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The Auditor's Guide to Analytical Procedures Under ISA 520
Complete guide: ISA 520 requirements quick reference, decision flowchart for when to use analytical procedures vs. tests of details, industry-specific ratio checklists for 12 sectors, threshold-setting guide by risk level, sample completed working paper, common quality-review findings, and documentation checklist.
ISA 520 Analytical Review for Healthcare Entities
Healthcare entities — hospitals, clinics, pharmaceutical companies, and care providers — operate under significant public interest considerations that affect both the audit approach and the analytical review methodology. Under ISA 520, the auditor must develop expectations that reflect the unique operational characteristics of healthcare: patient volumes and case-mix complexity drive revenue, while staff costs and medical supply consumption drive expenses. For hospitals, revenue per bed per day (or per patient episode) is the primary analytical driver. The auditor should calculate expected revenue from bed capacity × occupancy rate × average daily rate, adjusted for case-mix changes. Staff costs typically represent 60-70% of total healthcare entity expenditure and should be analysed against headcount data, average salary movements, and the mix between permanent and agency staff.
Government Funding and Grant Compliance
Many healthcare entities receive significant government funding, whether through direct service contracts, research grants, or capital subsidies. The auditor must assess whether reported government revenue is consistent with contract terms, service delivery metrics, and funding schedules. Grant income recognition requires assessment of conditions versus restrictions — conditions may create clawback risk that affects revenue recognition timing. For healthcare entities receiving government funding, the analytical review should compare actual funding received to contracted amounts and assess whether any performance conditions have been met or are at risk. The deferred income balance should be consistent with unfulfilled performance conditions. Changes in government funding policy or contract terms between periods can cause significant revenue fluctuations that the auditor must investigate to determine whether accounting treatment is appropriate.
Clinical Supply Costs and Provision Analysis
Medical supply and drug costs are subject to both volume effects (patient activity) and price inflation. The auditor should analyse supply costs as a percentage of revenue and compare to prior periods and industry benchmarks. Pharmaceutical entities face particular challenges with drug development costs (capitalisation under IAS 38), clinical trial provisions, and revenue recognition for licensing arrangements. Medical malpractice provisions require actuarial estimation and can be highly volatile — a single large claim or a change in claims experience assumptions can materially affect the provision balance. The auditor should analyse provision movements, assess the adequacy of the claims history data used, and consider whether trends suggest under-provisioning or over-provisioning in prior periods.
Key Ratios to Monitor for Healthcare
- Revenue per bed/patient
- Staff cost ratio
- Medical supply cost ratio
- Government funding as % of revenue
- Operating margin
- Days receivables outstanding
What Drives Account Fluctuations
Patient volume and case-mix complexity changes
Government funding contract terms and compliance
Drug and medical supply cost inflation
Staffing level changes (agency vs. permanent mix)
Capital investment in medical equipment affecting depreciation
Seasonal Considerations
Healthcare entities may show seasonal patterns related to elective procedure scheduling (reduced during holiday periods) and flu season impacts on emergency admissions. Government funding may be received in installments aligned with fiscal year quarters.
Recommended Investigation Thresholds for Healthcare
| Account Category | Threshold % |
|---|---|
| Revenue | 5% |
| Cost of Goods Sold | 10% |
| Operating Expenses | 10% |
| Current Assets | 10% |
| Equity | 10% |
Regulatory note: Healthcare entities are subject to sector-specific regulation varying by jurisdiction. Data protection (GDPR) compliance costs may be significant. Drug pricing regulations can affect pharmaceutical entity revenue.
Worked Example: Healthcare Analytical Review
A private hospital group with 3 facilities. Overall materiality €1,100,000, performance materiality €715,000.
Overall materiality: €1,100,000 | Performance materiality: €715,000 | Threshold: 10%
| Account | PY | CY | Change | % |
|---|---|---|---|---|
| Patient Revenue | €62,000,000 | €68,000,000 | €6,000,000 | +9.7% |
| Government Grants | €8,500,000 | €8,500,000 | €0 | +0.0% |
| Medical Supplies & Drugs FLAG | €16,000,000 | €18,500,000 | €2,500,000 | +15.6% |
| Clinical Staff Costs FLAG | €29,000,000 | €32,000,000 | €3,000,000 | +10.3% |
| Non-Clinical Staff | €7,800,000 | €8,200,000 | €400,000 | +5.1% |
| Depreciation — Equipment | €3,200,000 | €3,800,000 | €600,000 | +18.8% |
| Medical Equipment FLAG | €18,000,000 | €22,000,000 | €4,000,000 | +22.2% |
| Provisions — Claims FLAG | €1,500,000 | €2,800,000 | €1,300,000 | +86.7% |