Question 1

a. 4
b. 1
c. 2
d. 3
e. 3
f. 1
g. 3
h. 2
i. 1
j. 1

Question 2

Memorandum

To: Edward Sloane, Senior Audit Partner

From: David Mynarski, CGA

Date: March 24, 2015

Subject: Vehicle for Hope Limited

I have been the auditor for Vehicle for Hope Limited for the last 5 years and I just had a meeting with the company’s accountant to plan for the audit for the fiscal year that just ended. He told me about some issues that he has and I need your advice regarding those issues and your comments on how to approach the audit.
Significant Donation
Vehicle for Hope Limited received two month ago a significant donation from a long-time member of the board, who has a chain of autobody shops. He has donated to VHL land, building and equipment. In addition to the donation of the building, land and equipment, he has also donated $300,000.00 cash, so the new apprentice mechanics to get an automotive toolkit when they will complete the training program. The accountant did not know how to record these transactions, so the donations have not been recorded in VHL’s books.
VHL is a not-for-profit organization and they use the deferral method of accounting. As per this method, the land and the building should be recorded in their accounting at the fair market value and the building should be amortized. The donated land should never be amortized and not recorded as revenue. The land should be recorded as a direct increase in net assets. The donation of the cash, $300,000.00 is a restricted contribution, and whatever portion of the contribution is used in the current period is recognized as revenue, the difference will be a deferred contribution. I can offer the accountant with advice on how to treat these donations, but VHL will have to record these transactions in their books before me starting the audit.

Expense Report

At my meeting with the accountant, I was told that the board had submitted expense reports for the last year which either were late or incomplete. When I examined the expense reports, I have observed that the majority of the purchases appeared to be proper expenses in the general course of business, but some of them did not include all supporting receipts. For a proper audit I would need appropriate supporting documentation, otherwise the total audit risk will be very high. Also, the chair of the board made several purchases at the beginning of December, which includes purchases of clothing and jewellery. The receipts of these purchases did not provide details, just the vendor’s name, taxes and the total amount. When I asked the accountant about these expenses, he told me that all these expenses were approved by the board and that were made as appreciation gifts for volunteers, while I don’t remember of seeing any of these expenses in prior years. For the audit purpose I need to investigate these expenses and I need more details to be provided to me by the board, so I have notified the board in writing. I haven’t received any answer from the board, so I called the treasurer to talk to him about this issue. He has told me that he has spoken to the chair and these expenses were discussed in a recent board meeting and were not an issue. In the December’s meeting minutes, there is short mention to the chair excusing himself once when the topic of December expenditures was discussed. The board adheres to the Provincial Conflict of Interests Act and under this act a board member should not vote on subjects that may be the basis for a conflict of interests. In the meeting when these expenses were discussed, the chair of the board excused himself. In order for me to be able to complete the audit I need to get the complete information about these expenses. Not being able to audit these purchases, the end result will be a scope limitation. I want to ask the accountant and the board to supply me a complete list with all the volunteers that received gifts, and then I want to check with them about receiving gifts from the board.

Accounting Software

Currently VHL uses Excel for accounting procedure. The accountant had told me that using Excel is time-consuming and several errors have been made when the information was entered. These are some of the reasons why VHL is looking to buy an off-the-shelf accounting software program, but the accountant is concerned about the work required for implementation. I cannot engage too much in helping the accountant to put into practice the new software, as it will be a conflict of interest.

Key Performance Measures

The accountant has also mentioned that VHL wants to generate a report of the key performance measures, a report that shows the total number of applicants who have been accepted each year and a projection of the future number of applicants considering now that they have new building, land and equipment. This report will be given to all parties who receive the annual report and the board has asked me to comment on the suitability of the measure that will be used. I have told the board that I cannot provide them with this report, the audited financial statements is a different type of report, but they can generate any form of report that will consider is useful for the donors, including this category of key performance measures.

Conclusion

I have worked with VHL for the last 5 years and haven’t had any issue with them, but as an auditor I have to follow the audit standards and to do a proper planning of the audit. The chair of the board is a successful business man who owns a chain of autobody shops and has been chair for the last 5 years. Even though he has a strong personality and significant influence over the board, I have no reason to question his trustworthiness.
I need all the details required to conduct a correct audit, and if I will not received them from VHL I will have to declare a scope limitation and to withdraw from the engagement. I will request a meeting with you to discuss about the proper planning for VHL’s audit.