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 neighborhood 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 parents whose children use the program. This year the center 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 honoring its commitments, has also come to the aid of the center. This outside financial support came with the provision that the center 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 heard that we might have to capitalize and depreciate leasehold improvements. We have just completed $20,000 in expenditures to set up a weight room. We dont understand this amortization idea. Will it make us look like we exceeded our operating budget since this budget is based on all expenditures, capital and operating? The government might consider reducing our next operating grant because of this accounting. If you were selected as our auditor, would you have any problem if we simply expensed capital assets as incurred?
• The Parent Advisory Group has organized several fundraising events. They raised $250,000 in cash donations. They hired a part-time manager and paid for advertising on a local radio station. The total costs for salaries and advertising were $65,000. The net receipts of $185,000 have been deposited in a separate Computer Fund bank account to allow for the purchase of some PCs. Our financial statements do not reflect this fund. Is that okay with you?
• The manager of Sports Supplies Ltd. is a good friend of the centre. This year his company gave us a variety of items, such as exercise and bodybuilding apparatus and some basketball equipment. This is pretty neat stuff and must be worth at least $12,000 to $15,000. The audit committee does not want to record this because they are concerned that if it ends up in revenue our operating grants might be reduced.
• Certain of the parents have donated goods or their time and would like to receive a tax receipt for the value of these donations. We are not certain whether we will have to reflect these in our financial statements this year. For example,

1.	Jane Barnes provided valuable advice on improved management efficiency. 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 years operating grant. To keep revenues and expenses matched, we want to record the vacation pay on a cash basis. Would that be okay? Otherwise, well record a portion of next years 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 instalment of $12,000, but we havent 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 educational costs on the statement of operations.

Required

Prepare a draft of the response that will be sent to the audit committee.using Canadian accounting and auditing standards