Mont Louis Hospital, which is affiliated with a leading university, has an extremely reputable research department that employs several renowned scientists. The research department operates on a project basis. The department consists of a pool of scientists and technicians who can be called upon to participate in a given project. Assignments are made for the duration of the project, and a project manager is given responsibility for the work.
All major projects undertaken by the research department must be approved by the hospital’s administrative board. Approval is obtained by submitting a proposal to the board outlining the project, the expected amount of time required to complete the work, and the anticipated benefits. The board also must be informed of major projects that are terminated because of potential failure or technological changes that have occurred since the time of project approval. An overall review of the status of open projects is submitted to the board annually.
In many respects, profit-making techniques utilized by business firms are applied to the management of the research department. For example, the department conducts preliminary research work on potential major projects that it has selected prior to requesting the board to approve the project and commit large amounts of time and money. The department also assesses the potential for grants for and for future revenues of the project. Financial reports for the department and each project are prepared periodically and reviewed with the administrative board.
Over 75 percent of the cost of operating the department is for labour. The remaining costs are for materials utilized during research. Materials used for experimentation are purchased by the hospital’s central purchasing department. Once these materials are delivered, the research department is held accountable for their storage, their utilization, and the assignment of their costs to the projects.
In order to protect the hospital’s right to discoveries made by the research department, staff members are required to sign waiver agreements at the time of hire and at certain intervals thereafter. The agreements relinquish the employees' rights to patent and royalty fees relating to hospital work.
The excellent reputation of Mont Louis is due, in part, to the success of the research department. The research department has produced quality research in the health-care field and has always been able to generate revenues in excess of its costs. The administrative board believes that the hospital’s continued reputation for quality depends on a strong research department, and therefore the board has requested that the university’s internal auditors perform an operational audit of the department. As part of its request for the operational audit, the board has presented a set of objectives that the internal audit is to achieve.
The operational audit to be conducted by the university’s internal audit department should provide assurances as follows:
• The research department has assessed the revenues and cost aspects of each project to confirm that the revenue potential is equal to or greater than estimated costs.
• Appropriate controls exist to provide a means to measure how projects are progressing and to determine if corrective actions are required.
• Financial reports prepared by the research department for presentation to the administrative board properly reflect all revenues (both endowment and royalty sources and appropriated funding) and all costs.
REQUIRED
a. Evaluate the objectives presented by the administrative board to the university’s internal audit department in terms of their appropriateness as objectives for an operational audit. Fully discuss the following:
(1) The strengths of the objectives.
(2) The modifications and/or additions needed to improve the set of objectives.
b. Outline, in general terms, the basic procedures that would be suitable for performing the audit of the research department.
c. Identify three documents that members of the university’s internal auditing staff would be expected to review during the audit, and describe the purpose that the review of each document serves in carrying out the audit.
d. Discuss whether and how the work of the internal auditors could be used by the external auditors to reduce the cost of the financial statement audit.