ACCT 406 Auditing

The partner on your audit engagement would like you to prepare an audit planning memorandum that addresses significant engagement issues and specifically identifies the matters relevant to an upcoming audit committee meeting. In order to prepare the memo, you reviewed the financial statements (Exhibit 1) and have consulted last year’s audit file (Exhibit 2), the partner’s notes from a recent meeting with Emma and the CFO (Exhibit 3), and findings of the interim procedures.

Using the background information from the case, as well as Exhibits 1, 2, 3, and 4, prepare the audit planning memorandum requested by the partner (see the Appendix below for an outline of how to prepare an audit planning memorandum). Be sure to address any other significant engagement issues and consider the impact on the financial statement audit.

Please Note: In order to complete your planning memo, you are expected to perform both quantitative and qualitative analysis. You are also expected to research the relevant accounting and audit standards, if necessary. While Zoom Snowboards is a Canadian company in the case, we are going to assume that Zoom Snowboards is a U.S. company.

Requirement

Bear in mind that the partner on this engagement is also responsible for many other client engagements. Consequently, while you should endeavor to be direct and succinct in your memo, you should avoid assuming that the partner will fully recall all relevant facts, or that she will immediately recognize all important implications of those facts. In short, be sure to describe the specific facts that you consider relevant and explain the implications for the engagement.

Re: Planning for the year end, June 30, 2011 of Zoom Snowboards Inc.:

Engagement Overview

The purpose of this memo is to document significant engagement issues and especially identifies the matters relevant to an upcoming audit committee meeting. The key users of the financial statements are the bank, the investors, the board of directors, and Zoom management. The partner who has taken the initiative for preparing an audit planning memorandum did provide the information that the board of directors of the organization is very keen on improving the corporate governance of the company. Further information has been provided that in the year of 2009, when the bank had increased the operating line of Zoom, it came into light again that the company had a weak governance structure. This was the reason for which the board had decided to recruit new members in order to form an audit committee (Carcello and Joseph V). In spite of all these issues the board still placed their trust on Emma and Bill to inform the board about the various issues that the company is facing. Due to the growth boom that Zoom is facing currently, it makes it difficult for the issues to be investigated. Thus the board is of the opinion that it should take more initiatives in their role without having to depend on the information received from Gages’. Thus it is clear from the overview that the board of directors do not have much reliance on the financial statements and has suggested stronger corporate governance (Vînatoru, Sandu and Calot?).

Engagement Risk

The risk involved in the engagement with Zoom Inc. is quite high because there has been many changes in the company in the recent past, starting from recruiting new audit committee members, changing the operating structure of the company, employing a new internal auditor responsible for auditing the internal controls and internal management and also employment of action sports media company, TAS Inc. Some other factors to consider are that there is also a concern regarding the integrity of the management because Zoom Inc. though performing great, is putting the extra burden of pressure on its work force. Employees have to work overtime in order to comply with the huge pressure of work. There have also been repeated complaints on the part of the board regarding corporate governance, but no action has been taken by the management in order to eliminate the issue or improve the quality of corporate governance (Jones and Joanne ).

The audit experience of the prior year has not been great due to the poor sales season during Christmas, which forced Zoom to reduce the price on apparel but not on snowboards. Further major issues that rose was the arrival of the new pricing policy and uncertainty of the upcoming demand that made the management to take crude decisions like restructuring the entire operating structure which lead to salary cuts and laying off of employees. A good decision of the management that is worth mentioning is that the founders Bill and Emma eliminated the provision of their own salaries that is a sum total of $250000. Pay cuts were mostly experienced by the individuals who had high salaries and people obtaining lower amounts of salaries experienced lower percentages of pay cuts.

Recommended Materiality

The recommended materiality should be such that if any account in general is misstated by that amount then that will not affect the quality of the financial statements. For instance the cost of sales account as seen in the balance sheet has decreased in the year of 2011 drastically. Therefore the materiality for such an account should be specific since the probability of misstatement of such an account is huge and should be monitored with utmost care. Another account can also be found from the balance sheet namely licensing fees account which is created for the year of 2011 only. Sometimes in order to evade tax the accounts are also misstated that is accounts are either understated or overstated. Therefore materiality should be implemented both generally and specifically (Sutradher and Kumar).      

Financial Reporting Risks of Material Misstatement

The primary risk indicator is reduction in net profit incurred by the firm and this is due to the fact that the arrival of the new pricing policy, poor percentage of net sales in the season of Christmas and uncertainty in the upcoming demand is the most important reason for the risk. The inventory of apparel has also increased rapidly indicating a probability of misstatement thus should cross checked and investigated. All the accounts in general should be under the limit of materiality and should be checked thoroughly in order to make sure no fraud is committed (Gregory ., et al). The account that inevitably fall under the risk of material misstatement  is the Inventories Account. The Inventories Account balance has three balances in the three consecutive years which are not nearby figures. For an instance the balance for the accounts for the financial years 2009, 2010 and 2011 are $6742, $7945, $10859. This may be an inherent risk or control risk. An inherent risk is the risk that arises due to the material misstatements in the books of accounts due to reasons other than control risks. Control risks on the other hand is the risk of material misstatements that occur due to poor internal control inside the organization. The risk of material misstatements suspected in the inventories account is most probably a control risk. This is because there has been a lot of changes in the recent past both in the operational structure as well as the auditing committee of the company. This indicates that the company is not at a stable position thus it is quite reasonable that they will be no such internal control inside the firm. A legible solution to this issue is hiring an effective internal control auditor. The amount of materiality should also be calculated by the auditor which is the average of  all the nominal accounts that is accounts vulnerable to material misstatements.

References

Carcello, Joseph V. "What do investors want from the standard audit report?." The CPA Journal 82.1 (2012): 22.

Griffith, Emily E. "How do auditors use valuation specialists when auditing fair values?." (2015).

Jones, Joanne C. "Zoom Snowboards Incorporated: Understanding the impact of management decisions on the audit plan." Issues in Accounting Education Teaching Notes 27.4 (2012): 50-83.

Sutradher, Gouranga Kumar. "'Audit Materiality-It's Practices; Does It Meet the Expectations of Stakeholders?”." (2012).

Trompeter, Gregory M., et al. "A synthesis of fraud-related research." Auditing: A Journal of Practice & Theory 32.sp1 (2012): 287-321.

Vînatoru, Sorin Sandu, and George Calot?. "PRELIMINARY ACCEPTANCE OF THE ENGAGEMENT ACTIVITIES." Internal Auditing & Risk Management 10.2 (2015).