I have been auditing Vehicles For Hope Limited (VHL) for the last five years, however during my recent meeting with the accountant I was informed of several changes that have taken place during the last one year. I am writing this memo to apprise you of these changes and seek your feedback on audit planning.
Two months ago a long standing board member donated land, building and equipment to help VHL accept more applicants for the training. In addition to this he also made a cash donation of $ 300,000 earmarked for providing toolkits for graduating mechanics. The accountant was not sure of the treatment of these transactions and has therefore not recorded them. VHL uses the deferral method for accounting and follows the accounting for not-for profit organizations (part 111).
These donations are material transactions and not recording them in the financial statements and may result in a qualified audit report. Land and building should be recorded in the books at fair market value at the time of donation. The building should be amortized by estimating the remaining useful life. The $ 300,000 is an externally restricted contribution. The portion of this contribution used in current financial year should be shown as revenue and the remaining will be called a Deferred Contribution. These deferred contributions should be taken into revenue to match the expenditure on toolkits during that period. Since there is an encumbrance made on these amounts a special account should be created to track the use of these transactions.
I can provide my suggestions on the accounting treatment to the accountant however he will need to complete the accounting process before I can start the audit. One of my concerns is the level of advice I can provide to an audit client and would appreciate any feedback from you in this regard.
The accountant has raised several issues in regards to excel based accounting process. He is of the opinion that a new off the shelf software be implemented however is worried about the cost of implementation. I have recommended some off the shelf software’s however I have advised him that as an auditor I cannot provide any significant consulting or process improvement. Even though he was interested in me helping him implement the new software, I had to say no as that may create a conflict of interest. Do you think that we could play a more active role in accounting software implementation?
Key Performance Measures
One of the board members have asked to create a report of the key performance measures number of new applicants and projections for the future given that they have new building and land. This report will be given to all parties who will receive the annual report and the board has asked me to comment on the suitability of such report. Even though most commonly required information is provided in the audited annual financial statements VHL is free to use special purpose reports like the key performance measures to meet the needs of its donors. However I have advised the board that these will not be a part of the audit process and we will not be certifying them. Please advise if my approach is appropriate.
I have been advised that during the last one year VHL had several issues with the expense reports submitted by the board. These claims were submitted late and on several occasions without appropriate documentation. During my latest visit I have noticed most expenses were appropriate however several expense reports did not have proper supporting documentation. The detection risk would become high if sufficient backup information is not available making the total audit risk high. I have documented this into the audit file and I will need to allocate more time looking into the expenses claimed by the board.
I also noticed that there have been several purchases made by the chair made in early December that include expensive clothing and jewelry. The receipts of these just provide the total amount, taxes and the vendor name. The accountant has advised me that these are appreciation gifts for volunteers, however no such purchases have been made in prior years. I have informed the board that I need to investigate these expenses in detail and would require further information. The board has not responded to this request and on my follow-up the treasurer has informed me that these expenses were discussed in a recent board meeting and were not an issue.
The minutes of the board are not very clear on the discussions that took place when approving these expenses. The board adheres to the provincial conflict of interest act and under this act the board member should recuse himself/herself from voting on matter that may cause a conflict of interest situation. The chair had recused him from the meeting when these expenses were discussed and approved. There was no information of why the chair declared a conflict of interest and no minutes were made to show what actually got discussed in this meeting.
I am planning to inform the board that in order to complete the audit it is very critical for me to get the complete information of these expenses. My initial estimate tells me that these are material transactions and not being able to audit these items would result in a scope limitation. I am requesting a list of all the volunteers that received the applications gifts and would like to cross reference with the volunteers. Further to this I will also want robust details of the minutes of the meetings; if the notes are not available then someone should summarize the discussion on that meeting.
I have worked with this client for the last five years and have no reason to suspect the integrity of anyone involved. Then chair is a successful business man and has been chair for the last five years, he has a strong personality however I have no reason to challenge his integrity. However I am obligated to adhere to auditing standards and have to complete a robust audit. If further details are not provided then I would have no choice but to declare a scope limitation and withdraw from the engagement. I know that this is extreme however I would be left with no alternative but to rescue myself from the audit.
I am booking a meeting in your calendar for next week to discuss this further and to finalize our future course of action.