Part One Case Study Hadi Al-Salman is the manager of the audit of Al-Qahtani Holding Group, a public company that manufactures formed steel subassemblies for other manufacturers. Mr. Hadi is planning the 2022 audit and is considering an appropriate amount for overall financial statement materiality to be $899,018 (5% of its total asset). As a result, and after considering the inherent risks associated with Al-Qahtani's account receivables, Al-Salman has decided to allocate 60% to the account receivables of Alqahtani business as a tolerable misstatement rate. A summary of the financial statement's information is shown below the case. Additional relevant planning information is summarized; 1. Al-Qahtani Group has been a client for 4 years, and Mr. Hadi firm has always had a good relationship with the company. Management and the accounting people have always been cooperative, honest, and positive about the audit and financial reporting. No material misstatements were found in the prior years' audits. AL-Salman's firm has monitored the relationship carefully, because when the audit was obtained, Abdullah Alqahtani, the CEO, had the reputation of being a "high-flyer" and had been through bankruptcy at an earlier time in his career. 2. Mr. Abdullah is a controlling manager who makes all the decisions himself. He gives his employees responsibility, but he doesn't give them enough authority. 3. The industry in which Al-Qahtani Holding Group participates has been in a favorable cycle for the past 10 years, and that trend is continuing in the current year. Industry profits are reasonably favorable, and there are no competitive or other apparent threats on the horizon. [1] 4. Internal controls for Al-Qahtani Holding Group are evaluated as reasonably effective for all cycles but not strong. Although the clint supports the idea of control, Mr. Hadi has been disappointed that management has continually rejected his recommendation to improve its internal audit function. 5. Al-Qahtani Holding Group has a contract with its employees that if earnings before taxes, interest expense, and pension cost exceed $7.8 million for the year, an additional contribution must be made to the pension fund equal to 5% of the excess. Income Statement Sales Cost of goods sold Gross profit Preliminary 31 Dec. 2022 $ 43,994,931 24,197,212 19,797,719 Audited 31 Dec. 2021 $ 32,258,015 19,032,229 13,225,786 Operating Expenses: Selling, general, and administrative expenses 10,592,221 8,900,432 Pension cost 1,117,845 865,030 Interest expense 83,376 104,220 Total operating expenses 11,793,442 9,869,682 Income before taxes 8,004,277 3,356,104 Income tax expense Net income 1,800,000 1,141,000 $6,204,277 $2,215,104 Balance Sheet Cash Trade accounts receivable Allowance for uncollectible accounts Inventories Prepaid expenses 3,144,709 Preliminary 31 Dec. 2022 $ 443,689 Audited 31 Dec. 2021 $ 334,981 2,624,713 (120,000) (215,000) 4,120,380 3,588,400 29,500 24,700 Total current assets $7,618,278 $6,357,749 Property, plant, and equipment: At cost 14,095,077 10,271,787 Less accumulated depreciation (4,382,990) (3,775,911) Total non-current assets $9,712,087 $6,495,876 Goodwill 1,200,000 345,000 Total assets $18,530,365 $13,198,625 Accounts payable Bank loan payable 2,441,552 2,926,789 150,000 Accrued liabilities 723,600 598,020 Federal income taxes payable 1,200,000 1,759,000 Current portion of long-term debt 240,000 240,000 Total Current Liabilities $4,755,152 $5,523,809 Long-term debt 960,000 1,200,000 Total liabilities $5,715,152 $6,723,809 Stockholders' equity: Common stock 1,500,000 1,250,000 Additional paid-in capital 2,469,921 1,333,801 Retained earnings 8,845,292 3,891,015 Total stockholders' equity $12,815,213 $6,474,816 Total Liabilities and Stockholders' $18,530,365 $13,198,625 Equity [3] Retained Earnings Statement Beginning retained earnings Net income Dividends declared Preliminary 31 Dec. 2022 $ 3,891,015 6,204,277 (1,500,000) Audited 31 Dec. 2021 $ 2,675,911 2,215,104 (1,250,000) Ending retained earnings $ 8,595,292 $ 3,641,015 Instructions: You are to play the role of Mr. Hadi Al-Salman in the 31 Dec. 2022 audit of Al-Qahtani Holding Group. Answer the following questions. 1. Based on the provided information above. Calculate the tolerable misstatement to be allocated to the account receivable of Al-Qahtani Holding Group and explain the importance of this step in planning your audit. 2. Make an acceptable audit risk decision for the current year as high, medium, or low, and support your answer. 3. Perform analytical procedures that can help you evaluate Group Profitability, Liquidity and Solvency. Explain how your findings will impact this year's audit procedures. Document all information of the analytical procedures you perform and your conclusions. A minimum of Three financial ratios is acceptable. (i.e., 3 ratios to test the firm's profitability) 4. The evidence-planning worksheet to decide tests of details of balances for Al-Qahtani holding's accounts receivable is shown below. Use the information in the case and your conclusions in parts 1 through 3 to complete the following rows of the evidence planning worksheet: Acceptable audit risk, Inherent risk, control risk and substantive analytical procedures. [4] Al-Qahtani Holding Group Evidence Planning Worksheet to Decide Tests of Details of Balances for Accounts Receivable Detail tie-in Acceptable Audit Risk Inherent Risk Control Risk- Sales Control Risk- Cash Receipts Control Risk-Additional Controls Substantive Tests of Transactions - Sales Substantive Tests of Transactions- Cash Receipts Substantive Analytical Procedures Planned Detection Risks for Test of Details of Balances Planned Audit Evidence for Test of Details of Balances Existence Completeness Accuracy Classification Cut-off Realizable Value Rights