AC 521 Engagement Planning Memo

7/26/2019 AC 521 Engagement Planning Memo

http://slidepdf.com/reader/full/ac-521-engagement-planning-memo 1/6

Engagement Planning Memorandum

1. Objectives of the Engagement

The objective is to audit the financial statements of ChantalGoods,Inc. (the Compan!, "hich comprise the statement of financialposition as at #ecember $%, &'%, and statement of comprehensiveincome, statement of changes in e)uit and statement of cash flo"s forthe ear ended, and notes comprising a summar of significant accountingpolicies and other e*planator information, for the purpose of e*pressingan opinion on them.

In addition, the compan+s debt agreement "ith #eutsche an-re)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 developmentssince 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 setsand domestic refrigeration appliances, "hich include refrigerators andfree1ers. The compan+s main office and plant are located in el 2ir,Manila. It maintains "arehouses in Cebu, #avao, and Cagaan. TheCompan is registered "ith the oard of Investments (3I! under 4epublic 2ct 5o. 6%$ as a preferred non7pioneer enterprise for themanufacture and e*port of electronic products.

The compan caters largel to the domestic mar-et through anorgani1ed net"or- of franchised dealers. 2t the beginning of the third)uarters, the Compan made its first concentrated effort to sell productsinternationall.

oth domestic and foreign mar-ets are e*pected to increasesignificantl over the ne*t several ears. The Compan believes that it "illcontinue to be one of the leaders in industr because of its entrenchedinternational mar-ets. 8o"ever, mar-et conditions in the industr areinfluenced b aggressive competition.




The compan (and the industr as a "hole! is dependent onimports 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 programsee-s to ma-ing mandator the use of local ra" materials and parts for the manufacture of electronic components. In line "ith this program, theCompan implemented its plans for the construction of an electrolticcapacitor plant "hich "ill eventuall suppl the Compan and industrre)uire some of its ra" material re)uirements, the Compan increased itsinvestment in :ianca Pearl Corporation, a major supplier.

The compan is also planning to e*pand its color T: line inanticipation of the increase in demand for this product.

The compan is listed in the local stoc- e*change and hasappro*imatel &;' stoc-holders. The significant stoc-holders are ummaCum 9aude Electronics, Inc. (&%.<! and tud, Inc. (%<!. The combinedo"nership of directors and officers amounts to appro*imatel &'<.

The oard of #irectors consists of three Compan officers, sevenoutside directors and the Compan+s legal counsel. The oard+s regular meetings are held ever month "here detailed financial and operatinginformation is revie"ed. pecial meetings are called "henever there areurgent matters to be acted upon

In 2pril &'%, Ms. Cnthia Cavalida resigned as a Compan

Comptroller and Mr. =. Ponce "as hired to ta-e his place. The other members of the management team are/ Chantal tles, president> 2llan:ira, e*ecutive vice president7finance and administration, and ManoloCru1, corporate secretar. 2s part of our initial planning efforts, "e met"ith the members of the management team to discuss the Companoperations and results to date.

Each of the above officers is included in the Compan+s profitsharing plan covering managerial emploees. The management grouprepresents an e*perienced and -no"ledgeable team concerned aboutgro"th and stabilit of the Compan. The team is -no"n to beconservative in spite of the fact that the operating results affect their directl.




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, ourobservations from the preliminar revie" of the interim financialstatements 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 haveidentified the follo"ing areas that re)uire special accounting and auditingemphasis/

%.! 8istoricall, inventories have been a critical area in the audite*amination because of its materialit. 4a" materials and finishedgoods inventories are characteristicall susceptible toobsolescence caused b factors such as rapid technologicaladvances in the industr and e*tensive product developmentactivities 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 theseproducts, 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 ofra" material suppl, the Compan at the beginning of the earpurchased from a third part an additional e)uit interest of &'< in




this compan thereb increasing the level of its o"nership to $'<.@ith this additional investment, the Compan gained a seat in theoard and is no" in a position to e*ercise significant influence over

the affairs of the investee. The compan has decided to adopt thee)uit method of accounting for this investment. @e should ta-e upthis matter "ith the management and arrange to have auditedfinancial statements in time for the completion of the audit. Thisaccounting change ma re)uire restatement of prior ear+s financialstatements and also changes in the "ordings of the report andnotes to financial statements. 2dditionall, "e should scrutini1ever closel transactions "ith this affiliate and ensure that theseare carried out on arms+ length basis

$.! The compan has obtained additional long7term debt during thecurrent ear to finance the construction of the electroltic capacitorplant. The agreement covering the loan contains provisions relatingto the maintenance of current and debt to e)uit ratios. ased onthe =une $', &'% interim financial statements> the margin ofcompliance "ith these covenants "as ver narro". If the compancontinues "ith its capital e*penditure program and if the plans forthe increase in capitali1ation do not materiali1e, certain provisionsof the loan agreement could be violated. The compan is currentlnegotiating an amendment of the credit agreement and at thesame time finali1ing plans to increase its authori1ed capital stoc-.

@e should carefull revie" the terms of the loan agreement andan amendment thereto and determine "hether the Compan is incompliance "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




'.% (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 PreliminarEvaluation of Internal Control stem

2ugust % %, &'%

Compliance Testing (Interim testperiod "ill cover =anuar % eptember %, &7%

:arious dates tarting 2ugust %6

Insurance of Management 9etter onPreliminar @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 onAinal @or-

March $%

Ailing of Ainal Income Ta* 4eturn "iththe I4

2pril

Ailing of Ainancial tatements andupplementar chedules "ithEC

2pril




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 sstemsas "ell as our assessment of the ris-s associated "ith the financialstatements. 2 ris-7based approach identifies, categori1es, and prioriti1esris-. The highest priorit is allocated a greater proportion of the firm+sresources. 2s a part of our audit, "e "ill determine the e*tent to "hich "ecan rel on detailed control procedures and management+s monitoringactivities to prevent or detect specific material misstatements and addressall potential errors b conducting "al- through tests of all the identifiedsignificant audit areas. @here it is found that the accounting sstems andcontrols are sound, "e "ill see- to ta-e audit assurance from them. Inrespect of those significant audit areas "here either the controls don+te*ist or are "ea-, further substantive procedures are designed.

Prepared b/

G. 2GBI924

Manager

2pproved b/

:. 2moresEngagement Partner

Documents

AC 521 Engagement Planning Memo