Auditing Practice and Theory

This document is a planning memorandum of audit for Roots Corporation, a lifestyle brand. It discusses the importance of auditing the company's books, risk assessment, areas of risk, audit approach, materiality level, and suggestions for a successful audit.

Auditing practice and theory

Planning Memorandum of Audit
Date: April 30, 2019
To: Audit team
From: Steve, engagement manager
Regarding: Roots Corporation
Introduction: It is decided to audit the books of Roots Corporation. There are several factors which
should be considered while conducting the audit of this company. The memo will lay some important
strategy to audit the books of Roots Corporation for the interim financial statements which are
consolidated for the week 13th and 39th ending 3rd November 2018.
Company information: Roots is a brand in lifestyle which is engaged in delivering products such as
leather goods, footwear, apparel, accessories to its customer through online or through stores. The number
of retail stores of Roots in Canada is 118 and in the United States, there are seven retail stores. They also
have 115 stores in Taiwan and 33 stores in China. The shares of Root corporations are listed on Toronto
stock exchange and its symbol is “ROOT”.
Risk assessment: Root is a worldwide famous brand and is serving its customers for 45 years with its
different products. Root is earning its revenue worldwide by selling its products. Our team will be
assessing the different types of risk such inherent risk, control risk, detection risk, audit risk. In the year
2018, among the four quarters of the year, the first three-quarters of Root corporations have experienced
weakness in its sales trends. The main motive of this audit would be to analyze how the company
manages to increase its sales. As the Canadian market is a volatile market our audit team should analyze
the measures that Root corporations have taken to eradicate the risk. Due to these negative results in the
sales of the company, our team will be carrying out the audit of sales and gross profit portion of the
company. We will see that the company is complying with the rules of IFRS correctly.
Review of areas of risk: The audit risk generally occurs when a misstatement has been identified which
is material in any account balance or transactions; it can also be due to failure of internal control in
inventory management. As the stock of the company has increased so our audit team will not focus on
inventories management. The cash of the company has been dropped due to the seasonal ups and downs
of the business. Our team will be checking the cash flow statement from different activities. We will
check the internal controls of the company are good or not. We will also check the areas where the fraud
or errors can be done which could affect the financial statement of company. The earnings before interest
and tax of Roots Corporation in the first two quarters of the year 2018, was also negative. Earnings before
interest and tax are the revenue earned before depreciation, interest, and tax. The company is also doing
business in other countries as well so it might face the risk of foreign exchange fluctuations. So, our audit
team will see whether the company has done hedging to mitigate the risk of fluctuations to an extent. In
the third quarter, the company has shown amortization of lease of Canadian $407 thousands. Our audit
team will audit the cash flow statements of the company for the year 2018. Cash flow statements are
statements which give the information's of cash inflow and outflow of the company
Audit Approach; Our team will apply the approach of business risk so that the audit can be done
smoothly and effectively. We will also the substantive procedure and compliance procedure so that the
material misstatement which can be detected in the financial statements of the company. As the company
is engaged in the business of selling footwear, apparels, leather goods, accessories, we will be auditing

on the expenses, sales, earnings before interest and tax, gross profit of the company. We will do the
expenditure audit of the company as well as the revenue before interest and tax audit of the company. It
has been observed that the selling, administration, general expenses of the company has gone up by 4.1%
as compared to previous year third quarter expenses. So, we will check whether the company is doing
proper accounting of the income and expenditure of the company. The company adjusted earnings before
interest and tax have been reduced by 37.4% in comparison to the previous year third quarter. So, our
audit team will check whether the company is doing a proper accounting of the total income of the
company earned by the company after giving all the interest and taxes. We will apply analytical
procedures as the current year net income, gross profit has been decreased.
Materiality level; The materiality level for retail business should be 5% to identify the misstatement in
the balance sheet or profit and loss account or in cash flow or fund flow of the company.
Preliminary analytics; It has been analyzed that the earnings before interest and taxes have fallen down
by $ 10 million as compared to the previous year third quarter. The adjusted net income also fell down by
$4.7 million as compared to the previous year third quarter. So, our team will compare the financial
position of ROOTS competitors and also the industry ratios. The financial position of the same industry
should be compared.
Suggestions: It is observed that it is very important to have as much information about the company we
are going to audit. I will suggest to check the internal controls of the company as well as the third
confirmation from the third relating to the account payable and receivables balance and also to confirm
the bank statement with the banks. We will make sure where the company is complying with the rules of
the Canadian GAAP and also maintain the financial accounts of the company in accordance with the
IFRS. We will also see that the management of the company is not using any measures which are NON-
IFRS so that the management can eliminate the effect of certain income and expenses.

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