A & A CPAs B. Company, a public company Audit Risk Assessment Memo Audit Year December 31, 20X2 Performed by: SDM Date: 9/15/20x2 Materiality Methodology: Planning materiality (PM) is determined as follows: Reviewed by: TKJ Date: 2/14/20X3 (1) For public clients, we base materiality on 6% of prior year's net income unless the client is at a loss or close to break even, in which case we base materiality on 1% of total assets. (2) For private clients, we base materiality on 1% of prior year's equity. Tolerable misstatement (TM) is set at 50% of PM. Summary of audit differences (SAD) threshold is set at 5% of PM. We will place any identified misstatements greater than our SAD threshold onto the SAD listing. During our evaluations of overall misstatements, we will compare the total of misstatements on the SAD listing to our PM threshold. Application of Methodology to Audit for 202: 20x1 Total Equity for company .: $741,409 (B.1.1) Materiality thresholds for the 20x2 audit: PM=0.01 x $741,409= $7,414 = $7,400 TM = 0.50 x $7,400 = $3,700 SAD = 0.05 x $7,400 = $370 Determine Inherent Risk, Control Risk, and Detection Risk: During the planning of the audit, including understanding the client and its environment and understanding the internal control environment, we must determine the level of inherent risk (IR), control risk (CR) and detection risk (DR). Application of IR, CR, and DR for 20X2 Alpine Audit: Our preliminary risk assessment levels are set as follows: Audit Risk Inherent risk Control risk Detection risk Low - High = Moderate = High We have set our risk assessment levels for the overall audit in order to reduce our audit risk to the appropriate level.