AUDITING NON FOR NON-PROFIT ENTITIES AND HOSPITALS

A non-profit organiza on is an en ty that is operated for the benefit of society as a whole rather
than for the benefit of an individual proprietor or a group of partners or shareholders. A non-profit
organiza on strives only to obtain revenue sufficient to cover its expenses. Thus, the concept of income is
not meaningful. Non-profit organiza ons cons tute a significant segment of our society.

Some examples are:

 Voluntary health and welfare organiza ons

 Schools, colleges and universi es
 Hospitals
 Founda ons
 Religious organiza ons

Purpose of Financial Statements

The primary purpose of financial statements is to provide relevant informa on to meet the
common interests of donors, members, creditors and others who provide resources to not-for-profit
organiza ons. Those external users of financial statements have common interests in assessing:

1. The services an organiza on provides and its ability to con nue to provide those services and

2. How managers discharge their stewardship responsibili es and other aspects of their
performance.

STATEMENT OF FINANCIAL POSITION

This statement provides relevant informa on about the liquidity, financial flexibility and
interrela onship of an organiza on’s asset and liabili es in order to let the external users of such be able
to assess the organiza on’s ability to con nue providing the services, to meet obliga ons, and needs for
external financing.

STATEMENTS OF ACTIVITIES

This statement shows the revenues, gains, expenses and losses. The primary purpose of this
statement is to provide relevant informa on about:

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 a) the effects of transac ons and other events and circumstances that change the amount and
nature of net asset.
b) the rela onships of those transac ons and other events and circumstances to each other, and
c) how the organiza on’s resources are used in providing various programs or services.

STATEMENT OF CASH FLOW

This statement provides relevant informa on about the cash receipts and cash payments of an
organiza on during a period.

FUNDS COMMONLY USED BY NPO

1. Unrestricted Fund/ General Fund/ Current Fund

This is also known as the general fund which includes all the assets of a non-profit organiza on
that are available for use as authorized by the governing board and are not restricted for specific
purposes. The revenue and gains of unrestricted funds are derived from a number of sources.

2. Restricted Fund/ Restricted Current Fund/ General Fund

This is used to account for assets available for current use but expandable only as authorized by
the donor of the assets. The donor may impose either “use” restric on or “ me restric on” or both.
Assets of the restricted fund are not derived from the opera ons of the nonprofit organiza on.

a) A “permanent endowment fund” is one for which the principal must be maintained indefinitely
in revenue producing investment. Only the revenue from the investments may be expended. A
permanent endowment fund is also known as “regular endowment”. A permanent endowment
fund or “permanently restricted” but the revenue from the fund is “temporarily restricted”
b) A term “endowment fund” is one for which the principal may be expended a er the passage of
certain period or the occurrence of an event specified by the donor. The term is “temporarily
restricted”
c) A “quasi-endowment fund” is a fund established by the governing board of the nonprofit
organiza on. At the op on of the board, the principal may later be expended.

3. Agency Fund

This fund is used to account for assets held by the nonprofit organiza on as custodian.

Audi ng And Assurance: Specialized Industries Nikko Palma, CPA

Example: A university may act as custodian of cash of a student organiza on. The university disburses cash
as directed by the officers of the student organiza on.

4. Annuity Fund

Established when assets are contributed to the nonprofit organiza on with the s pula on that
the organiza on shall pay specified fixed amount to a designated beneficiary periodically during a specified
period of me. At the end of the specified period for the specified payments, the unexpended assets of
the annuity fund are transferred to the unrestricted fund, restricted fund or endowment fund as instructed
by the donor.

5. Life income Fund

Used to account for s pulated payments to a named beneficiary during the beneficiary’s life me.
Only the income on the fund is paid to the beneficiary’s payment from a life income fund varies form
period to period comparing to annuity fund that is fixed.

6. Plant Fund

Established for land, building, and equipment. It may also include cash and investments earmarked
for addi ons to plant or payments of liabili es collateralized by the plant assets. Sinking fund assets set
aside for re rement of debt incurred to acquire plant assets is also included.

CLASSIFICATIONS OF EXPENSE OF A NONPROFIT ORGANIZATION

1. Program services – these are the organiza ons ac vi es that result in the distribu on of goods and
services to beneficiaries, customers or members that fulfill the purposes or mission of the organiza on.

2. Suppor ng Services – these are other expenses that include all ac vi es of the organiza on other than
program services, i.e. management and general expenses, fund raising and membership development
ac vi es.

All expense of a non-profit organiza on is reported as unrestricted in the statement of ac vi es. This
means that expenses are deducted only from unrestricted revenue.

CLASSIFICATIONS OF NET ASSETS

1. Unrestricted net assets – assets in the “unrestricted fund”

Audi ng And Assurance: Specialized Industries Nikko Palma, CPA

2. Temporarily restricted net assets – assets in the restricted fund, term endowment fund, annuity fund,
life income fund and plant fund.

3. Permanently restricted net assets – “permanently endowment fund”.

AUDIT CONSIDERATIONS

INDUSTRY CHALLENGES:

1. Impact of COVID 19 pandemic on healthcare workforce.

 High turnover healthcare workforce can have an adverse effect in the delivery of
services, where the ra o of nurses to pa ents are low such that nurses experience
“burned out”;
 High cost of training, mentoring and coaching new and experienced personnel in terms
of monetary and me spent;
 Crea ng work environment where employees are encouraged to pursue goals is more
important than providing compe ve pay is a challenge.

2. Leadership and governance - Preven ng inherent risks.

3. On health insurances: Corrup on allega ons on the Philippine Health Insurance Corpora on, which has
been helping finance COVID-19 tes ng and treatment in the country, has been rocked with allega ons of
fund mismanagement and overpricing.

4. Accoun ng for dona ons, grands, and subsidies.

KEY AUDIT PROCEDURE:

1. Healthcare Financing-

a) Secure/determine/inquire about the "rate structure of fees" and expenses, plus its sharing
scheme with Medical Professionals, resident or consultant (non-resident), including specialists.
b) Ascertain/inquire about the "discount policy" for in-house/out-pa ents and how it affects the
billing and se lement.
c) Review concessionaire agreements and sharing schemes.
d) Procedures for SSS/Phil health claims/deduc ons, applica on of credit card payments and
u liza on of medical insurance/HMOs.

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2. Medical PPE, Products, and Technologies

a) Establish or check internal controls on procurement / purchasing of assets, medicines, importa on

of sophis cated (state-of-the-art) medical equipment, storage of inventory items and its
issuances, policy on clothing & provisions and consumables.
b) Procedures on the [year-end] observance of inventory count.

3. Informa on and Research - Determine sources of funds for the purpose assessing the efficacy of a
par cular medica on.

4. Leadership and Governance - secure Minutes or excerpts on financial transac ons rela ng to PPE,
Investments, and financial powers (signing authority and limits).

5. Service Delivery

a) VAT & EWT impact on medical professionals concerning professional fees, room rentals (for clinics)
and segrega on / set-up entries in billings and se lements, sale of medicines both to in-pa ents’
administra on and out-pa ent purchases.
b) For proper orienta on, visit the hospital client and observe how each sec on operates. Observe
procedures.
c) There is always a document-trigger point before the procedure is performed.

6. Opera onal audits, safety & compliance audits, and other considera ons.

Audi ng And Assurance: Specialized Industries Nikko Palma, CPA

Audi ng And Assurance: Specialized Industries Nikko Palma, CPA
Audi ng And Assurance: Specialized Industries Nikko Palma, CPA
 AUDITING ACADEMIC INSTITUTIONS

Overview:

Educa onal Services is widely considered a counter-cyclical industry. Typically, when the economy
is doing poorly and unemployment is rising, more working adults, as their career prospects start to dim,
decide to upgrade their educa on. This, in turn, leads to higher enrollment and increased profit at the
schools.

Nature and Background of Specialized Industry

The Educa onal Services sector comprises establishments that provide instruc on and training in
a wide variety of subjects. This instruc on and training are provided by specialized establishments, such
as schools, colleges, universi es, and training centers. These establishments may be privately owned and
operated for profit or not for profit, or they may be publicly owned and operated. They may also offer
food and/or accommoda on services to their students.

The industry is defined by four main categories:

1. Schools/ Service Providers: Providing Elementary and Secondary Educa on, Alterna ve/Special
Educa on Services, Educa on Management Organiza ons, Charter Schools, Virtual Schools, and
Proprietary Schools.
2. Supplemental Educa on Service Providers: Providing Higher Educa on, Voca onal Educa on,
Learning Centers, Tutoring Services and Assessment Services.
3. Educa onal Products & Services Sector: Produc on and supply of educa onal material and
products including Educa onal Products, Publishing, and Supplemental Products.
4. Educa on Support Services Sector: Providing support and ancillary services to the educa on
industry including Educa on Consultants, Educa on Informa on and Research, Educa on
Investment Services, Educa on Policy Specialists, and Technology Services.

AUDIT CONSIDERATIONS

The industry’s primary sources of income are – Fees, Subscrip ons, Dona ons, Grants, etc. A
group of persons known as ‘Trustee’ or ‘Governing Body’ or ‘Execu ve Commi ee’ or ‘Board of
Management’ organize and manage it. Day-to-day rou ne ac vi es are entrusted to a person who is
known as Secretary. Since there are many chances of fraud and embezzlement of the fund of the
Ins tu ons, it becomes essen al that the accounts of Ins tu ons should be drawn properly. Generally,

Audi ng And Assurance: Specialized Industries Nikko Palma, CPA

accounts of an educa onal ins tu on are maintained under cash-basis of accoun ng and not under
Mercan le-basis of accoun ng.

Collec on of tui on fees, admission fees, fines, session charges and special fees — laboratory fees,
library fees, sports fees etc. — should be separately recorded in Collec on Register.

Students’ Ledger must be maintained where all these collec ons should be credited to the
respec ve students. Students’ Ledger should also include free studentship, concessions and wri ng-off
irrecoverable fees which are to be sanc oned by higher authority or Managing Commi ee etc.

Periodical reconcilia on should also be made between the fees collected, fees outstanding at the
beginning and at the end of the period, fees wri en-off with fees that should have been collected
according to the number of students in different classes having regard to the number of students enjoying
free studentship, concessions etc.

Audi ng And Assurance: Specialized Industries Nikko Palma, CPA

 AUDIT PLANNING
PSA 300 provides that the objec ve of the auditor is to plan the audit so that it will be
performed in an effec ve manner.
OUTPUT:
1. Overall audit strategy- sets the scope, ming and direc on of the audit, and that
guides the development of audit plan.
2. Audit plan- develop a plan that includes;
a. Nature, ming, and extent of planned risk assessment procedure.
b. Nature, ming, and extent of planned further audit procedure.
c. Other planned audit procedure.
3. Dra audit programs detailing the work to be performed.
MAJOR AUDIT PLANNING ACTIVITIES
A. Obtaining an Understanding of the Client and Its Environment.
RISK ASSESSMENT PROCEDURES
1. Inquiry
2. Observa on
3. Inspec on
4. Analy cal Procedure
1.INQUIRY- inquiry can be directed to the following.
a) Those charged with governance
b) Internal Audit Personnel
c) Employees involved in processing complex transac ons
d) In house legal counsel
e) Marke ng or sales personnel
2. OBSERVATION AND INSPECTION- it may support your inquiries to management and others.
a) Observa on of en es opera ons
b) Inspec on of Documents
c) Visit en es premises and facili es
d) Tracing transac ons or walkthrough.
3. ANALYTICAL PROCEDURES- Analy cal procedures consist of 'evalua ons of financial
informa on through analysis of plausible rela onships among both financial and non-financial
data

Audi ng And Assurance: Specialized Industries Nikko Palma, CPA

 B. CONSIDER MATERIALITY
Steps in applying materiality
1. Establish a preliminary judgment about materiality
2. Determine tolerable misstatement.
Tolerable Misstatement- is the amount of planning materiality that is allocated to an
account balance or class of transac ons.
C. Iden fying and Assessing the Risk of Material Misstatement
Audit Risk- is the risk that the auditor gave an inappropriate audit opinion when the financial
statements are really misstated.
The auditor iden fies and assess the risk of material misstatement at;
a. Financial statements level,
b. Asser on level for classes of transac ons, account balances and disclosure.
Note: a higher risk of material misstatement will require the auditor to perform more
effec ve and extensive audit procedures.
Materiality vs Audit Risk- Inverse Rela onship
COMPONENTS OF AUDIT RISK
Inherent Risk- suscep bility of an account balance or class of transac ons to misstatement,
assuming there is no internal control.
Inherent Risk in Financial Statements Level
1. Integrity of Management
2. Unusual pressure in management
3. Nature of en ty’s business
Inherent Risk at Account balances and Transac on Level
1. Complex FS Accounts.
2. Complexity of Transac ons.
Control Risk- the risk that material misstatement that could occur will not be prevented or
detected and corrected, on a mely basis by the accoun ng and internal control systems.
Detec on Risk- the risk that the auditor’s substan ve procedure will not detect a material
misstatement that exists in an account balance or class of transac ons that could be material,
individually or when aggregated with misstatements in other balances or classes.

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 Lower DR Higher DR
Nature more effective procedures less effective procedures
Timing closer to year end may be performed at interim date
Extent large sample size small sample size

ESTABLISHING THE OVERALL AUDIT STRATEGY

1. Iden fy the characteris cs of the engagement that defines its scope such as:
a. Financial repor ng framework used.
b. Industry specific repor ng requirements.
2. Ascertain the repor ng objec ves of the audit engagement to plan the ming of and
audit.
a. Deadlines for repor ng of FS.
b. Key dates for communica on with management- ex. Physical Inventory Count,
Confirma on of Receivables.
3. Consider the factors that in auditor’s professional judgment are significant in direc ng
the engagement teams efforts.
a. Determina on of appropriate materiality level
b. Iden fica on of areas with possible higher risk of material misstatement.
c. Evalua on whether the auditor may plan to rely on effec veness of internal
control
4. Consider the results of preliminary engagement ac vi es.
5. Ascertain the nature, ming and extent necessary to perform the engagement.
AUDIT PLAN- is a more detailed than overall audit strategy in that it includes nature, ming, and
extent of audit procedures to be performed by engagement team members.
AUDIT PROGRAM- contains the audit objec ve for each area, the nature, ming and extent of
audit procedures and a me budget in which hours are budgeted for various audit procedures.

OTHER PLANNING CONSIDERATIONS

1. Arrangement for Company Assistance. Example. Audit Schedules
a. Leads Schedules or Trial Balance.
b. Inventory Lis ngs
c. Schedule of Fixed Assets
2. Consider the Work of Internal Auditors.
a. Observa on of Inventory Count
b. Review of Deprecia on Provisions.
3. Direc on, Supervision and Review

Audi ng And Assurance: Specialized Industries Nikko Palma, CPA