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Audit Planning Memorandum

Client Name:

Radical Accessories Enterprises

Reporting Date:
Subject:

Audit planning 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. This memorandum should be completed and approved as part of initial
audit planning. In completing this document, there may be occasions when matters already documented
in other work papers are relevant. There is no need to re-write such material if a specific reference can
be made.
This memorandum is structured so that planning documentation common to all engagements is
presented. All items should be read and considered on every engagement. When a section is not
applicable, indicate "N/A" with a brief explanation why it is not applicable.
The planning memorandum is divided into three sections:
1. Administration and job set up;
2. Risk assessment; and
3. Approach
The Understanding the Business 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 requirements, to verify the fairness of
financial statements assertions and to give reccommendations regarding the deficiencies
discovered.

I. ADMINISTRATION AND SET-UP


A. Initial Client Contact
1. Planning Conference with Management
A meeting with Company management should be held to discuss objectives, etc. A typical agenda for the
initial meeting may include the following:

Identification of high risk areas;

Discussion of clients concerns (e.g. recurring problems, unreasonable policies and


procedures);

Identification of significant disclosures (e.g. related party transactions);

Identification of changes since last audit (e.g. system, operations, personnel);

Agreement of functions and related management control objectives to be tested;

Discussion of client's participation;

Explanation of the audit approach;

Identification of possible efficiencies and cost savings;

Timing of the review (including submission of draft report and anticipated date of closing
meeting).

Management in attendance
Nikkolai Justin Manalili

Audit personnel in attendance

Cad, Loriel Aiko Marie

Regasajo, Reymart

dela Cruz, Charry

Rivera, Uzamee Kay

B. Audit Team and Specialist Assistance


Ensure that the audit team is appropriately leveraged in terms of experience given the relative complexity
of the audit. Consider the following:

Team skills and availability

The need for Information Technology (IT) auditor or other specialist assistance

Whether independent reviewer is needed (e.g., because client is designated for Close
Monitoring)

1. Audit Team Composition


Name

Role

Rivera, Uzamee Kay P.

Engagement Partner

dela Cruz, Charry O.

Manager

Algarme, Ma. Isabela P.

Manager

Augusto, Evith B.

Staff

Bolanio, Adrian

Staff

Cad, Loriel Aiko Marie A.

Staff

Comendador, Iris R.

Staff

Litorja, Trina L.

Staff

Regasajo, Reymart M.

Staff

2. IT Auditor or Specialist Assistance


Any work requiring IT specialty knowledge or other specialist assistance should be coordinated with the
appropriate experts in the planning phase of the engagement to ensure such work is adequately done to
meet the auditors objectives. List below areas where an expert is needed for the engagement.
N/A

C. Audit Time Table


Key Milestones

Date

Planning

February 13, 2014

Opening Conference

February 20, 2014

Fieldwork

February 21 22, 2014

Exit Conference

February 23, 2014

Management Response

N/A

Report Draft

March 3, 2014

Issuance of Final Report

March 5, 2013

II. RISK ASSESSMENT


A. Risk Indicators
The Understanding the Business 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:
1. Regulatory Requirements
Statutory and regulatory requirements impacting the engagement need to be considered and assessed in
terms of their relevance to the engagement. Consideration should also be given to the potential
consequences of non-compliance with statutory and/or regulatory requirements and our role in detecting
such non-compliance. Our work should be planned to address this risk.
Documentation:
The company has complied with legal requirements upon starting the business. The following are:

Sanitary Permit
Fire Safety Permit and Certification
Mayors Permit
BIR Certificate of Registration
DTI Certificate of Business Name Registration

And they are also complying with the 3% monthly income tax paid to the Bureau of Internal Revenue.
The engagement team followed the Philippine Standards on Auditing.

2. Prior Audits
a. Previous Audit History
Prior audit date:

N/A

Key Issues Raised:


N/A

b. Follow-Up on Previous Audit Concerns

Review previous reports, management responses, exceptions noted last audit period, pre-audit file
comments, etc. List items that require follow-up or special attention during the current audit (eg.
recommendations not implemented).
Matters for Follow-Up
N/A

Working Paper Reference


N/A

3. Extent of Change
Document any significant current events, issues and considerations and how such conditions will impact
the overall audit approach (restructuring, new products, changes in operations, management, changes in
compliance requirements and other regulations, environment, etc.). Consider management's 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 5 different types of products.
The remaining partners do the works of the inactive partners.
One person holds two positions: General manager and Operations manager.

4. Audit or Accounting Issues


Consider the following:

New or changed accounting standards / PFRS

Scope of audit

Financial statement preparation

Other issues

Documentation:

The company has not adapted any changes in their accounting policies.

5. Risk of Fraud
Consider whether there is a high risk of fraud, including:

Fraud risk factors, e.g., misappropriation of assets; fraudulent financial reporting

Matters arising from preliminary analytical review

Discussion with client officials

Overall 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 ORs. 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 (e.g 1 meter
of poly canvass yields 3 pieces of notebook organizers).
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 journal,
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. By not
appropriately disclosing the sale, he might take the full payment from the customers and only record
the discounted amount.
6. Other Factors
Consider the impact of other factors, e.g. reliance on work of internal auditors.
Documentation:
N/A

B. Significant Risks and Overall Risk Assessment


1. Significant Risks
Based on the risk assessment procedures, identify the entitys significant risks and the auditors response
to those risks. Consider the nature, timing and extent of procedures to be performed.
The following table summarizes the results of risk assessment and the planned response:
Significant Risks

Audit Response

Weak control of cash

Propose to management changes regarding


the physical custody of cash and related
controls

Lack of segregation of duties

Inform management regarding the matter


and propose certain changes regarding
operations

No 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.

Customized orders may not be adequately Propose a revised approach regarding the
customization of products and a list of
satisfied which can lower sales

standard costs to be applied to ascertain


additional product cost during customization

Low 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

2. Risk Assessment (High, Medium or Low) - Overall Conclusion


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
Understanding the Business of the Entity, the reasons for the change should be documented.
Documentation:
N/A. The same level of risk is assessed.

III. APPROACH
Once 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 of the Work to be Performed


a. Determine the specific functions to be reviewed. For business process reviews, it may not be
necessary to flowchart and process map all functions in the audit area. Select those functions that
are critical to the business unit achieving its objectives. Where processes are cross-functional, define
the extent of work to be performed in other business units.
b. For business units with more than one geographi need to be made to complete testing outside (main
location). c location, determine (and justify) where the audit work is to be performed and what
arrangements
c.

Where the engagement involves detailed transaction testing, a statistically based sampling approach
should generally be used. The justification for the sampling method and parameters selected should
be documented in the appropriate sampling approach memo.

Documentation:
The engagement team will test the companys internal control since the assessed level of control risk is
low. Substantive procedures will also be applied but not for the totality of the work.
Specific areas to be reviewed:

Control and handling of cash


Inventory management flow of inventory from the production area up until they are sold and
recorded
Validity of sales made and the authenticity of the customer accounts
Accounting records used regarding sales and collections of cash

The sampling method to be used is random sampling for inspection of accounting records and verifying
the authenticity of sales transactions.

B. Materiality and Tolerable Error


Document the levels of planning materiality and tolerable error, including their basis for determination.
Documentation:
Since the company is considered to be small-scale, even small amounts can be significant. The
assessed level of planning materiality is net income of Php 2000 and above. Tolerable error is onehalf of the materiality level.

C. Preliminary Analytical Procedures


Consider comparing information for prior periods with anticipated results of the entity which include
budgets, forecasts or auditors expectations of the entitys financial position and performance.

Documentation:
At the financial statement level, all budgeted amounts are compared with the actual amounts
incurred during the period.

Ratios
Gross Profit Ratio

Projected

Actual

75%

36%

Operating Margin Ratio

29%

15%

Return on Sales

29%

15%

Return on Assets/Investment

30%

11%

Return on Equity (ROE)

30%

11%

D. Internal Control Evaluation


Document our understanding of the entitys internal control to assist in risk evaluation and/or prepare an
outline of desirable control techniques compared to those in place to reduce risk of error or other
inaccuracies related to the accomplishment of management control objectives under audit.
The degree of testing of such controls and techniques is based on auditors judgment depending on risk.
Summarize below the internal control evaluation approach to be used for this audit area:

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. One of these areas is the proper
authorization 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 Assistance
Describe below the nature of any significant assistance that may be provided by client's staff and the
effect on the audit work to be performed. Attach request list if applicable.

Assistance from Client

Effect on Audit Work

Personal interview

First-hand information acquired widened our


understanding about the business of the
entity and its processes

Softcopies of financial statements

Made it easier to compare budgeted with


actual amounts at the financial statement
level

Prepared by:
Algarme, Ma. Isabela
Augusto, Evith
Bolanio, Adrian
Cad, Loriel Aiko Marie
Comendador, Iris
dela Cruz, Charry
Litorja, Trina
Regasajo, Reymart
Audit Engagement Team

February 27, 2014

Date

Reviewed by:

Uzamee Kay P. Rivera


Engagement Partner

February 28, 2014


Date

Approved by:

Uzamee Kay P. Rivera


Engagement Partner

10

March 1, 2014

Date