ACC568 201960 Assessment 3: Case Study B (25%) model solutions and marking guide

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ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
1
Dear students
The total marks awarded are as per the marking guide i.e. 25, so no there was no adjustment
when entering into Grade Centre. Note that 0.5 marks are the smallest unit awarded, 0.25
marks were not awarded in any question. Your feedback should include the marking criteria,
shaded on the relevant words (in the appropriate performance standards) to indicate the
level of performance. That shading, which for the one question might involve parts of
sentences shaded across several performance standards, should broadly reconcile with the
marks awarded.
Some general comments from the markers are that most did a good job in providing memo
format and appropriate referencing. Many still appear to have great difficulty in identifying
the correct assertions, particularly in Question 4. In Question 3 many students read control
tests rather than control environment. A number of students did not answer all parts of the
question and that is reflected in the marks.
The following marking guide and model solutions is what the team of 5 markers, across the 4
cohorts, used to mark the assessment task. It was refined after a rigorous pre-marking
calibration meeting. Papers have also been moderated to ensure consistency with the
marking criteria and within and across cohorts.
Ensure you have completed all PeerWise activites by 14 October. All the best in your exam
preparations, please ensure you read the exam guidance statement carefully.
Regards
Warwick Baines
ACC568 201960 Subject Convenor
1 October 2019
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
2
Criteria High Distinction Distinction Credit Pass
Q1. Analysis of the
client’s business risk
and application to the
audit risk model
(4 marks).
Comprehensive, and
coherent explanation of
the impact of fraud on
business risk, an
insightful understanding
of its relationship to
audit risk.
Comprehensive
explanation of the
impact of fraud on
business risk and its
relationship to audit risk.
Coherent explanation
of the impact of fraud
on business risk and
audit risk.
Limited explanation of
the impact of fraud on
business risk, minimal
connection to audit
risk.
Q2. Identification of an
audit strategy that
minimises identified
audit risk
(6 marks).
Comprehensive and
articulate identification
of all risks associated
with the new patient
revenue system.
Demonstrates an
insightful audit strategy
to minimise audit risk.
Accurate identification of
most risks associated
with the new patient
revenue system and
demonstrates a thorough
audit strategy to
minimise audit risk.
Most risks associated
with the new patient
revenue system
identified and
demonstrates an
effective audit strategy
to minimise audit risk.
Most risks associated
with the new patient
revenue system
identified.
Demonstrates a
limited audit strategy
to minimise audit
risk.
Q3. Appraisal of the
client’s internal control
environment, the
effectiveness of audit
procedures, and
application to the audit
risk model
(6 marks).
Comprehensive, and
coherent appraisal of
the internal control
weaknesses in relation
to the sales team.
Demonstrates an
insightful understanding
of audit procedures that
most effectively
minimise audit risk
Comprehensive appraisal
of the internal control
weaknesses in relation to
the sales team.
Demonstrates a
thorough understanding
of audit procedures that
most effectively
minimise audit risk.
Coherent appraisal of
the internal control
weaknesses in relation
to the sales team.
Demonstrates an
understanding of audit
procedures that most
effectively minimise
audit risk.
Limited appraisal of
the internal control
weaknesses in relation
to the sales team.
Demonstrates a
limited understanding
of the audit
procedures.
Q4. Identification and
appraisal of tests of
control and substantive
tests of balances
(5 marks).
Comprehensive, and
coherent appraisal of
the audit procedures
undertaken on accounts
payable. Demonstrates
an insightful
understanding of audit
procedures that most
effectively minimise
audit risk.
Comprehensive appraisal
of the audit procedures
undertaken on accounts
payable. Demonstrates a
thorough understanding
of audit procedures that
most effectively
minimise audit risk.
Coherent appraisal of
the audit procedures
undertaken on
accounts payable.
Demonstrates an
understanding of audit
procedures that most
effectively minimise
audit risk.
Limited appraisal of
the audit procedures
undertaken on
accounts payable.
Demonstrates a
limited understanding
of the audit
procedures.
Q5. Appraisal of the
client’s internal control
environment and
development of audit
procedures to
overcome audit risk
(4 marks).
Comprehensive and
coherent development
tests of control in
relation to payroll that
demonstrates an
insightful understanding
of audit procedures
most effectively
minimise audit risk.
Comprehensive
development tests of
control in relation to
payroll. Demonstrates a
thorough understanding
of audit procedures that
most effectively
minimise audit risk.
Coherent development
of tests of control in
relation to payroll.
Demonstrates an
understanding of audit
procedures that most
effectively minimise
audit risk.
Limited development
of tests of control in
relation to payroll.
Demonstrates a
limited understanding
of the audit
procedures that most
effectively minimise
audit risk.
These last two criteria relate to the whole of the case study. NB. although these criteria are not given a separate mark, they will be
taken into account when marking each of the previous five criteria.
Professional
communication * Arial
10pt or TNR 12 pt. font;
* 1.5 or double line
spacing;
* accurate spelling,
grammar, punctuation,
and word choice.
.
Focused, intelligible,
accurate, and concise
statements are
structured and
organised in a manner
that facilitates the
reader’s understanding.
Focused and intelligible
statements with minimal
errors are
structured and organised
in a manner that
facilitates the reader’s
understanding.
Intelligible statements
are organised into
paragraphs which
convey a single idea or
argument and a
coherent perspective
despite minor spelling,
grammar and
punctuation errors.
Intelligible statements
are structured into a
response that may
contain spelling,
grammar and
punctuation errors
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
3
Criteria High Distinction Distinction Credit Pass
Appropriate resources
and correct referencing
.
Seamlessly and
articulately integrated
evidence from at least
three credible, relevant
sources.
All work has been
referenced correctly as
per APA (6th ed.)
requirements.
Integrated evidence from
two or more credible,
relevant sources.
All work has been
referenced correctly as
per APA (6th ed.)
requirements.
Supported arguments
with evidence from
one or more credible,
relevant sources.
All work has been
referenced within the
body of the answer
and in the reference
list. Occasional
formatting errors
and/or omissions of
information do not
comply with APA (6th
ed.) but do not affect
transparency or
traceability of source
material.
Supported argument
with evidence from
the text. Others’ work
is always
acknowledged.
Frequent formatting
errors and/or
omissions of
information do not
comply with APA (6th
ed.) but do not affect
transparency or
traceability of source
ma
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
4
Marking guide
Question 1 (4 marks) 2 + 2
2 marks are available for the analysis of business risk, with 2 marks allocated to the analysis of
the accounts (as well as related assertions) impacted by the fraud at Pellegrino Shores. The
format of the answer is not relevant in awarding marks—for example the student is free to break
up their answer on business risk across several accounts/assertions. The crucial point is that the
key factors impacting business risk are analysed. Revenue and completeness must be identified
as the key account and assertion at risk. Cash could have been mentioned as an alternative
additional key account to accounts receivable for full marks. Accuracy is not a key assertion.
Question 2 (6 marks) 2 + 2 + 2
2 marks are available for identifying the audit risks in the switchover to the new patient revenue
system, 2 marks for key questions to ask internal audit in relation to the switchover. In relation
to part b), what is important is that the questions asked of internal audit, assist the external
auditors in meeting their objectives to reduce audit risk in relation to misstatement in revenue
and receivables to an acceptably low level. 2 marks for justifying the audit strategy for the audit
of patient revenue at St Neville’s. Student responses on audit risks should include an analysis on
each of the comments raised by staff. In relation to part c), answers obviously need to
acknowledge the need to increase substantive testing but given the class of transactions full
marks (2/2) can’t be awarded if the student simply says that a completely substantive approach
is required.
Question 3 (6 marks) 2 + 2 + 2
2 marks are available for identifying the key the key account balance(s) and associated assertions
at risk due to Acuity Vision’s arrangements for paying its sales team. There is no expectation that
sales is stated as an account at risk. However for full marks, both existence and valuation
assertions need to be stated and justified. Neither should students receive full marks for providing
irrelevant balances in addition to accounts receivable.2 marks for the implications for the control
environment within DHL (including specific issues management would need to consider), and 2
marks for an assessment of the effectiveness of Jek Porkins’ customer payments testing, which
needs to incorporate an understanding of subsequent receipts testing.
Question 4 (5 marks) 1 + 1 + 2 + 1
In relation to the accounts payable testing Jek Porkins has undertaken at DHL Head Office, 1 mark
for stating whether the test is a test of control or a substantive test; 1 mark for stating the key
assertion(s) addressed by each test; 2 marks for an analysis of the conclusion reached on each
test, and 1 mark for additional audit procedures that need to be performed to ensure sufficient
and appropriate audit evidence is collected. The available marks need to be shared 50/50 between
the two tests meaning that for a number of components, your options are 0 or 0.5. If you feel a
response has some merit then award 0.5.
Question 5 (4 marks) 1 + 1.5 + 1.5
1 mark is available for the key assertion(s) at risk (including a justification), 1.5 marks for
preventative controls and 1.5 marks for a detective control to address the risk in relation to
payment of overtime at Pellegrino Shores. Only one assertion was essentially asked for in this
question. Therefore if the assertion stated is either accuracy or occurrence and it is well justified,
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
5
award the full mark. Even though the one control can both prevent and detect, the preventative
and detective controls provided need to be different and enough detail must be provided to
ensure that the control is effective.
Professional communication and appropriate resources/referencing: although no marks are
given separately for these criteria, as per rubric please take them into account (and shade the
rubric accordingly) when awarding marks for the other criteria.
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
6
Model solutions (for all 5 questions)
To: Jek Porkins
Client: Dudley Health Limited
Report on: Planning brief for end of financial year audit 30 June 2019
Executive summary
As required by ASA300 Planning and Audit of a Financial Report (ASA 315, 2016) and ASA 315
Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity
and Its Environment (ASA 315, 2016) a range of key issues across the entities within the Dudley
Health Limited (DHL) group have been identified. Details on those issues, my assessment on your
current responses to them and advice about other issues and responses to consider, are outlined
in the sections below.
Fraud at Pellegrino Shores
A senior staff member at Pellegrino Shores was dismissed after it was discovered that she had
worked in collusion with a number of residents to reduce their fees and receive secret payments
from them in return. This implications for Pellegrino’s business risk, the risk that the entity’s
business objectives will not be met as the result of external and internal factors. Ultimately it’s
the ‘risk associated with the entity’s profitability and survival’ (Gay and Simnett, 2018 p. 198). As
revenue and cash receipts are reduced by the fraud this means that Pellegrino Shores appears
less profitable than it is. In addition if sanctions imposed on the residents, who colluded with the
senior staff member, include expulsion from Pellegrino Shores then DHL stands to lose revenue
from empty accommodation as well as potentially from reputational loss. All of this may have
implications for staffing decisions (i.e. the business has to cut back staff because of reduced
profits), equipment purchases and loan covenants (covenants may be breached due to reduced
profitability), particularly if cash forgone due to the fraud cannot be recovered from residents.
Given that the collusion resulted in reduced fees from residents I think the accounts, and
assertions, most affected by the fraud are:
 Revenue—understated for various medical and other services as well as room charges
(completeness of revenue).
 Accounts receivable—possible that this is also understated. Either amounts are too low
or some accounts are not recorded (valuation and allocation of accounts receivable).
 Cash—consequently if accounts receivable is understated then cash is also likely to be
understated (completeness).
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
7
St Neville’s patient revenue system
When St Neville’s switched from its ‘homegrown’ patient revenue system to the DHL ‘off the
shelf’ revenue system on Sunday 10 March 2019, DHL was confident that its revenue system
would perform all of the functions that the St Neville’s patient system had performed. It would
appear that this confidence was misplaced. The conversations you’ve had with a number of
administration staff at St Neville’s suggest that there are a number of issues with the new
revenue system.
I’ve analysed those staff comments and identified the key audit risks we’ll need to address,
important questions to ask of DHL’s internal auditors (who were involved in the switchover to
the new system) and some advice on the audit strategy we’ll need to adopt for the audit of
patient revenue.
Audit risks highlighted by staff comments
Staff comments suggest the following issues, and accompanying audit risks, with the new
patient revenue system:
 power surge resulted in loss of patient invoice data. Backups do not appear to be used to
prevent loss of data. There is a clear audit risk therefore that the billing system contains
errors and that revenue and accounts receivable could be materially misstated.
 software program change approval system does not appear to have procedures to prevent
billing calculation changes to client files to allow charges that depart from medical fund and
pensioner subsidy rates. Any charges that differ from approved rates should require specific
authorisation. Once again this indicates a clear audit risk therefore that the billing system
contains errors and that revenue and accounts receivable could be materially misstated.
 not using a unique identifier for patients, such as a patient number. New patients were
occasionally confused with old patients in the system. There should be a method of
identifying new patients at the point of admission and assigning a unique identifier to their
file at that point, to be used for all future transactions and services relating to the patient.
There is a clear risk therefore that the patient database contains errors.
 not having a system of approving room rates billed to patients. The system appears to
accept different room rates. Room rates should be charged based on an approved room rate
list using a code for the relevant room rate. There is an audit risk therefore that the rates
database contains errors, which has implications for errors flowing through to the billing
system with potential misstatement implications once again for revenue and accounts
receivable.
The issues raised by staff relate to controls over data entry and processing in the new IT system.
The problems suggest that control risk is high, especially in relation revenue and debtors.
Questions for internal audit
The DHL internal audit department was on hand throughout the switchover to the new system,
presumably to ensure that the switch-over was effective and not just to make sure it was
completed at the lowest possible cost. Given the issues that staff have identified, in accordance
with ASA 315.29 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment (ASA 315, 2016) which requires that where
significant risk exists, we obtain an understanding about the controls in place relevant to the risk
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
8
that information from the new patient revenue system is not accurate. Some of the questions
you could ask internal audit include:
 How did the performance indicators address the effectiveness of the switch-over? Who
was responsible for the switch-over and how was the effectiveness measured for the
purpose of performance review?
 What changes were made to the information processing activities and how was their
effectiveness assessed?
 What physical controls are used to prevent unauthorised changes to the patient revenue
system?
Audit strategy
As you know our audit strategy is affected by the assessment of control risk. The errors in the
new patient revenue system suggest that control risk is high. Ordinarily, in accordance with
ASA330.8 The Auditor’s Response to Assessed Risks (ASA 330, 2016) where control risk is high,
we would not test any controls and adopt a predominantly substantive approach to the audit of
patient revenue at St Neville’s. However ASA330.8b) indicates that test of controls may be
required if ‘substantive procedures alone cannot provide sufficient appropriate audit evidence at
the assertion level’. Given revenue is a significant class of routine transactions, then in
accordance with ASA315.30, it may not be practical to obtain sufficient and appropriate audit
evidence from substantive procedures alone.
In the first instance you need to establish whether there are any internal controls around the St
Neville’s patient revenue cycle that we can possible rely upon. If that is not the case then we
need to discuss with DHL management about changing the scope of the audit, which would be
accompanied by a significant fee increase to undertake a completely substantive approach.
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
9
Acuity Vision sales team
Key account balances and associated assertions at risk
The sales team at Acuity Vision are remunerated in two ways; a base salary plus a bonus based
on the dollar values of sales. The bonus payment increases if the sales person increases recorded
sales. This could lead attract members of the sales team to engage in inappropriate ways of
increasing sales such as:
 recording sales during the year for samples given to customers. When the sample is returned
following the year-end the sale is reversed or adjusted with a sales return or allowance;
 falsify sales by recording a sale to a fictitious customer. The account balance is eventually
written off for non-payment of the account.
Accounts receivable is the account balances at risk due to Acuity Vision’s arrangements for
paying its sales team. The associated assertions at risk are existence, and valuation and
allocation because the balance may have been fraudulently recorded or not represent the
amount that is reasonably expected to be received from customers.
Implications for the control environment
The sales bonus system would impact on the control environment at Acuity Vision because it
increases the focus on recorded sales and provides incentives for personnel to take actions to
increase their bonus through increasing sales. A bonus structure can work against management
attempts to communicate and enforce integrity and ethical values because it implies a reward
for ‘cutting corners’ in order to increase sales.
When such a bonus system is in place management have to work hard to communicate the core
values and show through their philosophy and operating style that there is not a focus on
increasing sales at all costs. Management will need to ensure that there is a commitment to
competence through mechanisms such as HR recruitment and review policies and practices.
Management would also pay attention to ensuring that sales, particularly those on credit to new
customers, are authorised by appropriately senior staff, and performance reviews are used to
guide sales staff towards the organisation’s objectives.
Effectiveness of payments testing
I understand that you took sample of customer payments subsequently received by Acuity Vision
(i.e. cash receipts) and traced back to the general ledger and customer account balance.
Performing this test will provide evidence about the existence/occurrence assertion for the
accounts receivable and sales balances, and the valuation and allocation assertion for accounts
receivable.
If the client receives cash for the credit of an accounts receivable this is reliable evidence that
the recorded sale did occur and that the balance of accounts receivable was fairly stated at the
year-end. However given you conducted this testing just after year end, all customer debts
outstanding at year end may not have been received. Consequently you will also need to
consider debtors’ confirmations and review the aged trial balance—neither of these procedures
are as comprehensive as subsequent receipts testing, particularly in relation to the valuation
assertion, but they may provide you with sufficient and appropriate audit evidence.
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
10
DHL Accounts Payable
The two tests you undertook on accounts payable at DHL’s Head Office have been analysed below.
I have some concerns about conclusions you’ve reached in relation to those tests and have
proposed some additional audit procedures to ensure we obtain sufficient and appropriate audit
evidence to address the key assertions.
Test Type of test Key assertion Reasonableness of
conclusion
Additional audit
procedures
1. This is a substantive
test. The test
gathers evidence
about the balance
of trade creditors at
year end and the
total of purchases.
In particular, the
test is gathering
evidence about the
date the goods
were received and
the date the entry is
posted.
Cut-off assertion for
purchases, valuation
and allocation
assertion for trade
creditors. The dates
are being verified to
ensure the
transactions are
recorded in the
correct financial
period.
The test does not address
the issue of completeness
for trade creditors or fully
address the cut-off
assertion for purchases.
The key risk for creditors is
understatement. By taking
a sample from the list of
trade creditors you are not
able to detect unrecorded
liabilities. Your conclusion
is not appropriate.
You should examine
suppliers’ invoices and
goods received notes
relating to the period
following year-end.
These documents
could reveal an
unrecorded liability,
that is, goods
recorded as received
after the year-end that
were actually received
by DHL prior to the
year-end.
2. This is a test of
controls. The test is
gathering evidence
about the process
of reviewing and
authorising the
pricing and discount
terms.
Controls over pricing
and discounts are
relevant to the
valuation and
allocation assertion
for trade creditors,
and the accuracy
assertion for
purchases.
The initial test reveals that
3 out of 20 invoices had not
been authorised and
incorrect discounts were
recorded. The follow-up
shows no pattern. Your
conclusion refers to the
amount of the discount.
This is not appropriate for a
test of controls. The issue is
whether the rate of
deviation in the control is
tolerable. If the deviation
rate in the sample is
tolerable when projected
to the population,
especially given the
additional testing, then you
could conclude that there
is no significant deviation in
the control. You cannot
conclude the valuation of
suppliers is fair based on
the control tests alone.
The conclusion about
the deviation in
controls should be
considered in light of
the tolerable deviation
rate. Substantive
testing needs to be
designed given the
control risk as
revealed by the
control tests. Further
procedures would
include selecting a
sample of suppliers
invoices, given the
control risk, and
testing of pricing and
discounts.
Pellegrino Shores payroll
ACC568 201960
Assessment 3: Case Study B (25%) model solutions and marking guide
11
Payment at overtime rates to casual nursing, cleaning and administrative staff at Pellegrino
Shores for standard weekend and night shifts has been a common occurrence. Unlike most
expenses, generally employees can be relied upon to detect errors of understatement and seek
to have them rectified quickly. Consequently the key assertions at risk here are occurrence i.e.
that overtime payroll transactions relate to authorised overtime work and accuracy i.e. that
overtime amounts are calculated and recorded appropriately. To mitigate against those risks I
propose:
 preventative controls—such as using different codes for standard shifts and overtime
hours; and the requirement for special authorisation of overtime payments over and
above the controls in place for authorising standard shifts;
 detective controls—such as a review of overtime payment reports

References
Chartered Accountants Australia and New Zealand (2016), Auditing and Assurance Standards
Board [AUASB] 2016, ASA 315 Identifying and Assessing Risks of Material Misstatement through
Understanding the Entity and its Environment, Auditing Assurance and Ethics Handbook. Brisbane:
John Wiley & Sons Australia
Chartered Accountants Australia and New Zealand (2016), Auditing and Assurance Standards
Board [AUASB] 2016, ASA 330 The Auditor’s Responses to Assessed Risks, Auditing Assurance and
Ethics Handbook. Brisbane: John Wiley & Sons Australia
Gay, G. E., & Simnett, R. (2018). Auditing and assurance services in Australia (7th ed.). Roseville:
McGraw Hill.

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