I just need Q3

Step 2 is : Understand Client environment and controls

Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit Year December 31, 20X2 Garcia and Foster, CPAS Performed by: SDM Reviewed by: TK Date: 9/25/20x2 Date: 2/14/2003 Materiality Methodology: Planning materiality (PM) is determined as follows: (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 Alpine Audit for 20x2: 20x Total Equity for Alpine Cupcakes, Inc.: 5741,409 (B.1.1) Materiality thresholds for the 20x2 audit: PM = 0.01 * 5741,409-57.414 57,400 TM = 0.50 x 57.400 = 33.700 SAD = 0.05 * $7,400 = 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 (OR). 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 In tan M+ Garcia and of 2 Poll boj COS DEL + 3 Cambridge Business Publishers Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit Year December 31, 20x2 Performed by: SDM Date: 9/125/20X2 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 Garcia and Foster Audit Workpaper ridge Business Publishers Alpine Cupcakes, Inc. Balance Sheets as of 3/31/20X2 and 12/31/20X1 (USD $) Audit Year December 31, 20X2 Performed by SOM 9/25/2012 Reviewed by: TKJ 9/20/20X2 PBC B.3.1 As of 3/31/20X2 As of 12/31/20X1 As of 3/31/20X1 $125,498.76 293,728.03 123,432.43 122,849.12 2,379.00 4,777.00 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 $151,293.5 57,069.68 122,931.81 159,537.02 2,133.00 3,808.00 26,779.44 434.95 2,348,50 $526,335.91 Balance Sheet: Current Assets Cash: Storefront Cash: Corporate Accounts Cash: Payroll Accounts Receivable Office Supplies Cooking Supplies Inventory: Ingredients Inventory: Cake Boxes and Cupcake Cups Inventory: Beverages Total Current Assets Long-term Assets Equipment Accumulated Depreciation Equipment Plant & Property Accumulated Depreciation: Plant & Property Land Total Long-term assets Total Assets Liabilities Accounts Payable Wage Taxes Payable Corporate Income Tax Payable Dividends Payable Mortgage Payable Notes Payable: Vehicles Total Liabilities Stockholders' Equity Common Stock, Par value $1.00; Authorized 1,000,000 shares; Issued and outstanding 50,000 shares Additional Paid in Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 150,180.00 (82,455.00) 330,000.00 (82,500.00) 125,000.00 $440,225.00 $1,142,843.35 150,180.00 (78,828.00) 330,000.00 (79,200.00) 125,000.00 $447,152.00 $1,148,356.66 150,180.00 (66,372.00) 330,000.00 (69,300.00) 125,000.00 $469,508.00 $995,843.91 25,712.00 0.00 21,247.78 0.00 290,673.81 22,555.53 $360,189.12 38,556.70 0.00 38,125.96 13,125.00 292,262.13 24,878.31 $406,948.10 40,168.65 0.00 18,683.66 0.00 296,909.93 31,659.28 $387,421.52 50,000.00 120,075.91 612,578.32 $782,654.23 $1,142,843.35 50,000.00 120,075.91 571,332.65 $741,408.56 3.2.1 $1,148,356.66 50,000.00 120,075.91 438,346.48 $608,422.39 $995,843.91 Current portion $6,555.19 at 3/31/20X2 and $6,236.12 at 3/31/20X1 Current portion $8,337.88 at 3/31/20X2 and 59,103.75 at 3/31/20X1 Garcia and Foster Audit Plan. Q3. Review Garcia and Foster's calculations of materiality thresholds for the 20x2 Audit (workpaper 8.2.1). 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. Eluate other aspects of the Audit Risk Assessment momo Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit Year December 31, 20X2 Garcia and Foster, CPAS Performed by: SDM Reviewed by: TK Date: 9/25/20x2 Date: 2/14/2003 Materiality Methodology: Planning materiality (PM) is determined as follows: (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 Alpine Audit for 20x2: 20x Total Equity for Alpine Cupcakes, Inc.: 5741,409 (B.1.1) Materiality thresholds for the 20x2 audit: PM = 0.01 * 5741,409-57.414 57,400 TM = 0.50 x 57.400 = 33.700 SAD = 0.05 * $7,400 = 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 (OR). 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 In tan M+ Garcia and of 2 Poll boj COS DEL + 3 Cambridge Business Publishers Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit Year December 31, 20x2 Performed by: SDM Date: 9/125/20X2 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 Garcia and Foster Audit Workpaper ridge Business Publishers Alpine Cupcakes, Inc. Balance Sheets as of 3/31/20X2 and 12/31/20X1 (USD $) Audit Year December 31, 20X2 Performed by SOM 9/25/2012 Reviewed by: TKJ 9/20/20X2 PBC B.3.1 As of 3/31/20X2 As of 12/31/20X1 As of 3/31/20X1 $125,498.76 293,728.03 123,432.43 122,849.12 2,379.00 4,777.00 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 $151,293.5 57,069.68 122,931.81 159,537.02 2,133.00 3,808.00 26,779.44 434.95 2,348,50 $526,335.91 Balance Sheet: Current Assets Cash: Storefront Cash: Corporate Accounts Cash: Payroll Accounts Receivable Office Supplies Cooking Supplies Inventory: Ingredients Inventory: Cake Boxes and Cupcake Cups Inventory: Beverages Total Current Assets Long-term Assets Equipment Accumulated Depreciation Equipment Plant & Property Accumulated Depreciation: Plant & Property Land Total Long-term assets Total Assets Liabilities Accounts Payable Wage Taxes Payable Corporate Income Tax Payable Dividends Payable Mortgage Payable Notes Payable: Vehicles Total Liabilities Stockholders' Equity Common Stock, Par value $1.00; Authorized 1,000,000 shares; Issued and outstanding 50,000 shares Additional Paid in Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 150,180.00 (82,455.00) 330,000.00 (82,500.00) 125,000.00 $440,225.00 $1,142,843.35 150,180.00 (78,828.00) 330,000.00 (79,200.00) 125,000.00 $447,152.00 $1,148,356.66 150,180.00 (66,372.00) 330,000.00 (69,300.00) 125,000.00 $469,508.00 $995,843.91 25,712.00 0.00 21,247.78 0.00 290,673.81 22,555.53 $360,189.12 38,556.70 0.00 38,125.96 13,125.00 292,262.13 24,878.31 $406,948.10 40,168.65 0.00 18,683.66 0.00 296,909.93 31,659.28 $387,421.52 50,000.00 120,075.91 612,578.32 $782,654.23 $1,142,843.35 50,000.00 120,075.91 571,332.65 $741,408.56 3.2.1 $1,148,356.66 50,000.00 120,075.91 438,346.48 $608,422.39 $995,843.91 Current portion $6,555.19 at 3/31/20X2 and $6,236.12 at 3/31/20X1 Current portion $8,337.88 at 3/31/20X2 and 59,103.75 at 3/31/20X1 Garcia and Foster Audit Plan. Q3. Review Garcia and Foster's calculations of materiality thresholds for the 20x2 Audit (workpaper 8.2.1). 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. Eluate other aspects of the Audit Risk Assessment momo