Canterlot Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2020


Canterlot Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2020 year Canterlot gained a new client, Cloudsdale Medical Group (CMG), which owns 100 per cent of the following entities:

• Everfree Forest Hospital, a private hospital group

• Calendula Care Pty Ltd, a private nursing home

• Tempo Cancer Treatment Limited (TCTL), a private oncology clinic that specialises in the treatment of cancer.

Year-end for all CMG entities is 30 June.

During the 2020 financial year, CMG released its own range of medical supplies such as bandages and first aid kits, which are sold via direct marketing by a sales team employed by the hospital.

The sales team are remunerated via a base salary and a bonus component which is based upon the dollar value of sales they generate. You recognise that their main motivation is to maximise their bonuses.

On 1 April 2020, Calendula Care Pty Ltd switched from its ‘home grown’ patient revenue system to CMG’s equivalent system. CMG is confident that its ‘off the shelf’ enterprise system would perform all of the functions that Calendula Care’s home grown system performed. 

Calendula Care’s home grown patient revenue system comprised the following.

1. Billing system — produces the invoice to charge the patient for services provided such as accommodation, medications and medical services. This software includes a complex formula to calculate the patient bill allowing for government subsidies, pensioner benefits and private medical insurance company benefits plans.

2. Patient database — a master file containing personal details about the patient as well as the period of stay, services provided and patient’s medical insurance details.

3. Rates database — a master file that shows all accommodation billing rates, rebate discounts and government assistance benefits.

At the request of the board, the group’s internal audit unit was involved throughout the entire switch-over process. The objective of its engagement, as the board stated, was to ‘make sure the switch-over worked without any problems’.

Discuss the implications of the sales bonus system for the control environment within CMG. What special factors would management have to have to consider?

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Related Book For  answer-question

Auditing A Practical Approach

ISBN: 9780730382645

4th Edition

Authors: Robyn Moroney, Fiona Campbell, Jane Hamilton

Question Details
Chapter # 6- Gaining an understanding of the client’s system of internal controls
Section: Review Questions
Problem: 36
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Question Posted: September 17, 2023 07:50:20