Chapter 11, Problem 11C

Background. Lake View Mental Health Affiliates, a nongovernmental not-for-profit organization, has contacted William Wise, CPA, about conducting an annual audit for its first year of operations. The governing board wishes to obtain an audit of the financial statements and. having received favorable information about Mr. Wise's ability to conduct such audits, has decided not to issue a request for proposals from other audit firms. Anne Bollin, president of the board, heard from a friend associated with a similar organization that $10,000 is an appropriate price for such an audit and has offered Mr. Wise the audit for that price. Although Mr. Wise agrees that $10,000 would be reasonable for a typical financial statement audit of an organization of Lake View's type and size, he refuses to contract for the audit at that price until he is able to estimate the extent of audit work that would be involved.

Facts. In discussions with Lake View’s controller, Mr. Wise obtains the following information about the organization for the year just ended:

1. 1. Lake View received a $200,000 grant from the City of Lake View, of which 50 percent was stated as being from federal sources. Of this amount, $150,000 was expended during the year, equally from federal and nonfederal sources.
2. 2. Unrestricted gifts of $50,000 were received from private donors; $40,000 was spent during the year.
3. 3. The organization received $300,000 from Medicare for mental health services rendered during the year.
4. 4. Lake View received federal funding passed-through Highlands County of $350,000; $300,000 of the funds were spent for allowable costs.
5. 5. Lake View carried out a program with the Federal Bureau of Prisons to provide alcohol and drug abuse counseling services for prisoners at a nearby federal prison. Services are provided on a “units of service” reimbursement basis. Each unit of service is reimbursed at the rate of $100 and the contract provides for maximum reimbursement of $400,000. Actual units of service for the year were 4,400. Direct costs incurred for these services amounted to $250,000 in total.

Required

1. a.      Based on the foregoing facts, is Lake View Mental Health Affiliates required to have a single audit? Explain your answer.
2. b.      Should Mr. Wise accept the audit engagement for a $10,000 fee? Why or why not?
3. c.       Would Mr. Wise be considered independent according to Government Auditing Standards if he also prepares routine tax filings for the organization? How would this be determined?

(Note: The authors are indebted to James Brown, a partner with BKD, LLP, in Springfield, Missouri, for providing the example on which Case 11–11 is based.)