[Your Name]

Audit Supervisor

Crow & Co

1 July 20X5

[Engagement Partner's Name]

Crow & Co

[Address]

[City, State, ZIP]

Dear [Engagement Partner's Name],

Subject: Audit Planning for Magpie Co – Year Ending 31 July 20X5

I am writing to provide you with an overview of the audit risks identified during our planning phase
for the upcoming audit of Magpie Co for the year ending 31 July 20X5, as well as the suggested
responses to each of these risks. This information will guide us in conducting a comprehensive and
effective audit of the company's financial statements.

1. **Property, Plant, and Equipment Recognition (Risk: Moderate)**

Magpie Co has recognized $0.75 million in expenditure on store refurbishments under property,
plant, and equipment. We must assess whether these costs have been properly capitalized and
whether they meet the criteria for recognition as assets. We will:

- Inspect the refurbishment documents and invoices.

- Confirm that the expenditures meet the criteria for capitalization.

- Assess the useful life and depreciation methods applied.

2. **Sales and Receivables Recording (Risk: Moderate)**

The new sales system records all sales and receivables, but an increasing number of cash shortages
have been identified. We should ensure that sales and receivables are accurately recorded. We will:
 - Test a sample of cash register reports against actual cash counts.

- Verify the accuracy and completeness of daily sales reports.

- Investigate and reconcile any discrepancies found.

3. **Overdue Receivables (Risk: Moderate)**

The level of overdue receivables has increased, and the finance director does not intend to make
further allowances. We need to assess the adequacy of the allowance for doubtful accounts. We will:

- Review the aging of receivables.

- Evaluate the historical collection patterns.

- Consider external economic factors impacting the industry.

4. **Supplier Statement Reconciliations (Risk: Moderate)**

Differences between supplier statements and the payables ledger have been noted but not
investigated. We should ensure the accuracy of accounts payable. We will:

- Select a sample of reconciling items and perform detailed testing.

- Review the payables ledger clerk's reconciliations for completeness and accuracy.

- Investigate and reconcile discrepancies.

5. **Inventory Impairment (Risk: Moderate)**

Contaminated soil affecting a batch of plants may lead to inventory impairment. We should assess
the potential impairment and its impact on financial statements. We will:

- Obtain information on the contamination test results.

- Determine whether the contamination is likely to result in reduced inventory value.

- Assess the need for an impairment loss.

6. **Payroll Deficiencies (Risk: Moderate)**

The prior year's audit identified deficiencies in the payroll cycle. We should consider the impact of
these deficiencies on the current financial statements. We will:

- Review the improvements made to the payroll process since the last audit.

- Test a sample of payroll transactions for accuracy and compliance.

- Assess the impact of any deficiencies on financial reporting.

7. **Key Ratios (Risk: Low)**

Key ratios, including gross profit margin and receivables collection period, have shown some
variations compared to the previous year. While these variations are not extreme, we should
consider their implications for our audit approach and risk assessment. We will:

- Analyze the reasons behind the variations in key ratios.

- Assess the impact of these variations on the overall financial health of the company.

In addition to the identified risks, we will continue to assess other inherent and control risks during
our fieldwork. Our audit approach will include substantive testing, analytical procedures, and
detailed inquiries as needed to address these risks effectively.

Please feel free to reach out if you have any questions or require further clarification on the audit
planning. We will continue to keep you updated on our progress throughout the audit engagement.

Sincerely,

[Your Name]

Audit Supervisor

Crow & Co