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Audit and Accounting Guide Health Care Entities September 1, 2017 AAG-HCO-Title.indd 1 21/07/17 1:01 PM Copyright © 2017 by American Institute of Certified Public Accountants, Inc. New York, NY 10036-8775 All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please e-mail [email protected] with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110. 1 2 3 4 5 6 7 8 9 0 AAP 1 9 8 7 ISBN 978-1-94549-846-6 AAG-HCO-Copyright.indd 1 21/07/17 1:02 PM iii Preface Prepared by the Health Care Committee and the Health Care Audit GuideTaskForce (UpdatedasofSeptember1,2017) About AICPA Guides ThisAICPAGuidehasbeendevelopedbytheAICPAHealthCareExpertPanel andtheAICPAHealthCareAuditandAccountingGuideOverhaulTaskForce toassistmanagementinthepreparationoftheirfinancialstatementsinconfor- mitywithU.S.generallyacceptedaccountingprinciples(GAAP)andtoassist auditorsinperformingandreportingontheirauditengagements. AICPA Guides may include certain content presented as "Supplement," "Ap- pendix," or "Exhibit." A supplement is a reproduction,in whole or in part,of authoritative guidance originally issued by a standard setting body (includ- ing regulatory bodies) and applicable to entities or engagements within the purviewofthatstandardsetter,independentoftheauthoritativestatusofthe applicableAICPAGuide.Bothappendixesandexhibitsareincludedforinfor- mationalpurposesandhavenoauthoritativestatus. TheFinancialReportingExecutiveCommittee(FinREC)isthedesignatedse- niorcommitteeoftheAICPAauthorizedtospeakfortheAICPAintheareasof financialaccountingandreporting.Conformingchangesmadetothefinancial accountingandreportingguidancecontainedinthisguideareapprovedbythe FinRECChair(orhisorherdesignee).Updatesmadetothefinancialaccount- ingandreportingguidanceinthisguideexceedingthatofconformingchanges are approved by the affirmative vote of at least two-thirds of the members of FinREC. ©2017, AICPA AAG-HCO iv Thisguidedoesthefollowing: (cid:2) Identifies certain requirements set forth in FASB Accounting Standards Codification® (ASC) and GAAP for governmental (cid:2) entities. Describes FinREC's understanding of prevalent or sole industry practiceconcerningcertainissues.Inaddition,thisguidemayin- dicate that FinREC expresses a preference for the prevalent or soleindustrypractice,oritmayindicatethatFinRECexpresses apreferenceforanotherpracticethatisnottheprevalentorsole industrypractice;alternatively,FinRECmayexpressnoviewon (cid:2) thematter. Identifies certain other, but not necessarily all, industry prac- ticesconcerningcertainaccountingissueswithoutexpressingFin- (cid:2) REC'sviewsonthem. Provides guidance that has been supported by FinREC on the accounting,reporting,or disclosure treatment of transactions or events that are not set forth in FASB ASC or GAAP for govern- mentalentities. AccountingguidancefornongovernmentalentitiesincludedinanAICPAGuide isasourceofnonauthoritativeaccountingguidance.Asdiscussedlaterinthis preface,FASBASCistheauthoritativesourceofU.S.accountingandreporting standardsfornongovernmentalentities,inadditiontoguidanceissuedbythe SEC. Accounting guidance for governmental entities included in an AICPA Guide, andclearedbyGASB,isasourceofauthoritativeGAAPdescribedincategory BofthehierarchyofGAAPforstateandlocalgovernmentalentitiesasdefined in GASB Statement No.76,The Hierarchy of Generally Accepted Accounting PrinciplesforStateandLocalGovernments.Theaccountingprovisionsofthis guide that have been cleared by GASB are formatted in orange font for the reader within the text of the guide and are noted in appendix F, "Category B Guidance." AICPA members should be prepared to justify departures from GAAP,asdiscussedinthe"AccountingPrinciplesRule"(AICPA,Professional Standards,ETsec.1.320.001and2.320.001). Auditing guidance included in an AICPA Guide is recognized as an interpre- tivepublication,asdefinedinAU-Csection200,OverallObjectivesoftheInde- pendent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards (AICPA, Professional Standards). Interpretive publicationsarerecommendationsontheapplicationofgenerallyacceptedau- ditingstandards(GAAS)inspecificcircumstances,includingengagementsfor entitiesinspecializedindustries. InterpretivepublicationsareissuedundertheauthorityoftheAICPAAuditing StandardsBoard(ASB)afterallASBmembershavebeenprovidedanoppor- tunitytoconsiderandcommentonwhethertheproposedinterpretivepublica- tionisconsistentwithGAAS.ThemembersoftheASBhavefoundtheauditing guidanceinthisguidetobeconsistentwithexistingGAAS. Although interpretive publications are not auditing standards, AU-C sec- tion 200 requires the auditor to consider applicable interpretive publications in planning and performing the audit because interpretive publications are AAG-HCO ©2017, AICPA v relevant to the proper application of GAAS in specific circumstances. If the auditordoesnotapplytheauditingguidanceinanapplicableinterpretivepub- lication,theauditorshoulddocumenthowtherequirementsofGAASwerecom- pliedwithinthecircumstancesaddressedbysuchauditingguidance. TheASBisthedesignatedseniorcommitteeoftheAICPAauthorizedtospeak fortheAICPAonallmattersrelatedtoauditing.Conformingchangesmadeto theauditingguidancecontainedinthisguideareapprovedbytheASBChair (orhisorherdesignee)andtheDirectoroftheAICPAAuditandAttestStan- dardsStaff.Updatesmadetotheauditingguidanceinthisguideexceedingthat ofconformingchangesareissuedafterallASBmembershavebeenprovidedan opportunitytoconsiderandcommentonwhethertheguideisconsistentwith theStatementsonAuditingStandards(SASs). Anyauditingguidanceinaguideappendixorchapterappendixinaguide,or in an exhibit,while not authoritative,is considered an "other auditing publi- cation."Inapplyingsuchguidance,theauditorshould,exercisingprofessional judgment, assess the relevance and appropriateness of such guidance to the circumstancesoftheaudit.Althoughtheauditordeterminestherelevanceof otherauditingguidance,auditingguidanceinaguideappendixorexhibithas beenreviewedbytheAICPAAuditandAttestStandardsstaffandtheauditor maypresumethatitisappropriate. AnAICPAGuidecontainingattestationguidanceisrecognizedasaninterpre- tivepublicationasdefinedinAT-Csection105,ConceptsCommontoAllAttesta- tionEngagements(AICPA,ProfessionalStandards).Interpretivepublications arerecommendationsontheapplicationofStatementsonStandardsforAttes- tationEngagements(SSAEs)inspecificcircumstances,includingengagements forentitiesinspecializedindustries.Interpretivepublicationsareissuedunder theauthorityoftheASB.ThemembersoftheASBhavefoundtheattestation guidanceinthisguidetobeconsistentwithexistingSSAEs. A practitioner should be aware of and consider the guidance in this AICPA Guideapplicabletohisorherattestationengagement.Ifthepractitionerdoes notapplytheattestationguidanceincludedinanapplicableAICPAGuide,the practitioner should be prepared to explain how he or she complied with the SSAEprovisionsaddressedbysuchattestationguidance. Anyattestationguidanceinaguideappendixorchapterappendixinaguide,or inanexhibit,whilenotauthoritative,isconsideredan"otherattestationpub- lication."Inapplyingsuchguidance,thepractitionershould,exercisingprofes- sional judgment, assess the relevance and appropriateness of such guidance tothecircumstancesoftheengagement.Althoughthepractitionerdetermines therelevanceofotherattestationguidance,suchguidanceinaguideappendix or exhibit has been reviewed by the AICPA Audit and Attest Standards staff andthepractitionermaypresumethatitisappropriate. TheASBisthedesignatedseniorcommitteeoftheAICPAauthorizedtospeak fortheAICPAonallmattersrelatedtoattestation.Conformingchangesmade to the attestation guidance contained in this guide are approved by the ASB Chair (or his or her designee) and the Director of the AICPA Audit and At- test Standards Staff.Updates made to the attestation guidance in this guide exceedingthatofconformingchangesareissuedafterallASBmembershave beenprovidedanopportunitytoconsiderandcommentonwhethertheguide isconsistentwiththeSSAEs. ©2017, AICPA AAG-HCO vi Recognition 2017GuideEdition AICPASeniorCommittees AuditingStandardsBoard DanielHevia,ASBMember MichaelJ.Santay,Chair FinancialReportingExecutiveCommittee CathyClarke,FinRECMember JimDolinar,Chair TheAICPAgratefullyacknowledgesthosemembersoftheAICPAHealthCare ExpertPanelwhoreviewedorotherwisecontributedtothedevelopmentofthis editionoftheguide:NicoleBlythe,BrianConner,MarthaGarner,JohnGaspich, Renee Gravalin, Farlen Halikman, John Hawryluk, Chuck Heimerdinger, LauraHyland,NormanMosrie,AndyMrakovcic,andMarkRoss. AICPAStaff ChristopherCole SeniorTechnicalManager MemberLearningandCompetency and StaffLiaison totheHealthCareExpertPanel Guidance Considered in This Edition ThiseditionoftheguidehasbeenmodifiedbytheAICPAstafftoincludecer- tainchangesnecessaryduetotheissuanceofauthoritativeguidancesincethe guidewasoriginallyissued,andotherrevisionsasdeemedappropriate.Rele- vant guidance issued through September 1,2017,has been considered in the developmentofthiseditionoftheguide.However,thisguidedoesnotinclude allaudit,accounting,reporting,regulatory,andotherrequirementsapplicable to an entity or a particular engagement.This guide is intended to be used in conjunctionwithallapplicablesourcesofrelevantguidance. RelevantguidancethatisissuedandeffectiveonorbeforeSeptember1,2017, is incorporated directly in the text of this guide. Relevant guidance issued but not yet effective as of September 1, 2017, but becoming effective on or before June 30, 2018, is also presented directly in the text of the guide, but shaded gray and accompanied by a footnote indicating the effective date of thenewguidance.Thedistinctpresentationofthiscontentisintendedtoaid thereaderindifferentiatingcontentthatmaynotbeeffectiveforthereader's purposes (as part of the guide's "dual guidance" treatment of applicable new guidance). Relevantguidanceissuedbutnotyeteffectiveasofthedateoftheguideand not becoming effective until after June 30,2018,is referenced in a "guidance update"boxthatcontainssummaryinformationontheguidanceissuedbutnot yeteffective. AAG-HCO ©2017, AICPA vii In updating this guide,all guidance issued up to and including the following wasconsidered,butnotnecessarilyincorporated,asdeterminedbasedonap- plicability: (cid:2) FASB Accounting Standards Update (ASU) No. 2017-11, Earn- ings Per Share (Topic 260); Distinguishing Liabilities from Eq- uity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) AccountingforCertainFinancialInstrumentswithDownRound Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Non- publicEntitiesandCertainMandatorilyRedeemableNoncontrol- lingInterestswithaScopeException(aconsensusoftheEmerging IssuesTaskForce) (cid:2) GASBstatements,interpretations,andtechnicalbulletinsissued throughSeptember1,2017 (cid:2) GASB Implementation Guidance Update No. 2017-2, Financial ReportingforPostemploymentBenefitPlansOtherThanPension Plans,issuedApril2017 (cid:2) SAS No. 133, Auditor Involvement With Exempt Offering Docu- ments,(AICPA,ProfessionalStandards,AU-Csec.945) (cid:2) Interpretation No. 3, "Reporting on Audits Conducted in Accor- danceWithAuditingStandardsGenerallyAcceptedintheUnited States of America and International Standards on Auditing" (AICPA,ProfessionalStandards,AU-Csec.9700par..08–.13),of AU-Csection700,ForminganOpinionandReportingonFinan- cialStatements (cid:2) SSAENo.18,AttestationStandards:ClarificationandRecodifica- tion(AICPA,ProfessionalStandards) (cid:2) Interpretation No. 1, "Third-Party Due Diligence Services Re- latedtoAsset-BackedSecuritizations:SECReleaseNo.34-72936" (AICPA,Professional Standards,AT-C sec.9215 par..01–.18),of AT-Csection215,Agreed-UponProceduresEngagements (cid:2) PCAOB Staff Guidance, Staff Guidance—Form AP, Auditor Re- portingofCertainAuditParticipantsandRelatedVoluntaryAudit Report Disclosure Under AS 3101,Reports onAudited Financial Statements(January26,2017) Usersofthisguideshouldconsiderguidanceissuedsubsequenttothoseitems listed previously to determine their effect on entities covered by this guide. Indeterminingtheapplicabilityofrecentlyissuedguidance,itseffectivedate shouldalsobeconsidered. The changes made to this edition of the guide are identified in appendix I, "Schedule of Changes Made to the Text From the Previous Edition." The changesdonotincludeallthosethatmightbeconsiderednecessaryiftheguide weresubjectedtoacomprehensivereviewandrevision. PCAOBquotedcontentisfromPCAOBAuditingStandardsandPCAOBStaff AuditPracticeAlerts,©2017,PublicCompanyAccountingOversightBoard.All rightsreserved.Usedbypermission. ©2017, AICPA AAG-HCO viii FASB standards quoted are from FASB Accounting Standards Codification ©2017,FinancialAccountingFoundation.Allrightsreserved.Usedbypermis- sion. GASBstandardsquotedarefromGASBStatements,ConceptsStatements,In- terpretations,ImplementationGuides,andTechnicalBulletins,©2017,Govern- mentalAccountingStandardsBoard.Allrightsreserved.Usedbypermission. AuditorswhoperformauditsunderGovernmentAuditingStandards;theSin- gleAuditActAmendmentsof1996;andTitle2U.S.CodeofFederalRegulations Part200,UniformAdministrativeRequirements,CostPrinciples,andAuditRe- quirementsforFederalAwards(UniformGuidance,effectiveforauditsoffiscal years ending on or after December 25,2015),should also refer to the AICPA AuditGuideGovernmentAuditingStandardsandSingleAudits. FASB ASC Pending Content Presentation of Pending Content in FASB ASC AmendmentstoFASBASC(issuedintheformofASUs)areinitiallyincorpo- ratedintoFASBASCin"pendingcontent"boxes,belowtheparagraphsbeing amendedwithlinkstothetransitioninformation.Thependingcontentboxes aremeanttoprovideuserswithinformationabouthowtheguidanceinapara- graphwillchangeasaresultofthenewguidance. Pending content applies to different entities at different times due to vary- ing fiscal year-ends,and because certain guidance may be effective on differ- entdatesforpublicandnonpublicentities.Assuch,FASBmaintainsamended guidanceinpendingcontentboxeswithinFASBASCuntilthe"roll-off"date. Generally,theroll-offdateissixmonthsfollowingthelatestfiscalyearendfor whichtheoriginalguidancebeingamendedcouldstillbeapplied. Presentation of FASB ASC Pending Content in AICPA Guides Amended FASB ASC guidance that is included in pending content boxes in FASB ASC on September 1,2017,is referenced as "Pending Content" in this guide.Readersshouldbeawarethat"PendingContent"referencedinthisguide willeventuallybesubjectedtoFASB's"roll-off"processandnolongerbelabeled as"PendingContent"inFASBASC(asdiscussedinthepreviousparagraph). Terms Used to Define Professional Requirements in This AICPA Guide Any requirements described in this guide are normally referenced to the ap- plicable standards or regulations from which they are derived.Generally the termsusedinthisguidedescribingtheprofessionalrequirementsoftherefer- encedstandardsetter(forexample,theASBandGASB)arethesameasthose usedintheapplicablestandardsorregulations(forexample,mustorshould). However,wheretheaccountingrequirementsarederivedfromFASBASC,this guideusesshould,whereasFASBusesshall.Initsresourcedocument"About the Codification" that accompanies FASB ASC,FASB states that it considers thetermsshouldandshalltobecomparabletermsandtorepresentthesame concept—therequirementtoapplyastandard. Readersshouldrefertotheapplicablestandardsandregulationsformorein- formation on the requirements imposed by the use of the various terms used AAG-HCO ©2017, AICPA ix todefineprofessionalrequirementsinthecontextofthestandardsandregula- tionsinwhichtheyappear. Certainexceptionsapplytothesegeneralrules,particularlyinthosecircum- stances where the guide describes prevailing and/or preferred industry prac- tices for the application of a standard or regulation. In these circumstances, theapplicableseniorcommitteeresponsibleforreviewingtheguide'scontent believestheguidancecontainedhereinisappropriateforthecircumstances. Applicability of Generally Accepted Auditing Standards and PCAOB Standards AppendixA,"CouncilResolutionDesignatingBodiestoPromulgateTechnical Standards," of the AICPA Code of Professional Conduct recognizes both the ASBandthePCAOBasstandardsettingbodiesdesignatedtopromulgateau- diting,attestation,andqualitycontrolstandards.Paragraph.01ofthe"Compli- anceWithStandardsRule"(AICPA,ProfessionalStandards,ETsec.1.310.001 and 2.310.001) requires an AICPA member who performs an audit to comply withtheapplicablestandards. Auditsofthefinancialstatementsofthoseentitiessubjecttotheoversightau- thority of the PCAOB (that is,those audit reports within the PCAOB's juris- diction as defined by the Sarbanes-Oxley Act of 2002,as amended) are to be conductedinaccordancewithstandardsestablishedbythePCAOB,aprivate sector,nonprofit corporation created by the Sarbanes-Oxley Act of 2002.The SEC has oversight authority over the PCAOB, including the approval of its rules,standards,andbudget.IncitingtheauditingstandardsofthePCAOB, references generallyusesectionnumberswithinthereorganizedPCAOBau- ditingstandardsandnottheoriginalstandardnumber,asappropriate. Auditsofthefinancialstatementsofthoseentitiesnotsubjecttotheoversight authorityofthePCAOB(thatis,thoseauditreportsnotwithinthePCAOB's jurisdiction as defined by the Sarbanes-Oxley Act of 2002, as amended)— hereinafterreferredtoasnonissuers1—aretobeconductedinaccordancewith GAAS as issued by the ASB,a senior committee of the AICPA.The ASB de- velops and issues standards in the form of SASs through a due process that includes deliberation in meetings open to the public, public exposure of pro- posedSASs,andaformalvote.TheSASsandtheirrelatedinterpretationsare codifiedinAICPAProfessionalStandards.IncitingGAASandtheirrelatedin- terpretations,referencesgenerallyusesectionnumberswithinthecodification of currently effective SASs and not the original statement number,as appro- priate. The auditing content in this guide primarily discusses GAAS issued by the ASB and is applicable to audits of nonissuers. Users of this guide may find the tool developed by the PCAOB's Office of the Chief Auditor help- ful in identifying comparable PCAOB Standards. The tool is available at http://pcaobus.org/standards/auditing/pages/findanalogousstandards.aspx. ConsiderationsforauditsofentitiesinaccordancewithPCAOBstandardsmay alsobediscussedwithinthisguide'schaptertext.Whensuchdiscussionispro- vided,therelatedparagraphsaredesignatedwiththefollowingtitle:Consid- erationsforAuditsPerformedinAccordanceWithPCAOBStandards.PCAOB 1 SeethedefinitionofthetermnonissuerintheAU-CGlossary(AICPA,ProfessionalStandards). ©2017, AICPA AAG-HCO x guidanceincludedinanAICPAGuidehasnotbeenreviewed,approved,disap- proved,orotherwiseacteduponbythePCAOBandhasnoofficialorauthori- tativestatus. Applicability of Quality Control Standards QCsection10,AFirm'sSystemofQualityControl(AICPA,ProfessionalStan- dards),addressesaCPAfirm'sresponsibilitiesforitssystemofqualitycontrol foritsaccountingandauditingpractice.Asystemofqualitycontrolconsistsof policiesthatafirmestablishesandmaintainstoprovideitwithreasonableas- surancethatthefirmanditspersonnelcomplywithprofessionalstandards,as wellasapplicablelegalandregulatoryrequirements.Thepoliciesalsoensure reportsissuedbythefirmareappropriateinthecircumstances. QC section 10 applies to all CPA firms with respect to engagements in their accounting and auditing practice. In paragraph .13 of QC section 10, an ac- countingandauditingpracticeisdefinedas"apracticethatperformsengage- ments covered by this section, which are audit, attestation, compilation, re- view, and any other services for which standards have been promulgated by theASBortheAICPAAccountingandReviewServicesCommitteeunderthe "GeneralStandardsRule"(AICPA,ProfessionalStandards,ETsec.1.300.001) or the "Compliance With Standards Rule" of the AICPA Code of Professional Conduct.Although standards for other engagements may be promulgated by otherAICPAtechnicalcommittees,engagementsperformedinaccordancewith thosestandardsarenotencompassedinthedefinitionofanaccountingandau- ditingpractice. InadditiontotheprovisionsofQCsection10,readersshouldbeawareofother sectionswithinAICPAProfessionalStandardsthataddressqualitycontrolcon- siderations,includingthefollowingprovisionsthataddressengagementlevel quality control matters for various types of engagements that an accounting andauditingpracticemightperform: (cid:2) AU-C section 220, Quality Control for an Engagement Con- ducted in Accordance With Generally Accepted Auditing Stan- (cid:2) dards(AICPA,ProfessionalStandards) (cid:2) AT-Csection105 AR-C section 60,General Principles for Engagements Performed inAccordanceWithStatementsonStandardsforAccountingand ReviewServices(AICPA,ProfessionalStandards) Becauseoftheimportanceofengagementquality,thisguideincludesappendix A,"OverviewofStatementsonQualityControlStandards."Thisappendixsum- marizeskeyaspectsofthequalitycontrolstandard.Thissummarizationshould bereadinconjunctionwithQCsection10,AU-Csection220,AT-Csection105, AR-C section 60,and the quality control standards issued by the PCAOB,as applicable. Alternatives Within U.S. GAAP ThePrivateCompanyCouncil(PCC),establishedbytheFinancialAccounting Foundation'sBoardofTrusteesin2012,andFASB,workingjointly,mutually agreeonasetofcriteriatodecidewhetherandwhenalternativeswithinU.S. GAAParewarrantedforprivatecompanies.Basedonthosecriteria,thePCC AAG-HCO ©2017, AICPA
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