Sunway LUniversilty Business School You are auditing the sal

Sunway LUniversilty Business School You are auditing the sales and collection cycle of Tropicana Medical Centre Sdn Bhd, a private hospital in Kuale Lumpur established by the Tan family The hospital has a reputation for excellent medical services but ?? weak in its record keeping The medical personnel have a tradtion of doing all aspects of the job well, but because of a shortage of accounting personnel, there is insufficient time for internal verification or review. In previous years, your audit firm has found a number of misstatements in billings, cash receipts and accounts receivable. As in all hospitals, the two largest assets are accounts rocoivablo and proporty, plant and oquipmont. The hospital has sovoral largo loans payable to local banks and two banks have told the management that they are reluctant to extend more credit, espocially considoring the modern hospital that is boing built in a nearby suburb. In the past, the Tan family had been injecting additional funds to finance any operating deficits but there are concerns that they may not be able to support the venture any longer In previous years, the response from patients to confirmation requests has been extremely low and those who responded did not know the purpose of confirmations or their correct outstanding balance. You have had the same experience in confirming receivables from other hospitals You conclude that control over cash is excellent and the likelihood of fraud is extremely small. However you are less confident about unintentional errors in billing, recording salos, cash rocoipts, accounts rocoivable (a) Critically discuss the major factors affecting client business risk and the inherent risks for this audit (7 marks) (b) In this audit of the sales and collection cycle, critically discuss the type of tests that you (10 marks) (c) Based on the above analysis, critically evaluate the area of emphasis for each of the following procedures, giving your reasons: . Tests of details of balances. (8 marks) (Total: 26 marks) 12

Solution

a)The major factors affecting client business risk and inherent risks for this audit :

b) While going through the sales and collection cycle, the tests to be performed are:

c)

1. Tests of control : The control tests should be on the cash receipts from the accounts receivables which are supposed to be equal to the total of invoices or sales. Periodical balance of receivables must be calculated.

2. Substantive tests of transactions : The transactions of the sales transactions must be evaluated in a way that the invoices should be given preference according to the amount of sales. Higher the amount, more importance should be given to the receivables.

3. Analytical procedures : The procedures of the billing and collection cycle should be reviewed and reconciled with the cash receipts periodically.

4. Tests of details of balances : The confirmation of the balances at the end of various period should be taken for the debtors and checked with the outstanding lists of debtors on that date. The confirmations and the balances should match with each other.