Do-It-Yourself Inc. (DIY) is a retailer of home improvement and construction products. It operates 25 big-box format stores across Canada and is the second largest of its kind in the country. Up until last year, the company had been owned and operated solely by the O'Neill family. Last year, they decided to expand operations and give Homeco, their biggest competitor, a run for their money. They issued a public offering but still currently own 75% of the shares. Hugh O'Neill, the grandson of the original founder, is the President. Watson Chartered Accountants have audited DIY for over six years.

You have been on the audit team for the DIY audit for the past four years and this is the first audit since your recent promotion to senior auditor. It is now December 7, 2011. While watching the evening news, you hear that DIY's largest store has just burned to the ground. One customer and one employee have been killed, with many others suffering non-life-threatening injuries.

You are starting to wonder whether or not the preliminary audit plan you had just completed for the December 31, 2011, audit is still valid, given. Within minutes of hearing the news, you get a text message from the engagement partner who was obviously thinking the same thing. "I don't know if you have seen the news but there was a fi re at one of the DIY stores this morning. I have just spoken to Hugh and he is pretty upset. As you know, the audit has a pretty tight timeline this year as the bank is anxiously awaiting our audit report before they increase DIY's operating line of credit. I would like you to meet with Jeremy Belmont, DIY's Controller, next week to gather information and then prepare a note for the audit file outlining the impact of the fi re on the audit, including the audit procedures required to specifically address the fire."

You settle in for a long night. You had based your preliminary audit plan on the November 30, 2011, financial statements. You had assessed audit risk as being low, the same level it has been at for the past few years. Materiality was set at the same level as the previous year, 5% of aft er-tax income. So much for a relaxing night of watching reality TV.

The next morning you phone Jeremy and decide to meet with him later that day.

NOTES FROM MEETING WITH JEREMY BELMONT:

» One month's worth of the store's accounting records were lost when the computer system

in the store was destroyed. DIY had no disaster recovery plan and system backup procedures were lax. Th e Information Technology Manager would back up data on each store site whenever he had time.

» Jeremy is confident that he can use information from the bank to estimate 75% of the store sales for the month as these were made using cash or credit card. Th e remaining 25% may be more difficult as these are sales to building contractors who buy their merchandise "on account" and are billed monthly.

» For inventory, Jeremy will use an average inventory value of the remaining 24 stores, confident that all stores are relatively similar in size and makeup.

» DIY is insured for damage caused by fi re. Inventory and capital assets are insured at their replacement cost. Th e policy also states that the insured will receive the fair value of the building that was destroyed whether or not it is rebuilt. There is no business interruption insurance policy.

» The statement of claim is currently being prepared by the accounting department. Once

the insurers receive the claim, it will be validated, approved, and paid within 60 days of

approval.

» DIY is just in the middle of re-financing its operating line of credit with its bank. Th e bank requires the audited financial statements for 2011 to be finalized no later than January 31, 2012.

» The accounting staff are trying to pull together the information for the insurance claim, but have decided that in light of the tight deadline for the year-end financial statements, they need to focus on these for now. Th e insurance claim will therefore have to wait until after year end.

» Given the uncertainty of the amount of the claim, Jeremy has decided not to book any receivables regarding the insurance proceeds. 

The accounting department prepares the insurance claim. He does however plan to write off the building, store fixtures, and any inventory that was destroyed in the fire on theDecember 31, 2011. In addition, he knows he will also have to accrue for building demolition and clean-up costs this year.

Requirement : 

Prepare a note to the audit file outlining the the impact of fire on audit, including the audit procedure  required to specifically address the fire.