- 20 Marks
AA – L2 – Q26 – Audit of Public Sector Entities
Question
(a) Explain the purpose of value for money audit.
(b) Akunka hospital is located in a country where healthcare is free, as the taxpayers funds are used to finance state owned hospitals. Two years ago, management reviewed all aspects of the hospital’s operations and instigated a number of measures aimed at improving overall “value for money” for the local community. Management have asked you, an audit manager in the hospital’s internal audit function, to perform a review over the measures which have been implemented.
Akunka has one centralized procurement department through which all purchase requisition forms are forwarded to. Upon receipt, the procurement team embarks on market research for the lowest price from suppliers after which a purchase order is raised. The purchased order is then submitted to the procurement director, who authorises all orders. The small procurement team receive in excess of 200 forms a day. The human resource department has had difficulties with recruiting suitably trained staff. Overtime rates have been increased to incentivise permanent staff to fill staffing gaps, this has been popular, and reliance on expensive temporary staff has been reduced. Monitoring of staff hours had been difficult but the hospital has implemented time card clocking in and out procedures and these hours are used for overtime payments as well.
The hospital has invested heavily in new surgical equipment, which although very expensive, has meant that more operations could be performed to ensure faster patient recovery. However, there is shortage of well-trained medical staff. A capital expenditure committee has been established, made up of senior managers, and they plan and authorise significant capital expenditure items.
Required:
(i) Identify and explain FOUR strengths within Akunka’s operating environment; and
(ii) For each strength identified, describe how Akunka might make further improvements to provide best value for money.
(c) Describe TWO substantive procedures the external auditor of Akunka should adopt to verify EACH of the following assertion in relation to an entity’s property, plant and equipment:
(i) Valuation;
(ii) Completeness; and
(iii) Rights and obligations.
(Note: Assume that the hospital adopts International Financial Reporting Standards).
Answer
(a) Purpose of a value for money (VFM) audit
VFM focuses on the best combination of services for the lowest level of resources. The purpose of a VFM audit is to examine the economy, efficiency and effectiveness of the activity or process in question.
Economy – Attaining the appropriate quantity and quality of physical human and financial resources (inputs) at lowest cost.
Efficiency – The relationship between goods or services produced (outputs) and the resources used to produce them.
Effectiveness – Concerned with how well an activity is achieving its policy objectives or other intended effects.
| Strength (i) | Improvement (ii) |
|---|---|
| (1) The buying department researches the lowest price from suppliers before raising a purchase order. This helps with economy of the process, attaining resources at the lowest cost. | (1) In order to also ensure the goods are of the required quality, an approved list of suppliers could be built up, with purchases only being permitted from those suppliers on the list. |
| (2) Overtime rates have been increased and this has incentivized staff to fill staffing gaps. As a result the hospital has saved money by decreasing the level of expensive temporary staff, additionally, the permanent staff may be more effective as they are familiar with the hospitals systems and the level of patient care expected at Akunka. | (2) The increased hours will affect overall efficiency given that the same staff are now carrying out extended shifts, as overtime rates are higher than basic rates, even though overtime cost appears to be lower than temporary staff. There is also an increased risk of mistakes due to tiredness which could have adverse effects on the reputation of the hospital. Ideally the hospital should recruit enough permanent staff of the required level to fill shifts without them working overtime. |
| (3) The hospital has implemented time card clocking in to ensure employees are only paid for those hours worked. It also provides a means for recording hours worked which is valuable management information. Before this there would have been no definitive record of actual hours worked. | (3) The system appears to allow payable overtime to accumulate simply because an employee clocks out late, even if there is no staff gap to fill. The system should be set to automatically clock out after the normal number of shift hours. Staff will then need to clock back in for their overtime if they have an authorized shift. Overtime hours each month should be reviewed by the department head for consistency with agreed extra shifts. |
| (4) A capital expenditure committee of senior managers has been set up to authorize significant capital expenditure items. This will help prevent cash out flows for unnecessary assets, or assets not budgeted for. | (4) In a hospital there will be very expensive equipment purchases, such as the recently acquired new surgical equipment. It is better that these are authorized at board level rather than by senior managers. An authorization policy should be drawn up setting out the different levels of authorization needed (the highest being at board level) depending on the amount of expenditure for capital items. |
(c) Substantive procedures – property, plant and equipment (non current assets)
(i) Valuation
Review depreciation rates applied in relation to asset lives, past experience of profits and losses on disposals, and consistency with prior years and disclosed accounting policies.
If assets have been revalued, consider:
- Experience and independence of valuer
- Scope of the valuer’s work
- Methods and assumptions used
- Whether valuation bases are in line with IFRSs
(ii) Completeness
Compare non-current assets in the general ledger with the noncurrent assets register and obtain explanations for differences.
For a sample of assets which physically exist agree that they are recorded in the non-current asset register.
(iii) Rights and Obligations
Verify title to land and buildings by inspection of:
- Title deeds
- Land registry certificates
- Leases
Examine documents of title for other assets (including purchase invoices, contracts, hire purchase or lease agreements).
- Tags: Healthcare, Internal Audit, Public Sector, Value for Money Audit
- Level: Level 2
- Uploader: Samuel Duah