You, a CGA, are the audit partner on the audit of Favour Care Homes, a not-for-profit organization that helps seniors remain in their own homes. Favour has been an audit client of your firm for a number of years. As a condition for a substantial amount of government funding, Favour must follow accounting standards for not-for-profit organizations as specified in the CICA Handbook , Part III.
While reviewing the general journal, the senior auditor noted an entry to reverse rent payable of $160,000 to Forgetful Inc.
When following up with the controller, the senior auditor was informed of the following:
• Favour has leased office space from Forgetful for the past six years. Last year, a new five-year lease was signed with an increase in rent from $100,000 per month to $110,000 per month, effective September 1, 2012.
• Even though a new lease had been signed, Favour continued to pay $100,000 per month because it had provided postdated cheques to the end of 2012. The $10,000 shortfall in monthly rent was accrued as rent payable since September 1, 2012.
• It appears that Forgetful has not noticed the shortfall in monthly rent since it has not followed up with Favour.
• You raise the issue with the controller. He indicates that Favour is experiencing some difficulty in paying its suppliers on a timely basis and Forgetful seems to be financially very strong. Favour intends to continue making payments of $100,000 a month and has reversed the accrued rent payable of $160,000 as of December 31, 2012.
Recommend how your firm should respond to this situation.