General Practice (GP) is a not-for-profit organization thatoperates a nursing home in Toronto, Ontario. You are auditing therevenue and receivables at GP. The nursing home has a reputationfor delivering excellent patient services, but its accountingdepartment is understaffed and does not have time for internalverification or other accuracy checks. Your assessment of controlsover cash receipts indicates that there are effective managementsupervision and monitoring procedures in place, and you have foundno indication of fraud risk, but past audits have foundmisstatements in recording the patient invoices and accountsreceivable. In confirming the accounts receivable from patients inpast audits, you have had a very low response rate. Furthermore,those patients who did respond did not appear to know whatinformation they were being asked to provide or what their correctoutstanding balance actually was. You have had the same experiencein confirming receivables at other nursing homes. The nursing homehas a large bank loan payable, which is up for renewal two monthsafter year-end. The bank’s loan officer has told management thebank’s head office may not approve a renewal. The bank is concernedabout its exposure to not-for-profit nursing homes because many newgovernment- funded nursing homes are expected to open over the newfew years. These new long-term care facilities will be more modernand will be located closer to many large hospitals than GP.
Required:
1. Identify the business risks in GP.
2. Assess the risk of material misstatement at the overallfinancial statement level. Identify the inherent and control riskfactors in the organization to support your assessment.
3. In the audit of the revenues, explain the overall auditapproach you would use to obtain sufficient appropriate evidence inthis situation. Give clear reasons for the mix of control andsubstantive work you would plan to do. Describe the substantivetests you would perform to audit the revenue transactions in thisorganization. Be specific and show how the tests tie in to therelevant assertions.
