Question

Review Garcia and Foster’s calculations of materiality thresholds for the 20X2 Audit . 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.

Step 2: Requires the audit team to obtain and document its understanding of the client’s environment including internal controls. This understanding allows auditors to identify significant risks in the audit engagement. During this phase, the auditors determine materiality and perform preliminary analytical procedures.

Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit Year December 31, 20X2 OC Garcia and Foster, CPAS Reviewed by: TKT Date: 2/14/20X3 Performed by: SDM Date: 9/15/20x2 come unless the client is at a lo at a loss or close to Materiality Methodology: Planning materiality (PM) is determined as follows: (1) For public clients, we base materiality on 6% of prior year's net income un 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. eshold onto the SAD listing. misstatements on the SAD list e SAD listing to 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 th During our evaluations of overall misstatements, we will compare the total of misst our PM threshold. Application of Methodology to Alpine Audit for 20X2: 20x1 Total Equity for Alpine Cupcakes, Inc.: $741,409 (B.1.1) Materiality thresholds for the 20x2 audit: $7,400 PM = 0.01 x $741,409= $7,414 TM = 0.50 x $7,400 = $3.700 SAD = 0.05 * $7,400 = $370 ment and understanding the rol risk (CR) and detection risk Determine Inherent Risk, Control Risk, and Detection Risk: During the planning of the audit, including understanding the client and its environment a internal control environment, we must determine the level of inherent risk (IR), control risk Ice (DR). 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.

Answer 1

Since the planning materiality is low, thus there will be higher inherent risk in the analytical audit procedures.

Since the company is in loss ( as inferred from application of 1% PM), the internal financial controls should be verified thoroughly. and the control risk should be mitigated.