- March 25, 2020
Nonprofit Financial Management
MajorMedical Center (MMC)
Theauditor’s report on Major Medical Center begins with theintroductory paragraph where the auditor states the period ofconducting the audit, the statements audited and the responsibilityof the management. In the second section, the auditor lays out theaudit procedure. Finally, the auditor gives an opinion about thebooks of MMC.
Analysisof Relevant Books.
Theaudit report is unqualified meaning that the auditor has not foundany problems with the statements. There are therefore no red flagsraised in the auditor’s opinion letter. In the statement offinancial position, there are various points that one notes. In theyear 2013, there are no receivables expected from third partyreimbursements, but in 2014 there is a steep increase in the entity’sexpected receivables. The entity also purchased PPE in the year 2014.During the current financial year, the company has no receivablegrants from the government, but in its current liabilities, thecompany owes the government much more than was acquired in theprevious year. The liability may extend beyond the 2013 financialyear. Also, the value of plant property and equipment has increasedas compared to the past year, a sign that the company may haveacquired more assets.
Thestatement of operations indicates an increase in revenue from theprevious year’s earnings. However, there is a similar increase inthe total operating expenses which reduces the income obtained. Thestatement of cash flows shows a reduction of the operational cashflows.
Theprovision for accrued salaries and related liabilities should bequeried to discover whether it is resulting from unpaid wages or latewages. One needs to find out why the organization maintains thisprovision.
Thenotes show important issues that need further scrutiny. Firstly, thenote on page 556 on PPE show recording of property, plant, andequipment purchased at cost. Ideally, Property and equipment shouldappear at cost, less accumulated depreciation meaning at any giventime, the asset values in books of accounts should be the netcarrying amount. Also, on page 558 in the last paragraph, it isindicated that approximately $45,673,000 and $45,706,000 of fullydepreciated assets are included in the buildings and equipment atDecember 31, 2014, and 2013 respectively. Fully depreciated assetsneed to be evaluated at the end of the period their net book valuecomes to zero. Afterward, analysis of the depreciated assets isnecessary to check whether they can have any additional life valueand if so, a revaluation should take place so that their value isnoted/booked in the accounts. The exercise helps avoid presentingassets with zero value in the books of accounts.
Withregards to transactions with affiliates, the NGO has received a loanfrom related parties. These loans attract interest and as such theaffiliates charge interest to the NGO. Laws indicate that forinterest paid out, withholding tax for the same goes to the taxauthorities. There is need to confirm remittance going to taxauthorities to avoid penalties. The NGO faces Concentrated CreditRisk since it has 30% and 27% of the receivables from Governmentrelated programs and Cambridge health plans. One should investigatewhy 57% of their receivables are held by two entities only, andsecondly, the fact that 95% of cash & cash equivalents were allheld in one financial institution.
Onthe entities contingencies, it is notable that the NGO has variouslegal cases arising out of the ordinary course of operations. Theauditor noted that the claimed amounts were material to the financialposition. It would have been good to have a summary of listedcontingencies for cases lodged by other parties against the NGO, andcases filed by the NGO against other stakeholders.
Thevarious ratios calculated can be used to assess the health of thenonprofit organization. The quick ratio of the organization is 1.04in the current financial year and 1.09 in the previous fiscal year.The current ratio is more than one in both instances indicating thatthe organization can meet its short-term obligations. The debt ratioof the organization is high. In both financial years, the company hasmaintained a debt ratio of more than one which could be an indicationthat the company is having liquidity problems. The liquidity ratio ofthe company also indicates that the company is financially weak. Thecash flow return ratio indicates an efficiency of 13% in the currentyear and 16% in the past year indicating that the company has notbeen efficient in utilizing its assets to generate cash flows. Thedefensive interval ratio, however, shows that there are adequateresources to cover the organization`s missions. The ratios calculatedhelp one quickly determine the position of the organization.
Consideringall the above factors, the financial status of the company appearsshaky. The financial ratios calculated and the decisions made by themanagement of the organizations regarding factors such as thevaluation of plant, property, and equipment, supports thisconclusion.