Audit Planning Report: Macro Appliances Inc. Risk Assessment

Accurate Auditing, Inc.
Date: May 2, 2019
To: Partner in Charge
From: Senior Staff Auditor
Subject: Client Acceptance Report

On May 4, 2019, the partner in charge requested my team to carry out a preliminary evaluation of Macro Appliances, Inc. The assessment should be conducted on inherent risks and control design of the company in order to determine its financial health and provide an opinion regarding Macro's financial statements. In response to the request, my team has carried out assessments on Macro and obtained some of its financial reports that are critical in the preliminary feasibility assessment.

Macro Appliances, Inc. is a small company that supplies a line of high-quality household appliances to its customers. With a workforce of 50 total employees including corporate officials, the company provides high-quality household appliances to residential contractors. Prior to the 2008 global financial recession, the wholesale appliance industry experienced gross sales growth at a rate of 7% annually. However, this industry was significantly affected by the recession, which resulted in a decline in sales. During this period, Macro's sales declined by 15%. The wholesale appliance industry subsequently experienced a slow economic recovery after the recession, as reflected in the annual increase in real growth rates of approximately 3%.

The appliances industry accounted for 27.8% of revenue share in 2016, with an estimated growth rate of approximately 5.4% between 2018 and 2025 (Bhandalkar & Das par. 1). During this period, the industry was valued at $43.34 billion (Grand View Research par. 1). In 2018, the household appliance industry grew by 4.5% (Wolf par. 2). Most items in this industry experienced an increase in sales of between 3.5% and 7.8%.

As real growth rates for the industry have started to increase by about 3%, Macro has begun to recover and capitalize on the market to expand its operations and profitability. Macro's opportunity for growth is also attributable to the changing lifestyle of consumers and the booming housing market. These trends are expected to enhance the growth of the company, which deals directly with contractors. The development of more houses due to the booming housing market implies that the future of Macro Appliances, Inc. looks promising.

Conducting this preliminary analysis entailed obtaining and examining the audited financial statements of Macro. My team obtained unaudited financial statements for the years ended December 2018 and 2019. These financial statements were critically studied in order to identify accounts that could have significant impacts on the company's financial health. The scrutiny of these financial statements revealed the following:

During the period between the 2018 and 2019 financial years, Macro's sales increased by approximately 20% and accounts receivable increased by 41.11%. Since the financial statements are unaudited, the growth in sales and accounts receivable could be attributable to several possibilities. It is possible that the firm's sales and accounts receivable increased because of probable inflation or because of poor strategies in the collection of receivables.

Macro also reported a dramatic increase in its sales returns from 2018 to 2019 — specifically, a 52.50% increase. This dramatic rise in the firm's sales returns requires additional scrutiny to ensure it accurately reflects Macro's financial status and health. Additionally, comprehensive scrutiny of this financial measure would help determine whether Macro is using an appropriate framework to estimate allowance for sales returns.

Macro Appliances, Inc. reported a 20.5% increase in its cost of goods sold during the same period. To account for cost of goods sold, Macro utilizes the FIFO method and ending inventory. It is necessary to examine whether the company's increase in cost of goods sold is attributable to a decline in the price of materials or to another factor in its operations.

The firm's cash and cash equivalents as well as money market funds declined by 50.71% and 49.22%, respectively, from 2018 to 2019. This raises significant concerns given that the firm's accounts receivable increased by 41.11% during the same period. It could be an indicator that Macro is selling its products to credit-unworthy clients. This implies a need to examine Macro's credit approval policy and whether its collection department is operating effectively.

The other area of concern relates to accounts payable. The firm reported a 167.36% increase in its accounts payable and a 108.33% increase in current liabilities.

The auditing process for Macro Appliances, Inc. requires getting in touch with the previous auditor, which will require authorization from the company's management. This will help obtain additional information about the qualifications, integrity, and ethics of management. Obtaining such information is essential to understanding the current internal control framework and structure of Macro. It will also ensure that Macro prepares its financial statements in accordance with current accounting regulations and principles.

Apart from contacting the previous auditor, the team will also need to obtain internal evidence by having full access to relevant financial documents. Relevant internal financial documents include receipts, checkbooks, sales orders, invoices, and purchase orders. External evidence from relevant government agencies, creditors, customers, and vendors will also be obtained and used in the auditing process. This will require management authorization and provision of contact information for vendors, customers, creditors, investors, and previous auditors.

My team will also examine the accuracy of Macro's current accounting system to ascertain that it is not a probable cause of inaccurate financial statements.

Accurate Auditing, Inc.
Macro Appliances, Inc.
May 3, 2019

Dear Mr. Partner in Charge,

This letter confirms our understanding and acceptance of the terms and objectives of the engagement.

We will audit the balance sheet of Macro Appliances, Inc. as of December 31, 2019, and the related income statements and cash flow for the year. The main objective of our audit will be to express an opinion regarding Macro's financial statements for the year ended December 2019. We understand that the financial statements are the responsibility of Macro's management team. Our responsibility as your auditor is to express a professional opinion regarding them based on our audit.

Our audit will be carried out in accordance with the International Standards on Auditing and based on Statements on Standards for Accounting and Review Services stipulated by the American Institute of Certified Public Accountants. Additionally, we will audit the financial statements in accordance with generally accepted auditing standards. These standards require that we plan and conduct the audit to obtain reasonable assurance that the financial statements are accurate and do not contain any material misstatements.

Our audit will essentially entail inquiry of the firm's personnel and analytic procedures, which will require a client representation letter from you. As part of the audit, we will obtain internal and external financial documents. Relevant internal financial documents include receipts, checkbooks, sales orders, invoices, and purchase orders. External financial documents include evidence from relevant government agencies, creditors, customers, and vendors. To obtain this evidence, we will require management authorization and provision of contacts for vendors, customers, creditors, investors, and previous auditors.

The audit will also seek to examine the current internal control structure at the company. This will help ascertain that the internal control structure is suitable and does not contribute to any material misstatement in the financial statements.

We look forward to full cooperation with your staff and trust that they will provide the relevant documentation and information requested for the purpose of the audit. Billing for the audit will be done as the work progresses and depending on the time required by assigned individuals to carry out their respective tasks.

Unless amended, superseded, or terminated, this letter will remain effective for future years. If this letter accurately expresses your understanding of the engagement, please sign the attached copy and return it to us.

We are grateful for the opportunity to serve you and hope that this will be the beginning of a long and meaningful relationship.

Sincerely,
________________________
Executive Director
Accurate Auditing, Inc.

Acknowledged on behalf of Macro Appliances, Inc. by:
___________________________ Date: _____________________

Marco Appliances, Inc. — WP B.2.1: Inherent Risk and Materiality Memo