Saint Gabriel Hospital 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 on 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 main 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 must also be informed of main 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 used by business firms are applied to the management of the research department. For example, the department performs preliminary research work on potential main projects it has selected before asking the board to approve the project and commit large amounts of time and money. The department also assesses the potential for grants and future revenues of the project. Financial reports for the department and each project are prepared periodically and reviewed with the administrative board.
Over 75% of the cost of operating the department is for labour. The remaining costs are for materials used during research. Materials used for experimentation are purchased by the hospital's central purchasing department. Once delivered, the research department is held accountable for storage, usage and assignment of cost to the projects.
In order to protect the hospital's rights 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 for hospital work.
Saint Gabriel's excellent reputation is due in part to the success of the research department. The research department has produced quality research in the healthcare field and has always been able to generate revenues in excess of its costs. Saint Gabriel's administrative board believes that the hospital's continued reputation depends on a strong research department, and so the board has asked the internal auditors to perform a performance audit of the department. As part of its request for the performance audit, the board presents the following set of objectives for the internal audit to accomplish.
The performance audit to be conducted by the hospital's internal audit department should provide assurances that:
• 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 identify whether 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 internal audit department in terms of their appropriateness as objectives for a performance audit. Discuss fully:
(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 procedures that would be suitable for performing the audit of the research department.
c. Identify three documents that members of the 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.