A summary of an internal audit engagement performed at the request of executive management is presented below. The claims department of Gecko Insurance Company has instituted new claims procedures for local offices. The new procedures have been designed to improve the review of claims and to prevent both overpayment and payment of false claims. Management mentioned concern about the new procedures at the opening conference of the audit engagement. Management told the internal auditors that three complaints had been received recently about the excessive time it took to receive the insurance proceeds for their claims. The company advertises 48-hour claim service. Each of the three claims that generated the complaints took seven days. Management said these were the first complaints of this type and were received only after the new procedures were implemented. Management feared that if the claims took too long to process, many clients would switch to another company. The internal auditors decided to find out if processing time had really increased, and if so, whether this was because of the new procedures. The internal auditors decided to test 25 randomly selected claims made since the change in the procedures and 25 claims from before the procedures and compare them. The tests revealed that the new process had caused an increase in the processing time for two reasons. First, there was a learning curve with the new required forms. The headquarters claims department often had to correct the forms and request additional information before claims could be processed. Second, the new process required a more extensive review than before, sometimes even including a field visit by one of the claims staff in addition to the regular inquiry by one of the company’s claims adjusters. The internal auditors estimated that the delayed disposition of the claims seriously eroded the marketability of the company’s insurance policies, perhaps decreasing sales by as much as 10 percent the first year and up to 25 percent in subsequent years. The new procedure also increased the cost of servicing claims by 5 percent to 10 percent, depending on whether an additional inquiry is conducted by one of the claims department staff members. The estimated savings on payment of improper claims was equivalent to a maximum of 10 percent of total expenditures in any one year. The internal audit team determined that returning to the previous claims service procedures, with minor modifications, would serve the intended purpose and avoid the problems associated with the revised procedures. The additional review procedure recommended by the internal audit team was that a computer scan of company records be performed to ascertain any previous claims by the claimant and the nature as well as the amount of prior claims.

Complete the following observation development form base on the information presented above.

Condition:

Criteria:

Effect: Cause:

Recommendation:

b) Develop an alternative internal audit recommendation to the one provided.

c) State an alternative internal audit procedure the audit team might have chosen to the one the team decided to perform.

d) Which of the two internal audit procedures, the one decided upon by the team or your alternative, is more effective? Why? Expert Answer