Background You are an experienced audit manager at Samway BakerFitzgerald (SBF), an accounting firm with offices in Orange, WaggaWagga, Tamworth, Port Macquarie and Albury in NSW, Toowoomba inQueensland and Ballarat in Victoria. Although a medium-sized firmby national standards, SBF includes Australia’s largestregionally-based auditing practice. Most of SBF’s audit clients arein the manufacturing and service industries. SBF recently acquireda major new audit client, Dudley Health Limited (DHL), which fullyowns:
• St Neville's, a highly regarded private hospital located inTamworth • Acuity Vision, a network of day surgery clinics acrossNSW and Queensland • Pellegrino Shores, a retirement villagelocated in Port Macquarie

Its a chilly evening in early July 2019 and you are meeting withyour audit senior, Jek Porkins, to discuss the findings of hispreliminary work for the 30 June 2019 audit of DHL.
Fraud at Pellegrino Shores Last month a senior staff member atPellegrino Shores was dismissed after it was discovered that shehad worked in collusion with a number of residents to reduce theirfees and receive secret payments from them in return. The seniorstaff member had access to the resident database. Whilst she wasonly supposed to update room location changes for residents, shewas able to reduce the resident's period of stay and the value ofother services provided. The fraud was detected by a fellowemployee who overheard the senior staff member discussing the'scam' with a resident.
St Neville's patient revenue system On Sunday 10 March 2019 StNeville's switched from its 'homegrown' patient revenue system tothe DHL 'off the shelf' revenue system. The DHL internal audit unitwas involved throughout the switchover. DHL was confident that itsrevenue system would perform all of the functions that the StNeville's patient system had performed. The 'homegrown' StNeville's revenue system consisted of:
1. Billing system: produces the invoice to charge the patient forservices provided such as accommodation, medications, and medicalservices. This software includes a complex formula to calculate thepatient bill after allowing for government subsidies, pensionerbenefits and private medical insurance benefits. 2. Patientdatabase: a master file containing personal patient details as wellas the period of stay, services provided and client medicalinsurance details. 3. Rates database: a master file that shows allaccommodation billing rates, rebate discounts, and governmentassistance benefits.
Jek Porkins spoke with a number of St Neville's administrationstaff about the impact of switching to the DHL patient revenuesystem:
• 'There was some sort of power surge last Friday and we had tore-enter every patient invoice that we processed in the last twoweeks'. • 'Lately, we've had an unusually high number of complaintsfrom recently discharged patients that the fee invoice we sent themdoes not line up with the agreed medical fund and pensioner subsidyrates. We found out that halfway through last month someone fromthe IT team made a software change to fix a bug in the billingcalculation formula'. • 'There were some occasions where weinvoiced people that were past patients. This seems to havehappened when they shared the same surname as a current patient'. •'We seem to have some patient fee invoices where for no reason wehave billed patients at a lower room rate than we hold on the ratesdatabase'.
Acuity Vision sales team During the financial year, Acuity Visionreleased its own range of medical supplies which are sold viadirect marketing by a sales team employed by Acuity. The sales teamreceive a fairly low base salary plus a bonus based on the dollarvalue of the sales they generate. Jek Porkins selected a sample ofcustomer payments received by Acuity just after year end and tracedthem back to the general ledger and customer account balance.

DHL accounts payable Whilst on site at DHL's Head Office in earlyJuly, Jek Porkins undertook two accounts payable tests: Test ResultConclusion
1
15 suppliers were selected from the list of trade creditors atyear-end. Balances were traced to supplier invoices and goodsreceived notes to ensure goods were received prior to year-end. Fortwo creditors out of 15 tested the balance was only marginallyoverstated.
Accepted as no material errors were located.
2
Selected 20 suppliers' invoices and checked that the pricing anddiscount terms have been reviewed and authorised by the purchasemanager. Three out of the 20 invoices tested had not beenauthorised and incorrect discounts had been applied to them. Afollow up of the three samples with deviations did not highlight apattern or specific reason for the errors.
Accepted as the errors in discounts claimed were immaterial.
Pellegrino Shores payroll
In addition to full-time staff, Pellegrino Shores employs asignificant number of casual nursing, cleaning and administrativestaff. Overtime is often worked on weekends and night shifts due toa shortage of staff. Payment at overtime rates for standard weekendand night shifts has been a common occurrence.
Required
Write a memo to Jek Porkins, the audit senior on the DHLassignment, that advises him on: Question 1 (4%) The business riskimpactandthe accounts (as well as related audit assertions) mostlikely affected by the fraud atPellegrino Shores.
Question 2 (6%)
Additional audit work to be undertaken in relation to theswitchover of the new patient revenue system atSt Neville's.Specifically:
a. the associated audit risks b. two key questions to ask internalaudit c. a justification for the audit strategy to be adopted forthe audit of patient revenue at St Neville's

Question 3 (6%)
Additional information required in relation toAcuity Vison'ssale ofmedical supplies. Specifically:
a. the key account balance(s) and associated assertions at risk dueto Acuity Vision's arrangements for paying its sales team b. theimplications for the control environment within DHL, includingspecific issues management would need to consider c. theeffectiveness of his customer payments testing
Question 4 (5%)
Both accounts payable tests he has undertaken. Specifically:
a. whether each is a test of control or substantive test b. the keyassertion addressed by each test c. the reasonableness of theconclusion reached for each test d. additional audit procedures, ifany, that need to be performed.
Answer this question using the following table: Test type of testkeyassertion reasonableness of conclusion additional auditprocedures 1 2
Question 5 (4%)
The key assertion at risk in relation to the payment of overtimeatPellegrino Shores, a preventative internal controlanda detectiveinternal control that would directly address the risk.