Prepare an Audit Planning Memo

Prepare an Audit Planning Memo

Assume that you are the engagement manager conducting the financial statement audit of your “selected company”. You are required to prepare an audit planning memo. The planning memo paper is due Thursday, November 19th, by the start of class – 3pm. This assignment is to be completed individually and is worth 10% of the course grade. You can submit via hardcopy (to me in-class) or via email.

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Use www.sedar.com to select a company and to access your company’s financial statements. (Sedar.com is a website where all of the Canadian public company annual + quarterly financial statements are filed. If you want to work on a US company (i.e. a company that files its financial statements in the US, you will NOT find the statements on sedar.com – you will have to use the company website [search in the investor section for annual reports]). You can assume that the financial statements included in your company’s annual report are not yet audited and you are responsible for planning the audit of these statements.

Use the information provided in the company’s Annual Report and other publicly documents relevant to your planning process. State any assumptions you find it necessary to make. You are not to contact the organization or interview people for this project. You also should not contact the actual auditors as they will need to keep all the client information confidential.

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The memo should be no more than four (4) pages in length (not including appendices) using normal margins and a font size no less than 10 and larger than 12. How you organize your memo is up to you – there is no specified format – this open format is to encourage you to work on your presentation of the information in addition to the content. Consider – you will be presenting this to the audit partner (me), so consider how best to present the required information below.

The memo should include (but may not limited to):

Your assessment of the background of the client (use appendix 6A in the textbook for some examples of what information may be pertinent – but by no means should you have ALL of the detail from this appendix). [Chapter 6]
Your evaluation of the risk assessment – this includes: [Chapter 5 & 6]
The audit risk (AR) model
Financial statement risk of material misstatement (ROMM) (i.e. control environment; fraud; going concern) – your discussion of the potential areas of overall ROMM + your evaluation of why
Assertion risk of material misstatement (ROMM) – your discussion of the potential areas of assertion ROMM + your evaluation of why
Your evaluation and assessment of materiality (overall materiality + planning/performance materiality). You can use the template we used in class as guidance (presented in the appendix). [Chapter 5]
Your calculation of the preliminary analytics (calculations to be presented in an appendix) – for 2 years. Preliminary analytics should include a trend + horizontal analysis + relevant ratios. This section should also include a qualitative component – where you analyze the potential relationship in your calculations and discuss potential areas of over/understatement. [Chapter 5]
The rubric to this assignment is noted below. Your instructor is available for further guidance if any of the requirements are not clear.

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Planning Tools
Section A: Understanding of the Client

Use headings and bullet form – to document key points you think are important to help understand the client – you will use this relevant background information for your risk assessment section (B). To help you brainstorm the kind of information which should be researched for this section you can use Appendix 6A in your text – it outlines specific topical areas that an auditor needs to understand (i.e. do research on) in order to get to know the company + the industry it operates in + other relevant items. Appendix 6A includes topics such as: industry/regulations; nature of the entity; accounting policies (i.e. significant transactions/complex accounting/non-routine transactions/estimates/related party transactions); strategies; financial performance/analysis; internal controls etc.

For example – company X owns 3 companies (A, B, C) all of which it uses the equity method to account for
Company X is in the pharmaceutical industry – the industry focuses on the research and development of new products.
Do not simply list company facts – the purpose here is to provide a summary of important information that someone can read to learn about the company. Do not copy the material from the company’s annual report or website (I will know) – this is a summary of relevant info. If you simply copy material written by the company in your report – I will give you a 0 for this section. I want you to tell me what you learned about this company from doing a read through its annual report and/or relevant data on the website.

Section B: Risk Assessment – evaluate the AR Model  (IR X CR X DR)

In this section – there are 2 parts (see below). You are assessing the risk of material misstatement (ROMM) at both levels. At the end of your assessment – you should conclude whether the overall company is HIGH/MODERATE/LOW risk.

1.ROMM at FS level

Use the research you did in section A to assess the ROMM at the FS level. What this means is you should consider the 3 topic areas below to discuss where + why you think an over or understatement could happen to the OVERALL financial statements.

Control environment – includes things such as corporate governance, mgmt. integrity, mgmt. override, mgmt. bias in accounting policies and FS recording, weak internal controls or complex IT. Consider these examples in your selected company and evaluate if there is any area which may increase the ROMM from the control environment.
For example, in a company that has had a significant change in management this increases the ROMM because there is uncertainty as to why the previous management left – this raises concerns over the quality of the overall financial statements. In general assets + revenue may be overstated and liabilities + expenses may be understated.

Fraud – includes things such as FS manipulation/misappropriation of assets/RPT transactions. Consider these examples in your selected company and evaluate if there is any area which may increase the ROMM from fraud.
For example – the company has accounts receivable from one of its related companies – the amount has increased from prior year + because of the poorer indicatory results, there is a risk that the revenue + AR from the related company has been overstated.

Going concern – includes such things as risky business strategy/unusual transactions. Consider these examples in your selected company and evaluate if there is any area which may increase the ROMM because of the potential of a going concern.
For example – the company has had losses over the past 3 years (because of R/D spent which did not result in a final product to market). As a result the future success of the company is at risk. This increases the risk of overstating assets/revenue and understating liabilities/expenses as the company wants to present itself in a positive light to continue to attract investors.

2.ROMM at Assertion level

Use the research you did in section A to assess the ROMM at the assertion level. What this means is you should consider an account + an assertion to discuss why you think an over or understatement may result.  In other words you are brainstorming what could go wrong (Chapter 5 is helpful here).

You must discuss at least 1 assertion for 6 unique balance sheet/income statement accounts.
For example – if I pick the completeness of liabilities – my company has a rebate accrual where it records volume discounts for its customers. There is a risk that liabilities are understated (incomplete) because the company estimates the volume per customer based on projected annual purchase patterns.

Section C: Materiality Decisions

-overall + planning/performance materiality is calculated

– (quantitative) support for calculation benchmark (i.e. net income, revenue etc.) and % (i.e. are you on the low or the high end of the range) is explained

– (qualitative) support is provided (i.e. who are the users, their objectives and any unique accounts that they may be extra sensitive to).

Section D: Preliminary Analytical Procedures

-common-size & horizontal analysis is completed (+2 years – current & previous year)

-selected ratios (at least 2) are calculated (current & previous year) [use Appendix 5A]

– Discussion of ‘what could go wrong’ is identified for at least 2 account balances – based on your review of the financial relationships discuss potential areas of over/understatement. [Similar to our in-class example].

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By admin in Essays on November 20, 2015