Audit Planning Memorandum
Client Name:
Radical Accessories Enterprises
Reporting Date: Subject:
Audit planning memorandum memorandum
The purposes of the audit plan are, first, to contribute to the effectiveness of the audit and, second, to contribute to the audit efficiency. efficiency. This memorandum should be completed and approved as part of initial audit planning. In completing this document, there may be occasions when matters already already documented in other work papers are relevant. relevant. There is no need to re-write re-write such material if a specific reference reference can be made. This memorandum is structured so that planning documentation common to all engagements is presented. All items items should be read and considered on every engagement. engagement. hen a section is not applicable, indicate !"#A! with a brief e$planation why it is not applicable. The planning memorandum is divided into three sections% &. Adm Admini inistr strati ation on and and 'ob 'ob set up( ). Ri Risk sk as asse sess ssme ment nt(( an and d *.
Approach
The +nderstanding the usiness of the Entity should be used as the starting point for engagement planning.
&
Engagement Objective: •
•
To understand the business, its processes, and the implementation and the effectiveness of its internal control To identify areas with high risks and enhance the effectiveness and efficiency of operations, to ascertain if the company has complied with leagal reuirements, to verify the fairness of financial statements assertions and to give reccommendations regarding the deficiencies discovered.
I. ADMINISRAION AND SE!"P A. Initial Client Contact #. Planning Con$erence %it& Management A meeting with ompany management should be held to discuss ob'ectives, etc. A typical agenda for the initial meeting may include the following% /
Identification of high risk areas(
/ 0iscussion of client1s concerns 2e.g. recurring problems, unreasonable policies and procedures3( /
Identification of significant disclosures 2e.g. related party transactions3(
/
Identification of changes since last audit 2e.g. system, operations, personnel3(
/
Agreement of functions and related management control ob'ectives to be tested(
/
0iscussion of client4s participation(
/
E$planation of the audit approach(
/
Identification of possible efficiencies and cost savings(
/ Timing of the review 2including submission of draft report and anticipated date of closing meeting3.
Management in attendance
"ikkolai 5ustin 6analili
Audit personnel in attendance
)
ad, 7oriel Aiko 6arie
Regasa'o, Reymart
dela ru8, harry
Rivera, +8amee 9ay
'. Audit eam and Speciali(t A((i(tance Ensure that the audit team is appropriately leveraged in terms of e$perience given the relative comple$ity of the audit. onsider the following% /
Team skills and availability
/
The need for Information Technology 2IT3 auditor or other specialist assistance
/ hether independent reviewer is needed 2e.g., because client is designated for lose 6onitoring3
#. Audit eam Compo(ition Name
Role
Rivera, +8amee 9ay :.
Engagement :artner
dela ru8, harry ;.
6anager
Algarme, 6a. Isabela :.
6anager
Augusto, Evith .
olanio, Adrian
ad, 7oriel Aiko 6arie A.
omendador, Iris R.
7itor'a, Trina 7.
Regasa'o, Reymart 6.
2.
I Auditor or Speciali(t A((i(tance
Any work reuiring IT specialty knowledge or other specialist assistance should be coordinated with the appropriate e$perts in the planning phase of the engagement to ensure such work is adeuately done to meet the auditor1s ob'ectives. 7ist below areas where an e$pert is needed for the engagement. "#A
C. Audit ime able )e* Mile(tone(
*
Date
:lanning
=ebruary &*, )>&?
;pening onference
=ebruary )>, )>&?
=ieldwork
=ebruary )& @ )), )>&?
E$it onference
=ebruary )*, )>&?
6anagement Response
"#A
Report 0raft
6arch *, )>&?
Issuance of =inal Report
6arch , )>&*
II. RIS) ASSESSMEN A. Ri(+ Indicator( The +nderstanding the usiness of the Entity and the opening meeting held with management should provide a basis for the risk assessment process. In evaluating the risk level of the engagement, the following items should also be considered% #. Regulator* Re,uirement(
The company has complied with legal reuirements upon starting the business. The following are% •
•
=ire
•
6ayor1s :ermit
•
IR ertificate of Registration
•
0TI ertificate of usiness "ame Registration
And they are also complying with the *B monthly income ta$ paid to the ureau of Internal Revenue. The engagement team followed the :hilippine
-. Prior Audit( a. Previou( Audit i(tor* :rior audit date%
"#A
Key Issues Raised:
"#A
b. /ollo%!"p on Previou( Audit Concern(
?
Review previous reports, management responses, e$ceptions noted last audit period, pre-audit file comments, etc. 7ist items that reuire follow-up or special attention during the current audit 2eg. recommendations not implemented3. Matter( $or /ollo%!"p "#A
0or+ing Paper Re$erence "#A
1. E2tent o$ C&ange 0ocument any significant current events, issues and considerations and how such conditions will impact the overall audit approach 2restructuring, new products, changes in operations, management, changes in compliance reuirements and other regulations, environment, etc.3. onsider management4s position on operational change as well as other prior events and issues which have carry over impact on the current audit engagement. Documentation:
They innovate and conform to the latest trends, so from only having notebook holders#organisers they now offer different types of products. The remaining partners do the works of the inactive partners. ;ne person holds two positions% Ceneral manager and ;perations manager.
3. Audit or Accounting I((ue( onsider the following% /
"ew or changed accounting standards # :=R<
/
/
=inancial statement preparation
/
;ther issues
Documentation:
The company has not adapted any changes in their accounting policies.
4. Ri(+ o$ /raud onsider whether there is a high risk of fraud, including%
/
=raud risk factors, e.g., misappropriation of assets( fraudulent financial reporting
/
6atters arising from preliminary analytical review
/
0iscussion with client officials
/
;verall programs and controls that address or mitigate fraud risks
/
Responses to fraud risks identified
Documentation:
There is a medium risk of fraud because their internal controls are effective in such a way that every transaction may be traced back to their inventory records and even to the ;Rs. If number of units sold is understated, it could be traced back to the inventory records which show the number of finished products during the period and how many of it were distributed in order to be sold. If inventory account shows deficiency, the number of units recorded would be traced back to the number of meters of cloth shown on the official receipt. This will show if the inventory records are correct since a certain a meter of cloth yields a specificnumber of items to be produced 2e.g & meter of poly canvass yields * pieces of notebook organi8ers3. There is a risk of self-review considering that the general manager hold multiple duties. The general manager#operations manager can sell the products, record the sale in his individual sales 'ournal, keep the money, review the records, and make the financial statements. There is risk in the documentation of product discounts. There is a possibility that the seller will record the sales from multiple customers as one order to avail the product discount. y not appropriately disclosing the sale, he might take the full payment from the customers and only record the discounted amount. 5. Ot&er /actor( onsider the impact of other factors, e.g. reliance on work of internal auditors. Documentation:
"#A
'. Signi$icant Ri(+( and Overall Ri(+ A((e((ment #. Signi$icant Ri(+( ased on the risk assessment procedures, identify the entity1s significant risks and the auditor1s response to those risks. onsider the nature, timing and e$tent of procedures to be performed. The following table summari8es the results of risk assessment and the planned response% Signi$icant Ri(+(
D
Audit Re(pon(e
eak control of cash
:ropose to management changes regarding the physical custody of cash and related controls
7ack of segregation of duties
Inform management regarding the matter and propose certain changes regarding operations
"o sufficient knowledge in preparing financial statements
Review of financial statements and accounts to ensure fairness of presentation and recalculation of certain amounts to reduce risk to an acceptable low level.
ustomi8ed orders may not be adeuately satisfied which can lower sales
:ropose a revised approach regarding the customi8ation of products and a list of standard costs to be applied to ascertain additional product cost during customi8ation
7ow sales or no income at all during off peak periods
Inform management about the matter and advise other strategies to improve effectiveness and efficiency of operations
-.
Ri(+ A((e((ment 6ig&7 Medium or 8o%9 ! Overall Conclu(ion
Documentation:
The overall audit risk is assessed to be at a medium level because they have strong internal controls but the way they operate is inherently risky.
If the risk level, assessed as a result of the planning phase, differs from the risk indicated on the +nderstanding the usiness of the Entity, the reasons for the change should be documented. Documentation:
"#A. The same level of risk is a ssessed.
III. APPROAC ;nce determined, the detailed work to be performed should be documented in the standard work program format. In determining the approach to the audit, the following issues should be considered%
A. Scope o$ t&e 0or+ to be Per$ormed
a.
0etermine the specific functions to be reviewed. =or business process reviews, it may not be necessary to flowchart and process map all functions in the audit area.
b.
=or business units with more than one geographi need to be made to complete testing outside 2main location3. c location, determine 2and 'ustify3 where the audit work is to be performed and what arrangements
c.
here the engagement involves detailed transaction testing, a statistically based sampling approach should generally be used. The 'ustification for the sampling method and parameters selected should be documented in the appropriate sampling approach memo.
Documentation:
The engagement team will test the company1s internal control since the assessed level of control risk is low.
• •
ontrol and handling of cash Inventory management @ flow of inventory from the production area up until they are sold and recorded Falidity of sales made and the authenticity of the customer accounts Accounting records used regarding sales and collections of cash
The sampling method to be u sed is random sampling for inspection of accounting records and verifying the authenticity of sales transactions.
'. Materialit* and olerable Error 0ocument the levels of planning materiality and tolerable error, including their basis for determination. Documentation:
>> and above. Tolerable error is onehalf of the materiality level.
C. Preliminar* Anal*tical Procedure( onsider comparing information for prior periods with anticipated results of the entity which include budgets, forecasts or auditor1s e$pectations of the entity1s financial position and performance.
Documentation:
At the financial statement level, all budgeted amounts are compared with the actual amounts incurred during the period.
Ratios Cross :rofit Ratio
G
:ro'ected
Actual
B
*DB
;perating 6argin Ratio
)HB
&B
Return on
)HB
&B
Return on Assets#Investment
*>B
&&B
Return on Euity 2R;E3
*>B
&&B
D. Internal Control Evaluation 0ocument our understanding of the e ntity1s internal control to assist in risk evaluation and#or prepare an outline of desirable control techniues compared to those in place to reduce risk of error or other inaccuracies related to the accomplishment of management control ob'ectives under a udit. The degree of testing of such controls and techniues is based on auditor1s 'udgment depending on risk.
The company has a strong internal control but it is inherently risky, thus there is a medium level of risk assessed. Test of control should be applied to areas considered to be risky. ;ne of these areas is the proper authori8ation of transactions @ specifically the withdrawal of cash and inventory count with reconciliation of records. Anyone can withdraw cash from the bank if the signatures of the general manager and financial manager are present. This process should be tested in order to trace deficiencies regarding the authenticity of the said signatures. Inventory count and reconciliation of items recorded should also be given appropriate attention to discover misappropriated amounts, if there are, or errors regarding the recording of such amounts.
E. Client A((i(tance 0escribe below the nature of a ny significant assistance that may be provided by client4s staff and the effect on the audit work to be performed. Attach reuest list if applicable.
A((i(tance $rom Client
H
E$$ect on Audit 0or+
:ersonal interview
=irst-hand information acuired widened our understanding about the business of the entity and its processes
6ade it easier to compare budgeted with actual amounts at the financial statement level
Prepared b*:
Algarme, 6a. Isabela Augusto, Evith olanio, Adrian ad, 7oriel Aiko 6arie omendador, Iris dela ru8, harry 7itor'a, Trina Regasa'o, Reymart Audit Engagement eam
=ebruary ), )>&?
Date
Revie%ed b*:
+8amee 9ay :. Rivera Engagement Partner
=ebruary )G, )>&? Date
Approved b*:
6arch &, )>&? +8amee 9ay :. Rivera Engagement Partner
&>
Date
