TO: Partner

FROM: CPA
RE: Audit Planning Memo

RISK

The following are overall risks of materiality misstatement:

• Rapid Growth - There has been doubling sales each month leading to less focus on
controls, procedures, policies as the business attempts to keep up with the growth. This
can lead to errors within the financial statements therefore increasing risk of material
misstatement.
• First year of operations - since this is the first year of operations, management is not
experienced in developing and applying accounting policies. This can lead to errors
within the financial statements therefore increasing risk of material misstatement.
• New bookkeeper - since they have little experience, this can lead to errors within the
financial statements therefore increasing risk of material misstatement.
• Untested System - Revenue being recorded heavily relies on the system, there have
been many crashes that could lead to inaccurate recording of revenue, therefore
increasing risk of material misstatement

The overall financial statement level risk is assessed as high.

APPROACH

Given this is the first year of operations, we are required to obtain an understanding of the
design of the controls.

Given that there are high volume and routine transactions, we as the auditors would want to
take a combined approach to the auditor. However, we cannot test the IT controls because we
are past year end.

Given that there are a lot of control weaknesses such as that in the IT system, and given that
we are not able to test it, we will take a substantive approach.

If there are good controls, then for those controls, we can test them and take a combined
approach.

However, for the controls that are determined weak, we will take a substantive approach.

There is a third party that hosts Coupon’s database. We will need to obtain additional
information based on the controls in place at that organization.

INTERNAL USE
MATERIALITY

The users of the financial statements are

• Hadi & Nevada - interested in growing the company and determining performance
• Vendors - interested in performance before engaging in business with the company
• Potential investors (banks) - ability to pay back and bank loans issued/performance
• Purchasers of coupons - performance of company to make sure validity of their coupons

We will calculate materiality based on 5% on net income.

5% x 917,450 = $45,872.5
• We selected net income as the users are interested in company performance
• We selected the lower range of net income due to the sensitivity of users

Performance materiality will be calculated at 65% of performance materiality, the users are
more sensitive because of first year of ops and system crashes.\
45,872.50 x 65% = 29,817.13

PROCEDURE

Risk Assertion Procedure

There is a risk of Occurrence, Accuracy
overstatement of revenue as
Coupon has recorded
revenue when received
instead of when the voucher
is redeemed.
There is a risk of
understatement of consulting
expenses as it has been
difficult for Coupon to track all
of the payments.
There is a risk of
understatement of A/P
expenses as it has been
difficult for Coupon to track all
of the payments.
Completeness, Accuracy
Completeness, Valuation
Obtain a sample of revenue
from the GL, vouch it to
supporting voucher sales
invoices and inspect when
the voucher was redeemed
(may need to obtain another
listing for redemption).
Obtain a sample of consulting
invoices (or bank statements)
and trace the amount from
the bank statement/invoice
back to the GL to ensure it
has been recorded.
Obtain a sample of
subsequent bank statements
after year end and trace them
to consulting invoices (or
bank statements) and trace
the amount from the bank
statement/invoice back to the
GL to ensure it has been
recorded as an expense, and
outstanding at year end.
Obtain a sample of IT
contractors that worked with

INTERNAL USE

There is a risk of
understatement of the
litigation of existing lawsuit
the company throughout the
year and send out A/P
confirmations.
Completeness, Valuation Send a legal letter to
Coupon’s lawyers to inquire
about all outstanding
liabilities. Trace them back to
the G/L to ensure they have
been recorded.
Discuss with management
the likelihood of
settlement/payout and
determine reasonableness of
estimate.
INTERNAL USE
INTERNAL USE