Mikong due MARCH 30

NAME SECTION

ANSWER

DISCUSS THE AUDIT CONSIDERATIONS (BOTH OPERATION AND ACCOUNTS) IN CONDUCTING AN

AUDIT OF HOSPITAL OPERATIONS

Auditing hospital operations and health maintenance organizations (HMOs) is simple but has many
inherent problems especially on the internal control that must be resolved for the purpose of providing
fair and credible information to the intended users. In auditing hospital operations, the very first factor
to consider is the (A) Leadership and governance for it is essential in an organization that there is a
group of people that have the capability to lead others, so according to the speaker, one must check on
the organizational chart or audit check the credentials of those people who govern the organization for
the auditor to know their capabilities and to make the organization, in this case the hospital to be more
credible in the eyes of the auditor. The auditor must also secure minutes or excerpts on financial
transactions relating to PPE, investments, and financial powers (signing authority and limits) of those
people in charged. Knowing the sides of the system will give an auditor the insights and better
understanding regarding the flow and if there is a problem detected, it would be easy to trace for the
auditor has already understand the environment in which he would conduct his audit. The consideration
for (B) Health care financing for the audit of hospital operations include an inquiry about the “rate
structure of fees” and expenses, the “discount policy”, reviewing the concessionaire agreements and
sharing schemes and the procedures for SSS/PhilHealth claims/deductions with the application of credit
card payments and utilization of medical insurance/HMOs. Securing and ascertaining these operations is
very much difficult for there are many inherent problems arise especially on the internal control of the
hospital and some may be difficult to trace so the auditor must plan procedures on how to check the
billing settlement and remittances to avoid a loss of revenue and to be aware against fraudulent claims
in the billing activities. The (C) Health care workforce must also be considered for as the situation we
are today, with this pandemic, there are high turnover of healthcare workforce which can have an
adverse effect in the delivery of services, for the ratio of nurses to patients are low such that nurses
experience “burned-out” and may affect their health and work. The (D) Medical products and
technologies of which an auditor must establish and check internal controls on procurement/
purchasing of assets, medicines, importation of sophisticated (state-of-the-art) medical equipment,
storage of inventory items and its issuances, policy on clothing & provisions and consumables and
should plan on procedures to conduct a year-end observance of the inventory count especially the small
items like syringe, etc. for these will be relevant in conducting the overall audit of the hospitals and also,
it is much essential to audit this at interim dates rather than at year end. The (E) Information and
research, in which one must determine the sources of funds for the purpose of assessing the efficacy of
a particular medication like in these times the source of funds to buy the vaccines or any medicine, the
auditor should check if there are any closed deals with other hospitals and should also trace the
transactions needed for the documentation and supporting evidence necessary. And lastly, the
considerations for (F) Service delivery includes the VAT & EWT impact on medical professionals
concerning professional fees, room rentals (for clinics) and segregation/ set-up entries in billings and
settlements, sale of medicines both to in-patients administration and out-patient purchases, but take
note that only the medicine is vatable not the services offered. For proper orientation, the auditor must
visit the hospital client and observe how each section operates, observe its procedures and what is
going around for there is always a document-trigger point before the procedure is performed for better
understanding the overall process that needs to be examined and checked.

AUDIT OF ACCOUNTS

Auditing the accounts of hospitals and HMOs is as I have stated a while ago is simple yet there are a lot
of internal concerns that must be resolved, so the auditor must plan the audit with the six elements
mentioned above, in a conscientious manner starting with the preliminary procedures, in which
according to the overall objectives of audit, he should examine the scope of responsibilities of each
officer in the company or in our case in the hospital and should also examine the minutes of the board
or committees and note important decisions on financial transactions relating to fixed assets,
investment and financial powers by obtaining a list of books, documents, register and other records
maintained by the hospital including billing charges book. Obtaining the rate structure for fees, medicine
and other services, power to do concession or waiver of fees and there should be adequate system for
changes and waiver that the auditor must know of and lastly is to examine the input-output ratios,
comparing the services rendered as to the amount being charged. In auditing the accounts of asset and
liabilities, the auditor must examine the title documents and other records relating to land and building
and should look into the records as for the fair market value or appraisals of the said property and the
sale and purchase of fixed assets should verified and their depreciation should be based on the policies
of the company. As for the liabilities, they should be verified in the usual manner. In auditing the income
account, the auditor must carefully examine the income or receipts coming from the bill book, bill
register and other copy of bills for bills are prepared properly according to visit charges of doctors,
medicine, stay charges, room rents, etc. counter checking the verification of the arrears of bills should
be done and in case of the occurrence of unrecoverable arrears, it should be written off with approval
and consent of proper authority. The auditor should also look into the computations of interest and
dividend income for it to be verified with the investment register and see to it that the amount in the
book is the same as the auditor’s computed amount. In auditing the expense account, vouching of
expenses in hospitals is almost the same as in other organizations, however, the auditor should also
consider the adoption of the usual way to vouch purchases and other expenses of the hospitals by
having a chart of accounts with a clear distinction made between capital and revenue expenses, to look
for the definition on which expense accounts the auditor should vouch for as well as the salary of staff
should also be vouched according to the general auditing principles, including the checking on the alpha
list of the newly hired employees. In auditing the accounts of hospitals and HMOs, it is very mush
essential to plan and conduct the audit in a conscientious manner, for even if it is very simple, there are
some inherent internal controls issues that should be checked and examined if they are functioning
effectively and also some outside factors that would have an impact on the audit should also be
considered to achieve the overall objective of the audit procedures conducted.
Discuss the accounting, audit, and regulatory considerations in conducting an external audit on
Insurance as mentioned and discussed by the resource speaker.

INSURANCE

Insurance is a means of protection from financial loss. It is a form of risk management primarily used to
hedge against the risk of a contingent, uncertain loss. Some of the key considerations on accounting,
audit, and regulatory in conducting an external audit includes (A) Key risk area: Underwriting Cycle,
which tackles on the launching of a new products that are not approved by the Insurance Commission,
thus the insurance company should conduct screening and independent testing on the validity of new
products and should also inspect the internal control approval of the new product launched if they
passed their criteria. Also, there should be a proper access over the underwriting data maintenance and
policy acceptance and issuance, segregating the duties over the underwriting process particularly
encoding of policy applications, underwriting approval, and quality control. (B) Key risk area: Premiums.
Some risks include premiums, commissions, and revenue and expense amounts recorded may not relate
to polices issued or in force during the period and premiums written may not include premiums from all
policies issued and are not accurately compiled and sometimes, premium revenues and unearned
premium reserve (non-life insurance) may not be recorded properly. The auditor’s response regarding
this are testing the controls over policy issuance and recording to know and understand the revenue
recognition methods used by subsequently testing the receipts and assess the adequacy of allowance
set up, inspecting the signed application and underwriting approval as to their validity in policy data to
the master file and also reconcile the premiums and cash receipts by having external confirmation from
the policy holders and also doing a full-false testing is also helpful. The speaker also tackles on the (C)
Key risk area: Claims and Benefits, of which some risks include claims recorded may not relate to the
transaction during the period, reserves and related balances under reinsurance assumed and
reinsurance recoverable on paid and unpaid losses may not be accurately recorded as well as the
outstanding claims payable may not be accurate or contested claims have not been removed from the
register and lastly the estimates of loss reserves may not be reasonable. The auditor’s response
regarding these risks would include test of controls on the validation of the claims notification and
verification controls as well as controls over the reinsurance transactions and claims settlement and
recording, as well as verify review and approval of loss reserves established. Substantive test of details is
also necessary like the inspection and validation of documents by performing floor to tag procedures
whether to accept or reject the validity, testing claims and unpaid claims recorded before and after year-
end, inspection of the reinsurance agreements with the confirmation of the balances with reinsurers to
test the reliability of data and understand and evaluate reasonableness of the reserve estimation
process by performing look back testing on estimates established vs actual results in previous years. And
the last key audit risk area is (D) Key risk area: Reserves which tackles on the completeness and accuracy
of inforce data used by doing test of controls to test system interface and to inspect some policy
contracts and do full false testing from policy administration system to reserve database. The
reasonableness of management estimates to arrive at assumptions by reviewing actual-to-experience
analysis of experience studies by studying industry benchmarking to know the reasonableness of
compliance with the internal control completeness and accuracy of information used in deriving
actuarial assumptions, as well as the reasonableness of actuarial calculation by recalculating the
reserves balances by auditor’s experts and agreeing on the inputs to be put into the system with the
approved assumptions. And lastly is the competence of auditor and management expert with
compliance with the credential requirements by the Actuarial Society of the Philippines and having a
regular meeting with the experts. These considerations need to be accounted for to understand the
insurance industry in today’s environment.

Banking

Banking industry is part of the financial system of a country and a key institution towards the stability of
its the financial system. In the Philippines, the banking system is the center of its financial system which
is a bank-based financial system contrary of the capital-based financial system in richer countries.
Banking industry is one of the most highly regulated and most complicated to audit for first reason of,
when accepting an audit engagement of a bank, the engagement partner must ensure to have the right
resources like the number of members, auditing tools, experience and have the ability to get experts
and specialist because of the succeeding consideration in banks. Also, the issuance of audit and other
various reporting requirements is highly regulated for there are some complex and peculiar transactions
and estimates and due to this pandemic, assets could rapidly change in value that is why the auditor
must also consider what is happening in the environment, inside and outside the industry. The extensive
use of PFRS 9 due to the pandemic, with its debt modification due to the borrowing of funds for the
Bayanihan Act with the deferral of at least 2 months, bank did not accrue interest during this period
which may result to a gain or loss on debt modification which is quite complicated to due to this
changing environments. Also with online activities increasing, as well as on online banking, the fraud on
banking transactions is also digitalized, so the auditor must be aware so that he/she can properly take
into considerations when accounting for transactions and assessing the risk and implications on the
impact of the treatment for the auditor’s responsibility in respect to fraud and misstatements to be
properly addressed and modified and in auditing online, the need of authenticity on documents for it is
prepared electronically and they may be some inherent limitations present.

On key tax considerations, in determining the income tax, direct cost of which includes all deductible
direct costs like the cost of service incurred directly and exclusively through obtaining the receipt of
withdrawal for it will be deducted. In case of the withholding tax, late withholding which upon payment
instead of upon accrual or payment whichever comes first, and the foregone interest on loans for
employee expense shall also be considered. The CREATE bill which is enacted as at December 31, 2020,
prior to the enactment, the issuance of financial statements and the provision of lowering income tax
rate retrospective to 2020 such will not have an effect on the current and deferred taxes for financial
statement purposes and the significant effect of the changes should be disclosed as event subsequent to
the reporting period. The use of the tax specialist’s help in auditing the transactions is also convenient
for the transactions are mostly complicated but this does not relieve the any accountants or auditors
who uses the work of the specialist from any responsibilities and he/she should review the work of the
specialist. Aside from this, the key risk considerations like credit, liquidity, currency, operational,
solvency, fiduciary, interest rate, replacement, concentration, regulatory and legal and documentary
risks should also be addressed. Other considerations include the Financial Institutions Strategic Transfer
(FIST) act of which will strengthen the financial sector by enabling banks to efficiently dispose of their
non-performing loans and assets, clean up their balance sheets, and extend credit to more sectors in
need to put the economy more on the solid path to recovery through this fiscal and economic reforms
by the government.
Power & Energy

Enumerate those regulatory bodies and laws, discuss briefly the effect of those issuances and laws in
accounting and audit of entities in power and energy industry

The regulatory bodies that were mentioned in the video are:

1. The Department of Energy (DOE) is the apex body for governing and developing policies within
the country’s power sector. They are responsible for the formulation of PEP 2017-2040 as the
pursuant of the “Renewable Energy Act of 2008” (RA 9513), the Power Development Plan and
also in supervising the reform process of the sector following the Electric Power Industry Reform
Act (EPIRA).
2. Energy Regulatory Commission (ERC) is an independent body responsible for regulating the
power industry and for the approval of bilateral power agreements, and setting the distribution
wheeling rates of distribution utilities and electric cooperatives.
3. National Electrification Administration (NEA) is the body responsible for the promotion of full
electrification in the country with the focus on the numerous electric cooperatives that serve on
less developed areas.
4. Philippine Competition Commission (PCC) is designed to exceed consumer protection while also
accelerating the investment and business growth in the country.

The laws and issuances that were mentioned in the video are:

1. Renewable Energy Act of 2008 (RA 9513) was enacted on December 2008 to affirm the government’s
commitment to accelerate the utilization of Renewable Energy (RE) resources and to effectively reduce
the harmful emission to protect people’s health as well as the environment.

2. Electric Power Industry Reform Act (EPIRA) was passed on 2001, which mandates the Energy
Regulatory Commission (ERC) to promote competition as well as to encourage market development and
penalize the abuse of market power.

3. Energy Efficiency and Conservation Act (RA 11285) was declared to institutionalize energy efficiency
and conservation as a way towards the efficient utilization of energy by implementing plans and
programs to enhance the energy supply security of the country as well as to protect the environment.

4. Department Circular No. 2020-04-0009 provides guidelines on the issuance, revocation and
administration of operating permits to the suppliers of renewable energy under the Green Energy
option Program.

5. Department Circular No. 2020-04-0010 ensures the safety and protection against hazards to life,
health, property and environmental pollution.

6. Administrative Order No. 2020-05-0001 is provided for the COVID-19 Response Protocol in the energy
sector of the country and provides a detailed guideline on the appropriate measures to be taken by all
industry players to protect the health and safety of its stakeholders.

The effect of these issuances and laws in the accounting and audit entities in power and energy industry
would be that of this will serve as a guide to the industry’s general accounting and auditing services,
ensuring the effective compliance with government rules and regulations as well as effectively
performing the accountant’ responsibility. One example of this is the fiscal incentives available for
renewable energy developers under the Rule 5 Section 13 of the Renewable Act implementing rules and
regulations like an income tax holiday for the first seven years of commercial operations and reduced
corporate tax of 10% after the income tax holiday, specialty realty tax rates on equipment and
machinery, accelerated depreciations and among others. These will guide and assist auditors in
preparing the audit, analyzing the industry environment with the changes that have occurred which will
materially impact the financial statements and if necessary, seek some help from the experts but this
doesn’t mean that the auditor is relieved from his responsibility, to effectively perform the audit in this
highly regulated specialized industry.