Audit Planning Memo Assignment

Memo A: Industry Description and Summary

Create a concise memo (no more than two pages in length) that describes your chosen industry. Some examples of information include the following:

• Describe the industry. Provide examples of industry products or services. Describe a generic or illustrative business model for companies in this industry.

o How do companies in this industry make money? Are there operational or design characteristics that are unique to this industry?

• What are some basic financial characteristics of companies in this industry? What are the largest assets for most companies in this industry? What are the largest liabilities? Where do the companies earn/spend the most each period?

Memo B: Industry Leaders

• Choose your “client” and another three of the Fortune 1000 companies in your industry, and search FactSet or the SEC’s EDGAR site for relevant company-specific information. Include a brief table in your memo that reports the following for each company:

o Company name

o Ticker symbol

o Stock exchange

o Chief Executive Officer

o Chief Financial Officer

o Chair of the Audit Committee (Hint: Look at the company’s most recent DEF-14A.)

• For each of the most recent three years, include a table in your memo with the following financial data:

o Total assets

o Total revenues

o Total expenses

o Pre-tax income

o Current assets

o Current liabilities

• For the most recent year, include the following information about the external auditor for each of the four firms in your chosen industry:

o Information from the PCAOB’s Form AP (use the Auditor Search tool)

 External audit firm

 Engagement partner

 Financial statement date

 Audit report date

 Number of firms providing 5% or greater of total audit hours

 Number of firms providing less than 5% of total audit hours

o Information from the DEF-14A (Proxy Filing)

 Audit fees (Audit fees, audit-related fees, tax fees, and other fees)

Memo C: Industry / Client Ratio Analysis

Auditing standards require the auditor to perform preliminary analytical procedures as part of the planning stage of an audit. These procedures generally consist of high-level trend analyses of various meaningful financial-statement ratios, and the auditor seeks to identify trends, correlations, or other patterns that might warrant particular attention during the audit.

Report the results of at least three relevant ratios over a five-year period (including the most recent year-end) to help illustrate important trends. Some examples include Current Ratio, Debt-to-Equity, Net Income before Taxes/Net Sales, Cash from Operations/Total Liabilities. (You may identify other ratios of particular interest to your industry or company.)

You should examine the intra-company trends (i.e., over time) for your client, and you may also choose to illustrate an industry comparison of each ratio (i.e., how your client compares to an average of its competitors). You should briefly summarize the results of your analysis and any findings of interest.

Memo D: Determine Planning Materiality

Create a concise memo (no more than one page in length) that documents your consideration and determination of planning materiality for your client. For example, you should briefly discuss which accounts might be considered as a basis for materiality, what conventional ranges are for percentages of each account (see your textbook or class notes), which account you would recommend for use as the basis for planning materiality, and then show a likely range for planning materiality.

** This step is typically performed using unaudited financial information for the current year. Since you won’t have access to that information, you should retroactively determine what planning materiality likely would have been for each of the past three years by examining the past three years of audited financial statement information (see Memo B). **

Memo E: Industry and Client-specific Risks

Create a concise memo (no more than two pages) that describes inherent business risks to the industry and your client. For example, does the industry deal with inventory obsolescence issues, fluctuating prices on raw materials, legal liability exposure, high elasticity of demand, thin profit margins, aggressive competition, etc?

You should cite current events and industry/client news (see FactSet, WSJ, or other sources for business news) that are likely to have an influence on your client’s business operations and, as a result, on their financial reporting for the period.

Briefly describe three significant business risks and the specific impact each risk may have on your client’s financial reporting process. You should tie the business risks to operational impacts and ultimately to risks of material misstatement on specific financial statement accounts. (For example, if your client has been in the news recently for having especially poor sales of a new product, you might expect that to affect Revenues and Inventory accounts for the client.)

NB// Charts and graphs can be used in this assignment

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