Engagement Planning Memorandum
1. Objectives of the Engagement The objective is to audit the financial statements of Chantal Goods,Inc. (the Compan!, "hich comprise the statement of financial position as at #ecember $%, &'%, and statement of comprehensive income, statement of changes in e)uit and statement of cash flo"s for the ear ended, and notes comprising a summar of significant accounting policies and other e*planator information, for the purpose of e*pressing an opinion on them. In addition, the compan+s debt agreement "ith #eutsche anre)uires the compan to furnish the lender a report b our firm on the Compan+s compliance "ith various debt covenants.
2. Background Information ome of the more significant information and current developments since the last e*amination are as follo"s/ The Compan is engaged in the assembl0manufacturing of home entertainment e)uipment consisting of television, radio and stereo sets and domestic domestic refriger refrigeratio ation n applian appliances, ces, "hich "hich include include refrige refrigerato rators rs and free1ers free1ers.. The compan+s compan+s main office and plant plant are located located in el 2ir, 2ir, Manila. Manila. It maintai maintains ns "arehou "arehouses ses in Cebu, Cebu, #avao, #avao, and Cagaa Cagaan. n. The Comp Compan an is regi regist ster ered ed "ith "ith the the oar oard d of Inve Invest stme ment nts s (3I (3I!! unde under r 4epub 4epublic lic 2ct 5o. 5o. 6%$ 6%$ as a prefe preferre rred d non7p non7pion ionee eerr enter enterpri prise se for for the the manufacture and e*port of electronic products. The compan caters largel to the domestic mar-et through an organi1ed net"or- of franchised dealers. 2t the beginning of the third )uarters, the Compan made its first concentrated effort to sell products internationall. oth oth domes domestic tic and and foreig foreign n mar-e mar-ets ts are are e*pec e*pecte ted d to increa increase se significantl significantl over the ne*t several several ears. The Compan believes that it "ill continue to be one of the leaders in industr because of its entrenched internat internationa ionall mar-ets. mar-ets. 8o"ever 8o"ever,, mar-et mar-et conditi conditions ons in the industr industr are influenced b aggressive competition.
Engagement Planning Memorandum
The compan (and the industr as a "hole! is dependent on imports for some of its ra" material re)uirements. #uring the current ear, the Government in cooperation "ith the industr approved the implementation of the Electronics 9ocal Content Program. This program see-s to ma-ing mandator the use of local ra" materials and parts for the manufacture of electronic components. In line "ith this program, the Compan implemented its plans for the construction of an electroltic capacitor plant "hich "ill eventuall suppl the Compan and industr re)uire some of its ra" material re)uirements, the Compan increased its investment in :ianca Pearl Corporation, a major supplier. The compan is also planning to e*pand its color T: line in anticipation of the increase in demand for this product. The compan is listed in the local stoc- e*change and has appro*imatel &;' stoc-holders. The significant stoc-holders are umma Cum 9aude Electronics, Inc. (&%. 2llan :ira, e*ecutive vice president7finance and administration, and Manolo Cru1, corporate secretar. 2s part of our initial planning efforts, "e met "ith the members of the management team to discuss the Compan operations and results to date. Each of the above officers is included in the Compan+s profit sharing plan covering managerial emploees. The management group represents an e*perienced and -no"ledgeable team concerned about gro"th and stabilit of the Compan. The team is -no"n to be conservative in spite of the fact that the operating results affect their directl.
Engagement Planning Memorandum
Diagram 1: Corporate Structure
3. Work that will reuire s!ecialist assistance In accordance "ith P2 6&', the firm "ill consult the follo"ing e*perts/ %.! &.! $.! ?.!
2ctuaries/ to evaluate pension and other postretirement benefits Engineers/ to estimate useful lives of e)uipment 2ttornes/ to interpret legal agreements 2ppraisers/ to value real estate
". #isk $actors ased on our understanding of the client+s business and industr, our observations from the preliminar revie" of the interim financial statements and our evaluation of the audit identified in last ear+s audit, "e have determined that there are no special audit ris-s associated "ith the general business or management environment. 8o"ever, "e have identified the follo"ing areas that re)uire special accounting and auditing emphasis/ %.! 8istoricall, inventories have been a critical area in the audit e*amination because of its materialit. 4a" materials and finished goods inventories are characteristicall susceptible to obsolescence caused b factors such as rapid technological advances in the industr and e*tensive product development activities resulting in the introduction of ne" models and ne" features for e*isting product lines. ecause of these conditions, certain of the Compan+s products have been moving ver slo"l. Closel attention "ill have to be given to the reliabilit of these products, including related ra" materials and "or- in process. &.! The Compan procures some of its ra" material re)uirements from 2C Corporation, an affiliate. To provide for a reliable source of ra" material suppl, the Compan at the beginning of the ear purchased from a third part an additional e)uit interest of &'< in
Engagement Planning Memorandum
this compan thereb increasing the level of its o"nership to $'<. @ith this additional investment, the Compan gained a seat in the oard and is no" in a position to e*ercise significant influence over the affairs of the investee. The compan has decided to adopt the e)uit method of accounting for this investment. @e should ta-e up this matter "ith the management and arrange to have audited financial statements in time for the completion of the audit. This accounting change ma re)uire restatement of prior ear+s financial statements and also changes in the "ordings of the report and notes to financial statements. 2dditionall, "e should scrutini1e ver closel transactions "ith this affiliate and ensure that these are carried out on arms+ length basis
$.! The compan has obtained additional long7term debt during the current ear to finance the construction of the electroltic capacitor plant. The agreement covering the loan contains provisions relating to the maintenance of current and debt to e)uit ratios. ased on the =une $', &'% interim financial statements> the margin of compliance "ith these covenants "as ver narro". If the compan continues "ith its capital e*penditure program and if the plans for the increase in capitali1ation do not materiali1e, certain provisions of the loan agreement could be violated. The compan is currentl negotiating an amendment of the credit agreement and at the same time finali1ing plans to increase its authori1ed capital stoc-. @e should carefull revie" the terms of the loan agreement and an amendment thereto and determine "hether the Compan is in compliance "ith the provisions of the agreement.
".% &eliverables The follo"ing are the final output to be submitted to the users/ • • • •
2nnual 2udited Ainancial tatements 2nnual Income Ta* 4eturn upplementar 4eport to EC Management 9etter
Engagement Planning Memorandum
'.% (ro!osed )imetable* +taffing and ,llocation of #oles a. Timetable / The follo"ing are tentative dates of importance pertaining to the audit engagement/ Bnderstanding and Preliminar Evaluation of Internal Control stem Compliance Testing (Interim test period "ill cover =anuar % eptember %, &7%
2ugust % %, &'%
Insurance of Management 9etter on Preliminar @or-
eptember $'
Inventor 3bservation
#ecember
%$Confirmation of 4eceivables as of 3ctober
%$5ovember %
Completion of Aield @or-
Aebruar %, &'%6
#iscussion of Ainancial tatements #raft "ith client
Aebruar &D
Issuance of Ainancial 4eport
March %
ubmission of Management 9etter on Ainal @or-
March
%$Ailing of Ainal Income Ta* 4eturn "ith the I4
2pril
Ailing of Ainancial tatements and upplementar chedules "ith EC
2pril
:arious dates tarting 2ugust %6
Engagement Planning Memorandum
b- +taffing and ,llocation of #oles The individuals "ho "ill be assigned to the engagement are the follo"ing/ Partner in Charge :ianca Pearl 2mores Manager
Genesis 2guilar
taff in Charge
Ed"ard 2)uino
2ssistants
Edel Castillo
Philip 4ees 2rturo Manansala =oselito 2ng
.% Engagement ,!!roach 3ur audit approach is a ris-7based one, informed b our understanding of the oard+s business and the accounting and the internal control sstems as "ell as our assessment of the ris-s associated "ith the financial statements. 2 ris-7based approach identifies, categori1es, and prioriti1es ris-. The highest priorit is allocated a greater proportion of the firm+s resources. 2s a part of our audit, "e "ill determine the e*tent to "hich "e can rel on detailed control procedures and management+s monitoring activities to prevent or detect specific material misstatements and address all potential errors b conducting "al- through tests of all the identified significant audit areas. @here it is found that the accounting sstems and controls are sound, "e "ill see- to ta-e audit assurance from them. In respect of those significant audit areas "here either the controls don+t e*ist or are "ea-, further substantive procedures are designed.
Prepared b/ G. 2GBI924 Manager 2pproved b/ :. 2mores Engagement Partner
