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ReadQ
Case Note

Engagement issues:
 Assist in preparing statement of claim and certify for insurance company
 Who is client? ReadQ or insurance company? ReadQ wants maximum possible claim. Insurance
company wants an objective statement
 We need to be independent
 Bank also a possible user if ReadQ approaches them for operating funds
 Should the insurance claim be limited in distribution to circumscribe our association?
 Proposed fee is on a contingent basis – impairs appearance of independence (self-interest
threat), therefore suggest an hourly fee basis consistent with a F/S audit
 Certification – suggest some form of assurance – perhaps a conclusion the claim is in accordance
with the terms of the insurance policy
o Report on compliance with agreements, statutes and regulations - S. 5815 (reasonable
assurance) or S. 8600 (limited assurance) (Note: new Handbook sections CSAE 3530
(Attestation engagements to report on compliance) and CSAE 3531 (Direct engagements
to report on compliance) in effect effective April 1, 2019)
o Performance of specified procedures – S. 9100
o Scope limitations may be needed, depending on information available after the fire
 Timeframe – ReadQ wants a very quick report – which may impair our independence. Should
agree on a reasonable timetable for report,
o May give rise to cash flow concerns
 Perhaps agree to defer payment for our services until funds received from
insurance company
 ReadQ needs to do everything it can to mitigate its losses
 Recommend separate audit teams for F/S audit and insurance claim to enhance independence
 Materiality – does not apply in the context of an insurance claim – each dollar is material
Statement of Claim:
 Consider the more significant issues first – those with greatest financial impact; do not tackle in
order listed
o Inventory
 No allowance for decline in value has been taken in the draft claim
 Policy stipulates lower of net realizable value and replacement cost
 Assuming standard allowances are appropriate, the claim should be adjusted to
$443,624 (95% of current year; 90% 1 year old; 85% 2 years old; 75% older)
 We have not tested or relied on the perpetual inventory system in our audit, so
we do not know if the client prepared count of books is reliable
o Profit on lost sales
 Profit from permanently lost sales are recoverable
 ReadQ’s draft claim suggests the profit is lost on all books destroyed, but not all
would necessarily be saleable and some will be able to be replaced and then
sold
 Determining amount of permanently lost sales may not be possible until several
months to a year – by comparing year over year change in sales
 Need to determine how long ReadQ will be out of operation to assess likely lost
sales
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 Consider sales lost during the busy Christmas season

 Factor in impact of the award-winning book
 ReadQ also has an obligation to try to minimize its losses, for example
through the timely replacement of key books
 ReadQ’s claim currently overstates profit on lost sales; adjustment will
be needed
 If ReadQ is compensated for lost sales, then not appropriate to also
compensate for additional promotion costs
o Printing equipment
 Objective is to put ReadQ back into same position as before fire; to repair or
replace with like kind and quality; what is the definition of ‘replacement cost’ in
this scenario?
 Will need to contact the insurance company for its definition – new or after
amortization? Since you cannot decide, consider both alternatives
 Neither equipment is exactly of like kind and quality
 Consider whether 10% increase in efficiency should be factored into
determining amount to claim relative to printing equipment. Is this 10% greater
efficiency demonstrable? Or a marketing claim?
 Make a case for either claiming the full cost of the equipment or reducing it
 Rush delivery charges should be covered – helps to minimize lost sales
 Training costs should also be covered as these are a direct result of the fire and
needed to validate the warranty
o Repairs and cleaning
 Materials and supplies are allowable
 Only 50% over cost of work done by ReadQ employees is allowable
 Only 50% of labour can be recovered; this will need to be actual costs
 Cannot claim overhead – will need to be actual cost of foreperson’s
work
 Benefits need to be actual cost of benefits, not just a 20% allocation
(since overhead is not permissible)
o Other items
 Fixtures – again need to clarify definition of replacement cost
 Inventory of materials – should be 95% of original cost
 Display books – are these inventory? Or fixed asset (i.e. not available for sale)?
 This will impact the allowable claim
 Interest – not clear if covered in policy; if yes, the claim should be for out of
pocket interest, not anticipated interest
 Our fees – can these be claimed?
 Conclusion – several items in draft claim appear to be overstated

Assurance Work Required:

 Review insurance policy
 Examine invoices for materials; examine time sheets for labour costs for clean up; determine
how supervision and benefit costs were determined
 Examine invoices for equipment, inspect equipment, compare technical specifications of
equipment – may need to demonstrate the upgraded equipment was the only possibility
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 Can we do an inventory rollforward from year end to determine inventory?; inspect inventory to
ensure it is saleable; may be difficult to determine inventory loss since we did no testing on the
perpetual inventory system
 Vouch purchases of materials inventory since year end; estimate usage since physical count
 Determine coverage of display books, promotional costs, interest
Other:
 Suggest that ReadQ consider special insurance coverage for first edition books and/or secure
storage
 Suggest ReadQ contact their bank to arrange interim financing until insurance payment is
received
 Confirm ReadQ filed written notice of the fire and pending claim with the insurance company in
the time frame required