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Accounting Case

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Memo:

To: Edward Sloane, Senior Audit Partner
From: David Mynarski, CGA
Date: January 15, 20X5
Re: Analysis of Issues for Vehicles for Hope Ltd. (VHL) Audit

I have identified issues pertaining to the 2014 audit of VHL, based on the information provided in my meeting with VHL’s Accountant today. I have provided an analysis and recommendations for each of these issues.

Financial Accounting Issues
Under the Deferral method of accounting that VHL adheres to, the land, building and equipment donation by the Board member would be recorded as revenue and matched to expenses in the year the related costs of maintaining / operating these items are incurred. However, since VHL follows Part III of the CICA Handbook – Accounting and under Part III, an entity has a choice between recording restricted contributions under the Deferral or the Restricted Fund method. I recommend VHL choose the Restricted Fund method of accounting. This would allow VHL to separate their contributions into specific funds, based on what the funds are used for, eliminating the need to defer recognition of the donation revenue.

Under the Restricted Fund method, the donated land, building and equipment would be recorded in the capital asset fund in the 2014 year, and the donation for automotive toolkits would be recorded in the restricted fund in 2014, since it is to be used for a specific purpose. Any other non-restricted, non-capital funds donated to VHL would be recorded in the Current Operation fund, which would provide funds for paying administrative costs, such as wages and small tool purchases. The Restricted fund method would allow users of the financial statements to more accurately track and determine how their donations are being utilized, and measure how well they are serving the needs of the mechanics.

Based on our knowledge of the Board member capital assets donation made and the donation for automotive toolkits, the two-year average annual revenues for VHL will be at least $500,000 in the next 2 years. Therefore, VHL should capitalize the fair value of the building and equipment in 2014, and amortize them over their useful lives. The land should also be recorded as a capital asset. I recommend that VHL have a valuation of these capital assets done by a valuator, so that they can be properly recorded at fair market value. Capitalizing these items beginning in 2014 would mean that VHL would not have to retroactively restate their financials in the future if their average annual revenue continues to be over $500,000.

Auditing / Assurance Issues
Currently there is a lack of segregation of duties at VHL, as the Accountant is responsible for doing the bank deposit, and recording all financial transactions. This allows the opportunity for fraud to occur. This lack of segregation of duties contributes to a control risk. By not addressing this risk, it will compromise our ability as auditors to give assurance that VHL’s financial statements are fairly presented in all material respects. This would negatively impact VHL’s abilities to obtain funding, as parties will not want to donate to a company whose internal controls are poor and therefore financial information at risk of being materially misstated.

I recommend that the administrative assistant make the actual bank deposit, and the accountant record and reconcile the deposits, which would ensure segregation of duties and decrease the risk of fraud occurring.

Information Technology Issues
Having the accountant manually enter all financial information increases the risk of errors, and therefore, misleading financial information, which would stakeholders. VHL should hire an external IT consultant to install an accounting software program appropriate for NPO’s, such as Quickbooks. This program would have the proper internal controls and verifications in place to mitigate the risk of inputting erroneous financial information.

Quickbooks would be able to track grants/donations and sales, and detailed expenses such as payroll. Quickbooks would also have the capability to automatically issue charitable donation receipts to donors, and provide timely and reliable financial reporting to stakeholders as needed.

It would be worth incurring the additional cost of hiring an IT consultant to implement this software, as it would ensure the implementation is done properly, and allow the ability to make future enhancements/upgrades to the software, meeting the specific needs of VHL.

Taxation Issues
Issuing charitable donation receipts would allow donors to either claim a personal tax credit or a deductible business expense. This could provide financial incentive for potential VHL donors.

To remain a registered charity and continue to issue charitable receipts, VHL must ensure it complies with tax filing requirements by annually filing a T3010 Registered Charity Information Return, reporting its activities, sources of revenue and expenditures, within six months of its year-end.

Key Performance Measures
The current measure of performance reporting is adequate. However, I recommend that in addition to tracking the number of accepted mechanic applicants, VHL also track the number of volunteer hours, as well as the number of apprentice mechanics that are able to find employment after their training with VHL. This would provide a measure of the success of the training, and measure the effectiveness of the volunteer hours put in.

Ethics Issues
My close friendships with several board members present a threat to our firm’s independence as auditors, due to familiarity. This could compromise our firm’s ability to provide assurance that our audit is free of bias towards VHL.

If we were to continue the audit without addressing this threat, our firm would be in violation of adhering to our code of ethics, specifically the responsibility to our client to perform the audit with due care and professional conduct. As auditors, we have an ongoing obligation to our profession and to VHL as our client to reduce the threat of independence to an acceptably low level.

To safeguard this threat, I recommend that my VHL audit work be reviewed by someone at our firm that does not have any close personal friendships with any VHL board members.

Another ethical concern involves the reimbursement of board member-incurred expenses without adequate / timely supporting documentation. Reimbursement of these expenses would be financially irresponsible spending of VHL funding, and users need assurance that their donations are being used in the best interest of VHL, in providing apprentice mechanics useful automotive training.

The volunteer appreciation gifts in December 2014 present a conflict of interest, since the Chairman’s wife is a VHL volunteer. The Chairman is not adhering to the Provincial Conflict of Interest Act (the Act), since he is not disclosing this potential conflict of interest issue in Board Meetings.

It appears the Chairman’s significant influence on the conduct of other Board members could affect the integrity of the expenses submitted for reimbursement, and other financial information at VHL could be compromised and possibly fraudulent due to this heavy influence as well.

The Chairman not responding to requests for additional expenditure details represents non-compliance by management, and could potentially qualify our audit opinion. This would concern stakeholders, and could negatively affect VHL’s ability to secure future funding. I recommend that we meet with the Chairman regarding adhering to the Act, making clear to him that our ability to express an unqualified audit opinion, and thus, the ability of VHL to secure future funding, is at stake.

Please advise if you require additional information regarding my analysis and recommendations.

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