Reference no: EM132701101

Question - Management has requested that the internal audit group perform an audit of the effectiveness and efficiency of the new claims process for its local offices. The new process was designed to improve the review of claims and to prevent overpayment and/or payment of false claims.

In the opening meeting of the audit engagement, management expressed concern over the new process. Management told the internal auditors that it has received three complaints about the excessive time it takes for claimants to receive their insurance proceeds. Each of the three claims took seven days to process. These are first complaints that Dynamic has every received regarding processing time and all three complaints were received after the new process was implemented.

Management fears that if the claims take too long to process, many clients will switch to another company. One of the key success factors for Dynamic Insurance is its fast processing of claims. In fact, as part of its advertising campaign it guarantees a 48-hour processing time.

The internal auditors decided to find out if processing time had really increased, and if so what was the cause of the increased processing time. Below is a summary of some of their procedures and findings:

There was a learning curve with the new required forms. The head office claims staff often had to correct the forms and request additional information before claims could be processed.

The new process has a much more extensive review process. All claims must be reviewed and approved by head office. Under the old process, head office only reviewed claims in excess of $10,000 and if the claimant had filed a previous claim with Dynamic.

Under the old process, claims adjusters made a field trip for all claims. Under the new process, in addition to the claims adjuster visit, claims staff members are required to make a field trip for all claims that in excess of $10,000 or if the claimant had filed a previous claim.

The internal auditors randomly selected 25 claims assessed under the new process and 25 claims assessed under the old process.

Based upon the random sample, the processing time for claims under the old system was 48 hours and the average processing time for claims under the new system was 55 hours.

Results of the sample of claims under the new system, showed that processing time was lower on the more recent claims when compared to those that were processed when the new systems was implemented.

For those claims that took in excess of 55 hours, the claim was either processed soon after the new process was implemented or had required a claims staff site visit.

The cost of processing claims under the new system has increased by 5 to 10 percent, depending upon whether additional inquiry is conducted by the claims department.

The estimated savings due to reduced payment of improper claims is equivalent to a maximum of 10 percent of total expenditures in any one year.

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.

Required - Based on the information provided above prepare an audit finding using the following format below and on the next page:

Condition:

Criteria:

Effect:

Causes:

Recommendations: