This audit engagement will be high-risk due to the following factors:
- YS is a new client therefore we are not familiar with their routines.
- YS has never been been audited before therefore, any information about internal controls or management support cannot be obtained through previous auditors.
- Segregation of duties is doubtful. One person is in charge for routine operational activities.
- Inherent risk is high because YS may be obligatory to report certain results to be eligible to receive art grants.
A significant user of financial statement will be the government, which would be interested to see that how effectively YS has distributed previous grants or private donations to serve its members. As YS is heavily relying on other private donors, they may also be interested in YS’s reports to analyze usage of …show more content…
YS can choose deferral or restricted method for reporting. However, according to the information provided by the case, YS does not have any endowment contribution, restricted fund and there is no restriction on usage of art grants, therefore, restricted method is not recommended. Deferral method with separate fund accounting would be appropriate as YS can demonstrate its revenues and expenses of different activities to provide relevant information to users.
- As YS is not recording any depreciation expense, it suggests that YS is capitalizing assets but does not depreciate them. As the annual revenue of YS from previous two years is under $500,000, YS has an option to capitalize assets without depreciating them. However, if YS’s revenue becomes greater than 500,000 then it has to depreciate its assets and retroactively adjust all previous years, which will increase the costs of reporting.
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