Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. In 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 (TLCL), a private clinic that specializes in the laser treatment of skin defects.
Year end for all HCHG entities is June 30.
You are performing the audit field work for the 2011 year for Shady Oaks Centre. The field work must be completed in time for the audit report to be signed on August 21, 2011. You have been asked to circulate the receivable confirmations. Shady Oaks Centre's trade receivables arise from the use of clinic facilities (including the provision of medical professionals, treatment rooms, and supplies) by medical practitioners in private practice. The trade receivables balance was $3,974,569 as at June 30, 2011, and was considered material.
The centre's payment terms are 14 days from the date of the invoice. Sixty percent of the balance is represented by invoices outstanding from five different medical practitioners. The remaining 40 percent is made up of numerous smaller amounts, most of which have been outstanding for more than 60 days. Any allowance for doubtful accounts is taken directly against the trade receivables account and not shown separately.
Required
Discuss the strength and weaknesses of accounts receivable confirmations as audit evidence for HCHG.