Audit Planning Memorandum for Zoom Snowboards

The Audit Planning Memorandum for Zoom Snowboards Inc. outlines significant engagement issues, risks, and recommended materiality for the upcoming audit. It highlights the need for improved corporate governance and internal controls due to recent changes in management and operational structure. The document emphasizes the importance of monitoring financial statements for potential misstatements, particularly in the context of the company's evolving business environment.

Running head: AUDIT PLANNING MEMORANDUM
Audit Planning Memorandum
Student’s Name:
University Name:
Author Note

1AUDIT PLANNING MEMORANDUM
Date:
To: Partner
From:
Re: Planning for the year end, June 30, 2011 of Zoom Snowboards Inc.:
Engagement Overview
The purpose of this memo is to document significant engagement issues and especially
identifies the matters relevant to an upcoming audit committee meeting. The key users of the
financial statements are the bank, the investors, the board of directors, and Zoom management.
The partner who has taken the initiative for preparing an audit planning memorandum did
provide the information that the board of directors of the organization is very keen on improving
the corporate governance of the company. Further information has been provided that in the year
of 2009, when the bank had increased the operating line of Zoom, it came into light again that
the company had a weak governance structure. This was the reason for which the board had
decided to recruit new members in order to form an audit committee (Carcello and Joseph V). In
spite of all these issues the board still placed their trust on Emma and Bill to inform the board
about the various issues that the company is facing. Due to the growth boom that Zoom is facing
currently, it makes it difficult for the issues to be investigated. Thus the board is of the opinion
that it should take more initiatives in their role without having to depend on the information
received from Gages’. Thus it is clear from the overview that the board of directors do not have
much reliance on the financial statements and has suggested stronger corporate governance
(Vînatoru, Sandu and Calotă).

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Engagement Risk
The risk involved in the engagement with Zoom Inc. is quite high because there has been
many changes in the company in the recent past, starting from recruiting new audit committee
members, changing the operating structure of the company, employing a new internal auditor
responsible for auditing the internal controls and internal management and also employment of
action sports media company, TAS Inc. Some other factors to consider are that there is also a
concern regarding the integrity of the management because Zoom Inc. though performing great,
is putting the extra burden of pressure on its work force. Employees have to work overtime in
order to comply with the huge pressure of work. There have also been repeated complaints on
the part of the board regarding corporate governance, but no action has been taken by the
management in order to eliminate the issue or improve the quality of corporate governance
(Jones and Joanne ).
The audit experience of the prior year has not been great due to the poor sales season
during Christmas, which forced Zoom to reduce the price on apparel but not on snowboards.
Further major issues that rose was the arrival of the new pricing policy and uncertainty of the
upcoming demand that made the management to take crude decisions like restructuring the entire
operating structure which lead to salary cuts and laying off of employees. A good decision of the
management that is worth mentioning is that the founders Bill and Emma eliminated the
provision of their own salaries that is a sum total of $250000. Pay cuts were mostly experienced
by the individuals who had high salaries and people obtaining lower amounts of salaries
experienced lower percentages of pay cuts.

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Recommended Materiality
The recommended materiality should be such that if any account in general is misstated
by that amount then that will not affect the quality of the financial statements. For instance the
cost of sales account as seen in the balance sheet has decreased in the year of 2011 drastically.
Therefore the materiality for such an account should be specific since the probability of
misstatement of such an account is huge and should be monitored with utmost care. Another
account can also be found from the balance sheet namely licensing fees account which is created
for the year of 2011 only. Sometimes in order to evade tax the accounts are also misstated that is
accounts are either understated or overstated. Therefore materiality should be implemented both
generally and specifically (Sutradher and Kumar).
Financial Reporting Risks of Material Misstatement
The primary risk indicator is reduction in net profit incurred by the firm and this is due to
the fact that the arrival of the new pricing policy, poor percentage of net sales in the season of
Christmas and uncertainty in the upcoming demand is the most important reason for the risk. The
inventory of apparel has also increased rapidly indicating a probability of misstatement thus
should cross checked and investigated. All the accounts in general should be under the limit of
materiality and should be checked thoroughly in order to make sure no fraud is committed
(Gregory ., et al). The account that inevitably fall under the risk of material misstatement is the
Inventories Account. The Inventories Account balance has three balances in the three
consecutive years which are not nearby figures. For an instance the balance for the accounts for

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the financial years 2009, 2010 and 2011 are $6742, $7945, $10859. This may be an inherent risk
or control risk. An inherent risk is the risk that arises due to the material misstatements in the
books of accounts due to reasons other than control risks. Control risks on the other hand is the
risk of material misstatements that occur due to poor internal control inside the organization. The
risk of material misstatements suspected in the inventories account is most probably a control
risk. This is because there has been a lot of changes in the recent past both in the operational
structure as well as the auditing committee of the company. This indicates that the company is
not at a stable position thus it is quite reasonable that they will be no such internal control inside
the firm. A legible solution to this issue is hiring an effective internal control auditor. The
amount of materiality should also be calculated by the auditor which is the average of all the
nominal accounts that is accounts vulnerable to material misstatements.

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References
Carcello, Joseph V. "What do investors want from the standard audit report?." The CPA Journal
82.1 (2012): 22.
Griffith, Emily E. "How do auditors use valuation specialists when auditing fair values?."
(2015).
Jones, Joanne C. "Zoom Snowboards Incorporated: Understanding the impact of management
decisions on the audit plan." Issues in Accounting Education Teaching Notes 27.4 (2012): 50-83.
Sutradher, Gouranga Kumar. "'Audit Materiality-It's Practices; Does It Meet the Expectations of
Stakeholders?”." (2012).
Trompeter, Gregory M., et al. "A synthesis of fraud-related research." Auditing: A Journal of
Practice & Theory 32.sp1 (2012): 287-321.
Vînatoru, Sorin Sandu, and George Calotă. "PRELIMINARY ACCEPTANCE OF THE
ENGAGEMENT ACTIVITIES." Internal Auditing & Risk Management 10.2 (2015).