To: Audit Partner
From: Me, CGA
Date: March 01, 2014
RE: City of Proudville Audit
During the preparation for the audit of the city of Proudville the following issues were uncovered:
Construction of roads
In the process of constructing roads the city has capitalized $1.5 million in excavation and purchase of materials costs, $2 million in labour costs and $100,000 in settlement of lawsuit costs related to a pedestrian injured in a construction zone. The city also expensed $200,000 for a building demolition and $200,000 for an engineering analysis of construction sites. The city should have not capitalized the lawsuit charge as it does not meet the criteria for capitalization, the lawsuit should have been recorded as an expense when paid out. The cost of demolition of the building and the engineering analysis of the survey sites should have been capitalized as those would be a direct cost related to the construction of roads. All costs directly related to the construction project including preparation costs are to be included as part of the assets costs and are eligible for capitalization.
Overtime wages
The newly promoted assistant director of operations in the utilities department has accessed the accounting system to post three journal entries to credit overtime wages of the utilities department staff and to debit consulting fees. The reclassification presents a violation of internal controls as only authorized personal should have access to post transactions and those transactions need to have proper back up, in this case the back-up states that the amounts were in fact overtime wages. Re-classification of expenses would alter the financial statements and present inaccurate information to users, and it seems the reason the entry was posted was to cover up for an unfavorable variance, leading to a conclusion of possible deception.
Recycling services outsourced to Terra
The director of waste management has requested guidance on audit procedures the...