Zipmed's Medical Aid Fund 08.05.

01

CASE STUDY NO. 08.05

ZIPMED'S MEDICAL AID FUND

Background
Rapid Transport Services (RTS) is situated in the capital and operates nationwide. Its
workforce is 60,000; and membership in the medical aid fund, Zipmed, is compulsory. Zipmed's
employees, however, are free to choose to belong to the fund.
You are the internal auditor of RTS. Following a directive from the board of control, you
conducted an audit review of Zipmed. The objective of the review was to establish whether controls
exist to ensure that only claims that are correct and valid are paid and that the subsidy received from
RTS is correctly applied. You are also supposed to write a report to the board of control, making
recommendations where necessary.

Audit Methodology
Interviews were conducted with the top-down approach. Flowcharts were drawn, and
available documentation was studied. Controls were then identified and evaluated. Here is an
overview of Zipmed's organization.

Organizational Structure of Zipmed

Manager

Deputy Manager

Accounting Administration

Accountant Not an Audit Concern

(Directive from
Senior Clerks board of control)

Clerks

For the purpose of this case study, the administrative division has been ignored.

Policy
Policies are formulated by a board of control on which representatives of both RTS and
Zipmed serve. The board meets monthly.
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Finance
Zipmed has the following major sources of income:
• RTS subsidizes all their employees' subscriptions on a dollar-for-dollar basis. This payment
is made annually in advance to Zipmed and is invested in such a way that funds are available
each month for the payment of claims.
• Members' subscription fees are deducted from RTS employees' salaries by a computerized
system. Subscriptions in respect of Zipmed employees are deducted from their salaries by the
accountant when preparing the monthly Zipmed payroll.
• Interest is received on investments. Investment of funds is the responsibility of the Deputy
Manager, subject to the approval of the Board of Control. At each monthly board meeting, he
must report on the current investment situation and request authorization for the conclusion
of any transactions during the following month.

Registering Members
When an employee assumes duty at RTS, the personnel section must inform both Zipmed and
the RTS's salary section of the new appointment. Reference numbers are assigned to newly appointed
employees by the personnel section. These numbers serve as both the employee's salary reference
number and Zipmed's membership number. Zipmed, in turn, issues a membership card to the new
member, upon receipt of which the member may start submitting claims to Zipmed.

Claims
Claims are doctor's accounts containing particulars of the type of service rendered and
amounts charged. Medical practitioners either forward accounts directly to Zipmed or to their patients.
The latter often use their personal funds to pay the account and then claim the amount from Zipmed.
Such a claim must always be accompanied by a receipt from the doctor.

Procedures at Zipmed

Registry
All mail is received at registry, where ordinary correspondence is separated from claims.
Correspondence is sent to the administrative division, and claims are date-stamped and sent to the
claims control section. A record of the number of claims received is maintained for statistical
purposes.

Claims Control
Claims are checked for the following:
• The doctor's practice number, which is assigned to doctors by the medical council with which
they must be registered.
• Zipmed's membership number.
• Date of service rendered.
• Code for service rendered.
• Amount charged for each service.
• Name of the person who was treated.
If any of this information is lacking, the claim is returned to the sender with a request to supply
the missing information.
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The date the service was rendered is compared to the date received at Zipmed. If the difference
between the two dates is greater than six months, the claim is rejected and is not paid.
The amount charged for the service rendered is compared to a list of standard tariffs. This list
is approved by the medical council, indicating standard tariffs for the various service codes. If the
amount charged is too much, it is changed to the standard amount; and the claimant is notified.
Zipmed members must pay the excess amount claimed to the doctor concerned.
The name of the person to whom the service was rendered is compared to a List of
Dependents, which is a computer printout of the names of registered members and their dependents.
If the name on the claim does not appear on this, the claim is rejected and is not paid.
After all the checking is done, a second officer transcribes the detail onto a claim-notification
form serving as a source document for capturing information on Zipmed's EDP system. A third
officer, who does not have access to blank-source documents, verifies the accuracy of the transcription
by comparing the source documents to the claims. The accounts and completed data forms are then
sent to the data-preparation section for further attention.

Data Preparation
The main function of this section is to batch the input-data forms. It was noticed here that the
personnel were prepared to work voluntary overtime in peak periods in order to meet the EDP cutoff
deadlines. The procedures are as follows:
• The data forms are grouped into batches with a maximum of 50 documents.
• A batch header is prepared for each batch.
• Each batch is numbered according to a register of sequential batch numbers.
• The accounts (claims) are filed in batchnumber sequence.
• The batches of input-data forms are placed in a specially designed box, and once per week
they are sent to RTS's EDP center in the capital to be processed.

Electronic Data Processing

Data capture. Information on the data forms is captured onto magnetic tape, and a keypunch-
verification technique is used to ensure accurate punching. The forms are returned to Zipmed, where
they are filed in batch-number sequence.
Validation. The practice number, member number, service code, and amount are validated. If
these identifications are either not present or not wholly numeric, the information is rejected and
reported on. If all conditions met, the data are fed through to the update phase where the following
conditions are tested:
• The practice number is compared to a practice-number master file for validity.
• The membership number is compared to a membership master file for validity.
• Date of admission to the fund is equal or prior to the date of service rendered.
• The practice number, service code, date of service, and amount are compared to a transaction
master to detect possible duplications.

Control totals
The only control total maintained by the system is a record count between the various program
modules.

Output
Output consists of:
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• Reports indicating rejected items and the reasons for the rejections. These reports are sent to
the applicable sections at Zipmed, where the cause of the error is determined and corrected on
the original input form that is resubmitted for processing.
• A list of the names of all registered members and their dependents in alphabetical order. This
list is used as described in procedures at Zipmed (mailed).
• Cheques once a month. These are returned to Zipmed to be signed and posted.

Cheques
Cheques are computer-printed on perforated stationery and are numbered sequentially. The
system indicates the first and last cheque numbers printed in every run. Cheques are signed by a
signature machine that also counts the Cheques and that is under the strict custody of the deputy
manager of Zipmed. The accountant does a monthly cheque reconciliation. A thorough investigation
of the reconciliation procedures revealed no irregularities.

Evaluating Controls
An evaluation of the internal controls described above revealed these weaknesses:
• The value of the subsidy payable to Zipmed is calculated with this formula:
All registered members at the end of a financial year X subscription fees = subsidy.
This means that RTS is subsidizing Zipmed employees as well. This is contrary to Board of Control's
regulations.
• Before the Deputy Manager may conclude an investment transaction, he must have the
approval of the Board of Control at its monthly meetings. This prevents him from making any
timely decisions regarding investments that might have large profit or loss potential.
• New members may submit claims as soon as a membership card has been issued to them.
This could lead to their claiming benefits before they have paid subscriptions.
• If a doctor's practice number is not entered on the claim, it is returned to him. A considerable
amount of time is wasted by returned the account and could even lead to an account becoming
nonpayable due to the six-month period between the date of service and that of receipt for
payment.
• The name of the person who was treated is manually compared to a List of Dependents. Since
this is done manually, the possibility of the nondetection of invalid names is a risk.
• A monetary value is not calculated for all the claims submitted. A comparison cannot be made
between all claims submitted and all Cheques produced. This means that illegal Cheques
could be produced without detection. A record of the number of batches sent to and resumed
by RTS is not maintained. The loss of input documents without detection is possible.
• The name of the person to whom the medical service was rendered is not tested. If the manual
check on the member's name fails, it is possible that an illegal Cheque could be produced for
an unregistered member or dependent.
• Totals are not built up to facilitate a control such as claims submitted, claims rejected, and
Cheques produced.

Required
1. Write a report to the board, bearing in mind the objective of the review.
2. After reviewing Zipmed's procedures, outline a series of tests to be used in determining the
quality of internal controls.
3. Identify two or more possible internal control deficiencies disclosed in this case study.