In a management letter following its year-end audit of the North Country Hospital, the not-for-prot hospital's independent

In a management letter following its year-end audit of the North Country Hospital, the not-for-profit hospital's independent audit firm questioned the adequacy of the hospital's accounts receivable allowance for contractual adjustments. It noted that owing to contractual changes, the discounts given to insurance companies and HMOs were increasing, and it urged that the hospital carefully review the collectibility of its receivables. It asserted that audit tests revealed numerous required adjustments and as a consequence the hospital reduced its receivable balance by 7 percent. Nevertheless, the firm warned, additional write downs would likely be required in the future. The firm had issued an unqualified opinion on the financial statements.
Several months following the audit, the hospital announced that operating losses for the then-current year would far exceed expectations, owing to a 30 percent write down of accounts receivable. The required write-down was greatly in excess of the allowance for contractual adjustments.
The partner in charge of the engagement was asked by a reporter, who was unaware of the management letter, why the audit of the previous year failed to detect the overstatement of receivables.