Question

1. Willis and Adams, CPAs uses the template shown below in the "Audit Planning Memorandum" to prepare the planning memo. Some portions have already been completed or begun. Brief descriptions of what will be included in these sections of the planning memo are included for instructional purposes. For each of the memo topics that remain to be completed (suppliers and competition), you should address at least two key points about EarthWear Clothiers or the mail order clothing industry. Keep in mind that the points you identify should have important implications for the audit. Address each topic using information from the EarthWear and Willis & Adams websites, the textbook, the work papers provided in this workbook, and prior mini-cases.

EARTHWEAR CLOTHIERS
Audit Planning Memorandum
December 31, 2016

ENGAGEMENT OBJECTIVES, DELIVERABLES, AND KEY DATEs

Typically, in this section the auditors will discuss the scope of the upcoming audit. The auditor will list the deliverables that will result from their work (e.g., debt covenant letters, quaterly reviews, etc..). Lastly, the auditor will typically list or attach a schedule of when each of those deliverables will be completed.

UNDERSTANDING THE BUSINESS

A short histroy of the company is typically given in this section. Some detail pertaining to the location(s) of the business will be provided, along with an organizational chart of the company and its entities, An overview of the company's strategy may be provided as well. Related parties will be listed and an industry overview is also typically included, along with any regulatory developments which have taken/are taking place in relation to the company or industry. From a financial standpoint,preliminary analytics will be performed to provide a high-level perspective of the company's development over time and relation to the industry as a whole. Finally, this section may conclude with an initial assessment of the company as a going concern.

BACKGROUND INFORMATION

· Business Strategy and Target Customers

EarthWear Clothiers generates revenue mainly through the sale of high quality clothing for outdoor sports, such as hiking, skiing, fly-fishing, and white-water kayaking. The company’s product lines also include casual clothes, accessories, shoes, and soft luggage. The company’s key customers are the 18.8 million persons on its mailing list, approximately 6.8 million of whom are viewed as “current customers” because they have purchased from the company in the last 24 months. Market research as of January 2015 indicates that approximately 50 percent of customers are in the 35-54 age group and had a median income of $62,000. Almost two-thirds are in professional or managerial positions.

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·  Suppliers

Address at least two key points about issues relating to EarthWear clothiers'suppliers. Keep in mind that the points you identity should have important implications for understanding EarthWear as an audit client.

·  Competition

Address at least two key points about EarthWear clothiers'competitors or the mail order clothing industry. Keep in mind that the points you identity should have important implications for understanding EarthWear as an audit client.

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·  Social Factors

The company’s results can be affected by changing fashion trends.

·  Analytical Procedures

*Days Outstanding in Accounts Receivable is 3.09 and the industry average is 14.10. This ratio indicates that EarthWear collects on sales much more quickly than the rest of the industry. It also represents a significant improvement relative to prior years for EarthWear and is better than expected for this year. This ratio is consistent with a relatively low allowance for doubtful accounts. Controller explains that fast collection rate is a result of increased focus on collection activities and newly implemented incentives for early payment. We will corroborate the client's explanation as a part of our testing in the sales & collection cycle.

INTERNAL CONTROL ENVIRONMENT

In this section, the auditors will discuss the control environment, including company-level controls. Prior audit results pertaining to the control environment may also be reported, in addition to the amount of control reliance expected throughout the audit.

AUDIT SCOPE CONSIDERATIONS

Typically, in this section the auditors will discuss the scope of the procedures to be preformed. Materiality for the audit and tolerable misstatement for accounts or business processes will be established. These scoping decisions will affect audit program preparation at a more detailed level. For example,tolerable misstatement will affect sample sizes involved in tests of details, with lower levels of tolerable misstatement leading to larger sample sizes.

·  Materiality

Materiality for the 2016 audit is calculated on work paper 3-7.

COMMUNICATION AND COORDINATION

With regards to communication and coordination, the auditor will discuss how specialists/experts will be used throughout the audit. In addition, the auditor may list the locations that will be visited so that the audit may be more efficiently coordinated. Lastly, the auditor may create a review schedule so the entire audit team knows the timetable for the audit and the work that needs to be performed.

SUMMARY OF AUDIT PLAN

In this section, a summary of all the previously addresed issues will be provided key issues,such as the scope of the audit,the main risks which need to be addressed, and the schedule of the audit will all be reviewed and included.

AUDIT PLANNING MEMORANDUM APPROVALS

The audit partners and managers will sign off on the planning memo as evidence that they are in agreement as to the documented understanding of the client and its risks, as well as the scope and plan of the audit, as presented in this memorandum.

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2. In addition to the analytical procedures already listed in the memo, analyze an additional four that are useful in the planning process for the EarthWear audit. Discuss the meaning of the analytical procedures included and how they may affect your audit plan/procedures. Work Paper 3-6 and the Common Size Balance Sheet and Income Statement for EarthWear have been provided to assist you.

Analyze 4 additional analytical procedures that were completed in the planning process.

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EarthWear's Quick Ratio is 0.73 and the industry average is 0.80

Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or your planned audit procedures.

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EarthWear's Inventory Turnover is 3.88 and the industry average is 6.20

Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or your planned audit procedures.

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EarthWear's Gross Profit Percentage is 43.90% and the industry average is 38.80%

Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or your planned audit procedures.

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EarthWear's Debt to Equity ratio is 0.50 and the industry average is 0.84

Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or your planned audit procedures.

Answer 1