110-550 Sample audit planning memorandum

(Note: This sample Audit Planning Memorandum is in respect of a manufacturing company.

The sample should be used strictly as an "Example" only and be tailored to cover key risk
areas in other industries. It should also highlight critical audit areas that may be specific or
unique to individual companies.)

XYZ Sdn Bhd

AUDIT PLANNING MEMORANDUM

Year Ended 31 December 2009

1. PRINCIPAL ACTIVITIES

The principal activities of the Company are the manufacture and sale of chemicals,
adhesives and sealant for the construction and automotive industries. There have been no
significant changes in the client's business during the year.

2. SIGNIFICANT ACCOUNTING AND AUDITING ISSUES

2.1 Stocks

2.1.1 Costing and valuation

Stocks are costed using the weighted average basis, and includes all the relevant
direct materials, packing materials and overhead absorbed. We will review the
costing of the closing stocks as at year end, including client's basis for the absorption
of production overheads during the year end audit.

2.1.2 Obsolescence

As at 30 June 2009, approximately 2% (2008: 2%) of total stocks have been placed
under quarantine. These items represent stocks which are slow moving, damaged or
nearing expiration. The Company's procedures in identifying stocks placed under
quarantine are described in the relevant audit working paper/ schedule. We will, at
year end, ensure that there is adequate provision for stock obsolescence at year end
taking into account the shelf life of the products.
2.1.3 Stockcount

A stockcount was carried out on 31 May 2009. The net variances between the
physical count and the stock records was RM XX which represents 0.14% of gross
stocks. We noted that the largest variance, on an individual stock item basis, was RM
XX.

We will attend the year end stockcount expected to be in December 2009 and review
the Stock Variance report resulting from this stockcount to ensure that there are no
material stock variances and that any variances have been properly adjusted in the
accounts.

We will also ensure that any damaged stocks (other than those placed under
quarantine) are separately identified during the stockcount and compiled accordingly,
with appropriate write-off effected in the year-end accounts.
2.2 Trade Receivables

The average debtor turnover ratio noted as at 30 June 2009 was approximately 180 days
(2007: 161 days). This indicates a possible slowdown in collections and also the existence of
additional doubtful debts for this period. The total provision of doubtful debts as at 30 June
2009 has increased to RM XX (2008: XX), being 43% (2008: 43%) of total trade receivables,
which also includes a general provision of RM XX (15% of net trade receivables' balance,
after specific provision).

In view of the above and the inherent risk of this account, we will review the trade
receivables aging and ensure that adequate provision for doubtful debts has been made for
long outstanding or doubtful debts at year end. We will also assess whether the general
provision made in the accounts is conservative, and not excessive, taking into account
factors such as the current economic conditions and the effects on the industry in which the
client operates in, the average aging of the debts, etc.

2.3 Income Tax

Tax assessments have been agreed by the Inland Revenue Board (IRB) up to YA07. As
noted in the previous year, there is a potential overprovision of tax of approximately RM XX,
in relation to YA08 and YA09, which has not been adjusted then, pending agreement by IRB
to the revised tax computation for YA08 and YA09 tax computation. We will conduct a review
of the Company's income tax status at year end to update the tax position of the Company,
and determine any adjustments required for any over/under provision of taxation in the prior
years.

2.4 Other Matters

2.4.1 Dividends payable

The shareholder, (name of shareholder), has proposed to waive the dividends of RM

XX million in respect of the financial years ended 31 December 2006 and 2007.
Instead it is to be satisfied by way of a bonus issue in lieu of cash payments. We will
sight the relevant approvals, including that from the Malaysian Industrial
Development Authority (MIDA) at year end and ensure that proper disclosures are
made in the accounts. An update will be obtained on the situation during final audit to
determine any further disclosures required.
 2.4.2 Restructure of equity

Noted in the prior years that, due to the limitation of RM XX million placed on its
shareholders' funds by MITI (under the manufacturing licence), the Company was
considering long term measures to overcome this restriction placed. Management
had however deferred any restructuring plans in recent years in view of the economic
slowdown.

In October 2003, client had obtained a confirmation from MIDA that under the new
liberalisation policy (effective 31 July 2008 to 31 December 2010), client's possible
new expansion to be financed by an estimated equity injection of RM XX million to
RM XX million from its holding company would not be limited by the RM XX million
threshold.

We would review the status of any restructuring plans at year end, for appropriate
disclosure to be made in the accounts.

3. OVERALL ANALYTICAL REVIEW

Annualised 2009 2008 Variance

RM’000 RM’000 RM’000 %
Turnover 19,904 23,000 ↓ 3,906, 13
Cost of Sales (9,728) (12,415) ↓ 2,687, 22
Gross profit 10,176 10,585 ↓ 509, 4
GP Margin 51% 46% ↑ 5%
Operating Expenses (9,147) (9,619) ↓ 472, 5
Profit before Tax (PBT) 1,029 966 ↑ 63, 7
Profit before Tax - margin 5% 4% ↑ 1%

The annualised turnover as compared to last year has decreased, mainly due to the lower
demand from the construction industry. Generally, the GP margin has increased as
compared to previous year, as there were sales of expiring stocks below cost to related
companies in 2008.
Operating expenses mainly comprise of salaries and related expenses, depreciation,
provision for doubtful debts, royalties and interest charges payable to inter-companies. Due
to the semi-fixed nature of some expenses, the PBT margin has increased marginally.

4. CONTROL ENVIRONMENT

The Company's structure of data processing has not undergone any significant changes
during the year. It uses the 'Distribution System' software, which is a widely distributed
software modified to meet the client's need.

The Financial Controller and Managing Director review the monthly management accounts.
The holding company also monitors the monthly results against that budgeted. The
Company has a multi-tiered organisation structure with distinct lines of reporting and
responsibilities.

Based on our review, no significant changes have occurred in the overall control
environment and we continue to assess it as effective.

5. AUDIT PLAN AND STRATEGY

We will update all the significant routine applications (Sales, Purchases, Receipts, Payments
and Production Systems) and perform walk-through tests on each application. On a
rotational basis, we have performed compliance testing on the Sales and Purchase systems
during the interim audit. For items below the tolerable error limit, only a high level review will
be done during the audit, which includes agreeing the balances to the General Ledger and
obtaining comments from the client.

6. PLANNING MATERIALITY

As in previous year, 10% PBT is used for PM. Based on the low number of audit differences
noted in the previous year, the TE is set at 75% of PM and Schedule of Audit Differences
("SAD") is at 33.3% of the TE.

2009 (annualised) 2008

RM’000 RM’000
Planning Materiality (PM) – 10% PBT: 103 97
Tolerable Error (TE) – 75% PM: 77 73
SAD – 33.3% TE: 26 25

We will not carry audit differences below RM 26K to the SAD.

7. DELIVERABLES

By 31 July 2009: Interim limited review report by fax*

End of week 2, 2010 Sales information by fax*
Share capital by fax*
Earnings of managing director by mail*
End of week 4, 2010 Standard forms and consolidation
questionnaire*
End of week 5, 2010 Auditor’s report
Management letter
Letter of Representation
Local report for annual general meeting

* Requested by the parent company overseas.

Prepared by:
(Senior)

Reviewed by:
(Senior Manager)

Approved by:
(Partner)