1. An auditor’s working papers include the following narrative description of the cash receipts and
billing portions of Southwest Medical Center’s internal control. Evaluate each condition following the
narrative as being either (1) a strength, (2) a deficiency, or (3) not a strength or a deficiency.
Southwest is a health care provider that is owned by a partnership of five physicians. It employs 11
physicians, including the five owners; 20 nurses; five laboratory and X-ray technicians; and four
clerical workers. The clerical workers perform such tasks as reception, correspondence, cash
receipts, billing, accounts receivable, bank deposits, and appointment scheduling. These clerical
workers are referred to as office manager, clerk #1, clerk #2, and clerk #3. Assume that the narrative
is a complete description of the system.
About two-thirds of Southwest’s patients receive medical services only after insurance coverage is
verified by the office manager and communicated to the clerks. Most of the other patients pay for
services by cash or check when services are rendered, although the office manager extends credit on
a case-by-case basis to about 5 percent of the patients.
When services are rendered, the attending physician prepares a prenumbered service slip for each
patient and gives the slip to clerk #1 for pricing. Clerk #1 completes the slip and gives the completed
slip to clerk #2 and a copy to the patient.
Using the information on the completed slip, clerk #2 performs one of the following three procedures
for each patient:
Clerk #2 files an insurance claim and records a receivable from the insurance company if the
office manager has verified the patient’s coverage, or
Clerk #2 posts a receivable from the patient on clerk #2’s PC if the office manager has
approved the patient’s credit, or
Clerk #2 receives cash or a check from the patient as the patient leaves the medical center,
and clerk #2 records the cash receipt.
At the end of each day, clerk #2 prepares a revenue summary.
Clerk #1 performs correspondence functions and opens the incoming mail. Clerk #1 gives checks
from insurance companies and patients to clerk #2 for deposit. Clerk #2 posts the receipt of patients’
checks on clerk #2’s PC patient receivable records and insurance companies’ checks to the
receivables from the applicable insurance companies. Clerk #1 gives mail requiring correspondence
to clerk #3.
Clerk #2 stamps all checks “for deposit only” and each day prepares a list of checks and cash to be
deposited in the bank. (This list also includes the cash and checks personally given to clerk #2 by
patients.) Clerk #2 keeps a copy of the deposit list and gives the original to clerk #3.
Clerk #3 personally makes the daily bank deposit and maintains a file of the daily bank deposits.
Clerk #3 also performs appointment scheduling for all of the doctors and various correspondence
functions. Clerk #3 also maintains a list of patients whose insurance coverage the office manager has
verified.
When insurance claims or patient receivables are not settled within 60 days, clerk #2 notifies the
office manager. The office manager personally inspects the details of each instance of nonpayment.
The office manager converts insurance claims that have been rejected by insurance companies into
patient receivables. Clerk #2 records these patient receivables on clerk #2’s PC and deletes these
receivables from the applicable insurance companies. Clerk #2 deletes the patient receivables that
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