The CPA firm of Penmen Associates is planning to take over the audit of financial statements of Keystone Enterprises. As a senior auditor for the firm, you have been tasked with evaluating Keystone, using GAAS, best practices and risk assessment techniques to identify the objectives and scope of the audit for this client. After completion, Penmen Associates has asked you to prepare for the audit. You will gain an understanding of Keystone's internal control structure, financial accounts, business environment, materiality, and any inherent risks that may impact the company. You will also review external and other factors.

A working paper is an informational report prepared by accountants and auditors as supporting documents for formal reports and financial statements. Note that rubric criterion #1 below references the risk assessment completed in Milestone One. If you did not complete Milestone One, you will need to complete the risk assessment portion in order to satisfy this criterion.

Financial Data:

Keystone Consolidated Balance Sheet ASSETS December 31, 2025 December 31, 2024 Current assets: Cash and cash equivalents 11,692,308 9,780,769 Accounts receivable, less allowance for doubtful accounts of $2,773,077 and $2,515,385 361,538 60,361,539 rading securities (Inventory) 54,773,077 65,615,385 Investments ( Derivatives 14,460,577 14,852,885 Deferred income taxes 3,357,692 3,288,461 Prepaid expenses and other current assets 5,250,000 7,276,923 Total current assets 151,895,192 151,175,962 Property and equipment, net 62,261,539 60,900,000 Identifiable intangible assets and goodwill, net 3,820,192 3,950,961 Deferred income taxes and other assets 5,853,846 ,238,462 Total asset 223,830,769 $ 225,265,385 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt 207,692 1,926,923 Notes payable 28,896,154 35,546,154 Accounts payable 20,615,385 20,915,385 Accrued liabilities 18,157,692 23,336,581 Income taxes payable 842,308 582,650 Total current liabilities 68,719,231 82,307,693 Long-term debt 16,765,384 18,088,462 Deferred income taxes and other liabilities 3,942,308 4,253,846 Shareholders' equity Common stock at par value 107,692 107,692 Capital in excess of par value 17,669,231 14,192,308 Unearned stock compensation 380,769 (450,000 Accumulated other comprehensive income (5,850,000) (4,273,077) Retaining earnings 122,857,692 111,038,461 Total shareholders' equity 134,403,846 120,615,384 Total liabilities and shareholders' equity $ 223,830,769 $ 225,265,385Keystone Consolidated Statement of Income For the year ended For the year ended December 31, 2025 December 31, 2024 Revenues 364,953,846 $ 345,965,385 Costs and expenses: Cost of sales 222,496,154 207,838,462 Selling and administrative 104,450,000 100,246,154 Interest expense 1,257,692 1,730,769 Other (income)/expense, net 1,311,539 796,154 Total costs and expenses 329,515,385 310,611,539 Income before income taxes 35,438,461 35,353,846 Income taxes 12,757,692 13,080,769 Net income S 22,680,769 22,273,077Cash provided by operations Cash used by investing activities Cash used by financing activities Effect of exchange rate changes on cash 3,284,616 Met increase in cash and cash equivalents 1,911,539 Cash and cash equivalents, beginning of year 9,780,769 Cash and cash equivalents, end of year *Includes dividends paid of 54,988,462 in 2025 and $5,119,231 in 2024 Keystone Condensed Cash Flow Statement For the year ended December 31, 2025 25,250,000 (13,165,385 (13,457,692 P 5 11,692,308 | $ December 31, 2024 Keystone Liquidity Ratios 2025 2024 Current ratio = CA/CL 151,895,192 =2.21 151,175,962 = 1.84 68,719,231 82,307,693 Acid-test (quick) ratio = Liquid assets/CL 11,692,308+62,361,538 = 1.08 9,780,769+60,361,539 = 0.85 68,719,231 82,307,693 Inventory turnover in days 365 + 222,496,154 = 90.6 days 365 + 207,838,462 = 97.6 days (54,773,077+55,615,385)/2 55,615,385 Receivables turnover in days 365 + 364,953,846 = 61.3 days 365 + 345,965,385 = 63.7 days (62,361,538+60,361,539)/2 60,361,539 Payables turnover in days 365+ 222 496,154 = 34.1 days 365 + 207,838,462 = 36.8 days (20,615,385+20,915,385)/2 20,915,385 Gross operating cycle 61.3 + 90.6 = 151.9 days 63.7 + 97.6 = 161.3 days Net operating cycle 151.934.1 = 117.8 days 161.3 36.8 = 124.5 days Solvency ratios Debt to equity 89,426,923 = 66.5% 134,403,846 104,650,001 = 86.7% 120,615,384 Times interest earned 35,438,461 +1,257,692 =29.2 35,353,846+1,730,769=21.4 Profitability ratios 1,257,692 1,730,769 Gross profit margin 364,953,846-222 496,154 = 39.0% 345,965,385-207,838,462 = 39.9% 364,953,346 345,965,385 Profit margin 22,680,769 = 6.2% 22,273 077 =6.4% 364,953,846 345,965,385 Return on assets _l 22,680,769 = 10.1% 22,273,077 =9.9% (223,830,769+225,265,385)/2 225,265,385 Return on stockholders' equity 22,680,769 =17.7% 22,273,077 =18.5% (134,403,846+120,615,384)/2 120,615,384