Association of Washington Public Hospital Districts The Role of the Audit Process in Sustaining Your District’s Credibility

IVAN D. DANSEREAU, CPA Assistant Director Washington State Auditor’s Office x 107

Session Objectives Public Expectations GAO Independence Standard SAO’s Constitutional & Statutory Authority and Obligations Hospitals’ Contractual Rights Common Problems What’s Ahead

Public Expectations Audit Organizations are Independent Auditors are Objective

The Concepts OBJECTIVITY Independence in Fact Your Attitude & State of Mind – Conflicts of Interest INDEPENDENCE Perceived Objectivity Perception of Reliant Parties

Why the New GAO Independence Why the New GAO Independence Standard? David M. Walker Comptroller General of the United States “The focus of the changes to the auditor independence standard is to better serve the public interest and to maintain a high degree of integrity, objectivity and independence for audits of government entities.”

GAO’s Independence Standard Auditors should not perform management functions or make management decisions Auditors should not audit their own work or provide nonaudit services in situations where the amounts or services involved are significant/material to the subject matter of the audit

Supplemental Safeguards Personnel who perform certain nonaudit services would be precluded from performing related audit work The auditor’s work could not be reduced beyond the level that would be appropriate if the nonaudit work was performed by another unrelated party Certain documentation and quality assurance requirements must be met

Providing Basic Accounting Services An audit organization’s independence to perform audits is impaired if it: – maintains or prepares the audited entity’s basic accounting records, – maintains or takes responsibility for basic financial or other records that the audit organization will audit, or – posts transactions to the entity’s financial records or to other records that subsequently provide data to the entity’s financial records.

Developing Draft Financial Statements and Notes Viewed as technical assistance and part of the audit Auditor must be careful not to be, in essence, constructing the records Must be based on a trial balance: – provided by management using appropriate books and records that balance, or – prepared by auditors when their work to prepare the trail balance is technical formatting in nature and uses management’s chart of accounts.

Developing Draft Financial Statements and Notes Must be reviewed and approved by audited entity management, who must have adequate knowledge to evaluate and take responsibility for the result Management representation letter should acknowledge auditor’s role and management’s review, approval, and responsibility for the financial statements and notes Independence would not be impaired if the auditor does not make management decisions. Must comply with other safeguards except that which precludes the same personnel from providing the service and the audit

Why Does This Standard Apply to Public Hospitals? The State Auditor’s Office requires all audits of governmental entities to be conducted under the Generally Accepted Government Auditing Standards (GAGAS)

What Is SAO’s Authority for Making This Requirement? Washington State Constitution, Article III establishes SAO as an independent component of the executive branch of government. RCW prescribes the powers and duties of SAO, which primarily include examining all the financial affairs of every local government and its officers and employees.

How Does This Standard Impact You? Hospitals have the legal authority to contract with CPA firms for audit services HOWEVER, Hospitals and CPA firms must adhere to SAO expectations

SAO Expectations When contracting audit services with a CPA firm, you must: – Comply with GAGAS, including the new independence standard – Be cognizant of the public records requirement of RCW – Be cognizant that SAO will review work papers to assess audit quality and avoid duplication of effort – Be cognizant that SAO may re-issue the independent auditor’s report

SAO Expectations SAO’s audit scope consists of: – Financial statements – Single Audit – Legal Compliance – Accountability SAO does not issue opinion letters on CPA firms’ independence

Common Problems

Cash Receipting Purchasing/ Disbursements Contract Monitoring – Incentive Pay – Physicians Using Facilities for Private Practice Proper Disclosures of Non-Profits (GASB14) Areas at Risk for Fraud

No Fixed Responsibility Employees are tempted and even put at risk in work environment where internal controls are weak or not properly monitored When losses occur, managers are unable to fix responsibility for losses to a particular employee Employees are often accused unjustly under these circumstances

What’s Ahead Financial Crisis/ Going Concern Washington Casualty Company Notification Letters

Reference Material Hospital Audit Guide Summary of Hospital Audit Results The new GAO Independence Standard is available on GAO’s web site at An electronic version of GAO’s Q&A can be accessed at

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