Avery Research is a department of Northern Valley Hospital that is affiliated with a leading university. Avery operates on a project basis and consists of a pool of highly respected 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 Avery must be approved by the hospital's board of directors. Each project requires a proposal outlining the scope, cost, expected amount of time required to complete the work, and anticipated benefits. The board must also be informed of any major projects that are terminated before completion. The status of all open projects is reviewed by the board each quarter.
Avery performs preliminary research work on potential major projects 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 and estimates future revenues from the project. Expenditures on preliminary research must not exceed \(\$ 5,000\) for any one project or \(\$ 25,000\) for any given quarter. Financial reports for the department and each project are prepared quarterly and reviewed with the board.
Over 75 percent of Avery's operating cost is for labor; the remaining costs are for materials utilized during research. Materials used for experimentation are purchased by the hospital's centralized purchasing department. Once delivered, Avery is accountable for storage, utilization, and assignment of cost to the projects. To protect the hospital's rights to discoveries, staff members are required to sign waiver agreements at the time of hire. These agreements relinquish the employees' rights to patent and royalty fees relating to hospital work.
Because of its desire to ensure the continued solid reputation of Avery, the board of directors has requested that the hospital's internal auditors perform an operational audit of the Avery research department. In its request, the board outlined the following set of objectives for the audit. The audit should provide assurances that - Avery has properly assessed the revenues and costs of each project. Revenue potential should be equal to or greater than estimated costs.

- Appropriate controls exist to provide a measure of how projects are progressing and to identify, on a timely basis, if corrective actions are required.
- Financial reports prepared by Avery for presentation to the board properly reflect all revenues and all costs.
Required:

a. Evaluate the objectives presented by the board of directors in terms of their appropriateness as objectives for an operational audit. Include in your discussion (1) The strength of the objectives.
(2) Modifications and/or additions needed to improve the objectives.

b. Outline, in general terms, the basic procedures that would be suitable for performing the audit of the Avery research department.

c. Identify three documents that members of the internal auditing staff would be expected to review during the audit of the Avery research department, and describe the purpose that the review of each document serves in carrying out the audit.