Based on the information B 2.1 on IMG0181 given, Answer question 2 on the IMG0184

Cambridge Business Publishers Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit Year December 31, 20X2 Performed by: SDM Date: 9/15/20X2 Reviewed by: TKJ Date: 2/14/20X3 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. 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 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 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 BEVERAGE WRONDE Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit Year December 31, 20X2 ORIGINALE Garcia and Foster, CPAS Reviewed by: TKJ Date: 2/14/20X3 Performed by: SDM Date: 9/15/20X2 (12) for public clients, we base materiality on 6% of prior ve art ne sieteso me unless the client is at a loss or close to Materiality Methodology: Planning materiality (PM) is determined as follows: break 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 Alpine Audit for 20x2: 20x1 Total Equity for Alpine Cupcakes, Inc.: $741,409 (B.1.1) Materiality thresholds for the 20x2 audit: PM = 0.01 * $741,409= $7,414 = $7,400 TM = 0.50 * $7,400 = $3.700 SAD = 0.05 * $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 Low Inherent risk Control risk Detection risk = 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. DE NIDS D'H C. un ruster collected and mening system in the lower right-hand corner of each puper within the audit is numbered and linked back to the audit program. In this part of your assignment, you will examine the firm's audit documentation in relation to the auditors' performance on several risk assessment procedures. Please complete the following tasks: Q1. Research, cite, and summarize (in one or two sentences per standard identified) the auditing standards as they relate to the auditors' responsibilities in the following areas: a. Obtaining and documenting an understanding of the client's environment, including internal controls. b. Materiality assessment in planning and performing the audit. The audit risk model. d. Preliminary analytical procedures. Q2. Evaluate Garcia and Foster's documentation of their understanding of the client's environment (workpaper B.2.1.) Describe any problems you find and provide suggestions for improvement. This question relates to Step 2 of the Garcia and Foster Audit Plan. Q3. Review Garcia and Foster's calculations of materiality thresholds for the 20x2 Audit (workpaper B.2.1). Determine if the auditors correctly applied the materiality concept in their risk assessment procedures. Describe any problems you find and provide suggestions for improvement. This question relates to Step 2 of the Garcia and Foster Audit Plan. 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. b. Review the explanations of ratio fluctuations provided by the auditors. Describe any problems Q6. Prepare a memo to document your understanding of Alpine Cupcakes environment and provide your you identify 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? a. Cambridge Business Publishers Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit Year December 31, 20X2 Performed by: SDM Date: 9/15/20X2 Reviewed by: TKJ Date: 2/14/20X3 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. 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 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 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 BEVERAGE WRONDE Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit Year December 31, 20X2 ORIGINALE Garcia and Foster, CPAS Reviewed by: TKJ Date: 2/14/20X3 Performed by: SDM Date: 9/15/20X2 (12) for public clients, we base materiality on 6% of prior ve art ne sieteso me unless the client is at a loss or close to Materiality Methodology: Planning materiality (PM) is determined as follows: break 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 Alpine Audit for 20x2: 20x1 Total Equity for Alpine Cupcakes, Inc.: $741,409 (B.1.1) Materiality thresholds for the 20x2 audit: PM = 0.01 * $741,409= $7,414 = $7,400 TM = 0.50 * $7,400 = $3.700 SAD = 0.05 * $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 Low Inherent risk Control risk Detection risk = 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. DE NIDS D'H C. un ruster collected and mening system in the lower right-hand corner of each puper within the audit is numbered and linked back to the audit program. In this part of your assignment, you will examine the firm's audit documentation in relation to the auditors' performance on several risk assessment procedures. Please complete the following tasks: Q1. Research, cite, and summarize (in one or two sentences per standard identified) the auditing standards as they relate to the auditors' responsibilities in the following areas: a. Obtaining and documenting an understanding of the client's environment, including internal controls. b. Materiality assessment in planning and performing the audit. The audit risk model. d. Preliminary analytical procedures. Q2. Evaluate Garcia and Foster's documentation of their understanding of the client's environment (workpaper B.2.1.) Describe any problems you find and provide suggestions for improvement. This question relates to Step 2 of the Garcia and Foster Audit Plan. Q3. Review Garcia and Foster's calculations of materiality thresholds for the 20x2 Audit (workpaper B.2.1). Determine if the auditors correctly applied the materiality concept in their risk assessment procedures. Describe any problems you find and provide suggestions for improvement. This question relates to Step 2 of the Garcia and Foster Audit Plan. 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. b. Review the explanations of ratio fluctuations provided by the auditors. Describe any problems Q6. Prepare a memo to document your understanding of Alpine Cupcakes environment and provide your you identify 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? a