evaluate each condition following the name 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 1l physicians, including the five own ; 20 nurses, five laboratory and X-ray technicians and four clerical workers. The clerical workers perform sach tasks as recepcion, correspondence, cash receipts, Milline ac t s receivable, bank deposies, and appointment scheduling These clerical workers are referred to as office manager, clerk 1, clerk 2, and clerk 3. Assume that the n ative 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 clertes. Most of the other patients pay for services by ch 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 prepare a prenumbered service slip for each patient and gives the slip to clerkol for pricing Clerk complete 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 receivable from the insurance company if the office manager has verified the patient's coverage, or Clerk 2 s o lvable from the paticat on clerk W2's PC the office manager has approved the patient's credit, or Clerk #2 receives cash or a check from the patient as the parent leaves the medical center, and clerk 12 records the cash receipt At the end of each day, clerk 2 prepares a revenue summary. Clerk #1 performs correspondere functions and opens the incoming mail. Clerk #1 gives checks from i n ce companies and patients to clerk #2 for deposit. Cerk 2 posts the receipt of patients checks on clerk 02's PC patient receivable records and insurance compa nies checks to the receivables from the applicable insurance companies. Clerk Wl gives mail requiring correspondence to clerk Clerk 12 m all check 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 keep a copy of the deposit lista gives the original to clerk #3 Clerk 3 personally makes the daily bank deposit and maintains a file of the daily bark deposits. Clerk 13 also performs appointment scheduling for all of the doctors and various 500 per correspondence factsCerta i ns a list of patients whose name coverage the office managers verified When Inse lms or patriables are s ettled within 60 days, clerk 2 noti- fies the office manager. The office personally inspect the details of each instance of no payment. The office manager ce claims that have been rejected by insurance companies into patient receivables Clerk rond these patient receivables clak 2's PC and delete these c ables from the applicable insurance companies Clerk 12 delete the paint recevables appear to be celebra cek s PC when thered by the office meer k o s with bestille balces und des a copy of delicat e will dowhere parts to make appointments for services Once a month posts clerk 's daily revenue s to the peo- calleder, prepare a walance and mothly financial statements, accounts for pembered service pe Siles payroll forms and text s, 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 maig a Southwest and software package that was acquired from sowe c h at robe modified by Southwest's employees None of the clerical employees are able to write checks co the company's account Por each of the following cod e , indicate whether they present an internal control g r e y " the condition is not an internal strength or deficiency, respond that the condition is the Conditions 4. Southwest is involved only in medical services and has not diversified its operations Insurance coverage for patients is verified and communicated to the clerks by the office manager before medical services are rendered The physician whorender the medical services down the services on a prembered slip that is used for recogree and as a recept for the patient Cash collection is contraditat clerk 2 receives the cash (checks) from paints and monds the cashop & Southwest extended the quiring cash or insurance in all cases The office presence by c onsther than sing a formal credit search and bad cred i ts The office manager approve the of credit to patients and also approves the write-offs of uncollectible patient receivables Clerk meves cash and checks and prepares the daily bank deposit i Cerk 2 maintains the accounts receivable record and can add or delete information on the PC. Prenumbered service slips e d for a monthly basis by the outside C D who is independent of the even i ng and revencecording functions The bankre a tion is prepared meatly by the outside accountant, who is indepen del of the g e ng factions I Computer passwords are allows to the individual employces and the managing part- er, who has no dies in the re c ording functions m Computer software cannot be sodified by Southwest's employees None of the employees who perform duties in the revenue generating and revenue recording functies e le to write checks LO 11-6 11-41. Simulation Anditor may use confirmations of accounts receivable. Reply as to whether the following statements are correct or incorrect with respect to the confirmatice pro when applied to accounts receivable a. The confirmation requests should be mailed to respondents by the CPAS. b. A combination of positive and negative roguest forms must be used if receivables are nificant c. Second requests are ordinarily sent for positive form confirmation requests when the first aquest is not returned 502 Chapter Eleven d. Confirmation address existence more than they address completeness & Confirmation of accounts receivable is a generally accepted auditing standard. The suditors ordinarily should confirm accounts receivable. Auditors should always confirm the total balances of accounts rather than individual por tions o f the balance is made up of three sales, all three should be confirmed Audio y por individually m aterial sounts when confirming accounts receivable. i The best way to evaluate the results of the confirmation process is to compare the total misstatements identified to the accounts tolerable statements amounts 1 Accounts receivable are ordinarily confirmed on a standard for developed by the American Institute of Certified Public Accountants and the Financial Executives LO 11-4,6 11-35. Hale Nelson, CPA, is engaged to edit the financial statements of Hollis Manufacturing, Inc. Hollis engages in very complex sales agreements that create issues with respect to revenue recognition. As a result, Nelson has identified revence recognition as an audit area of sipi- cant risk that requires special sadit consideration Describe the implications of Nelson's identification of revenue recognition as an area of significant risk. Describe how Nelson might decide to react to the significant risk related to revenue roogmation Required: LCTR $ 11-39. Simulation An auditor's working papers include the following arrative description of the cash ripe od billing portions of Southwest Medical Center's mal control. Evaluate each condition following the name 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 1l physicians, including the five own ; 20 nurses, five laboratory and X-ray technicians and four clerical workers. The clerical workers perform sach tasks as recepcion, correspondence, cash receipts, Milline ac t s receivable, bank deposies, and appointment scheduling These clerical workers are referred to as office manager, clerk 1, clerk 2, and clerk 3. Assume that the n ative 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 clertes. Most of the other patients pay for services by ch 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 prepare a prenumbered service slip for each patient and gives the slip to clerkol for pricing Clerk complete 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 receivable from the insurance company if the office manager has verified the patient's coverage, or Clerk 2 s o lvable from the paticat on clerk W2's PC the office manager has approved the patient's credit, or Clerk #2 receives cash or a check from the patient as the parent leaves the medical center, and clerk 12 records the cash receipt At the end of each day, clerk 2 prepares a revenue summary. Clerk #1 performs correspondere functions and opens the incoming mail. Clerk #1 gives checks from i n ce companies and patients to clerk #2 for deposit. Cerk 2 posts the receipt of patients checks on clerk 02's PC patient receivable records and insurance compa nies checks to the receivables from the applicable insurance companies. Clerk Wl gives mail requiring correspondence to clerk Clerk 12 m all check 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 keep a copy of the deposit lista gives the original to clerk #3 Clerk 3 personally makes the daily bank deposit and maintains a file of the daily bark deposits. Clerk 13 also performs appointment scheduling for all of the doctors and various 500 per correspondence factsCerta i ns a list of patients whose name coverage the office managers verified When Inse lms or patriables are s ettled within 60 days, clerk 2 noti- fies the office manager. The office personally inspect the details of each instance of no payment. The office manager ce claims that have been rejected by insurance companies into patient receivables Clerk rond these patient receivables clak 2's PC and delete these c ables from the applicable insurance companies Clerk 12 delete the paint recevables appear to be celebra cek s PC when thered by the office meer k o s with bestille balces und des a copy of delicat e will dowhere parts to make appointments for services Once a month posts clerk 's daily revenue s to the peo- calleder, prepare a walance and mothly financial statements, accounts for pembered service pe Siles payroll forms and text s, 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 maig a Southwest and software package that was acquired from sowe c h at robe modified by Southwest's employees None of the clerical employees are able to write checks co the company's account Por each of the following cod e , indicate whether they present an internal control g r e y " the condition is not an internal strength or deficiency, respond that the condition is the Conditions 4. Southwest is involved only in medical services and has not diversified its operations Insurance coverage for patients is verified and communicated to the clerks by the office manager before medical services are rendered The physician whorender the medical services down the services on a prembered slip that is used for recogree and as a recept for the patient Cash collection is contraditat clerk 2 receives the cash (checks) from paints and monds the cashop & Southwest extended the quiring cash or insurance in all cases The office presence by c onsther than sing a formal credit search and bad cred i ts The office manager approve the of credit to patients and also approves the write-offs of uncollectible patient receivables Clerk meves cash and checks and prepares the daily bank deposit i Cerk 2 maintains the accounts receivable record and can add or delete information on the PC. Prenumbered service slips e d for a monthly basis by the outside C D who is independent of the even i ng and revencecording functions The bankre a tion is prepared meatly by the outside accountant, who is indepen del of the g e ng factions I Computer passwords are allows to the individual employces and the managing part- er, who has no dies in the re c ording functions m Computer software cannot be sodified by Southwest's employees None of the employees who perform duties in the revenue generating and revenue recording functies e le to write checks LO 11-6 11-41. Simulation Anditor may use confirmations of accounts receivable. Reply as to whether the following statements are correct or incorrect with respect to the confirmatice pro when applied to accounts receivable a. The confirmation requests should be mailed to respondents by the CPAS. b. A combination of positive and negative roguest forms must be used if receivables are nificant c. Second requests are ordinarily sent for positive form confirmation requests when the first aquest is not returned 502 Chapter Eleven d. Confirmation address existence more than they address completeness & Confirmation of accounts receivable is a generally accepted auditing standard. The suditors ordinarily should confirm accounts receivable. Auditors should always confirm the total balances of accounts rather than individual por tions o f the balance is made up of three sales, all three should be confirmed Audio y por individually m aterial sounts when confirming accounts receivable. i The best way to evaluate the results of the confirmation process is to compare the total misstatements identified to the accounts tolerable statements amounts 1 Accounts receivable are ordinarily confirmed on a standard for developed by the American Institute of Certified Public Accountants and the Financial Executives