Audit Team Deliverable 1

Josh Thomas, Audit Senior, has asked you to research the retail and wholesale backpack
industries and write a memo to file on your results. Your report will form part of the overall
understanding of Alpine Bags' structure and its environment.

Understand the Business

You should concentrate your research on providing findings from those areas that have a
financial statement impact and are considered probable given Alpine Bags' operations. In
conducting your research, you should consider the following key market forces, as they relate
to Alpine Bags' operations.

The section on understanding the business should consider:

• General and industry specific economic trends and conditions
• Competitive environment
• Product information
• Customer information
• Supplier information
• Technological advances and the effect of the Internet
• Laws and regulatory requirements

And be prepared in a table with the following headings:

• Potential risk – description
• Accounts impacted
• Assertions
• Level of inherent risk

Calculate Materiality

W&S Partners' audit methodology dictates that one planning materiality (PM) amount is to be
used for the financial statements as a whole. Further, only one basis should be selected—a
blended approach or average should not be used. The basis selected is the one determined to
be the key driver of the business.
W&S Partners uses the following percentages as starting points for the various bases.
Base Threshold (%)
Profit before tax 5.0
Revenues 1.0
Total assets 1.0
Equity 3.0

These starting points can be increased or decreased by taking into account qualitative client
factors, which could be:
• the nature of the client's business and industry (such as rapid change, either through
growth or downsizing, or unstable environment)
• the fact that it is a publicly listed entity (or subsidiary of one) subject to regulations
• the knowledge of or high risk of fraud.

Typically, profit before tax is used; however, it cannot be used if the entity is reporting a loss for
the year or if profitability is not consistent.

When calculating PM based on interim figures, it may be necessary to annualize the results.
This allows the auditor to properly plan the audit based on an approximate projected year-end
balance. Then, at year end, the figure is adjusted, if necessary, to reflect the actual results.
Note: Adjustments to the starting points are made by an experienced auditor using their
professional judgement. The aim is to set PM at a high enough level that appropriately balances
the amount of testing, while still keeping the audit risk to an acceptable level.

W&S Partners also dictates that performance materiality be determined for each audit
engagement. Performance materiality is an amount less than planning materiality that reduces
the likelihood that any uncorrected and undetected misstatements within a class of
transac�ons, account balances, or disclosures in aggregate exceed overall planning materiality.
W&S Partners' policy is to use 70 percent of planning materiality to determine performance
materiality.

Document your materiality calcula�on in a working paper. An example of a materiality working

paper can be found in appendix 1 to these instruc�ons
Fraud Risk and Control Risk

Write a memo to file documen�ng fraud risk, the overall control environment, any inherent risks, and
conclude on your overall assessment of audit approach.
Appendix 1
Materiality working paper example.