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Engagement Planning Memorandum

1. Objectives of the Engagement


The objective is to audit the financial statements of Chantal
Goods,Inc. (the Company), which comprise the statement of financial
position as at December 31, 2015, and statement of comprehensive
income, statement of changes in equity and statement of cash flows for
the year ended, and notes comprising a summary of significant accounting
policies and other explanatory information, for the purpose of expressing
an opinion on them.
In addition, the companys debt agreement with Deutsche Bank
requires the company to furnish the lender a report by our firm on the
Companys compliance with various debt covenants.

2. Background Information
Some of the more significant information and current developments
since the last examination are as follows:
The Company is engaged in the assembly/manufacturing of home
entertainment equipment consisting of television, radio and stereo sets
and domestic refrigeration appliances, which include refrigerators and
freezers. The companys main office and plant are located in Bel Air,
Manila. It maintains warehouses in Cebu, Davao, and Cagayan. The
Company is registered with the Board of Investments (BOI) under
Republic Act No. 6135 as a preferred non-pioneer enterprise for the
manufacture and export of electronic products.
The company caters largely to the domestic market through an
organized network of franchised dealers. At the beginning of the third
quarters, the Company made its first concentrated effort to sell products
internationally.
Both domestic and foreign markets are expected to increase
significantly over the next several years. The Company believes that it will
continue to be one of the leaders in industry because of its entrenched
international markets. However, market conditions in the industry are
influenced by aggressive competition.

Engagement Planning Memorandum

The company (and the industry as a whole) is dependent on


imports for some of its raw material requirements. During the current year,
the Government in cooperation with the industry approved the
implementation of the Electronics Local Content Program. This program
seeks to making mandatory the use of local raw materials and parts for
the manufacture of electronic components. In line with this program, the
Company implemented its plans for the construction of an electrolytic
capacitor plant which will eventually supply the Company and industry
require some of its raw material requirements, the Company increased its
investment in Vianca Pearl Corporation, a major supplier.
The company is also planning to expand its color TV line in
anticipation of the increase in demand for this product.
The company is listed in the local stock exchange and has
approximately 290 stockholders. The significant stockholders are Summa
Cum Laude Electronics, Inc. (21.5%) and Study, Inc. (15%). The combined
ownership of directors and officers amounts to approximately 20%.
The Board of Directors consists of three Company officers, seven
outside directors and the Companys legal counsel. The Boards regular
meetings are held every month where detailed financial and operating
information is reviewed. Special meetings are called whenever there are
urgent matters to be acted upon
In April 2015, Ms. Cynthia Cavalida resigned as a Company
Comptroller and Mr. J. Ponce was hired to take his place. The other
members of the management team are: Chantal Styles, president; Allan
Viray, executive vice president-finance and administration, and Manolo
Cruz, corporate secretary. As part of our initial planning efforts, we met
with the members of the management team to discuss the Company
operations and results to date.
Each of the above officers is included in the Companys profit
sharing plan covering managerial employees. The management group
represents an experienced and knowledgeable team concerned about
growth and stability of the Company. The team is known to be
conservative in spite of the fact that the operating results affect their
directly.

Engagement Planning Memorandum

Diagram 1: Corporate Structure

3. Work that will require specialist assistance


In accordance with PSA 620, the firm will consult the following experts:
1.)
2.)
3.)
4.)

Actuaries: to evaluate pension and other postretirement benefits


Engineers: to estimate useful lives of equipment
Attorneys: to interpret legal agreements
Appraisers: to value real estate

4. Risk Factors
Based on our understanding of the clients business and industry, our
observations from the preliminary review of the interim financial
statements and our evaluation of the audit identified in last years audit,
we have determined that there are no special audit risks associated with
the general business or management environment. However, we have
identified the following areas that require special accounting and auditing
emphasis:
1.) Historically, inventories have been a critical area in the audit
examination because of its materiality. Raw materials and finished
goods inventories are characteristically susceptible to
obsolescence caused by factors such as rapid technological
advances in the industry and extensive product development
activities resulting in the introduction of new models and new
features for existing product lines. Because of these conditions,
certain of the Companys products have been moving very slowly.
Closely attention will have to be given to the reliability of these
products, including related raw materials and work in process.
2.) The Company procures some of its raw material requirements from
ABC Corporation, an affiliate. To provide for a reliable source of
raw material supply, the Company at the beginning of the year
purchased from a third party an additional equity interest of 20% in

Engagement Planning Memorandum

this company thereby increasing the level of its ownership to 30%.


With this additional investment, the Company gained a seat in the
Board and is now in a position to exercise significant influence over
the affairs of the investee. The company has decided to adopt the
equity method of accounting for this investment. We should take up
this matter with the management and arrange to have audited
financial statements in time for the completion of the audit. This
accounting change may require restatement of prior years financial
statements and also changes in the wordings of the report and
notes to financial statements. Additionally, we should scrutinize
very closely transactions with this affiliate and ensure that these
are carried out on arms length basis
3.) The company has obtained additional long-term debt during the
current year to finance the construction of the electrolytic capacitor
plant. The agreement covering the loan contains provisions relating
to the maintenance of current and debt to equity ratios. Based on
the June 30, 2015 interim financial statements; the margin of
compliance with these covenants was very narrow. If the company
continues with its capital expenditure program and if the plans for
the increase in capitalization do not materialize, certain provisions
of the loan agreement could be violated. The company is currently
negotiating an amendment of the credit agreement and at the
same time finalizing plans to increase its authorized capital stock.
We should carefully review the terms of the loan agreement and
any amendment thereto and determine whether the Company is in
compliance with the provisions of the agreement.

4.) Deliverables
The following are the final output to be submitted to the users:

Annual Audited Financial Statements


Annual Income Tax Return
Supplementary Report to SEC
Management Letter

Engagement Planning Memorandum

5.) Proposed Timetable; Staffing and Allocation of Roles


a. Timetable : The following are tentative dates of importance
pertaining to the audit engagement:
Understanding
and
Preliminary
Evaluation of
Internal Control
System
Compliance Testing (Interim test
period will cover January 1
September
15,
2-15
transactions)
Insurance of Management Letter on
Preliminary Work

August 1 15, 2015

Inventory Observation

December 31

Confirmation of Receivables as of
October 31

November 15

Completion of Field Work

February 15, 2016

Discussion of Financial Statements


Draft with client

February 28

Issuance of Financial Report

March 15

Submission of Management Letter on


Final Work

March 31

Filing of Final Income Tax Return with


the BIR

April 5

Filing of Financial Statements and


Supplementary Schedules with
SEC

April 5

Various dates Starting


August 16
September 30

Engagement Planning Memorandum

b: Staffing and Allocation of Roles


The individuals who will be assigned to the engagement are the following:
Partner in Charge
Vianca Pearl Amores
Manager

Genesis Aguilar

Staff in Charge

Edward Aquino

Assistants

Edel Castillo
Philip Reyes
Arturo Manansala
Joselito Ang

6.) Engagement Approach


Our audit approach is a risk-based one, informed by our understanding of
the Boards business and the accounting and the internal control systems
as well as our assessment of the risks associated with the financial
statements. A risk-based approach identifies, categorizes, and prioritizes
risk. The highest priority is allocated a greater proportion of the firms
resources. As a part of our audit, we will determine the extent to which we
can rely on detailed control procedures and managements monitoring
activities to prevent or detect specific material misstatements and address
all potential errors by conducting walk through tests of all the identified
significant audit areas. Where it is found that the accounting systems and
controls are sound, we will seek to take audit assurance from them. In
respect of those significant audit areas where either the controls dont
exist or are weak, further substantive procedures are designed.

Prepared by:
G. AGUILAR
Manager
Approved by:
V. Amores
Engagement Partner