Cloud 9 - Continuing Case Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Required a. Based on your conclusions from the case study questions in previous chapters (particularly Chapters 3, 4, and 8), complete the following worksheet to determine the risk of material misstatement (RMM) and the acceptable detection risk (DR). Inherent Control Risk of Material Detection Account Assertion Risk Risk Misstatement Risk Salesy-occurrence Sales-completeness Trade receivables-existence Trade receivables-completeness Cash-existence Cash-completeness b. Scan the line items on the prior-year financial statements and the current-year trial balance for Cloud 9. Using your knowledge of financial accounting, identify line items that require estimates or fair value measurements. For each item, state whether estimation uncertainty is low or high and briefly explain why. Cloud 9 Consolidated Statement of Income For the year ended January 31, 2022 For the year ended January 31, 2021 $364,953,846 $345,965,385 Revenues Costs and expenses: Cost of sales Selling and administrative Interest expense Other (income) expense, net Total costs and expenses Income before income taxes Income taxes Net income $222,496,154 104,450,000 1,257,692 1,311,539 $207.838,462 100,246,154 1,730,769 796,154 329.515385 35,438,461 12.757,692 S 22,680.769 310,611,539 35,353,846 13,080,769 $ 22,273,077 Cloud 9 Consolidated Balance Sheet January 31, 2022 January 31, 2021 S11,692,308 62,361,538 54.773,077 14,460,577 3,357,692 5,250.000 $ 9,780,769 60,361,539 55,615,385 14,852,885 3,288,461 7,276.923 $151,895,192 62,261,539 3,820,192 5,853,846 $223.830,769 S151,175,962 60,900,000 3,950,961 9.238,462 $225.265.385 Assets Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $2,773,077 and $2,515,385 Inventory Investments (derivatives) Deferred income taxes Prepaid expenses and other current assets Total current assets Property, plant, and equipment, net Identifiable intangible assets and goodwill, net Deferred income taxes and other assets Total assets Liabilities and Stockholders' Equity Current liabilties: Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes and other liabilities Stockholders' equity: Common stock at par value Capital in excess of par value Unearned stock compensation Accumulated other comprehensive income Retaining earning Total stockholders' equity Total liabilties and stockholders' equity $ 207,692 28,896,154 20,615,385 18,157,692 842,308 $ 1,926,923 35,546,154 20,915,385 23,336,581 582,650 $ 68,719,231 16,765,384 3,942,308 $ 82,307,693 18,088,462 4,253,846 107,692 17,669,231 (380,769) (5,850,000) 122,857,692 107,692 14,192,308 (450,000) (4,273,077) 111,038,461 134.403,846 $223.830.769 120,615,384 S225.265.285 Cloud 9 Condensed Cash Flow Statement For the year ended January 31, 2022 January 31, 2021 Cash provided by operations $ 25,250,000 $ 26,907,692 Cash used by investing activities (13,165,385) (16,923,077) Cash used by financing activities (13,457,692) (9,696,154) Effect of exchange rate changes on cash 3,284,616 1,873,077 Net increase in cash and cash equivalents 1,911,539 2,161,538 Cash and cash equivalents, beginning of year 9.780.769 7,619.231 Cash and cash equivalents, end of year S 11.692.308 $ 9.780.769 *Includes dividends paid of $4,988,462 in 2022 and $5,119,231 in 2021. October 31, 2021 Debit Credit $ 6,123,884 64,867,910 $ 648,679 57,900,000 13,805,769 3,584,615 6,446,154 97,576,923 35,207,692 3,851,923 8,410,849 Cloud 9 Trial Balance October 31, 2022 Debit Credit Cash and cash equivalents $ 13,446,154 Accounts receivable 70,485,625 Allowance for doubtful accounts $ 704,856 Inventory 55,100,000 Investments (derivatives) 13,419,231 Deferred income taxes (current) 2,857,692 Prepaid expenses and other current assets 9,265,385 Property, plant, and equipment 103,8 Accumulated depreciation 39,761,538 Identifiable intangible assets and goodwill 3,723,007 Accumulated amortization Deferred income taxes and other assets (noncurrent) 9,557,692 Current portion of long-term debt 2,115,385 Notes payable 21,376,923 Accounts payable 14,986,457 Accured liabilities 25,803,846 Income taxes payable 2,211,539 Long-term debt 23,661,538 Deferred income taxes and other liabilities (noncurrent) 4,915-384 Common stock at par value 111,538 Capital stock in excess of par value 19,415,385 Unearned stock compensation 253,846 Accumulated other comprehensive income 5,011,538 Beginning retained earnings 122,857,692 Dividends 3,866,838 Repurchases of common stock 4,627.381 Revenue 277,338,461 Cost of sales 169,346,154 Selling and administrative 79,092,308 Interest expense 1,438,461 453,846 9.511,538 $555,260,542 $555,260,542 300,125 34,823,077 22,561,538 24,150,000 3,726,923 17,119,106 4,330,769 107,692 16,484,615 480,769 4,746,154 98,150,473 3,299,423 2,939,393 269,442,308 Other expense Income tax expense Totals 163,003,846 78,246,154 1,773,077 757,692 9,238,462 $527,052.997 $527,052,997 Cloud 9 - Continuing Case Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Required a. Based on your conclusions from the case study questions in previous chapters (particularly Chapters 3, 4, and 8), complete the following worksheet to determine the risk of material misstatement (RMM) and the acceptable detection risk (DR). Inherent Control Risk of Material Detection Account Assertion Risk Risk Misstatement Risk Salesy-occurrence Sales-completeness Trade receivables-existence Trade receivables-completeness Cash-existence Cash-completeness b. Scan the line items on the prior-year financial statements and the current-year trial balance for Cloud 9. Using your knowledge of financial accounting, identify line items that require estimates or fair value measurements. For each item, state whether estimation uncertainty is low or high and briefly explain why. Cloud 9 Consolidated Statement of Income For the year ended January 31, 2022 For the year ended January 31, 2021 $364,953,846 $345,965,385 Revenues Costs and expenses: Cost of sales Selling and administrative Interest expense Other (income) expense, net Total costs and expenses Income before income taxes Income taxes Net income $222,496,154 104,450,000 1,257,692 1,311,539 $207.838,462 100,246,154 1,730,769 796,154 329.515385 35,438,461 12.757,692 S 22,680.769 310,611,539 35,353,846 13,080,769 $ 22,273,077 Cloud 9 Consolidated Balance Sheet January 31, 2022 January 31, 2021 S11,692,308 62,361,538 54.773,077 14,460,577 3,357,692 5,250.000 $ 9,780,769 60,361,539 55,615,385 14,852,885 3,288,461 7,276.923 $151,895,192 62,261,539 3,820,192 5,853,846 $223.830,769 S151,175,962 60,900,000 3,950,961 9.238,462 $225.265.385 Assets Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $2,773,077 and $2,515,385 Inventory Investments (derivatives) Deferred income taxes Prepaid expenses and other current assets Total current assets Property, plant, and equipment, net Identifiable intangible assets and goodwill, net Deferred income taxes and other assets Total assets Liabilities and Stockholders' Equity Current liabilties: Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes and other liabilities Stockholders' equity: Common stock at par value Capital in excess of par value Unearned stock compensation Accumulated other comprehensive income Retaining earning Total stockholders' equity Total liabilties and stockholders' equity $ 207,692 28,896,154 20,615,385 18,157,692 842,308 $ 1,926,923 35,546,154 20,915,385 23,336,581 582,650 $ 68,719,231 16,765,384 3,942,308 $ 82,307,693 18,088,462 4,253,846 107,692 17,669,231 (380,769) (5,850,000) 122,857,692 107,692 14,192,308 (450,000) (4,273,077) 111,038,461 134.403,846 $223.830.769 120,615,384 S225.265.285 Cloud 9 Condensed Cash Flow Statement For the year ended January 31, 2022 January 31, 2021 Cash provided by operations $ 25,250,000 $ 26,907,692 Cash used by investing activities (13,165,385) (16,923,077) Cash used by financing activities (13,457,692) (9,696,154) Effect of exchange rate changes on cash 3,284,616 1,873,077 Net increase in cash and cash equivalents 1,911,539 2,161,538 Cash and cash equivalents, beginning of year 9.780.769 7,619.231 Cash and cash equivalents, end of year S 11.692.308 $ 9.780.769 *Includes dividends paid of $4,988,462 in 2022 and $5,119,231 in 2021. October 31, 2021 Debit Credit $ 6,123,884 64,867,910 $ 648,679 57,900,000 13,805,769 3,584,615 6,446,154 97,576,923 35,207,692 3,851,923 8,410,849 Cloud 9 Trial Balance October 31, 2022 Debit Credit Cash and cash equivalents $ 13,446,154 Accounts receivable 70,485,625 Allowance for doubtful accounts $ 704,856 Inventory 55,100,000 Investments (derivatives) 13,419,231 Deferred income taxes (current) 2,857,692 Prepaid expenses and other current assets 9,265,385 Property, plant, and equipment 103,8 Accumulated depreciation 39,761,538 Identifiable intangible assets and goodwill 3,723,007 Accumulated amortization Deferred income taxes and other assets (noncurrent) 9,557,692 Current portion of long-term debt 2,115,385 Notes payable 21,376,923 Accounts payable 14,986,457 Accured liabilities 25,803,846 Income taxes payable 2,211,539 Long-term debt 23,661,538 Deferred income taxes and other liabilities (noncurrent) 4,915-384 Common stock at par value 111,538 Capital stock in excess of par value 19,415,385 Unearned stock compensation 253,846 Accumulated other comprehensive income 5,011,538 Beginning retained earnings 122,857,692 Dividends 3,866,838 Repurchases of common stock 4,627.381 Revenue 277,338,461 Cost of sales 169,346,154 Selling and administrative 79,092,308 Interest expense 1,438,461 453,846 9.511,538 $555,260,542 $555,260,542 300,125 34,823,077 22,561,538 24,150,000 3,726,923 17,119,106 4,330,769 107,692 16,484,615 480,769 4,746,154 98,150,473 3,299,423 2,939,393 269,442,308 Other expense Income tax expense Totals 163,003,846 78,246,154 1,773,077 757,692 9,238,462 $527,052.997 $527,052,997