Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities:
• Shady Oaks Centre, a private treatment centre
• Gardens Nursing Home Ltd., a private nursing home
• Total Laser Care Limited, a private clinic that specializes in laser treatment of skin defects. Year end for all HCHG entities is June 30.
The audit partner for the audit of HCHG, Tania Fellowes, has discovered that two months before the end of the financial year, one of the senior nursing officers at Gardens Nursing Home was dismissed. Her employment was terminated after it was discovered that she had worked in collusion with a number of patients to reduce their fees. The nurse would then take secret payments from the patients.
The nursing officer had access to the patient database. While she was only supposed to update room-located changes for patients, she was able to reduce the patient period of stay and the value of other services provided. The fraud was detected by a fellow employee who overheard the nurse discussing the "scam" with a patient. The employee reported the matter to Gardens Nursing Home's general manager.
Required
(a) Which accounts on the balance sheet and income statement are potentially affected by the fraud?
(b) Describe how Gardens Nursing Home's business could be affected as a result of the fraud.