You have just completed an interview with the newly formed audit committee of the Andrews Street Youth Centre (ASYC). This organization was created to keep neighbourhood youth off the streets by providing recreational facilities where they can meet, exercise, play indoor sports, and hold dances. Since its inception,
the organization has managed to survive on the basis of user fees charged to par- ents whose children use the program. This year the centre received support from a new provincial government program, in the form of an operating grant along with subsidy fees for those parents whose income is considered insufficient to pay the user fee. A local foundation, with a long history in the community and a reputation for honouring its commitments, has also come to the aid of the centre. This outside financial support came with the provision that the centre now present audited financial statements annually.
Your firm is attempting to obtain the audit, as it is a November year-end, and the audit would be completed at a traditionally slow time of year. Many questions were posed during the interview, and the ASYC audit committee has requested a written response to the issues raised. Excerpts from the interview follow:
• “We are looking for financial statements that are understandable to the board.
For
example,
we
have
hea
r
d
that
we
might
have
to
capitalize
and
dep
r
eciate
leasehold
imp
r
ovements.
W
e
have
just
completed
$20,000
in
expenditu
r
es
to
set
up
a
weight
r
oom.
W
e
don’t
understand
this
amortization
idea.
W
ill
it
make
us
look
like
we
exceeded
our
operating
budget
since
this
budget
is
based
on
all
expenditu
r
es,
capital
and
operating?
The
government
might
con-
sider
r
educing
our
next
operating
grant
because
of
this
accounting.
If
you
we
r
e
selected
as
our
audito
r
,
would
you
have
any
p
r
oblem
if
we
simply
expensed
capital assets as incur
r
ed?”
•
“
The
Pa
r
ent Advisory
G
r
oup
has
o
r
ganized
several
fundraising
events.
They
raised
$250,000
in
cash
donations.
They
hi
r
ed
a
part-time
manager
and
paid
for
advertising
on
a
local
radio
station.
The
total
costs
for
salaries
and
adve
r
-
tising
we
r
e
$65,000.
The
net
r
eceipts
of
$185,000
have
been
deposited
in
a
sep-
arate
‘Computer
Fund’
bank
account
to
allow
for
the
pu
r
chase
of
some
PCs.
Our financial statements do
not
r
eflect this fund. Is
that okay with you?”
•
“
The
manager
of
Sports
Supplies
Ltd.
is
a
good
friend
of
the
cent
r
e.
This
year
his
company
gave
us
a
variety
of
items,
such
as
exe
r
cise
and
bodybuilding
apparatus
and
some
basketball
equipment.
This
is
p
r
etty
neat
stu
f
f
and
must
be
worth
at
least
$12,000
to
$15,000.
The
audit
committee
does
not
want
to
r
eco
r
d
this
because
they
a
r
e
concerned
that
if
it
ends
up
in
r
evenue
our
ope
r
-
ating grants might be
r
educed.”
•
“
Certain
of
the
pa
r
ents
have
donated
goods
or
their
time
and
would
like
to
r
eceive
a
tax
r
eceipt
for
the
value
of
these
donations.
W
e
a
r
e
not
certain
whether
we
will
have
to
r
eflect
these
in
our
financial
statements
this
yea
r
.
For
example,
1. Jane Barnes provided valuable advice on improved management effi- ciency. She is a professional consultant and although these consulting fees were not budgeted for, the centre made several changes that resulted in a reduction of administrative costs. Ms. Barnes estimates that her full-rate fee would have been $7,500.
2. Rick James, who is a qualified Phys. Ed. instructor, has been substituting one day a week at no charge, which reduced our budgeted expenditures by $4,500 this year.
3. Parents have donated an awful lot of their time to operate fundraising activities (in addition to those involved with the Computer Fund). This time must be worth thousands of dollars.”
• “Some of the staff have not been able to take their vacation this year due to scheduling problems. As a result, we will have to pay them vacation pay. These funds will be paid out after the year-end and will likely be covered by next year ’s operating grant. To keep revenues and expenses matched, we want to record the vacation pay on a cash basis. Would that be okay? Other- wise, we’ll record a portion of next year ’s grant as receivable this year.”
• “The local foundation has provided the centre with a $30,000 grant to cover the expenses of a volunteer coordinator for two years. We received an instal- ment of $12,000, but we haven’t hired a coordinator yet. The coordinator will be paid on an hourly basis, and the number of hours each month will fluctuate over the next two years depending on the monthly activities.”
• “The cost of the fundraising program for the year was $100,000, which includes the salary of one full time employee and the costs of preparing and mailing brochures to past and prospective donors. The brochures provide a summary of the programs at ASYC and some tips and early warnings sign to help parents recognize when their children may be involved with drugs. We are wondering whether these fundraising costs can be classified as educa- tional costs on the statement of operations.”
Required:
Prepare a draft of the response that will be sent to the audit committee.