AUDIT OF HOSPITAL INDUSTRY

Definition
Hospital is an institution for health care providing treatment by specialized staff and
equipment. It is set up to deal with many kinds of disease and injury and typically has an
emergency ward to deal with immediate threats to health and the capacity to dispatch emergency
medical services.

Audit of Assets and Liabilities

General Points of Consideration PPE

 Assets recorded at
 Title documents and other records relating to land and building historical cost or fair
should be carefully examined.
value for donations
 Resolution of Trustees/Managing committee should be verified for
 Depreciation
sale and purchase of fixed assets.
recorded on all
 Depreciation should be charged on the basis of the policies of the
Managing Committee. assets
 Liabilities should be verified in the usual manner.  Capitalization policy,
 An Auditor should physically verify the investments like shares, method of valuing
debentures, bonds and security certificates. He should also verify assets, and
them with the investment register. depreciation method
 Stock and stores of medicines, clothing, consumables, etc. should must be disclosed in
be physically verified at the end of the year. notes to financial
statements

Audit of Income and Expenses

Income
 An Auditor should check the bill book, bill register and copy of bills.
 Bills prepared properly according to visit charges of doctors, medicine, stay charges, room rent, etc.
 Bills should be verified with the fees/charges structure.
 Concession and waiver on account of fees and other charges should be verified.
 Bills should be verified with cash receipt book, counterfoil of receipts and cash book.
 Verification of arrears of bills should be done.
 Unrecoverable arrears should be written off with the approval and consent of proper authority.
 Rental income should be properly verified. He should properly vouch property register, arrear of
rent, advance rent and provisions for the same.
 Interest and dividend income should be verified with investment register, cash book and share
warrants, etc.
 Documents and correspondence relating to donations and grants should be verified; the list of
donors, grant sanction letter should be obtained to verify the same.
 Unutilized grant should be verified at the end of the year. In case of non-fulfillment of conditions,
grant will be taken back by the authority.
 Distinction between revenue and capital donation should be checked and verified. In case donation
is for some specific purpose, Auditor should assure that the money is used for the same purpose
 only.
Expenses
 An Auditor should adopt the usual way to vouch purchases and other expenses of the hospitals.
 Clear distinction should be made between capital and revenue expenses.
 Salary of staff should be vouched according to general auditing principles.

Internal Audit

Challenges

 There is difficulty in finding the ‘right talent’. Hiring and keeping the “right kind of talent,” is
internal audit’s greatest challenge.
 Matching the skills of internal audit personnel with an organization’s needs and demands.
Most companies reported having too many internal auditors with financial reporting compliance
skills. And some internal auditors are mainly focused on IT functionalities. This leaves gaps in
other significant areas like Fraud prevention and detection, Tax, Controls and transactions. There
is a need for greater focus on matching the skills of internal audit personnel with an
organization’s needs and demands.
 Delivering Additional Value. An ongoing challenge for internal audit relates to multiple
stakeholder expectations which, at times, may differ.
 Use of technology in Internal audit. There is the need to do a better job at leveraging
technology in internal audit including using data analytics. Many internal audit departments are
struggling to find good IT auditors.
 Gaining trust. Trust has to be earned and cannot be solely given on reputation.

Benefits
 Internal audit search throughout the organization to appraise activities, at given sufficient
time and resources.
 Internal audit is dedicated to improving systems rather than detecting errors.
 Hospital departments and processes that are evaluated are also improved.
 An internal audit brings a professional level of objectivity and independence to the
facility.
 It helps in protecting the assets and reduce the possibility of fraud
 It Improves the efficiency in operations
 It Increases financial reliability and integrity
 Ensuring compliance with laws and statutory regulations
 Establishing monitoring procedures
 Accounting for Hospital Industry

Areas of Focus
 Human Resources
 Revenue Cycle Processes
 Accounts Payable Processing
 Cash Management
 Policies and Procedures
 Physician Relationships
 System Implementations
 Ethics and Compliance
 External Audit Communications and Co-
 Purchasing and Receiving
sourcing
 Financial Operations
 Other Areas Identified by Management

Revenue or Income

Classes of Revenues Main Items of Income

 Patient service revenues  Room Rent

 Daily patient services  Medical Care
 Other nursing services  Dentistry Charges
 Other professional services  Delivery Room Charges
(Deductions from patient service revenues)  Anesthesia Charges
 Charity services – indigent patients  Laboratory Charges
 Policy discounts – members of groups that  Grants for Operating Needs of Hospital
receive discounts as a result of hospital policy  Grants for Fixed Assets
 Contractual adjustments – third-party  Donations
payments that are lower than standard rates by  Miscellaneous Income
contract  Interest on Investments
 Uncollectible accounts  Fees from Nursing Training School
 Premium fees – revenues from other organizations  Bed Charges
based on agreement to provide services for specific  Operating Room Charges
fee  X-ray Charges
 Other revenues – derived from ongoing activity  Pharmacy Charges
other than patient services  Physiotherapy Charges

Typical Gains

 Sales of investments in securities

 Sales of capital assets
 Gifts or donations (may be revenues in some hospitals)
 Investment income (may be revenues in some hospitals).
 Expenses

Types Typical Expense Functions

 Electricity and Water  Rent for Nursing Hostel  Nursing services

Charges Accommodation  Other professional
 Pharmacy Charges  Telephone Expenses
services
 Salaries and Wages  Laboratory Expenses
 General services
 Pharmacy Expenses  Surgery Expenses
 Fiscal services
 Building Repair and  Operation Tools and
Maintenance Equipment Expenses  Administrative services
 Laundry Charges  Depreciation  Other services

Government Hospital Restricted Funds

 Specific Purpose Funds – used to account for assets restricted by donors and grantors
 Plant Replacement & Expansion Funds – used to account for financial resources restricted by
donors or grantors for capital asset purposes
 Endowment Funds – used to account for principal of permanent endowments, term endowments,
and similar gifts.
 Questions

1. Which of the following is not a government hospital restricted fund?

a. Endowment Funds
b. Plant Replacement and Expansion Funds
c. Specific Replacement Funds
d. General Funds

D
Government hospital restricted funds include (a) Specific Purpose Funds which is used to
account for assets restricted by donors and grantors, (b) Plant Replacement & Expansion Funds
which used to account for financial resources restricted by donors or grantors for capital asset
purposes, and (c) Endowment Funds which is used to account for principal of permanent
endowments, term endowments, and similar gifts. Only (d) general funds is not a government
hospital restricted fund.

2. Private non-profit health care organizations follow standards by:

a. FASB
b. GASB
c. SEC
d. None of the above

FASB, which stands for Financial Accounting Standards Board, has the authority to establish
and interpret generally accepted accounting principles (GAAP) for public and private companies
and nonprofit organizations. GAAP is a set of standards that companies, nonprofits, and
governments should follow when preparing and presenting their financial statements, including any
related party transactions.

3. Private sector, not-for-profit health care organizations have a category of assets called “Assets Whose
Use is Limited.” That category refers to

I. Assets that have been restricted by donor action.

II. Unrestricted assets that have been limited by individuals or entities other than contributors (such as
by bond covenants).

a. Only I
b. Only II
c. Both I and II
d. Neither I nor II
 B

Assets whose use is limited, classified as an Unrestricted Net Asset, refer to those accounts
used in the equity section of private not-for-profit hospitals to show limitations on the use of assets
due to bond covenant restrictions and governing board plans for future use. This category is
especially important for private sector, not for-profit health care entities because the “restricted”
category is limited to restrictions placed on contributions by the outside donor.

4. The AICPA Audit and Accounting Guide: Health Care Organization applies to

I. Private not-for-profit health care organization

II. Government owned health care organization
III. Investor-owned health care organization

a. I and II
b. II and III
c. I and III
d. I, II and III

All health care organizations follow AICPA Audit and Accounting guidance hence includes (I)
Private not-for-profit health care organization, (II) Government owned health care organization,
and (III) Investor-owned health care organization. Specifically, Government owned health care
organization follows the GASB Guidance while private not-for-profit health care organization and
investor-owned health care organization follows the FASB Guidance. These guidance are under the
said AICPA Audit and Accounting Guide.

5. What is/are the benefit/s of hospital internal audit?

a. An internal audit brings a professional level of objectivity and independence to the facility
b. Multiple stakeholder expectations which, at times, may differ
c. An increase in financial reliability and integrity
d. Both A and C

Both (a) an internal audit brings a professional level of objectivity and independence to the
facility and (c) an increase in financial reliability and integrity are included in the benefits of
internal audit while (b) multiple stakeholder expectations which, at times, may differ is a challenge
which relates to delivering additional value. Other benefits include improving systems,
evaluation and improvement of hospital departments and processes, protecting the assets,
reducing the possibility of fraud, improving operations efficiency, ensuring compliance
with laws and statutory regulations and establishing monitoring procedures.