1. 1. QUESTION

   Task-Based Simulation 1.

   An auditor’s working papers include the narrative description of the cash receipts and billing portions of Southwest Medical Center’s internal control. Evaluate the information in the situation as being either (1) a strength, (2) a weakness, or (3) not a strength or a weakness.

   Southwest is a health-care provider that is owned by a partnership of five physicians. It employs eleven physicians, including the five owners, twenty 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

   in the situation 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% 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 appear to be uncollectible from clerk #2’s PC when authorized by the office manager. Clerk #2 prepares a list of patients with uncollectible balances and gives a copy of the list to clerk #3, who will not allow these patients to make appointments for future services.

   Once a month an outside accountant posts clerk #2’s daily revenue summaries to the general ledger, prepares a monthly trial balance and monthly financial statements, accounts for prenumbered service slips, files payroll forms and tax returns, and reconciles the monthly bank statements to the general ledger. This accountant reports directly to the physician who is the managing partner.

   All four clerical employees perform their tasks on PCs that are connected through a local area network. Each PC is accessible with a password that is known only to the individual employee and the managing partner. Southwest uses a standard software package that was acquired from a software company and that cannot be modified by Southwest’s employees. None of the clerical employees have access to Southwest’s check-writing abilities.

   For each of the following conditions indicate whether it is a strength, weakness, or neither. (Write S for strength, W for weakness and N for neither at the end of the following statements)

    

   STATEMENTS:

   1. Southwest is involved only in medical services and has not diversified its operations.
   2. Insurance coverage for patients is verified and communicated to the clerks by the office manager before medical services are rendered.
   3. The physician who renders the medical services documents the services on a prenumbered slip that is used for recording revenue and as a receipt for the patient.
   4. Cash collection is centralized in that clerk #2 receives the cash (checks) from patients and records the cash receipt.
   5. Southwest extends credit rather than requiring cash or insurance in all cases.
   6. The office manager extends credit on a case-by-case basis rather than using a formal credit search and established credit limits.
   7. The office manager approves the extension of credit to patients and also approves the write-offs of uncollectible patient receivables.
   8. Clerk #2 receives cash and checks and prepares the daily bank deposit.
   9. Clerk #2 maintains the accounts receivable records and can add or delete information on the PC.
   10. Prenumbered service slips are accounted for on a monthly basis by the outside accountant, who is independent of the revenue generating and revenue recording functions.
   11. The bank reconciliation is prepared monthly by the outside accountant, who is independent of the revenue generating and revenue recording functions.
   12. Computer passwords are only known to the individual employees and the managing partner, who has no duties in the revenue recording functions.
   13. Computer software cannot be modified by Southwest’s employees.
   14. None of the employees who perform duties in the revenue generating and revenue recording are able to write checks.

    

   Task-Based Simulation 2

   Auditors often observe the counting of their clients’ inventories. Reply as to whether the following statements are correct or incorrect with respect to the inventory observation. (Write C for correct and I for incorrect at the end of each of the following statements:

   STATEMENTS

   1. With strong internal control, the inventory count may be at the end of the year or at other times.
   2. When a client has many inventory locations, auditors ordinarily need not be present at each location.
   3. All auditor test counts must be documented in the working papers.
   4. Auditors’ observation of the counting of their clients’ inventories addresses the existence of inventory, and not the completeness of the count.
   5. When the client manufactures a product, direct labor and overhead ordinarily become a part of inventory item costs.
   6. Inventory is ordinarily valued at the lower of standard cost or market.
   7. Inventory items present as “consigned in” should not be included in the clients’ inventory value.
   8. Auditor recording of test counts ordinarily replaces the need for client “tagging” of inventory.
   9. Ordinarily, an auditor need not count all items in the inventory.
   10. At the completion of the count, an auditor will ordinarily provide the client with copies of his or her inventory test counts to help assure inventory accuracy.

    

    

    Task-Based Simulation 3

   Suppose Winston incorporated and had the following accounts. Indicate how each of the following is classified on the financial statements. (Write the appropriate letter A to J that corresponds to the account classification next to each of the accounts from 1 to 10 below):

   CLASSIFICATION

   1. Current asset
   2. Noncurrent asset
   3. Current liability
   4. Noncurrent liability
   5. Owner’s equity
   6. Contra asset
   7. Contra equity
   8. Revenue
   9. Expense
   10. Contra Revenue

   ACCOUNT

   1. Bonds payable, due in year 8
   2. Treasury stock
   3. Accounts payable
   4. Sales discounts
   5. Notes payable, due in nine months
   6. Inventory
   7. Accounts receivable
   8. Common stock
   9. Cost of goods sold
   10. Allowance for uncollectible accounts

    

   Task-Based Simulation 4

   Indicate whether each of the following should be classified as an operating (designate with “O”), investing (designate with “I”), or financing (designate with “F”) activity on the statement of cash flows.

   CONCEPTS

   1. Payment for inventory           
   2. Payment of dividend 
   3. Cash received from sale of equipment          
   4. Cash sales      
   5. Issuance of stock to investors
   6. Payment of utility bill
   7. Payment of interest on long-term note payable
   8. Purchase of Treasury stock

    

   Task-Based Simulation 5

   SITUATION

   In 2010 Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000.

   For the year ended December 31, 2011, ACH Associates had profits of $60,000 that were distributed to the partners. During 2012, ACH Associates was operating at a loss. In September 2012, the partnership dissolved.

   In October 2012, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associated did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.

    

   REQUIRED:

   For each item, determine whether (A) or (B) is correct or incorrect. (Write “C” right next to the correct statement and “I” next to the incorrect statement):

   1. A. The ACH Associates oral partnership agreement was valid.
   2. The ACH Associates oral partnership agreement was invalid because the partnership lasted for more than one year.
   3. A. Anchor, Chain, and Hook jointly owning and conducting a business for profit establishes a partnership relationship.
   4. Anchor, Chain, and Hook jointly owning income-producing property establishes a partnership relationship.
   5. A. Anchor’s share of ACH Associates’ 2011 profits was $20,000.
   6. Hook’s share of ACH Associates’ 2011 profits was $30,000.
   7. A. Anchor’s capital account would be reduced by 1/3 of any 2012 losses.
   8. Hook’s capital account would be reduced by 1/2 of any 2012 losses.
   9. A. Ace Automobile Co. would lose a suit brought against ACH Associates because Hook, as a general partner, has no authority to bind the partnership.
   10. Ace Automobile Co. would win a suit brought against ACH Associates because Hook’s authority continues during dissolution.
   11. A.  ACH Associates and Hook would be the only parties liable to pay any judgment recovered by Ace Automobile Co.
   12. Anchor, Chain, and Hook would be jointly and severally liable to pay anyjudgment recovered by Ace Automobile Co.

    

   Task-Based Simulation 6

   Tom and Joan Moore are married filing a joint return. During 2015, the following events took place. For items 1 through 12, select the appropriate tax treatment (Write the appropriate letter “A” through “F” next to each event).

   TAX TREATMENT

   1040. Not deductible on Form 1040.
   1041. Deductible in full in Schedule A—Itemized Deductions.
   1042. Deductible in Schedule A—Itemized Deductions, subject to a threshold of 10% of adjusted gross income.
   1043. Deductible in Schedule A—Itemized Deductions, subject to a limitation of 50% of adjusted gross income.
   1044. Deductible in Schedule A—Itemized Deductions, subject to a $100 floor and a threshold of 10% of adjusted gross income.
   1045. Deductible in Schedule A—Itemized Deductions, subject to a threshold of 2% of adjusted gross income.

    

    

   EVENTS

   1. On March 23, 2015, Tom sold 50 shares of Zip stock at a $1,200 loss. He repurchased 50 shares of Zip on April 15, 2015.
   2. Payment of a personal property tax based on the value of the Moores’ car. 3. Used clothes were donated to church organizations.
   3. Premiums were paid covering insurance against Tom’s loss of earnings.
   4. Tom paid for subscriptions to accounting journals.
   5. Interest was paid on a $10,000 home-equity line of credit secured by the Moores’ residence. The fair market value of the home exceeded the mortgage by $50,000. Tom used the proceeds to purchase a sailboat.
   6. Amounts were paid in excess of insurance reimbursement for prescription drugs.
   7. Funeral expenses were paid by the Moores for Joan’s brother.
   8. Theft loss was incurred on Joan’s jewelry in excess of insurance reimbursement. There were no 2015 personal casualty gains.
   9. Loss on the sale of the family’s sailboat.
   10. Interest was paid on the $300,000 acquisition mortgage on the Moores’ home. The mortgage is secured by their home.
   11. Joan performed free accounting services for the Red Cross. The estimated value of the services was $500.

    

   Task-Based Simulation 7

   Yeager Company is considering several alternative capital investments. In evaluating the investments, management of the company has used the payback and accounting rate of return methods.

   Prepare a memorandum to Linda Gordon, the chief financial officer, describing the limitations of these two methods for evaluating investments and suggesting other methods that might be more appropriate.

   To:      Ms. Linda Gordon, CFO Yeager Company

   From:  CPA Candidate

   REMINDER:

   Your response will be graded for both technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended reader and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use a standard business memo or letter format with a clear beginning, middle, and end. Do not convey information in the form of a table, bullet point list, or other abbreviated presentation.

    

   Task-Based Simulation 8

   Tintco, Inc. is a distributor of auto supplies. Currently, the corporation has a batch processing system for processing all transactions and maintaining its inventory records. Batches are processed monthly.

   George Wilson, the chief information officer for the corporation, is considering adopting an online, real-time processing system. He has asked you (a consultant) to prepare a memorandum describing the advantages of adopting such a system for the corporation.

   To:      Mr. George Wilson, CIO Tintco, Inc.

   From:  CPA Candidate

   REMINDER:

   Your response will be graded for both technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended reader and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use a standard business memo or letter format with a clear beginning, middle, and end. Do not convey information in the form of a table, bullet point list, or other abbreviated presentation.

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