| Section | Purpose | Content |
| Objectives of the Engagement. | To describe the services to be rendered to the client. | The aims are to check the financial statements of KCN for the previous three years and to give a response letter based on the client’s letter of credit. |
| Trade and conditions of the business. | To analyze the condition of the industry. And business with which KNC deals. | KCN is a company that sells and provides services like the installation of computer workstations, networking software, and hardware to business customers and other IT consulting services. IT is a very competitive industry and computer products are very sensitive to market conditions. KCN’s competitive advantage lies in its favorable geographical location and expert workforce. The company expects an annual progress yearly at the rate of 3% for the following three years, in selling IT products. |
| Intends to arrange meetings. | To explain the meeting conducted with customers and the involvement group of CPA. | A meeting has been arranged with the controller and president of the KCN and another meeting with all the members of the engagement team. |
| Proprietorship and managerial work. | To explain about the managers and the proprietors of the organization. | The proprietors of KCN are Terry Keystone, Keith Young, John Keystone, Mark Keystone, and Rita Young. Terry and Mark Keystone are active members of the management. |
| Objectives, Strategies, and Business Risks | To describe the company’s goals, the main strategies, and the risks involved to reach the company’s objectives. | KCN’s main goal is to increase its revenue and net income by 6% and 8% respectively for the next three years. The major strategies of KCN are mass advertising, sales to customers on credit, and new software development. The risks associated with the business are: a downturn in the economy, predatory pricing by the competitors and software development activities, and that advertisement expenditure may not generate effective results. |
| Measurement and review of financial performance | To describe the methods and measures used by the management to evaluate the performance of the company. | Measures used by the management of the company are inventory and receivables turnover, sales and gross margins by type of revenue, aging of accounts receivable, total inventory balance, and net income. |
| Processes in gaining knowledge about the customer and the Environment. | To describe the procedures of auditors to understand the business environment and the client. | The procedures used by auditors are: analyzing information carefully from the previous year’s audit, reading the minutes of the quarterly meetings of the board of directors, reviewing the monthly performance report of the company, reviewing industry reports, going through the official website of the company, and analyzing articles published in the Wall Street Journal. |
| Audit Approach | To describe the various approaches undertaken by the auditor. | As in the previous year’s audit, CPA will execute a test of control to evaluate the control risk. |
| Significant Risks | To describe the risks noted by the auditors. | The two significant risks identified by auditors are KCN’s strategy to sell to customers on a high credit basis and the bonus received by the officers of the company on quarterly results. |
| Significant Accounting and Auditing Matters | To describe important matters in accounting and auditing. | Significant matters to be considered are the revenue recognition method for sale extended warranties and the accounting method for evaluating the cost for the software development. |
| Planning Materiality | To select a reasonable amount for estimating planning materiality. | Considering the operating result as the basis for planning materiality, an amount of $300,000 is selected for planning materiality. |
| Scheduling and Staffing Plan | To provide the schedule for the audit, and to plan staffing time requirements for the audit engagement. | Important dates are scheduled and the procedure will start with an interim audit the last step is the issuing of the updated management letter. |
