Audit Engagement at Vehicles for Hope Limited

Part B: Short Case

                                             Memorandum

Date:                 March 25, 2015

To:                    Edward Sloane, Senior Audit Partner

From:                David Mynarski, CGA

Re:                    Audit Engagement at Vehicles for Hope Limited

I am writing you to obtain guidance on some of the issues and business risks faced by VHL and my oncoming audit engagement with the company. The main focus of the memo is to highlight the issues related to this audit engagement, an analysis of the risks faced by VHL and a possible way of dealing with these issues and mitigation of the risks. I would greatly appreciate your review and a feedback on planning the audit for this year.

I have been the auditor for VHL for past five years and have developed close friendly relations with some of the board members at VHL. The fact that board of directors are mainly responsible for the financial management of this not-for-profit organization, I am a bit concerned now if I should conduct the audit engagement this year. The development of friendly relations with some of the board members poses a direct threat to my independence as an auditor for this organization. Further, my recent meeting with the accountant at VHL has revealed that there had been many changes in the normal business activities in past year at VHL. My concern with regards to a threat to my independence as an auditor has made me think if this is a good time for another audit partner from our firm to take on this audit engagement at VHL.

At VHL, there are two paid staff members. One is an accountant and the other is an administrative assistant. The accountant is responsible of the receipt of funds, custody of funds and depositing them in the bank. Further, the same accountant is responsible for completing all the financial records. One individual handling all the duties mentioned above poses a great risk of misappropriation of funds at VHL. An appropriate solution can be to segregate the duties between the administrative assistant and accountant. For example, the accountant may receive the funds while receipts must be issued by the administrative assistant. Also, the accountant may deposit the funds but the administrative assistant should do the bank reconciliation and cross match with the total funds received as per the receipts issued in a given period.

VHL had received a significant donation from one of its board members this year. The donation comprised of land, building and equipment. In addition, the board member also donated $300,000.00 cash to provide new graduates of the apprenticeship program with automotive toolkits. The donation money was enough to provide toolkits to graduates for next three years. The accountant had not recorded these donation transactions in the books of VHL. Not recording these transactions is against the Accounting Standards for not for profit organization. The standards require that all the donations of capital and equipment be recorded in the financial statements. This violation of the accounting standard would result in a qualified audit opinion. Further, VHL accepts a limited number of applicants each year for the apprenticeship program and also carries a waitlist for the low cost maintenance services it provides. This is because of the limited space and facility available at VHL. The donation of $300,000.00 and more land and equipment would allow VHL to expand its operations. Thus, $300,000.00 donation should also be recorded in its financial statements.