Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year Chan and Partners gained a new client, Medical Services Holdings Group (MSHG), which owns 100 per cent of the following entities:

• Shady Oaks Hospital, a private hospital group

• Gardens Nursing Home Pty Ltd, a private nursing home

• Total Cancer Specialists Limited, a private oncology clinic that specialises in the treatment of cancer.

Year-end for all MSHG entities is 30 June.

The audit partner for the audit of MSHG, 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 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 the Gardens Nursing Home’s general manager.

Required
(a) Which accounts — 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 event.