Q$1.$ 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.

c$.$ The audit risk model.

d$.$ Preliminary analytical procedures.

Q$2.$ Evaluate Garcia and Foster's documentation of their understanding of the client's environment

$($workpaper B$\mathrm{.}2\mathrm{.}1.)$ Describe any problems you find and provide suggestions for improvement. This

question relates to Step $2$ of the Garcia and Foster Audit Plan.

Q$3.$ Review Garcia and Foster's calculations of materiality thresholds for the $20$X$2$ Audit $($workpaper B$\mathrm{.}2\mathrm{.}1).$

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.

Q$4.$ Evaluate other aspects of the Audit Risk Assessment memo $($workpaper B$\mathrm{.}2\mathrm{.}1.)$ 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.

Q$5.$ Evaluate the preliminary analytical procedures completed by Garcia and Foster, CPAs $($workpapers B$\mathrm{.}3\mathrm{.}1$

to B$\mathrm{.}3\mathrm{.}3.)$ This question relates to Step $2$ of the Garcia and Foster Audit Plan.

a$.$ Determine if the analyses of account fluctuations were appropriately performed and completed

$($workpapers B$\mathrm{.}3\mathrm{.}1$ and B$\mathrm{.}3\mathrm{.}2).$ Review the explanations of account fluctuations provided by the

auditors. Describe any problems you identify.

b$.$ Determine if the ratio analysis $($workpaper B$\mathrm{.}3\mathrm{.}3)$ was appropriately performed and completed.

Review the explanations of ratio fluctuations provided by the auditors. Describe any problems

you identify.

Q$6.$ 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?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 $20$X$2$:

$20x1$ Total Equity for Alpine Cupcakes, Inc.: $$741,409(B\mathrm{.}1\mathrm{.}1)$

Materiality thresholds for the $202$ audit:

$PM=0\mathrm{.}01$$$741,409=$$$7,414$~~$$7,400$

$TM=0\mathrm{.}50$$$7,400=$$$3,700$

SAD$=0\mathrm{.}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 $20$X$2$ Alpine Audit:

Our preliminary risk assessment levels are set as follows:

Ne have set our risk assessment levels for the overall audit in order to reduce our audit risk to the appropriate

evel.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 $6,20x_3.$ Overall we

find the client to be highly ethical. Owner Alexis Madison has the highest integrity and has strong ties to the

co