answer questions 4,5,6

hello , the questions 4,5,6 are the questuons using the information i provided .. only write out whatever info is found . also question 6 to write out a memo stating a clear message on what you find

and Foster Audit Plan. a. Hey wish Q4. Evaluate other aspects of the Audit Risk Assessment memo (workpaper B.2.1.) In particular, review the auditors' application of the audit risk model and brainstorming processes. Describe any problems you find and provide suggestions for improvement. Identify and document any additional problems you discover with the memo. This question relates to Step 3 of the Garcia and Foster Audit Plan. Q5. Evaluate the preliminary analytical procedures completed by Garcia and Foster, CPAS (workpapers B.3.1 to B.3.3.) This question relates to Step 2 of the Garcia and Foster Audit Plan. Determine if the analyses of account fluctuations were appropriately performed and completed (workpapers B.3.1 and B.3.2). Review the explanations of account fluctuations provided by the auditors. Describe any problems you identify. Determine if the ratio analysis (workpaper B.3.3) was appropriately performed and completed. 2. Review the explanations of ratio fluctuations provided by the auditors. Describe any problems you identify Q6. Prepare a memo to document your understanding of Alpine Cupcakes environment and provide your assessment of Garcia and Foster's audit risk. Describe the specific risks for Alpine Cupcakes, explain why you believe these factors relate to the Alpine Cupcakes audit, and identify which specific accounts are likely to be affected by these risks. Describe how the audit teams should address the risks identified. For example, the background information mentions that sugar prices may rise. What risks would this present to Alpine Cupcakes? Which accounts would be affected by this risk? How should the audit team address these risks in the audit plan? perin Coren b. (1) For public clients, we base materiality on 6% of prior year's net income unless the clients at a los We will place any identified misstatements greater than our SAD threshold onto the SAD sting During our evaluations of overall misstatements, we will compare the total of misstatements on the SAD ng to Alpine Audit Risk Assessment Audit Year December 31, 20x2 PM Reviewed by: TKJ Date: 2/14/2003 Gandia and Foster, CPA Sachs Performed by: SDM Date: 9/15/20 Materiality Methodology: Planning materiality (PM) is determined as follows: 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 our PM threshold Application of Methodology to Alpine Audit for 20X2: 200 Total Equity for Alpine Cupcakes, Inc.: 5743,409 (B.1.1) Materiality thresholds for the 20x2 audit: Faso = 50 PM = 0.01 * 5742,409= 57,41457,400 2,10 TM -0.50 * 57,400 = 53,700 1,050 SAD = 0.05 * 57.400 = 5370 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 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 Low - High Moderate High Detection risk We have set our risk assessment levels for the overall audit in order to reduce our audit risk to the appropriate level. Audit Year Reviewed by: 7 Date: 2/14/20X3 Performed by: SDM Date: 9/15/20 Fraud Brainstorming To comply with PCAOB ASC 2110, identifying and Assessing Risks of Material Misstatement, the firm requires all engagement team personnel to be involved in a brainstorming session, during which team members exchange ideas about how and where the client's financial statements may be susceptible to material misstatement due to fraud, Pull we sides j thens stould be anche Documentation As required, Tryg Johnson and I conducted a fraud brainstorming session on February 6, 20X3. Overall we find the client to be highly ethical. Owner Alexis Madison has the highest integrity and has strong ties to the community. Tryg and I concluded that there was little or no risk of material misstatement due to fraud at Alpine and no accounts for which fraud was a concern Simon Malik Tryg Johnson Understanding of Client's Environment Including Internal Controls: We reviewed the client's background information retained in our PERM FILE workpapers to understand the 7 company and its inherent risk. We will also perform an understanding of internal controls over the client's processes prior to our test of control procedures (see audit program.) Through performing preliminary analytical procedures, we also assessed any significant changes within the company's accounts and activities (see WPS B.3.1 through B.3.3.) Per discussion with Alexis Madison, there are no significant changes within the company beyond the consideration of issuing debt. SDM 3 Account Balances and Transaction Risk Assessment: Per our review of the account balances and transactions, we have assessed a higher level for the risk of material misstatement in the following accounts: Inventory (due to inventory price fluctuations) Revenue (potential fictitious sales could lead to overstated revenues) Accounts Receivable (potential fictitious sales transactions could lead to AR overstatement) We believe that there is a higher likelihood for material misstatements in these accounts. SDM Overall Risk Assessment Summary: Based on our preliminary analytical procedures, and knowledge of the client, we assess inherent risk as high and control risk as moderate, making detection risk high. Simon Malik Barcia and Foster Audit Workpaper 45 B.2.1: pg. 2 of 120% Preliminary Analyti Audit Mar December 31, As of 12/31/20x1 $ Change As of 3/31/2002 *7.15% Current Assets Cash Storefront Cash Corporate Accounts $125,49876 293,72R03 123.432.43 122,849.12 2,379.00 4,277.00 25.190.66 1,423.05 3,340.30 $702,618.35 $135,135.15 210.019.06 124,726.15 193,976,31 2,604.00 4,713.00 25,580.09 1,190.10 3,260.80 $701,204.66 (8,636.39) 84,708 97 (293.72) (70,127.19 775.00 1,06400 610.52 1,232.95 1,079.50 22.5% 103.60% 33.11% Office Supplies Cooking Supplies Inventory Ingredients Inventory Cole Boxes and Cupcake Cups Inventory: Beverages Total Current Assets Long-Term Assets Equipment Accumulated Depreciation: Equipment Plant & Property Accumulated Depreciation: Plant & Proprty Land Total Long-Term assets Total Assets 150,180.00 150,180.00 (82,455.00) (78,828.00) 330,000.00 330,000.00 (82,500.00) 179,200.00) 125,000.00 125,000.00 440,225.00 $447,152.00 $1,142,843.35 $1,148,356.66 0.00 3,627.00 0.00 3,300.00 0.00 0.00% 4.60% 0.00% 4.17% 0.00% -33.315 3 0.00% (12,844.70) 0.00 (16,878.18) (13,125.00) (1,588.32) (2,322.78) -44.27% 4 -100.00% 5 -0.54% -9.34% Liabilities $25,712.00 38,556.70 Accounts Payable 0.00 0.00 Wage Taxes Payable 21, 247.78 38,125.96 Corporate Income Tax Payable 0.00 13,125.00 Dividends Payable Mortgage Payable 290,673.81 292,262.13 Notes Payable: Vehicles 22,555.53 24,878.31 Total Liabilities 360,189.12 $406,948.10 Stockholders' Equity Common Stock, Par value $1.00; Authorized 1,000,000; Issued and outstanding 50,000 shares 50,000.00 50,000.00 Additional Paid in Capital 120,075.91 120,075.91 Retained Earnings 612,578.32 571,332.65 Total Stockholders' Equity 782,654.23 $741,408.56 Total Liabilities and Stockholders' Equity $1,142,843.35 $1,148,356.66 F -The fluctuation is less than TM (523,700) and less than a 10% change. - Footed 1000 arcia and Foster Audit Workpaper 46 0.00 0.00 41,245.67 0.00% 0.00% 7.225 Pos 10% Charge} B.3.1: Pg 1012 Alpine Cupcakes, Inc. Preliminary Analytical Procedures ---Balance Sheets Audit Year December 31, 20x2 7.15% 9:18 Reviewed by K 10/9/2010 We discussed the fluctuation in the cash accounts with Miguel Lopez, Store Manager and Cash Receipts Accounting. He stated that cash fluctuates drastically depending on the timing of cash receipts and disbursements. The company tries to keep less cash in the storefront account and more cash in the operating account to earn more interest. The company has not had a significant purchase in the past year, so the overall cash balance has significantly increased. The company plans to purchase some new cooking equipment in the next year to expand the business and take on some new accounts. In addition, the company has paid down some debt 2. We discussed the lower AR balance from prior year with Lisa Thomas, Corporate Sales Representative. She noted that the company has seen a slight decline in Corporate Sales primarily due to having two customers reducing their purchases in 20x2. These two customers are Luigi's Bistro and Mountain Lion Restaurant. In addition, the Company has made new efforts to collect from its customers in a timelier manner. If a customer does not pay in 30 days, Alpine calls the customer weekly to discuss and requests payment as soon as possible. 3. We discussed changes in Accounts Payable with Lindsay McKenna. She noted that the company experienced a slight dip in purchase prices and the amount of purchases in 01 20x2 in all of the vendors' accounts except for Mountain Dairy Company. The company expects sales to increase in O2, so that payables will be in line with previous year activity with vendors. Milk prices have been increasing, so there is a concern that the cost of production will go up with milk and potentially sugar costs throughout 20x2. In addition, Lindsay stated that this change in the account is immaterial to the company's financial statements and is a reasonable fluctuation in this type of business 4 - Per discussion with Miguel Lopez, the company paid the income tax payable amount of s38,125.96 from 04 in 2011 on January 14, 20x2. The new balance of $21, 247.78 relates to the first quarter 20x2 income tax expense. The company pays its income taxes on a quarterly basis. 5- Miguel stated that the dividends payable was paid in the first quarter 20x2 on April 24, 20x2 to Wasatch Range Trust. The company pays the dividends on an annual basis. 2,3,5 ewery Diones Aprit dy would be on the second quarch for doritos Paythole. kouple that dort should tsknore support Hoa thy epast fearly [new-old/ma arcia and Foster Audit Workpaper 47 B 3.1 Cambridge Business Publishers Performed by: Alpine Cupcakes, Inc. SDM 10/1/20x2 Preliminary Analytical Procedures-Balance Sheets Reviewed by: Audit Year December 31, 20X2 TKJ 10/9/20X2 1 - We discussed the fluctuation in the cash accounts with Miguel Lopez, Store Manager and Cash Receipts Accounting. He stated that cash fluctuates drastically depending on the timing of cash receipts and disbursements. The company tries to keep less cash in the storefront account and more cash in the operatin account to earn more interest. The company has not had a significant purchase in the past year, so the overa cash balance has significantly increased. The company plans to purchase some new cooking equipment in th next year to expand the business and take on some new accounts. In addition, the company has paid down some debt. 2. We discussed the lower AR balance from prior year with Lisa Thomas, Corporate Sales Representative. She noted that the company has seen a slight decline in Corporate Sales primarily due to having two customers reducing their purchases in 20x2. These two customers are Luigi's Bistro and Mountain Lion Restaurant. In addition, the Company has made new efforts to collect from its customers in a timelier manner. If a custome does not pay in 30 days, Alpine calls the customer weekly to discuss and requests payment as soon as possit 3. We discussed changes in Accounts Payable with Lindsay McKenna. She noted that the company experience slight dip in purchase prices and the amount of purchases in 01 20x2 in all of the vendors' accounts except fo Mountain Dairy Company. The company expects sales to increase in Q2, so that payables will be in line with previous year activity with vendors. Milk prices have been increasing, so there is a concern that the cost of production will go up with milk and potentially sugar costs throughout 20x2. In addition, Lindsay stated tha this change in the account is immaterial to the company's financial statements and is a reasonable fluctuati in this type of business. 4 - Per discussion with Miguel Lopez, the company paid the income tax payable amount of $38,125.96 from Q4 20x1 on January 14, 20x2. The new balance of s21,247.78 relates to the first quarter 20x2 income tax expens The company pays its income taxes on a quarterly basis. 5-Miguel stated that the dividends payable was paid in the first quarter 20x2 on April 24, 20x2 to Wasatch Ran Trust. The company pays the dividends on an annual basis. 2,3,5 pe werey Dlones Aprit dy would be on the econd quarch for dorita live up parthol. pouple that dort . should ask hore Support How they expset fearly [new-old/may by SOM 101/2003 Reviewed by TKJ 10/9/20X2 Alpine Cupcakes, Inc. Preliminary Analytical Procedures-Quarterly Income Statements Audit Year December 31, 20x2 /8.1.2 3 Months Ended 03/31/20X2 3 Months Ended 03/31/20x1 S Change % Change 1 1 Revenue Sales Revenue: Corporate Accounts Sales Revenues Storefront Total Sales Revenue Cost of Goods Sold: Ingredients Cost of Goods Sold: Boxes and Cupcake Cups Cost of Goods Sold: Beverages Total COGS Gross Profit Interest Revenue Gross Profit Plus Interest Revenue $353,739.57 $343,050.56 (10,689.01) 80,649.00 91,411.50 (10,762.50) 434,388.57 434,462.06 66,736.39 64,645.64 3,875.55 3,755.55 5,466.50 5,681.50 76,078,44 74,082.69 358,310.13 360,379.37 89.00 65.00 358,399.13 360,444.37 (73.49) 2,090.75 120.00 (215.00) 1,995.75 -3.12% -11.77% -0.01% 3.23% 3.20% -3.78% 2.69% 24.00 36.92% -0.49% -0.59% -52.63% 2 0.00% -4.78% Expenses Wage Expense Wage Tax Expense Medical Insurance Expense Auto Insurance Expense Interest Expense Electrical & Gas Service Expense Liability Insurance Expense Telecommunications Expense Cell Phone Service Expense Postage Expense Professional Services Expense Maintenance Expense Office Supplies Expense Dry Cleaning Expense Storefront Paper Supplies Expense Rental Expense Naste Services Expense 216,719.00 17,971.24 8,100.00 1,035.00 3,996.90 1,523.20 3,768.40 472.50 912.00 139.50 2,070.00 1,212.00 8,050.00 398.75 778.25 4,752.00 217,791.00 18,077.94 17,100.00 1,035.00 4,197.69 1,708.00 3,693.60 462.00 933.00 135.90 2,122.50 1,132.00 7,342.00 416.15 869.00 4,752.00 150.00 (1,072.00) (106.70) 19,000.00) 0.00 (200.79) (184.80) 74.80 10.50 (21.00) 3.60 (52.50) 80.00 708.00 (17.40) (90.75) 0.00 0.00 -10.82% 2.03% 2.27% -2.25% 2.65% -2.47% 7.07% 9.64% -4.18% -10.44% 0.00% 0.00% 150.00 und Foster Audit Workpaper Cambridge Business Publishers Performed by SOM 10/1/20 Reviewed by IKT 10/9/20X2 Alpine Cupcakes, Inc. Preliminary Analytical Procedures - Quarterly Income Statements Audit Year December 31, 20X2 18.1.2 3 Months Ended 03/31/20X2 3 Months Ended 03/31/20x1 $ Change % Change Expenses (continued) Car Maintenance and Fuel Expense Repair Expense Water Expense Soda Machine Repair and CO2 Expense Credit Card Expense Cooking Supplies Expense Banking Fees Selling and Administrative Expenses Depreciation Expense: Equipment Depreciation Expense: Plant & Property Total Depreciation Expense Total Expenses 995.38 372.50 378.75 1,156.00 878.31 12,704.00 445.00 288,978.68 3,627.00 3,300.00 6,927.00 295,905.68 1,026.78 381.25 373.75 1,128.00 897.89 11,858.00 445.00 (31.40) (8.75) 5.00 28.00 (19.58) 846.00 0.00 -3.06% -2.30% 1.34% 2.48% -2.1896 7.1396 0.00% 298,028.45 4,152.00 3,300.00 7,452.00 305,480.45 (525.00) 0.00 -12.64% 0.00% Earnings Before Income tax Income Tax Expense Net Income 62,493.45 21,247.78 $83,741.23 54,963.92 18,683.66 $73,647.58 2.564.12 13.72% 7. Auditor Notes The fluctuation is less than TM ($2.700) and less than a 10% change. F-Footed 19,050 1 - The Company has seen decreases in both their corporate and storefront sales. The Company has experienced a decrease in birthday party and holiday orders leading to the decline in storefront sales. Most customers order these items a week before the event and pick them up in the store. The decrease in corporate accounts revenue is primarily due to two customers, Luigi's Bistro and Steinberg Delis. The Company expects corporate sales to pick up through the rest of the year. 2. We discussed the change in the medical insurance expense account with Lindsay McKenna. Lindsay said the increase in medical insurance expense from prior year is due to accidentally paying $3,000 more on each check that was written to Blue Cross Blue Shield in Q1 of 20X1. The Company received a refund of 39,000 from the medical insurance company in April 20X due to the mistakes in payments. Tcia and Foster Audit Workpaper 49 Alpine Reviewed by TK 10/9/2012 Preliminary Analytical Procedures-Ratio Anal Audit Year December 31, 20X2 nuk: thy should hare looking the Katos kry from As, ma, ma Company Ratios 3/31/20X2 3/31/20x1 % Change 7.094 60.1% 1, 11 360 10.875 6.696 62.4% 1, 2.879 2.150 33.9% 2, 126.760 169.745 -25.3% 2, 2.540 2.506 1.4% V. 143.710 145.654 -1.3% V. 4.710 4.865.43 -3.2% VH 0.095 0.084 0.036 0.036 0.053 0.060 0.274 0.330 0.400 0.540 Current Ratio Quick Ratio Receivables Turnover Pays Outstanding in Receivables inventory Turnover pays of Inventory on Hand Gross Profit Percentage Profit Margin Return on Assets Return on Equity Debt to Assets Debt to Equity 2 0.82 Comportestle/ 13.1% 3 0.0% V. -11.7% 9H -17.0% 5. -25.9% 5. Account Rec? March 20x1 Avg 5.55 4.50 2.97 (150.08 1.62 Max 13.76 12.45 Current Ratio Quick Ratio Receivables Turnover Days Outstanding in Receivables Inventory Turnover Days of Inventory on Hand Gross Profit Percentage Profit Margin Return on Assets Return on Equity Debt to Assets Debt to Equity Industry Ratios March 20X2 Min Max Avg 1.05 15.30 5.70 0.77 14.00 4.54 1.28 5.68 2.66 64.30 285.43 159.54 0.24 3.95 1.51 92.29 1525.44 458.39 0.01 0.49 0.33 -0.09 0.10 0.11 -0.03 0.04 0.04 -0.04 0.23 0.08 0.00 0.74 0.19 -0.05 1.76 0.58 Min 2.02 1.06 1.09 82.83 0.20 87.88 0.10 -0.09 -0.02 -0.16 441 54 333.76 4.15 1830.71 0.48 1.02 0.31 0.02 0.01 -0.04 021 9.26 0.29 0.67 0.55 3.99 0.00 0.00 Auditor Notes Calculation includes current portion of mortgage payable and notes payable based on client's amortization schedule. On 3/31/20X2, the current portions of the mortgage and notes payables are 56,555.19 and $8,337.88, respectively. On 3/31/20X2, the current portions of the mortgage and notes payables are $6,236.12 and 59,103-75, respectively. Fluctuation meets expectations of being less than a 10% change. The 20X2 ratio is within the expected range (between the min and max) of the industry data. and Foster Audit Workpaper 50 B.3.3. pg. 10/2 Auditor Notes (continued) Ratio Calculations Short-term (ST) Liquidity Ratios: Ability to Meet ST Obligations Current Ratio - Current Assets + Current Liabilities Quick Ratio (Current Assets - Inventories) + Current Liabilities Activity Ratios: How Effectively Assets Are Managed Receivables Turnover = Credit Sales Receivables Days Receivables Outstanding = 365 + Receivables Turnover Inventory Turnover = COGS + Inventory Days Inventory on Hand = 365 + Inventory Turnover Profitability Ratios Gross Profit Percentage = (Sales - COGS) + Sales? Profit Margin = Net Income + Net Sales Return on Assets - Net Income + Total Assets Return on Equity = Net Income - Total Stockholder's Equity Coverage Ratio: Long-Term Solvency (Ability of Entity to Continue as a Going Concern) Debt to Assets - (ST Debt + LT Debt) + Total Assets Debt to Equity - (ST Debt +LT Debt) + Stockholders' Equity 1- The current ratio and quick ratios increased significantly primarily due to an increase in corporate cash of 236,658 (293.728 - 57,070) (B.1.1) from 3/31/20X1 to 3/31/20X2. As noted in our balance sheet analysis (B.2.2), Miguel Lopez says cash fluctuates drastically depending on the timing of cash receipts and purchases. The company has not made any major purchases in the past year, but plans to make some purchases in 20x3. In addition, the current liabilities in 20x2 have decreased from 3/31/20X1 primarily due to the timing of paying accounts payable balances and the timing of purchases 2- The Company is collecting its receivables more quickly than it has in prior years. Per our discussion with Lisa Thomas, the Company is taking additional steps to have customers pay in a more timely manner by improving customer relationships and calling customers weekly when the customers have past due balances, 3. The Company's profit margin has increased since prior year due to increases in storefront sales and decreases in the Company's selling and administrative expenses. Per discussion with Miguel Lopez, the Company has seen great growth and has performed well in relation to the industry competitors, largely because the Company has built its reputation for quality and has maintained good relationships with vendors to keep costs down. 4 - The company's ROE is significantly lower than prior year. We have requested a time to meet with Miguel Lopez to discuss the difference in this ratio in comparison to our expectations. 5- The company's debt to assets and debt to equity ratios have decreased from prior year due to the decrease in the long-term liabilities, along with the decreases in current accounts payable (due to timing of purchases and payments of liabilities). Garcia and Foster Audit Workpaper 51 B.3 3.29 (1) For public clients, we base materiality on 6% of prior year's net income unless the client statt We will place any identified misstatements greater than our SAD threshold onto the SAD sting During our evaluations of overall misstatements, we will compare the total of misstatements on the SAD ng to Alpine Audit Risk Assessment Audit Year December 31, 20x2 Reviewed by: TKJ Date: 2/14/2003 Ps o Gandia and Foster, CPA Sets Performed by: SDM Date: 9/15/20 Materiality Methodology: Planning materiality (PM) is determined as follows: 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 our PM threshold Application of Methodology to Alpine Audit for 20X2: 2014 Total Equity for Alpine Cupcakes, Inc.: 5741,409 (B.1.1) Materiality thresholds for the 20x2 audit: PM = 0.01 * 5742,409= 57,41457,400 2,10 TM -0.50 * 57,400 = 53,700 16,050 SAD = 0.05 * 7.400 = 5370 5350 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 for ( 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. and Foster Audit Plan. a. Hey wish Q4. Evaluate other aspects of the Audit Risk Assessment memo (workpaper B.2.1.) In particular, review the auditors' application of the audit risk model and brainstorming processes. Describe any problems you find and provide suggestions for improvement. Identify and document any additional problems you discover with the memo. This question relates to Step 3 of the Garcia and Foster Audit Plan. Q5. Evaluate the preliminary analytical procedures completed by Garcia and Foster, CPAS (workpapers B.3.1 to B.3.3.) This question relates to Step 2 of the Garcia and Foster Audit Plan. Determine if the analyses of account fluctuations were appropriately performed and completed (workpapers B.3.1 and B.3.2). Review the explanations of account fluctuations provided by the auditors. Describe any problems you identify. Determine if the ratio analysis (workpaper B.3.3) was appropriately performed and completed. 2. Review the explanations of ratio fluctuations provided by the auditors. Describe any problems you identify Q6. Prepare a memo to document your understanding of Alpine Cupcakes environment and provide your assessment of Garcia and Foster's audit risk. Describe the specific risks for Alpine Cupcakes, explain why you believe these factors relate to the Alpine Cupcakes audit, and identify which specific accounts are likely to be affected by these risks. Describe how the audit teams should address the risks identified. For example, the background information mentions that sugar prices may rise. What risks would this present to Alpine Cupcakes? Which accounts would be affected by this risk? How should the audit team address these risks in the audit plan? perin Coren b. (1) For public clients, we base materiality on 6% of prior year's net income unless the clients at a los We will place any identified misstatements greater than our SAD threshold onto the SAD sting During our evaluations of overall misstatements, we will compare the total of misstatements on the SAD ng to Alpine Audit Risk Assessment Audit Year December 31, 20x2 PM Reviewed by: TKJ Date: 2/14/2003 Gandia and Foster, CPA Sachs Performed by: SDM Date: 9/15/20 Materiality Methodology: Planning materiality (PM) is determined as follows: 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 our PM threshold Application of Methodology to Alpine Audit for 20X2: 200 Total Equity for Alpine Cupcakes, Inc.: 5743,409 (B.1.1) Materiality thresholds for the 20x2 audit: Faso = 50 PM = 0.01 * 5742,409= 57,41457,400 2,10 TM -0.50 * 57,400 = 53,700 1,050 SAD = 0.05 * 57.400 = 5370 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 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 Low - High Moderate High Detection risk We have set our risk assessment levels for the overall audit in order to reduce our audit risk to the appropriate level. Audit Year Reviewed by: 7 Date: 2/14/20X3 Performed by: SDM Date: 9/15/20 Fraud Brainstorming To comply with PCAOB ASC 2110, identifying and Assessing Risks of Material Misstatement, the firm requires all engagement team personnel to be involved in a brainstorming session, during which team members exchange ideas about how and where the client's financial statements may be susceptible to material misstatement due to fraud, Pull we sides j thens stould be anche Documentation As required, Tryg Johnson and I conducted a fraud brainstorming session on February 6, 20X3. Overall we find the client to be highly ethical. Owner Alexis Madison has the highest integrity and has strong ties to the community. Tryg and I concluded that there was little or no risk of material misstatement due to fraud at Alpine and no accounts for which fraud was a concern Simon Malik Tryg Johnson Understanding of Client's Environment Including Internal Controls: We reviewed the client's background information retained in our PERM FILE workpapers to understand the 7 company and its inherent risk. We will also perform an understanding of internal controls over the client's processes prior to our test of control procedures (see audit program.) Through performing preliminary analytical procedures, we also assessed any significant changes within the company's accounts and activities (see WPS B.3.1 through B.3.3.) Per discussion with Alexis Madison, there are no significant changes within the company beyond the consideration of issuing debt. SDM 3 Account Balances and Transaction Risk Assessment: Per our review of the account balances and transactions, we have assessed a higher level for the risk of material misstatement in the following accounts: Inventory (due to inventory price fluctuations) Revenue (potential fictitious sales could lead to overstated revenues) Accounts Receivable (potential fictitious sales transactions could lead to AR overstatement) We believe that there is a higher likelihood for material misstatements in these accounts. SDM Overall Risk Assessment Summary: Based on our preliminary analytical procedures, and knowledge of the client, we assess inherent risk as high and control risk as moderate, making detection risk high. Simon Malik Barcia and Foster Audit Workpaper 45 B.2.1: pg. 2 of 120% Preliminary Analyti Audit Mar December 31, As of 12/31/20x1 $ Change As of 3/31/2002 *7.15% Current Assets Cash Storefront Cash Corporate Accounts $125,49876 293,72R03 123.432.43 122,849.12 2,379.00 4,277.00 25.190.66 1,423.05 3,340.30 $702,618.35 $135,135.15 210.019.06 124,726.15 193,976,31 2,604.00 4,713.00 25,580.09 1,190.10 3,260.80 $701,204.66 (8,636.39) 84,708 97 (293.72) (70,127.19 775.00 1,06400 610.52 1,232.95 1,079.50 22.5% 103.60% 33.11% Office Supplies Cooking Supplies Inventory Ingredients Inventory Cole Boxes and Cupcake Cups Inventory: Beverages Total Current Assets Long-Term Assets Equipment Accumulated Depreciation: Equipment Plant & Property Accumulated Depreciation: Plant & Proprty Land Total Long-Term assets Total Assets 150,180.00 150,180.00 (82,455.00) (78,828.00) 330,000.00 330,000.00 (82,500.00) 179,200.00) 125,000.00 125,000.00 440,225.00 $447,152.00 $1,142,843.35 $1,148,356.66 0.00 3,627.00 0.00 3,300.00 0.00 0.00% 4.60% 0.00% 4.17% 0.00% -33.315 3 0.00% (12,844.70) 0.00 (16,878.18) (13,125.00) (1,588.32) (2,322.78) -44.27% 4 -100.00% 5 -0.54% -9.34% Liabilities $25,712.00 38,556.70 Accounts Payable 0.00 0.00 Wage Taxes Payable 21, 247.78 38,125.96 Corporate Income Tax Payable 0.00 13,125.00 Dividends Payable Mortgage Payable 290,673.81 292,262.13 Notes Payable: Vehicles 22,555.53 24,878.31 Total Liabilities 360,189.12 $406,948.10 Stockholders' Equity Common Stock, Par value $1.00; Authorized 1,000,000; Issued and outstanding 50,000 shares 50,000.00 50,000.00 Additional Paid in Capital 120,075.91 120,075.91 Retained Earnings 612,578.32 571,332.65 Total Stockholders' Equity 782,654.23 $741,408.56 Total Liabilities and Stockholders' Equity $1,142,843.35 $1,148,356.66 F -The fluctuation is less than TM (523,700) and less than a 10% change. - Footed 1000 arcia and Foster Audit Workpaper 46 0.00 0.00 41,245.67 0.00% 0.00% 7.225 Pos 10% Charge} B.3.1: Pg 1012 Alpine Cupcakes, Inc. Preliminary Analytical Procedures ---Balance Sheets Audit Year December 31, 20x2 7.15% 9:18 Reviewed by K 10/9/2010 We discussed the fluctuation in the cash accounts with Miguel Lopez, Store Manager and Cash Receipts Accounting. He stated that cash fluctuates drastically depending on the timing of cash receipts and disbursements. The company tries to keep less cash in the storefront account and more cash in the operating account to earn more interest. The company has not had a significant purchase in the past year, so the overall cash balance has significantly increased. The company plans to purchase some new cooking equipment in the next year to expand the business and take on some new accounts. In addition, the company has paid down some debt 2. We discussed the lower AR balance from prior year with Lisa Thomas, Corporate Sales Representative. She noted that the company has seen a slight decline in Corporate Sales primarily due to having two customers reducing their purchases in 20x2. These two customers are Luigi's Bistro and Mountain Lion Restaurant. In addition, the Company has made new efforts to collect from its customers in a timelier manner. If a customer does not pay in 30 days, Alpine calls the customer weekly to discuss and requests payment as soon as possible. 3. We discussed changes in Accounts Payable with Lindsay McKenna. She noted that the company experienced a slight dip in purchase prices and the amount of purchases in 01 20x2 in all of the vendors' accounts except for Mountain Dairy Company. The company expects sales to increase in O2, so that payables will be in line with previous year activity with vendors. Milk prices have been increasing, so there is a concern that the cost of production will go up with milk and potentially sugar costs throughout 20x2. In addition, Lindsay stated that this change in the account is immaterial to the company's financial statements and is a reasonable fluctuation in this type of business 4 - Per discussion with Miguel Lopez, the company paid the income tax payable amount of s38,125.96 from 04 in 2011 on January 14, 20x2. The new balance of $21, 247.78 relates to the first quarter 20x2 income tax expense. The company pays its income taxes on a quarterly basis. 5- Miguel stated that the dividends payable was paid in the first quarter 20x2 on April 24, 20x2 to Wasatch Range Trust. The company pays the dividends on an annual basis. 2,3,5 ewery Diones Aprit dy would be on the second quarch for doritos Paythole. kouple that dort should tsknore support Hoa thy epast fearly [new-old/ma arcia and Foster Audit Workpaper 47 B 3.1 Cambridge Business Publishers Performed by: Alpine Cupcakes, Inc. SDM 10/1/20x2 Preliminary Analytical Procedures-Balance Sheets Reviewed by: Audit Year December 31, 20X2 TKJ 10/9/20X2 1 - We discussed the fluctuation in the cash accounts with Miguel Lopez, Store Manager and Cash Receipts Accounting. He stated that cash fluctuates drastically depending on the timing of cash receipts and disbursements. The company tries to keep less cash in the storefront account and more cash in the operatin account to earn more interest. The company has not had a significant purchase in the past year, so the overa cash balance has significantly increased. The company plans to purchase some new cooking equipment in th next year to expand the business and take on some new accounts. In addition, the company has paid down some debt. 2. We discussed the lower AR balance from prior year with Lisa Thomas, Corporate Sales Representative. She noted that the company has seen a slight decline in Corporate Sales primarily due to having two customers reducing their purchases in 20x2. These two customers are Luigi's Bistro and Mountain Lion Restaurant. In addition, the Company has made new efforts to collect from its customers in a timelier manner. If a custome does not pay in 30 days, Alpine calls the customer weekly to discuss and requests payment as soon as possit 3. We discussed changes in Accounts Payable with Lindsay McKenna. She noted that the company experience slight dip in purchase prices and the amount of purchases in 01 20x2 in all of the vendors' accounts except fo Mountain Dairy Company. The company expects sales to increase in Q2, so that payables will be in line with previous year activity with vendors. Milk prices have been increasing, so there is a concern that the cost of production will go up with milk and potentially sugar costs throughout 20x2. In addition, Lindsay stated tha this change in the account is immaterial to the company's financial statements and is a reasonable fluctuati in this type of business. 4 - Per discussion with Miguel Lopez, the company paid the income tax payable amount of $38,125.96 from Q4 20x1 on January 14, 20x2. The new balance of s21,247.78 relates to the first quarter 20x2 income tax expens The company pays its income taxes on a quarterly basis. 5-Miguel stated that the dividends payable was paid in the first quarter 20x2 on April 24, 20x2 to Wasatch Ran Trust. The company pays the dividends on an annual basis. 2,3,5 pe werey Dlones Aprit dy would be on the econd quarch for dorita live up parthol. pouple that dort . should ask hore Support How they expset fearly [new-old/may by SOM 101/2003 Reviewed by TKJ 10/9/20X2 Alpine Cupcakes, Inc. Preliminary Analytical Procedures-Quarterly Income Statements Audit Year December 31, 20x2 /8.1.2 3 Months Ended 03/31/20X2 3 Months Ended 03/31/20x1 S Change % Change 1 1 Revenue Sales Revenue: Corporate Accounts Sales Revenues Storefront Total Sales Revenue Cost of Goods Sold: Ingredients Cost of Goods Sold: Boxes and Cupcake Cups Cost of Goods Sold: Beverages Total COGS Gross Profit Interest Revenue Gross Profit Plus Interest Revenue $353,739.57 $343,050.56 (10,689.01) 80,649.00 91,411.50 (10,762.50) 434,388.57 434,462.06 66,736.39 64,645.64 3,875.55 3,755.55 5,466.50 5,681.50 76,078,44 74,082.69 358,310.13 360,379.37 89.00 65.00 358,399.13 360,444.37 (73.49) 2,090.75 120.00 (215.00) 1,995.75 -3.12% -11.77% -0.01% 3.23% 3.20% -3.78% 2.69% 24.00 36.92% -0.49% -0.59% -52.63% 2 0.00% -4.78% Expenses Wage Expense Wage Tax Expense Medical Insurance Expense Auto Insurance Expense Interest Expense Electrical & Gas Service Expense Liability Insurance Expense Telecommunications Expense Cell Phone Service Expense Postage Expense Professional Services Expense Maintenance Expense Office Supplies Expense Dry Cleaning Expense Storefront Paper Supplies Expense Rental Expense Naste Services Expense 216,719.00 17,971.24 8,100.00 1,035.00 3,996.90 1,523.20 3,768.40 472.50 912.00 139.50 2,070.00 1,212.00 8,050.00 398.75 778.25 4,752.00 217,791.00 18,077.94 17,100.00 1,035.00 4,197.69 1,708.00 3,693.60 462.00 933.00 135.90 2,122.50 1,132.00 7,342.00 416.15 869.00 4,752.00 150.00 (1,072.00) (106.70) 19,000.00) 0.00 (200.79) (184.80) 74.80 10.50 (21.00) 3.60 (52.50) 80.00 708.00 (17.40) (90.75) 0.00 0.00 -10.82% 2.03% 2.27% -2.25% 2.65% -2.47% 7.07% 9.64% -4.18% -10.44% 0.00% 0.00% 150.00 und Foster Audit Workpaper Cambridge Business Publishers Performed by SOM 10/1/20 Reviewed by IKT 10/9/20X2 Alpine Cupcakes, Inc. Preliminary Analytical Procedures - Quarterly Income Statements Audit Year December 31, 20X2 18.1.2 3 Months Ended 03/31/20X2 3 Months Ended 03/31/20x1 $ Change % Change Expenses (continued) Car Maintenance and Fuel Expense Repair Expense Water Expense Soda Machine Repair and CO2 Expense Credit Card Expense Cooking Supplies Expense Banking Fees Selling and Administrative Expenses Depreciation Expense: Equipment Depreciation Expense: Plant & Property Total Depreciation Expense Total Expenses 995.38 372.50 378.75 1,156.00 878.31 12,704.00 445.00 288,978.68 3,627.00 3,300.00 6,927.00 295,905.68 1,026.78 381.25 373.75 1,128.00 897.89 11,858.00 445.00 (31.40) (8.75) 5.00 28.00 (19.58) 846.00 0.00 -3.06% -2.30% 1.34% 2.48% -2.1896 7.1396 0.00% 298,028.45 4,152.00 3,300.00 7,452.00 305,480.45 (525.00) 0.00 -12.64% 0.00% Earnings Before Income tax Income Tax Expense Net Income 62,493.45 21,247.78 $83,741.23 54,963.92 18,683.66 $73,647.58 2.564.12 13.72% 7. Auditor Notes The fluctuation is less than TM ($2.700) and less than a 10% change. F-Footed 19,050 1 - The Company has seen decreases in both their corporate and storefront sales. The Company has experienced a decrease in birthday party and holiday orders leading to the decline in storefront sales. Most customers order these items a week before the event and pick them up in the store. The decrease in corporate accounts revenue is primarily due to two customers, Luigi's Bistro and Steinberg Delis. The Company expects corporate sales to pick up through the rest of the year. 2. We discussed the change in the medical insurance expense account with Lindsay McKenna. Lindsay said the increase in medical insurance expense from prior year is due to accidentally paying $3,000 more on each check that was written to Blue Cross Blue Shield in Q1 of 20X1. The Company received a refund of 39,000 from the medical insurance company in April 20X due to the mistakes in payments. Tcia and Foster Audit Workpaper 49 Alpine Reviewed by TK 10/9/2012 Preliminary Analytical Procedures-Ratio Anal Audit Year December 31, 20X2 nuk: thy should hare looking the Katos kry from As, ma, ma Company Ratios 3/31/20X2 3/31/20x1 % Change 7.094 60.1% 1, 11 360 10.875 6.696 62.4% 1, 2.879 2.150 33.9% 2, 126.760 169.745 -25.3% 2, 2.540 2.506 1.4% V. 143.710 145.654 -1.3% V. 4.710 4.865.43 -3.2% VH 0.095 0.084 0.036 0.036 0.053 0.060 0.274 0.330 0.400 0.540 Current Ratio Quick Ratio Receivables Turnover Pays Outstanding in Receivables inventory Turnover pays of Inventory on Hand Gross Profit Percentage Profit Margin Return on Assets Return on Equity Debt to Assets Debt to Equity 2 0.82 Comportestle/ 13.1% 3 0.0% V. -11.7% 9H -17.0% 5. -25.9% 5. Account Rec? March 20x1 Avg 5.55 4.50 2.97 (150.08 1.62 Max 13.76 12.45 Current Ratio Quick Ratio Receivables Turnover Days Outstanding in Receivables Inventory Turnover Days of Inventory on Hand Gross Profit Percentage Profit Margin Return on Assets Return on Equity Debt to Assets Debt to Equity Industry Ratios March 20X2 Min Max Avg 1.05 15.30 5.70 0.77 14.00 4.54 1.28 5.68 2.66 64.30 285.43 159.54 0.24 3.95 1.51 92.29 1525.44 458.39 0.01 0.49 0.33 -0.09 0.10 0.11 -0.03 0.04 0.04 -0.04 0.23 0.08 0.00 0.74 0.19 -0.05 1.76 0.58 Min 2.02 1.06 1.09 82.83 0.20 87.88 0.10 -0.09 -0.02 -0.16 441 54 333.76 4.15 1830.71 0.48 1.02 0.31 0.02 0.01 -0.04 021 9.26 0.29 0.67 0.55 3.99 0.00 0.00 Auditor Notes Calculation includes current portion of mortgage payable and notes payable based on client's amortization schedule. On 3/31/20X2, the current portions of the mortgage and notes payables are 56,555.19 and $8,337.88, respectively. On 3/31/20X2, the current portions of the mortgage and notes payables are $6,236.12 and 59,103-75, respectively. Fluctuation meets expectations of being less than a 10% change. The 20X2 ratio is within the expected range (between the min and max) of the industry data. and Foster Audit Workpaper 50 B.3.3. pg. 10/2 Auditor Notes (continued) Ratio Calculations Short-term (ST) Liquidity Ratios: Ability to Meet ST Obligations Current Ratio - Current Assets + Current Liabilities Quick Ratio (Current Assets - Inventories) + Current Liabilities Activity Ratios: How Effectively Assets Are Managed Receivables Turnover = Credit Sales Receivables Days Receivables Outstanding = 365 + Receivables Turnover Inventory Turnover = COGS + Inventory Days Inventory on Hand = 365 + Inventory Turnover Profitability Ratios Gross Profit Percentage = (Sales - COGS) + Sales? Profit Margin = Net Income + Net Sales Return on Assets - Net Income + Total Assets Return on Equity = Net Income - Total Stockholder's Equity Coverage Ratio: Long-Term Solvency (Ability of Entity to Continue as a Going Concern) Debt to Assets - (ST Debt + LT Debt) + Total Assets Debt to Equity - (ST Debt +LT Debt) + Stockholders' Equity 1- The current ratio and quick ratios increased significantly primarily due to an increase in corporate cash of 236,658 (293.728 - 57,070) (B.1.1) from 3/31/20X1 to 3/31/20X2. As noted in our balance sheet analysis (B.2.2), Miguel Lopez says cash fluctuates drastically depending on the timing of cash receipts and purchases. The company has not made any major purchases in the past year, but plans to make some purchases in 20x3. In addition, the current liabilities in 20x2 have decreased from 3/31/20X1 primarily due to the timing of paying accounts payable balances and the timing of purchases 2- The Company is collecting its receivables more quickly than it has in prior years. Per our discussion with Lisa Thomas, the Company is taking additional steps to have customers pay in a more timely manner by improving customer relationships and calling customers weekly when the customers have past due balances, 3. The Company's profit margin has increased since prior year due to increases in storefront sales and decreases in the Company's selling and administrative expenses. Per discussion with Miguel Lopez, the Company has seen great growth and has performed well in relation to the industry competitors, largely because the Company has built its reputation for quality and has maintained good relationships with vendors to keep costs down. 4 - The company's ROE is significantly lower than prior year. We have requested a time to meet with Miguel Lopez to discuss the difference in this ratio in comparison to our expectations. 5- The company's debt to assets and debt to equity ratios have decreased from prior year due to the decrease in the long-term liabilities, along with the decreases in current accounts payable (due to timing of purchases and payments of liabilities). Garcia and Foster Audit Workpaper 51 B.3 3.29 (1) For public clients, we base materiality on 6% of prior year's net income unless the client statt We will place any identified misstatements greater than our SAD threshold onto the SAD sting During our evaluations of overall misstatements, we will compare the total of misstatements on the SAD ng to Alpine Audit Risk Assessment Audit Year December 31, 20x2 Reviewed by: TKJ Date: 2/14/2003 Ps o Gandia and Foster, CPA Sets Performed by: SDM Date: 9/15/20 Materiality Methodology: Planning materiality (PM) is determined as follows: 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 our PM threshold Application of Methodology to Alpine Audit for 20X2: 2014 Total Equity for Alpine Cupcakes, Inc.: 5741,409 (B.1.1) Materiality thresholds for the 20x2 audit: PM = 0.01 * 5742,409= 57,41457,400 2,10 TM -0.50 * 57,400 = 53,700 16,050 SAD = 0.05 * 7.400 = 5370 5350 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 for ( 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