What risks would you consider to be significant risks?Identify the major factors affecting client business risk and acceptable audit risk for this audit.

You are auditing the sales and collection cycle for the Smalltown Regional Hospital, a small not-for-profit hospital. The hospital has a reputa-
tion for excellent medical services and deficient record keeping. The medical people have a tradition of doing all aspects of their job correctly, but because of a shortage of accounting personnel, there is not time for internal verification or careful performance. In previous years, your CPA firm has found quite a few misstatements in billings, cash receipts, and accounts receivable. As in all hospitals, the two largest assets are accounts receivable and property, plant, and equipment.
The hospital has several large loans payable to local banks, and the two banks have
told management that they are reluctant to extend more credit, especially considering the modern hospital that is being built in a nearby city. In the past, county taxes have made up deficits, but in the past year, the county has also been incurring deficits because of high unemployment.
In previous years, your response from patients to confirmation requests has been
frustrating at best. The response rate has been extremely low, and those who did respond did not know the purpose of the confirmations or their correct outstanding balance. You have had the same experience in confirming receivables at other hospitals.
You conclude that control over cash is excellent and the likelihood of fraud is extremely small. You are less confident about unintentional errors in billing, recording sales, cash receipts, accounts receivable, and bad debts.
a. Identify the major factors affecting client business risk and acceptable audit risk for
this audit.
b. What inherent risks are you concerned about?
c. What risks would you consider to be significant risks?
Required
570Part 3 / APPLICATION OF THE AUDIT PROCESS TO THE SALES AND COLLECTION CYCLE
d. For each of the following, explain whether you plan to emphasize the tests in the
audit of the sales and collection cycle and give reasons:
(1) Tests of controls
(2) Substantive tests of transactions
(3) Substantive analytical procedures
(4) Tests of details of balances.

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