Kindness Home (KH) is a not-for-profit organization that operates a nursing home in a town near a major city. You are auditing the revenue and receivables at KH. The nursing home has a reputation for delivering excellent patient services, but its accounting department is understaffed and does not have time for internal verification or other accuracy checks. Your assessment of controls over cash receipts indicates that there are effective management supervision and monitoring procedures in place, and you have found no indication of fraud risk, but past audits have found misstatements in recording the patient invoices and accounts receivable. In confirming the accounts receivable from patients in past audits, you have had a very low response rate. Furthermore, those patients who did respond did not appear to know what information they were being asked to provide or what their correct outstanding balance actually was. You have had the same experience in confirming receivables at other nursing homes. The nursing home has a large bank loan payable, which is up for renewal two months after year-end. The bank’s loan officer has told management the bank’s head office may not approve a renewal. The bank is concerned about its exposure to not-for-profit nursing homes because many new government-funded nursing homes are expected to open over the new few years. These new long-term care facilities will be more modern and will be located closer to many large hospitals than KH.
a. Identify the business risks in KH.
b. Assess the risk of material misstatement at the overall financial statement level. Identify the inherent and control risk factors in the organization to support your assessment.
c. In the audit of the revenues, explain the overall audit approach you would use to obtain sufficient appropriate evidence in this situation. Give clear reasons for the mix of control and substantive work you would plan to do.
Describe the substantive tests you would perform to audit the revenue transactions in this organization. Be specific and show how the tests tie in to the relevant assertions.