You CA have recently been assigned as audit senior for
You CA have recently been assigned as audit senior for
You, CA, have recently been assigned as audit senior for the audit of Open Arms Society (OAS), a not-for-profit organization set up three years ago to help integrate students with disabilities in schools. OAS lobbies educational leaders, organizes seminars, and provides small grants to help schools provide aid to students with disabilities.
OAS was 100% funded by the government when it was originally established. However, in the current year, government funding has been reduced to 75% of capital and operating expenditures, and funding will be reduced by a quarter of the full amount for each of the next three years until OAS is completely self-sufficient. The government will continue to fund specific events and projects undertaken by OAS. If OAS is unable to generate sufficient funds from these and other sources, the government may cut future funding altogether. In the past, the OAS financial statements were reviewed, but starting with the 2013 year the government has required an unqualified audit report as a condition for funding. The prior years' review engagements were completed by your firm.
In addition to the government funding, the organization also receives funding from corporations and not-for profit organizations for special projects, such as retreats and seminars attended by educators. Any funds remaining after a project is completed must be repaid to the funding entity. Some have asked for assurance on the financial information provided by OAS for the projects they funded. They would like to ensure that the expenses actually relate to the project sponsored. Cathy Letourneau, office manager and accountant at OAS, is not sure how to meet the requirements of these organizations.
OAS has three employees: Cathy, who works part-time and handles all accounting and finance; Jameel, an educational therapist who specializes in children with disabilities; and Zarqa, who is the executive director of OAS and performs most of the organizational tasks as well as soliciting contributions and donations.
OAS is overseen by a board that is made up of five members from the local community, mostly from educational fields. The board is responsible for approving the budget and the financial statements at its monthly meeting. Very little time is spent on other financial matters, as most board members are more interested in the operational issues and fundraising activities. They told Cathy, "We will rely on you to keep our sponsors happy."
OAS's fiscal year ended June 30, 2013. It is now July 25, 2013. A junior has completed most of the field work. You have been provided with the details of the government funding (Exhibit C9-3 [a]), extracts from the audit file (Exhibit C9-3[b]), and other information from various sources (Exhibit C9-3[c]).
The partner requests that you prepare a memo to her detailing any concerns regarding the reporting. Also, she asks that your memo include responses to concerns raised by Cathy.
Prepare the memo to the audit firm partner.
DETAILS OF GOVERNMENT FUNDING
OAS must submit a detailed operating and capital budget six months before the start of any year. It must be approved in order for OAS to receive government funding. Initial funding for the first two months of this year is based on the budget, the formula being:
Operating funding = total operating budget x 1/6 x 75%
Capital funding = total capital budget x 1/6 x 75%
Subsequent funding, paid every other month, must be supported by actual invoices and cancelled cheques from the previous two-month period. This year's maximum annual funding is 75% of the total approved budget.
OAS's 2013 budget was approved with budgeted operating expenditures of $100,000 and capital expenditures of $11,000. Accordingly, OAS received its first operating installment of $12,500 ($100,000 x 1/6 x 75%) on July 2, 2012. The capital funding amount was received a few days later. Subsequent operating payments, summarized by the junior, were as follows:
All funding for the 2011-12 year has been received. The junior noted that no funding was received before year end for the July 2, 2013, submission. He wrote the following note: "From examination of cancelled cheques, the reimbursement from the government should be part of the 2012-13 year.
Accordingly, I have posted an accrual for $10,500 as a receivable from the government." In June 2013, OAS received approval from the government for its 2013-14 budget, with planned operating expenditures of $110,000 and capital expenditures of $9,000. OAS received a payment of $9,167 for operating expenditures on June 30, 2013. The payment has been set up as deferred revenue on the June 30, 2013, balance sheet.
The government responded to the confirmation request from OAS with the following letter:
"We confirm operational funding from July 1, 2012, to June 30, 2013, in the amount of $83,917.
[Signed] Nathan Shu" The junior has been unable to reconcile this confirmation to the records of OAS.
EXTRACTS FROM AUDIT FILE
1. Funding from the government has been confirmed. Other significant revenues have been vouched to deposit slips and bank statements.
2. Expenses have been tested by analytical review, comparing current year with prior year, with explanations sought for significant variances. Explanations for many of the variances consist of "one-time project in 2011-12; not repeated in 2012-13 year" or "one-time project in 2012-13; not done in 2012-13."
3. Bank confirmation has been sent to the bank.
4. There were no significant additions to capital assets. Three computers were sold to a school for use by children with disabilities. A gain of $3,500, an amount equal to the proceeds, has been recorded. The units were part of a donation to OAS of five computers made by a local company last year.
5. Accounts receivable, except for the $10,500 booked by the junior, were not considered significant. Inventory and prepaids were also not significant.
6. Accounts payable were tested by vouching to invoices. The junior performed a search for unrecorded liabilities by reviewing all invoices received after June 30. He found nothing significant.
7. The only other liability on the books of OAS is the deferred funding for the $9,167.
8. Planning in all other respects reflects a typical recurring audit engagement. Audit risk was assessed as low. A substantive audit approach has been used. There is no comment on internal controls in the file.
9. No work has been done on the capital funding received by OAS.
In prior years, OAS had very few projects funded by corporate and non-profit sponsors. Each sponsor received a schedule pre pared by Cathy of revenues and expenses for the project. Expenses on the schedule include an amount for overhead administration (mostly salaries and office rent). Your firm did not comment on the schedules, although Cathy informed you that she attached a copy of the review engagement report to the schedules when sending them to sponsors.
Cathy sets up a receivable for additional funding when a project does not break even. OAS has successfully solicited additional funding from sponsors for about half of the projects for which a receivable was set up. The receivables from prior years still remaining on the books total about $7,500. In the 2012-13 year, OAS continued to pursue corporate sponsorships in an effort to be more self-sufficient. Five out of eight new projects did not break even for a total of $6,900, and a receivable was set up.
OAS's financial statements do not distinguish between operating and capital funding. However, when she has time, Cathy updates a listing that tracks capital funding and expenditures.
OAS had total operating revenues for 2012-13, before adjustments made by the junior, of $140,000.