You have been engaged to be the new auditor for Charms Jewelry Store (CHARMS) for the year ended December 31, 2016. CHARMS faces a lot of local competition and now with on-line access to unique jewelry on sites such as Etsy, competition has increased. CHARMS has been in business for 20 years and has built a solid reputation for customer service and their unique designs created by the owner Charles MANSION. Charles is known for his creative necklaces, bracelets and rings using both precious and synthetic gems as well as 10K to 24K gold. The following are some facts about CHARMS and its industries. 1) Due to the recession sales have fallen off in 2016, so Charles has extended credit terms to his customers to make the sale. 2) Charles has 3 sales individuals that earn a large commission based on the sales. The commission are greatest on genuine precious stones and is significantly larger than on sales of synthetic gems. 3) Charles counts the inventory himself at the end of each month and over the past few months, he has found a discrepancy between the precious and synthetic gem count. The precious gem count has been over what the accounting records indicate and the synthetic gem count has been under by the same amount. He has discussed the matter with the sales individuals as he suspects that they have may have sold synthetic gems as precious gems and he is concerned about his reputation in the local community. 4) Charles is also concerned about the sales mix as the sale of precious gems was skyrocketing in this time of recession and increase in the price of gold, which Charles has not passed on to the customers, hoping that the gold price would come back down. 5) The bank that Charles is dealing with has asked for audited financial statements for the first time, as due to the extension of credit to his customers and the highly volatile price of gold in 2016, CHARMS has drawn the maximum amount on its operating line. The bank will not extend the line until audited financial statements have been provided. 6) Although, the only accounting staff is Charles's wife, Barbara. Barbara is very conscientious and takes pride in having the bank reconciled, a listing of receivables and payables every month for Charles to review. She takes the listing provided by Charles of inventory each month and values it at fair value and adjusts the inventory balance in the accounts each month. 7) Barbara has indicated that it is difficult for Charles to determine the payments to suppliers as Barbara records all the payables to suppliers in Europe and South Africa in the currency that they are due in and no adjustment is made to the accounts until paid. The entire adjustment for the difference in the balance in the accounts payable and the cash is adjusted through cost of goods sold. Charles has indicated that he feels that the gross margin has decreased as.a.result.of the foreign exchange fluctuations in the current year. CHARMS's preliminary financial statements prepared by Barbara using ASPE, contain the following: \begin{tabular}{|l|c|c|} \hline & December 31, 2016 & December 31, 2015 \\ \hline Total Revenue & $1,200,000 & $1.450,000 \\ \hline Gross Margin & 720,000 & 690,000 \\ \hline Normalized net income before tax & 150,000 & 225,000 \\ \hline Income after tax & 120,000 & 180,000 \\ \hline Total Current Assets & 900,000 & 600,000 \\ \hline Total Assets & $1,250,000 & $1,000,000 \\ \hline Total Current Liabilities & 300,000 & 350,000 \\ \hline Total Debt & 800,000 & 670,000 \\ \hline Total Equity & 450,000 & 330,000 \\ \hline \end{tabular} 0) Determine preliminary overall materiality based on the Revenue benchmark and Normalized net income before income taxes benchmark. Choose the most appropriate preliminary materiality and state the qualitative factors and reasoning for your choice. c) Recommend what you would chose for performance materiality and explain why you have chosen that amount. d) Based on the information given, identify 3 significant risks of material misstatements at either the overall financial statement level or the financial statement assertion level. Explain why this is a significant risk. For each risk identified at the financial statement assertion level, identify the specific account being affected. e) Based on the limited financial information provided, complete a vertical and horizontal analysis to determine if there are any further risks that should be identified and investigated. Also, calculate the current ratio and gross margin to determine if the variances confirm or identify and additional risks Horizontal Analysis Vertical Analysis Ratio Analysis SA