Keystone Computers & Networks, Inc.

Section

Purpose

Content

Objectives of the engagement

To describe the services that are to be delivered to the client.

The objectives are (1) audit of KCN’s financial statements for the year ended 12/31/X5, and (2) issuance of a letter on compliance with covenants of the client’s letter of credit agreement.

Business and Industry Conditions

To describe the current condition and business of KCN and its industry and the factors that are affecting it.

Sells and installs computers and networking hardware and software to business customers and also provides other technology services. They are very competitive and they maintain high level of expertise. They charge higher price for their products and customers are willing to pay. Future annual growth for this industry is expected to be 3 percent per year for the next three years.

Planning Meetings

To discuss when meeting were held both with client and the engagement team assigned to the audit.

On July 20th, meeting was held with personnel to discuss the planning of the audit for the current year. On August 2, a planning meeting was held with members of the engagement team performing the audit.

Ownership and Management

To describe the ownership and management of the business.

KCN is owned by five stockholders: Terry Keystone, Mark Keystone who are active members in the management of the business and John Keystone, Keith Young, Rita Young are not active in the running of the business.

Objectives, Strategies, and Business Risks

States KCN’s primary objectives, major strategies in achieving the objective and the risk involved.

Primary objectives are to increase revenues by 6 percent and increase net income by 8 percent every year for the next three years. To achieve these, there will be increased advertising, sales to customers with a higher credit risk profile and new software development. The risk involved are: the economy may suffer additional significant downturn, increased advertising may not produce the desired results, credit losses may exceed benefits of increase in sales and software development may not generate products.

Measurement and Review of Financial Performance

Describe the measure used by management to monitor the company’s performance.

These measures include: inventory and receivables turnover, aging of accounts receivable, sales and gross margins by type of revenue, net income and total inventory balance.

Procedures to Obtain an Understanding of the Clients and Its Environment

Outlines the steps taken by the engagement team assigned to the audit to understand the client and its environment.

To understand KCN, the following steps were performed: reviewing information from prior year’s audit, review of KCN’s website, review of selected articles in The Wall Street Journal, review of monthly performance reports and reading quarterly board meetings being held.  

Significant Risks

To point out KCN’s significant risks based on its information and environment.

Auditors identified that KCN has engaged in a strategy to sell to customers with higher credit risk and the officers of receive significant bonuses based on a quarterly results.

Significant Accounting and Auditing Matters

To describe the auditing and accounting matters that KCN have encountered in compliance with FASB.

These matters include: review of revenue recognition, capitalizing certain cost of development and acquisition of a small business accounting system licensed to its customers.

Planning Materiality

To determine the basis for estimating planning materiality.

Auditors concluded that’s based on KCN steady growth in the last three years and the fact that is not a public company, $300,000 has been selected as a reasonable materiality amount for planning purposes.

Scheduling and Staffing Plan

To outline the dates for the audit to be completed and the staffing requirements.

Interim work will begin on October 15th 20X5 up until the issuance of the updated management letter on March 10th, 20X6.  The staffing time requirements is 195 hours.