Alpine Cupcake Audit Case-Cash Module

Question 4:

You have concerns about the adequacy of the substantive audit work done by the engagement team. Review in detail the cash confirmation and bank reconciliation substantive audit program steps (C.3 and C.4) and the associated audit workpapers (C.3.1 to C.4.8)

Identify any of the following issues:

a. Did they perform all of the steps associated with the audit program?

b. Did they perform the steps accurately? If not, describe the problem and follow up on it to the extent possible with the information given.

c. Do you see any other issues or problems with the auditors work or client documentation?

Garcia and Foster, CPAs, LLC 1790 Lawrence St., Denver, CO 80202 Audit Workpapers Client: Alpine Cupcakes, Inc. Balance Sheet Date: December 31, 20X2 Engagement Partner: Anna Garcia Fieldwork ended: February 13, 20X3 Audit Report date: February 27, 20X3 Second Partner Review Completed: Evan Foster 3/5/20X3 Document Completion Date: April 30, 20X3 Alpine Cupcakes, Inc. Working Paper Index Year ended December 31, 20X2 Garcia and Foster, CPAs Index of workpapers included for peer review: Reference ADMIN PERM FILE ORG CHART Audit Program A.1.1 A.1.2 A.1.3 A.1.4 A.1.5 A.1.6 A.1.7 A.1.8 A.1.9 B.1.1 B.2.1 B.2.2 B.2.3 C.1.1 C.2.1 C.2.2 C.2.3 C.2.4 C.2.5 C.2.6 C.2.7 C.2.8 C.2.9 C.2.10 C.2.11 C.3.1 C.3.2 C.3.3 C.4.1 C.4.2 C.4.3 C.4.4 C.4.5 C.4.6 C.5.1 Title Staffing for Alpine Audit Background of Alpine Cupcakes Alpine Cupcakes Organization Chart Risk Assessment Audit Program Balance Sheet as of 12/31/20X1 Income Statement Year Ended 12/31/20X1 Balance Sheet as of 3/31/20X2 Income Statement Quarter Ended 3/31/20X2 Trial Balance as of 12/31/20X2 Balance Sheet as of 12/31/20X2 Income Statement Year Ended 12/31/20X2 Cash Receipts Journal December 20X2 Check Log December 20X2 Audit Risk Assessment Memo Analytical Procedures - Balance Sheet Analytical Procedures - Income Statement Analytical Procedures - Ratio Analysis Alpine Cash Narrative 20X2 Test of Control (TOC) Memo Mailroom Control Listing - October Mailroom Control Listing - December TOC - Mountain Dairy TOC - Denver Office Supplies TOC - Cynthia Jamison TOC - Rocky Mountain Kitchen Goods TOC - Milsap Foods TOC - Bank transfer October 20X2 Bank Reconciliation November 20X2 Bank Reconciliation Cash Confirmation Memo Alpine bank confirmation - copy Alpine bank Confirmation - Dec 20X2 Bank Reconciliation Memo Alpine December 20X2 Bank Reconciliation Alpine December Outstanding Check Listing 20X2 Alpine December Bank Statement 20X2 Alpine January Bank Statement 20X3 Alpine November Outstanding Check Listing 20X2 Cash Memo P&D INDEX: pg.1 of 1 Alpine Cupcakes, Inc. Audit Engagement Team Staffing Year Ended December 31, 20X2 Garcia and Foster, CPAs 1790 Lawrence St., Denver, CO 80202 Client: Year End: Alpine Cupcakes, Inc. 12/31/20X2 Position Partner Name Anna Garcia Initials AAG Sign Off Experience 30 years Client responsibilities Overall review and key discussions Partner Evan Foster EMF EMF 30 years Second partner review Sr. Manager Tryg Johnson TKJ TKJ 15 years Overall review, meetings and discussion with key executives Manager Simon Malik SDM SDM 8 years Review AR/Sales, review Inventory Senior Tracey Smith TES TES 3 years AR/Sales, review Cash, PP&E and AP Staff 2 Sachdev Gupta SNG SNG 2 years Inventory and AP Staff Kaleem Adams KJA KJA Less than one year PPE Staff Alicia Ortiz ARO ARO Less than one year Cash audit procedures AAG ADMIN: page 1 of 1 Alpine Cupcakes, Inc. Background Year Ended December 31, 20X2 Alpine Cupcakes, Inc. is an upscale, boutique bakery located in Denver, Colorado. The company was founded ten years ago by Alexis Madison. She is a native Coloradan who loves all the outdoor activities available in the Rocky Mountainsskiing and snowboarding in the winter, hiking and rock-climbing in the summer. Alexis joined her college ski club during her freshman year, and she regularly made cupcakes for her teammates. She and the other ski club members would enjoy the cupcakes together after a long day on the slopes. Friends and family began asking her to cater their weddings, anniversary parties, and other events. This side business helped put Alexis through college. After graduating from college, Alexis worked at a local CPA firm in their forensic accounting department. She continued to bake for her colleagues and friends, and would often bring cupcakes into her office on Saturdays during busy season. About two years after college, Alexis entered the regional competition \"Cupcake Combat\" and won the grand prize$75,000. Although she loved her work at the CPA firm, Alexis decided to use her winnings to take on her own entrepreneurial dreams. She named her business Alpine Cupcakes, Inc., and began by selling her treats in downtown Denver out of a van she called her \"Cupcake Coup\". A year later, Alexis had her first big break when her friend Julie Beauregard, owner of a local lunch spot, asked Alexis to supply her restaurant with cupcakes. Other business customers soon followed. Finally, Alexis had enough business to open a retail storefront shop. Alpine Cupcakes specializes in gourmet cupcakes. Focusing on cupcakes allows Alpine to keep costs down by eliminating the need to buy specialized equipment for a larger scale bakery. The company offers a variety of choices, including vanilla, chocolate, lemon, spice, carrot cake, red velvet, gluten free chocolate and almond vegan. About 80% of their sales are to business clients, with the remaining 20% sold through its store-front location on the 16th Street mall in downtown Denver. Business sales are on credit while retail sales at the storefront are cash only. Alexis works closely with friends and family, including her brother-in-law who owns Mountain Dairy. Eventually Alexis found that the business was taking a great deal of time and she was unable to supervise the kitchen properly. At that point, Alexis hired her good friend, Gabrielle Kraus, to take over the kitchen as the main chef. She taught everything she knows to Gabrielle. PERM FILE: pg.1 of 2 Alpine Cupcakes, Inc. Background Year Ended December 31, 20X2 Alexis continues to modify her business plan and monitor the gourmet cupcake trends. Current reports expect that the gourmet cupcake business will continue to see positive growth for the next five years. Alexis has a few concerns about the current condition of the business. In 20X1, sugar prices were on the rise and Alexis is hoping that prices decline in 20X2. The United States Dairy Association has predicted that dairy prices will likely increase in 20X2 since the production per cow has been decreasing in the past three years. Alexis continues to monitor the change in prices of other raw materials to try to prevent any pricing shocks to her business. Next year, Alexis is planning to implement a large scale advertising campaign to try to double her cupcake business. She is planning to offer a private debt issuance to cover the costs of the advertising campaign and additional baking equipment needed to increase production. With this debt issuance, she will be required to have audited financial statements and meet various debt covenant restrictions. This has led her to have her 20X2 financial statements audited in preparation for the debt issuance. PERM FILE: pg.2 of 2 Alpine Cupcakes, Inc. Organizational Chart Year Ended December 31, 20X2 l Priscilla Orr Order Mgmt & Accounts Payable Lindsay McKenna Purchasing & Accounts Receivable Miguel Lopez Store Manager Lisa Mercer, Corporate Sales Gabrielle Krause, Chef, Receiving Diana Hayes Asst. Store Manager Cupcake Sales Delivery personnel Cupcake Specialists Associates ORG CHART: pg.1 of 1 Alpine Cupcakes, Inc. Audit Program December 31, 20X2 No. Audit Procedure A.1 Obtain relevant financial statement information A. Obtain Alpine Cupcakes, Inc. Balance Sheet and Income Statement for 20X1. B. Obtain the March 20X1 and March 20X2 balance sheet and income statement information. C. Obtain the following accounting records: December 31, 20X2 Trial Balance; December 31, 20X2 Balance Sheet; 12 Months Ended December 31, 20X2 Income Statement; December 20X2 Cash Receipts Journal; and December 20X2 Check Log. B.1 B.2 Risk Assessment Procedures A. Using Garcia & Foster methodology, set the Planning Materiality (PM), Tolerable Misstatement (TM), and Summary of Audit Difference (SAD) thresholds for the 20X2 Alpine Audit. B. Obtain an understanding of the client and its environment including internal controls. C. Determine the levels of inherent risk, control risk and detection risk. Preliminary Analytical Procedures A. Use Alpine's 1st quarter 20X2 data to determine if there are any accounts with unusual fluctuations. The firm's strategy identifies unusual fluctuations as a change in the account from prior year where the dollar change is greater than TM and percentage change is greater than 10%. i. Discuss with management any accounts with unusual fluctuations to determine the reasoning for these changes. ii. Identify any potential risk (misstatements) that could occur to cause these changes. By Date WP Ref. # TES 10/10/20X2 A.1.1-A.1.2 TES 10/10/20X2 A.1.3-A.1.4 ARO 1/18/20X3 A.1.5-A.1.9 TKJ 9/15/20X2 B.1.1 SDM 9/15/20X2 B.1.1 SDM 9/15/20X2 B.1.1 TES 10/1/20X2 B.2.1-B.2.2 WORK PROGRAM: pg.1 of 4 Alpine Cupcakes, Inc. Audit Program December 31, 20X2 No. B.2 C.1 C.2 Audit Procedure Preliminary Analytical Procedures (Continued) B. Perform a ratio analysis on Q1 20X2 data that identifies any unusual changes in the company's financial statement account balances. The firm's strategy identifies unusual ratios as a 10% change in the ratio from prior year. Our firm methodology also identifies any ratios that are outside of the min and max industry range as a potential red flag. i. Document the analysis and explain the significant fluctuations. ii. Identify any potential risk (misstatements) that could occur in these related accounts to cause the change or difference from prior year and/or industry norms. Cash - Understanding Internal Controls A. Interview appropriate personnel to understand the cash receipts and disbursements process. B. Document the interview and responses in a cash receipts and disbursements narrative. By Date WP Ref. # TES 10/1/20X2 B.2.3 ARO 2/1/20X3 C.1.1 ARO 2/7/20X3 C.1.1 2/1/20X3 C.2.1 2/1/20X3 C.2.2-C.2.3 2/1/20X3 C.2.2-C.2.3 2/1/20X3 C.2.2-C.2.3 2/7/20X3 C.2.1 2/7/20X3 C.2.4-C.2.9 Test Internal Controls Over Cash Receipts and Cash Disbursements A. Test the mailroom control listing by obtaining the October and December Monthly control listing logs ARO from Diana Hayes. Determine if the following controls were performed: i. Lindsay McKenna reconciles the total on the ARO monthly control listing to the Cash Receipts Subledger and GL. ii. Diana inputs the entries on a daily basis. ARO Perform a surprise check to see if she has inputted all of the checks for the day. iii. Miguel Lopez reviews and signs off on the ARO monthly Control Listing by the 2nd day of the following month. B. Obtain 6 cash disbursements made during the ARO month of December to determine if the following controls are operating effectively: i. The company employees follow the proper authorization limits where Miguel Lopez signs any ARO checks under $5,000 and Alexis Madison co-signs (along with Miguel) any checks over $5,000. WORK PROGRAM: pg.2 of 4 Alpine Cupcakes, Inc. Audit Program December 31, 20X2 No. C.2 C.3 C.4 Audit Procedure By Date Test Internal Controls Over Cash Receipts and Cash Disbursements (Continued) ii. The company creates a voucher packet with the ARO 2/7/20X3 purchase order, vendor invoice and the receiving report. iii. Miguel Lopez cancels supporting documents ARO 2/7/20X3 with a PAID stamp, the date of payment and the signature of the person signing the check. C. Obtain the October and November cash operating ARO 2/1/20X3 account reconciliations. Determine if the following controls were properly applied: i. Lindsay McKenna prepares the account ARO 2/1/20X3 reconciliation on a monthly basis. ii. The bank reconciliation is performed within 5 ARO 2/1/20X3 days of month end. iii. The reconciliation is reviewed by Miguel Lopez ARO 2/1/20X3 within 10 days of month end. iv. Unreconcilable differences are investigated by ARO 2/1/20X3 Lindsay McKenna in a timely manner. Cash - Bank Confirmations A. Identify the material cash balances held in bank accounts and provide a memo on the confirmation auditing procedures. B. Have the client create a cash confirmation for their main checking account. C. Create and document the cash confirmation process in a cash confirm control listing. D. Send out confirmations directly to the bank. Document your procedures and actions in the confirm memo. E. When confirmations are received document and set aside for use in the bank reconciliation process. Cash - Bank Reconciliation A. Obtain the December bank reconciliations for significant cash/bank accounts. B. Perform the following procedures to complete substantive testing on the December bank reconciliation. i. Test the reconciliation for clerical accuracy ii. Tie the reconciliation to the TB: Tie the balance per the books on the bank reconciliation to the Trial Balance. WP Ref. # C.2.4-C.2.9 C.2.4-C.2.9 C.2.10C.2.11 C.2.10C.2.11 C.2.10C.2.11 C.2.10C.2.11 C.2.10C.2.11 ARO 2/1/20X3 C.3.1 ARO 2/1/20X3 C.3.2 ARO 1/18/20X3 C.3.1 ARO 2/1/20X3 C.3.1 ARO 2/1/20X3 C.3.3 ARO 2/1/20X3 C.4.1-C.4.2 ARO 2/8/20X3 C.4.1-C.4.2 ARO 2/8/20X3 C.4.2, A.1.1 WORK PROGRAM: pg.3 of 4 Alpine Cupcakes, Inc. Audit Program December 31, 20X2 No. C.4 C.5 Audit Procedure Cash - Bank Reconciliation (Continued) iii. Tie the balance per the bank to the cash confirmation. iv. Tie the outstanding checks to the outstanding check listing. v. Test the deposits in transit: trace the deposits in transit to the January cutoff bank statement and to the cash receipts journal for December. 1. Obtain the January cutoff bank statement directly from bank. vi. Test other items: Tie any bank fees, interest earned or other reconciling items to the December bank statement. C. Test the outstanding checks on the December bank reconciliation as follows: i. Trace the total of outstanding checks from the reconciliation to the outstanding checks listing ii. Trace the outstanding checks (date, amount, check number) from the outstanding check listing to clearance on the January Cutoff bank statement. iii. Reconcile the outstanding check register from December by beginning with the outstanding checks total for November, adding checks written during December from the client's cash disbursements records, and subtracting checks clearing on the bank statement in December. iv. Investigate any checks that still are outstanding from the November outstanding check register. D. Note any unusual items Inquiry of Management A. Discuss with management any related party transactions that would affect cash transactions and any restrictions on cash. B. Determine if any of the above items require disclosure By Date WP Ref. # ARO 2/8/20X3 C.4.2, C.3.3 ARO 2/8/20X3 C.4.2, C.4.3 ARO 2/8/20X3 C.4.2, C.4.5, A.1.4 ARO 2/8/20X3 C.4.5 ARO 2/8/20X3 C.4.2, C.4.4 ARO 2/8/20X3 C.4.2, C.4.3 ARO 2/8/20X3 C.4.2, C.4.3, C.4.5 ARO 2/8/20X3 C.4.3,C.4.4, C.4.6, A.1.5, ARO 2/8/20X3 C.4.3, C.4.6 ARO 2/8/20X3 C.4.1 ARO 2/9/20X3 C.5.1 ARO 2/14/20X3 C.5.1 WORK PROGRAM: pg.4 of 4 Alpine Cupcakes, Inc. Balance Sheets as of 12/31/20X1 and 12/31/20X0 Audit year December 31, 20X2 As of 12/31/20X1 As of 12/31/20X0 Balance Sheet Current Assets Cash: Storefront Cash: Corporate Accounts Cash: Payroll Accounts Receivable Office Supplies Cooking supplies Inventory: Ingredients Inventory: Cake Boxes and Cupcake cups Inventory: Beverages Total Current Assets Long-term Assets Equipment Accumulated Depreciation: Equipment Plant & Property Accumulated Depreciation: Plant & Property Land Total Long-term assets Total Assets $135,135.15 301,140.10 124,726.15 191,451.64 2,604.00 4,713.00 25,580.09 1,190.10 3,260.80 789,801.03 $150,000.00 100,000.00 125,000.00 80,090.00 2,500.00 4,200.00 22,218.00 1,399.50 2,323.00 487,730.50 150,180.00 78,828.00 330,000.00 79,200.00 125,000.00 447,152.00 $1,236,953.03 150,180.00 62,220.00 330,000.00 66,000.00 125,000.00 476,960.00 $964,690.50 Liabilities Accounts Payable Taxes Payable Mortgage Payable Notes Payable: Vehicles Total Liabilities 38,556.70 0.00 292,262.13 24,878.31 355,697.14 26,881.50 0.00 298,420.95 33,858.57 359,161.02 Stockholder's Equity Common Stock Retained Earnings Total Stockholder's Equity 170,921.00 710,334.89 881,255.89 170,921.00 434,608.48 605,529.48 $1,236,953.03 $964,690.50 Total Liabilities and Stockholder's Equity A.1.1: pg.1 of 1 Alpine Cupcakes, Inc. Statements of Profit and Loss, 12 Months ended 12/31/X1 and 12/31/X0 Audit year December 31, 20X2 Revenue Sales Revenue: Corporate Accounts Sales Revenues: Storefront Total Sales Revenue Cost of Goods Sold: Ingredients Cost of Goods Sold: Boxes and Cupcake cups Cost of Goods Sold: Beverages Total COGS Gross Profit Interest Revenue Gross Profit Plus Interest Revenue Expenses Wage Expense Tax expense Medical Insurance Expense Auto Insurance Expense Interest Expense Electrical & Gas Service Expense Liability Insurance Expense Telecommunications Expense Cell Phone Service Expense Postage Expense Professional Services Expense Maintenance Expense Office supplies expense Dry Cleaning Expense Storefront Paper Supplies Expense Rental Expense Waste Services Expense Car Maintenance and Fuel Expense Repair Expense Water Expense Soda Machine Repair and CO2 Expense Credit Card Expense Cooking Supplies Expense Banking Fees Selling and Admin Expenses Depreciation Expense: Equipment Depreciation Expense: Plant & Property Total Depreciation Expense Total Expenses Net Income 12/31/20X1 1,400,349.58 345,317.00 $1,745,666.58 264,716.87 15,389.90 23,081.20 $303,187.97 $1,442,478.61 306.00 $1,442,784.61 12/31/20X0 776,593.05 287,886.09 $1,064,479.14 261,591.68 5,026.65 6,929.07 $273,547.39 $790,931.75 299.63 $791,231.38 866,004.00 57,829.08 32,400.00 4,140.00 16,492.92 6,736.80 14,805.20 1,821.00 3,660.00 555.75 8,437.50 4,716.00 30,196.00 1,703.75 3,374.25 19,008.00 600.00 3,956.40 1,508.75 1,557.50 4,728.00 3,714.30 47,745.00 1,560.00 $1,137,250.20 16,608.00 13,200.00 $29,808.00 $1,167,058.20 $275,726.41 329,465.62 11,382.85 25,631.85 4,121.40 6,684.82 5,552.53 4,462.71 1,387.80 2,530.50 383.79 3,262.25 2,335.09 11,720.37 1,224.46 428.27 11,784.81 447.04 3,010.55 967.84 1,339.52 2,852.89 2,648.22 27,045.65 66.12 $460,736.95 16,608.00 13,200.00 $29,808.00 $490,544.95 $300,686.43 A.1.2: pg.1 of 1 Alpine Cupcakes, Inc. Balance Sheets as of 3/31/X2 and 3/31/X1 Audit year December 31, 20X2 As of 3/31/20X2 As of 3/31/20X1 125,498.76 436,100.03 123,432.43 120,324.46 2,379.00 4,777.00 25,190.66 1,423.05 3,340.30 $842,465.69 142,293.51 100,215.36 122,931.81 158,766.71 2,133.00 3,808.00 26,779.44 434.95 2,348.50 $559,711.28 150,180.00 82,455.00 330,000.00 82,500.00 125,000.00 440,225.00 $1,282,690.69 150,180.00 66,372.00 330,000.00 69,300.00 125,000.00 469,508.00 $1,029,219.28 Liabilities Accounts Payable Taxes Payable Mortgage Payable Notes Payable: Vehicles Total Liabilities 25,712.00 0.00 290,673.81 22,555.53 $338,941.34 40,168.65 0.00 296,909.93 31,659.28 $368,737.86 Stockholder's Equity Common Stock Retained Earnings Total Stockholder's Equity 170,921.00 772,828.35 $943,749.35 170,921.00 489,560.42 $660,481.42 $1,282,690.69 $1,029,219.28 Current Assets Cash: Storefront Cash: Corporate Accounts Cash: Payroll Accounts Receivable Office Supplies Cooking supplies Inventory: Ingredients Inventory: Cake Boxes and Cupcake cups Inventory: Beverages Total Current Assets Long-term Assets Equipment Accumulated Depreciation: Equipment Plant & Property Accumulated Depreciation: Plant & Property Land Total Long-term assets Total Assets Total Liabilities and Stockholder's Equity A.1.3: pg.1 of 1 Alpine Cupcakes, Inc. Statements of Profit and Loss, three months ended 3/31/X1 and 3/31/X2 Audit year December 31, 20X2 Revenue Sales Revenue: Corporate Accounts Sales Revenues: Storefront Total Sales Revenue Cost of Goods Sold: Ingredients Cost of Goods Sold: Boxes and Cupcake cups Cost of Goods Sold: Beverages Total COGS Gross Profit Interest Revenue Gross Profit Plus Interest Revenue Expenses Wage Expense Tax expense Medical Insurance Expense Auto Insurance Expense Interest Expense Electrical & Gas Service Expense Liability Insurance Expense Telecommunications Expense Cell Phone Service Expense Postage Expense Professional Services Expense Maintenance Expense Office supplies expense Dry Cleaning Expense Storefront Paper Supplies Expense Rental Expense Waste Services Expense Car Maintenance and Fuel Expense Repair Expense Water Expense Soda Machine Repair and CO2 Expense Credit Card Expense Cooking Supplies Expense Banking Fees Selling and Admin Expenses Depreciation Expense: Equipment Depreciation Expense: Plant & Property Total Depreciation Expense Total Expenses Net Income 03/31/20X2 $353,739.58 80,649.00 434,388.58 66,736.39 3,875.55 5,466.50 76,078.44 358,310.14 89.00 358,399.14 03/31/20X1 $365,450.08 60,000.00 425,450.08 59,623.00 3,755.55 5,681.50 69,060.05 356,390.03 65.00 356,455.03 216,719.00 17,971.24 8,100.00 1,035.00 3,996.90 1,523.20 3,768.40 472.50 912.00 139.50 2,070.00 1,212.00 8,050.00 398.75 778.25 4,752.00 150.00 995.38 372.50 378.75 1,156.00 878.31 12,704.00 445.00 288,978.68 3,627.00 3,300.00 6,927.00 295,905.68 $62,493.46 217,791.00 18,077.94 8,100.00 1,035.00 4,197.69 1,708.00 3,693.60 462.00 933.00 135.90 2,122.50 1,132.00 7,342.00 416.15 869.00 4,752.00 150.00 1,026.78 381.25 373.75 1,128.00 897.89 16,880.64 445.00 294,051.09 4,152.00 3,300.00 7,452.00 301,503.09 $54,951.94 A.1.4: pg.1 of 1 Alpine Cupcakes, Inc. Trial Balance December 31, 20X2 PBC Account No. 1100 1101 1102 1200 1250 1260 1600 1610 1620 1300 1400 1310 1410 1320 2200 2100-2105 2400 2500 3100 3110 4100 4101 5000 5010 5020 4102 6200 6201-6205 7001 7002 7003 7004 7005 7006 7007 7010 7011 Description Cash: Storefront Cash: Corporate Accounts C.4.2 Cash: Payroll Accounts Receivable Office Supplies Cooking supplies Inventory: Ingredients Inventory: Cake Boxes and Cupcake cups Inventory: Beverages Equipment Accumulated Depreciation: Equipment Plant & Property Accumulated Depreciation: Plant & Property Land Accounts Payable Taxes Payable Mortgage Payable Notes Payable: Vehicles Common Stock Retained Earnings (beginning) Sales Revenue: Corporate Accounts Sales Revenues: Storefront Cost of Goods Sold: Ingredients Cost of Goods Sold: Boxes and Cupcake cups Cost of Goods Sold: Beverages Interest Revenue Wage Expense Tax expense Medical Insurance Expense Auto Insurance Expense Interest Expense Electrical & Gas Service Expense Liability Insurance Expense Telecommunications Expense Cell Phone Service Expense Postage Expense Professional Services Expense Dr $ 124,473.95 651,057.24 123,227.85 195,120.87 1,726.00 4,090.00 22,053.14 2,165.65 4,224.00 150,180.00 Cr 93,336.00 330,000.00 92,400.00 125,000.00 37,691.60 285,788.21 15,393.70 170,921.00 710,334.89 1,465,488.42 349,820.50 275,649.21 16,093.95 23,390.80 320.00 869,372.00 58,032.08 32,400.00 4,140.00 15,673.47 6,563.20 14,862.40 1,762.50 3,834.00 538.65 8,311.00 A.1.5: pg.1 of 2 Alpine Cupcakes, Inc. Trial Balance December 31, 20X2 Account No. 7012 7013 7014 7015 7016 7017 7018 7019 7020 7021 7022 7023 7024-7025 8000 8010 Description Maintenance Expense Office supplies expense Dry Cleaning Expense Storefront Paper Supplies Expense Rental Expense Waste Services Expense Car Maintenance and Fuel Expense Repair Expense Water Expense Soda Machine Repair and CO2 Expense Credit Card Expense Cooking Supplies Expense Banking Fees Depreciation Expense: Equipment Depreciation Expense: Plant & Property Dr 4,712.00 31,553.00 1,671.85 3,148.75 19,008.00 600.00 3,956.40 1,458.75 1,536.25 4,680.00 3,760.36 52,199.00 1,560.00 14,508.00 13,200.00 $3,221,494.32 Cr $3,221,494.32 A.1.5: pg.2 of 2 Alpine Cupcakes, Inc. Statement of Financial Position (USD $) December 31, 20X2 PBC December 31, 20X2 Current Assets Cash: Storefront Cash: Corporate Accounts Cash: Payroll Accounts Receivable Office Supplies Cooking supplies Inventory: Ingredients Inventory: Cake Boxes and Cupcake cups Inventory: Beverages Total Current Assets Long-term Assets Equipment Accumulated Depreciation: Equipment Plant & Property Accumulated Depreciation: Plant & Property Land Total Long-term assets Total Assets $ 124,473.95 651,057.24 123,227.85 195,120.87 1,726.00 4,090.00 22,053.14 2,165.65 $4,224.00 $1,128,138.70 December 31, 20X1 $ 135,135.15 301,140.10 124,726.15 191,451.64 2,604.00 4,713.00 25,580.09 1,190.10 $3,260.80 $789,801.03 150,180.00 93,336.00 330,000.00 92,400.00 125,000.00 419,444.00 $1,547,582.70 150,180.00 78,828.00 330,000.00 79,200.00 125,000.00 447,152.00 $1,236,953.03 Total Liabilities 37,691.60 0.00 $285,788.21 $15,393.70 338,873.51 38,556.70 0.00 $292,262.13 $24,878.31 355,697.14 Stockholder's Equity Common Stock Retained Earnings Total Stockholder's Equity 170,921.00 1,037,788.19 1,208,709.19 170,921.00 710,334.89 881,255.89 Total Liabilities and Stockholder's Equity 1,547,582.70 1,236,953.03 Liabilities Accounts Payable Taxes Payable Mortgage Payable Notes Payable: Vehicles A.1.6: pg.1 of 1 Alpine Cupcakes, Inc. Statement of Income (USD $) For the 12 Months Ended December 31, 20X2 PBC Statement of Profit and Loss Sales Revenue: Corporate Accounts Sales Revenues: Storefront Total Sales Revenue Cost of Goods Sold: Ingredients Cost of Goods Sold: Boxes and Cupcake cups Cost of Goods Sold: Beverages Total COGS Gross Profit Interest Revenue Gross Profit Plus Interest Revenue Expenses Wage Expense Tax expense Medical Insurance Expense Auto Insurance Expense Interest Expense Electrical & Gas Service Expense Liability Insurance Expense Telecommunications Expense Cell Phone Service Expense Postage Expense Professional Services Expense Maintenance Expense Office supplies expense Dry Cleaning Expense Storefront Paper Supplies Expense Rental Expense Waste Services Expense Car Maintenance and Fuel Expense Repair Expense Water Expense Soda Machine Repair and CO2 Expense Credit Card Expense Cooking Supplies Expense Banking Fees Selling and Admin Expenses Depreciation Expense: Equipment Depreciation Expense: Plant & Property Total Depreciation Expense Total Expenses Net Income 12 Months Ended 12 Months Ended December 31, 20X2 $1,465,488.42 $349,820.50 $1,815,308.92 $275,649.21 $16,093.95 $23,390.80 $315,133.96 $1,500,174.96 $320.00 $1,500,494.96 December 31, 20X1 $1,400,349.58 $345,317.00 $1,745,666.58 $264,716.87 $15,389.90 $23,081.20 $303,187.97 $1,442,478.61 $306.00 $1,442,784.61 $869,372.00 $58,032.08 $32,400.00 $4,140.00 $15,673.47 $6,563.20 $14,862.40 $1,762.50 $3,834.00 $538.65 $8,311.00 $4,712.00 $31,553.00 $1,671.85 $3,148.75 $19,008.00 $600.00 $3,956.40 $1,458.75 $1,536.25 $4,680.00 $3,760.36 $52,199.00 $1,560.00 $1,145,333.66 $14,508.00 $13,200.00 $27,708.00 $1,173,041.66 $327,453.30 $866,004.00 $57,829.08 $32,400.00 $4,140.00 $16,492.92 $6,736.80 $14,805.20 $1,821.00 $3,660.00 $555.75 $8,437.50 $4,716.00 $30,196.00 $1,703.75 $3,374.25 $19,008.00 $600.00 $3,956.40 $1,508.75 $1,557.50 $4,728.00 $3,714.30 $47,745.00 $1,560.00 $1,137,250.20 $16,608.00 $13,200.00 $29,808.00 $1,167,058.20 $275,726.41 A.1.7: pg.1 of 1 Alpine Cupcakes, Inc. Cash Receipts Journal - Corporate Account December 20X2 Entry No 1468 1469 1470 1471 1472 1473 1474 1475 1476 1477 Date 12/1/20X2 Acct Number PBC 1101 1200 Sender Mountain Trout Fish House Cash: Corporate Accounts Accounts Receivable 1101 1200 Southside Caf Cash: Corporate Accounts Accounts Receivable $20.13 1101 1200 Country Barrel Restaurants Cash: Corporate Accounts Accounts Receivable $6,933.60 1101 1200 Mountain Trout Fish House Cash: Corporate Accounts Accounts Receivable $2,299.20 1101 1200 St. Francis Hotel and Spa Cash: Corporate Accounts Accounts Receivable $2,047.20 1101 1200 UC Boulder Food Service Cash: Corporate Accounts Accounts Receivable $11,455.20 1101 1200 Scotty's Taverns Cash: Corporate Accounts Accounts Receivable $10.07 1101 1200 St. Francis Hotel and Spa Cash: Corporate Accounts Accounts Receivable $14.22 1101 1200 Steinberg Delis Cash: Corporate Accounts Accounts Receivable $7.32 1101 1200 Bon Appetito Restaurants Cash: Corporate Accounts Accounts Receivable $10,968.00 12/1/20X2 12/1/20X2 12/1/20X2 12/1/20X2 12/1/20X2 12/2/20X2 12/2/20X2 12/2/20X2 12/2/20X2 Debit Credit $15.97 $15.97 $20.13 $6,933.60 $2,299.20 $2,047.20 $11,455.20 $10.07 $14.22 $7.32 $10,968.00 A.1.8: pg.1 of 8 Alpine Cupcakes, Inc. Cash Receipts Journal - Corporate Account December 20X2 Entry No 1478 1479 1480 1481 1482 1483 1484 1485 1486 1487 Date 12/2/20X2 Acct Number 1101 1200 Sender Brown's Tavern Cash: Corporate Accounts Accounts Receivable 1101 1200 High Country Coffee Cash: Corporate Accounts Accounts Receivable $4,852.80 1101 1200 Steinberg Delis Cash: Corporate Accounts Accounts Receivable $1,053.60 1101 1200 The Sandwich Place Cash: Corporate Accounts Accounts Receivable $1,221.60 1101 1200 UC Denver Food Service Cash: Corporate Accounts Accounts Receivable $8,450.40 1101 1200 Broken Eggs Restaurant Cash: Corporate Accounts Accounts Receivable $1,063.20 1101 1200 Denver Bakery Caf Cash: Corporate Accounts Accounts Receivable $5,284.80 1101 1200 Granny's Caf Cash: Corporate Accounts Accounts Receivable $2,620.80 1101 1200 Smokey's Barbeque Pit Cash: Corporate Accounts Accounts Receivable $4,440.00 1101 1200 Bon Appetito Restaurants Cash: Corporate Accounts Accounts Receivable $15,040.80 12/2/20X2 12/2/20X2 12/2/20X2 12/2/20X2 12/3/20X2 12/3/20X2 12/3/20X2 12/3/20X2 12/13/20X2 Debit Credit $547.20 $547.20 $4,852.80 $1,053.60 $1,221.60 $8,450.40 $1,063.20 $5,284.80 $2,620.80 $4,440.00 $15,040.80 A.1.8: pg.2 of 8 Alpine Cupcakes, Inc. Cash Receipts Journal - Corporate Account December 20X2 Entry No 1488 1489 1490 1491 1492 1493 1494 1495 1496 1497 Date 12/13/20X2 Acct Number 1101 1200 Sender Elkhorn Coffee Shops Cash: Corporate Accounts Accounts Receivable 1101 1200 Bon Appetito Restaurants Cash: Corporate Accounts Accounts Receivable $11,260.80 1101 1200 Bon Appetito Restaurants Cash: Corporate Accounts Accounts Receivable $13,161.60 1101 1200 Bon Appetito Restaurants Cash: Corporate Accounts Accounts Receivable $94.45 1101 1200 Chavez Cantina Cash: Corporate Accounts Accounts Receivable $28.33 1101 1200 Granny's Caf Cash: Corporate Accounts Accounts Receivable $22.30 1101 1200 Mile High Steakhouses Cash: Corporate Accounts Accounts Receivable $63.60 1101 1200 Scotty's Taverns Cash: Corporate Accounts Accounts Receivable $2.57 1101 1200 Broken Eggs Restaurant Cash: Corporate Accounts Accounts Receivable $12.18 1101 1200 Buckhead Restaurants Cash: Corporate Accounts Accounts Receivable $27.53 12/18/20X2 12/24/20X2 12/25/20X2 12/25/20X2 12/25/20X2 12/25/20X2 12/25/20X2 12/26/20X2 12/26/20X2 Debit Credit $7,972.80 $7,972.80 $11,260.80 $13,161.60 $94.45 $28.33 $22.30 $63.60 $2.57 $12.18 $27.53 A.1.8: pg.3 of 8 Alpine Cupcakes, Inc. Cash Receipts Journal - Corporate Account December 20X2 Entry No 1498 1499 1500 1501 1502 1503 1504 1505 1506 1507 Date 12/26/20X2 Acct Number 1101 1200 Sender Julie's Wraps Cash: Corporate Accounts Accounts Receivable 1101 1200 Luigi's Bistro Cash: Corporate Accounts Accounts Receivable $16.53 1101 1200 Smokey's Barbeque Pit Cash: Corporate Accounts Accounts Receivable $29.05 1101 1200 Bon Appetito Restaurants Cash: Corporate Accounts Accounts Receivable $13,600.80 1101 1200 Chavez Cantina Cash: Corporate Accounts Accounts Receivable $4,080.00 1101 1200 Country Barrel Restaurants Cash: Corporate Accounts Accounts Receivable $7,180.80 1101 1200 High Country Coffee Cash: Corporate Accounts Accounts Receivable $6,566.40 1101 1200 Mountain Lion Restaurant Cash: Corporate Accounts Accounts Receivable $3,520.80 1101 1200 Papa's Restaurant Cash: Corporate Accounts Accounts Receivable $2,611.20 1101 1200 St. Francis Hotel and Spa Cash: Corporate Accounts Accounts Receivable $1,840.80 12/26/20X2 12/26/20X2 12/26/20X2 12/26/20X2 12/26/20X2 12/26/20X2 12/26/20X2 12/26/20X2 12/26/20X2 Debit Credit $16.77 $16.77 $16.53 $29.05 $13,600.80 $4,080.00 $7,180.80 $6,566.40 $3,520.80 $2,611.20 $1,840.80 A.1.8: pg.4 of 8 Alpine Cupcakes, Inc. Cash Receipts Journal - Corporate Account December 20X2 Entry No 1508 1509 1510 1511 1512 1513 1514 1515 1516 1517 Date 12/27/20X2 Acct Number 1101 1200 Sender Boulder Tea house Cash: Corporate Accounts Accounts Receivable 1101 1200 Bubba's Fish House Cash: Corporate Accounts Accounts Receivable $17.38 1101 1200 Elkhorn Coffee Shops Cash: Corporate Accounts Accounts Receivable $41.43 1101 1200 Mountain Trout Fish House Cash: Corporate Accounts Accounts Receivable $16.15 1101 1200 Nora's Caf Cash: Corporate Accounts Accounts Receivable $33.97 1101 1200 UC Boulder Food Service Cash: Corporate Accounts Accounts Receivable $79.65 1101 1200 UC Denver Food Service Cash: Corporate Accounts Accounts Receivable $61.27 1101 1200 Bubba's Fish House Cash: Corporate Accounts Accounts Receivable $2,503.20 1101 1200 Southside Caf Cash: Corporate Accounts Accounts Receivable $2,757.60 1101 1200 Brown's Tavern Cash: Corporate Accounts Accounts Receivable $1.67 12/27/20X2 12/27/20X2 12/27/20X2 12/27/20X2 12/27/20X2 12/27/20X2 12/27/20X2 12/27/20X2 12/28/20X2 Debit Credit $3.33 $3.33 $17.38 $41.43 $16.15 $33.97 $79.65 $61.27 $2,503.20 $2,757.60 $1.67 A.1.8: pg.5 of 8 Alpine Cupcakes, Inc. Cash Receipts Journal - Corporate Account December 20X2 Entry No 1518 1519 1520 1521 1522 1523 1524 1525 1526 1527 Date 12/28/20X2 Acct Number 1101 1200 Sender Country Barrel Restaurants Cash: Corporate Accounts Accounts Receivable 1101 1200 Denver Sirloin Restaurants Cash: Corporate Accounts Accounts Receivable $24.55 1101 1200 Fontana Catering & Caf Cash: Corporate Accounts Accounts Receivable $16.48 1101 1200 Little's Grill Cash: Corporate Accounts Accounts Receivable $6.53 1101 1200 Mountain Lion Restaurant Cash: Corporate Accounts Accounts Receivable $24.45 1101 1200 Papa's Restaurant Cash: Corporate Accounts Accounts Receivable $18.13 1101 1200 Pebbles Inn Cash: Corporate Accounts Accounts Receivable $3.10 1101 1200 Southside Caf Cash: Corporate Accounts Accounts Receivable $19.15 1101 1200 St. Francis Hotel and Spa Cash: Corporate Accounts Accounts Receivable $12.78 1101 1200 Steinberg Delis Cash: Corporate Accounts Accounts Receivable $12.18 12/28/20X2 12/28/20X2 12/28/20X2 12/28/20X2 12/28/20X2 12/28/20X2 12/28/20X2 12/28/20X2 12/28/20X2 Debit Credit $49.87 $49.87 $24.55 $16.48 $6.53 $24.45 $18.13 $3.10 $19.15 $12.78 $12.18 A.1.8: pg.6 of 8 Alpine Cupcakes, Inc. Cash Receipts Journal - Corporate Account December 20X2 Entry No 1528 1529 1530 1531 1532 1533 1534 1535 1536 1537 Date 12/28/20X2 Acct Number 1101 1200 Sender The Breakfast Place Cash: Corporate Accounts Accounts Receivable 1101 1200 The Sandwich Place Cash: Corporate Accounts Accounts Receivable $11.05 1101 1200 Nora's Caf Cash: Corporate Accounts Accounts Receivable $4,560.00 1101 1200 Mountain Trout Fish House Cash: Corporate Accounts Accounts Receivable $2,325.60 1101 1100 Cash: Storefront Cash: Corporate Accounts Cash: Storefront $30,000.00 1101 1200 Fontana Catering & Caf Cash: Corporate Accounts Accounts Receivable $2,373.60 1101 1200 Granny's Caf Cash: Corporate Accounts Accounts Receivable $3,211.20 1101 1200 Julie's Wraps Cash: Corporate Accounts Accounts Receivable $2,414.40 1101 1200 The Breakfast Place Cash: Corporate Accounts Accounts Receivable $4,140.00 1101 1200 UC Boulder Food Service Cash: Corporate Accounts Accounts Receivable $11,469.60 12/28/20X2 12/28/20X2 12/28/20X2 12/28/20X2 12/29/20X2 12/29/20X2 12/30/20X2 12/30/20X2 12/30/20X2 Debit Credit $28.75 $28.75 $11.05 $4,560.00 $2,325.60 $30,000.00 $2,373.60 $3,211.20 $2,414.40 $4,140.00 $11,469.60 A.1.8: pg.7 of 8 Alpine Cupcakes, Inc. Cash Receipts Journal - Corporate Account December 20X2 Entry No 1538 1539 1540 1541 Date 12/30/20X2 Acct Number 1101 1200 Sender UC Denver Food Service Cash: Corporate Accounts Accounts Receivable 1101 1200 Boulder Tea house Cash: Corporate Accounts Accounts Receivable $480.00 1101 1200 Broken Eggs Restaurant Cash: Corporate Accounts Accounts Receivable $1,754.40 1101 1200 Elkhorn Coffee Shops Cash: Corporate Accounts Accounts Receivable $5,966.40 12/31/20X2 12/31/20X2 12/31/20X2 Debit Credit $8,822.40 $8,822.40 $480.00 $1,754.40 $5,966.40 $233,715.69 $233,715.69 A.1.8: pg.8 of 8 Alpine Cupcakes, Inc. Check Log - Corporate Cash Account December 20X2 PBC Check Date Check number Check Type Amount Payee 12/1/2002 12/1/2002 12/1/2002 12/1/2002 12/3/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 4780 4781 4782 4783 4784 4785 4786 4787 4788 4789 4790 4791 4792 4793 4794 4795 4796 payment payment payment payment payment payment payment payment payment payment payment payment payment payment payment payment payment $1,745.00 $467.00 $424.00 $7,491.00 $2,725.00 $2,657.80 $2,700.00 $345.00 $576.80 $800.00 $426.80 $127.50 $345.00 $50.40 $265.00 $270.00 $165.00 12/4/2002 4797 payment $444.00 12/4/2002 12/4/2002 4798 4799 payment payment $123.25 $275.00 12/4/2002 4800 payment $1,584.00 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/5/2002 12/5/2002 12/28/2002 12/28/2002 12/28/2002 12/30/2002 12/31/2002 12/31/2002 4801 4802 4803 4804 4805 4806 4807 4808 4809 4810 4811 4812 4813 payment payment payment payment payment payment payment payment payment payment payment payment payment $50.00 $348.54 $111.25 $143.75 $456.00 $4,284.00 $80.00 $78,496.32 $10,376.50 $1,747.00 $5,675.76 $1,446.18 $1,446.18 Colorado Home State Bank Wells Fargo Bank of Denver Mountain Dairy Company Denver Office Supplies Boulder Spice Importers Blue Cross/Blue Shield - Colorado State Farm Insurance Xcel Energy Company Farmers Insurance Farmers Insurance Qwest Telephone Verizon US Post Office Hwang Accounting Connor Computing Cynthia Jamison, Attorney Rocky Mountain Heating and Air Conditioning Summit Cleaners Denver Restaurant Supplies Rocky Mountain Property Management Republic Waste Services Chevron Jerry's Handiman City of Denver Speedy Fountain Service Rocky Mountain Kitchen Goods Joe's Organic Supplies to Cash: Payroll Account Mountain Dairy Company PaperMart Milsap Foods Colorado Dept of Revenue Denver City Dept of Revenue Entered in the system yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes 12/1/2002 12/1/2002 12/1/2002 12/1/2002 12/3/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 yes 12/4/2002 yes yes 12/4/2002 12/4/2002 yes 12/4/2002 yes yes yes yes yes yes yes yes yes yes yes yes yes 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/4/2002 12/5/2002 12/5/2002 12/28/2002 12/28/2002 12/28/2002 12/30/2002 12/31/2002 12/31/2002 JE Date A.1.9: pg.1 of 1 Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit year December 31, 20X2 Garcia and Foster, CPAs Performed by: SDM Reviewed by: TKJ Date: 09/15/20X2 Date: 02/28/20X3 Materiality Methodology: Planning materiality (PM) is determined as follows: (1) For large public clients, we base materiality on 4% 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 small private clients with fewer than 4 owners, we base materiality on 1% of prior year's equity. Tolerable misstatement (TM) is set at 50% of Planning Materiality. Summary of audit differences (SAD) threshold is set at 5% of Planning Materiality. 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 20X2: 20X1 Total Equity for Alpine Cupcakes, Inc.: $605,529 Materiality thresholds for the 20X2 audit: PM = 0.01 $605,529 = $6,056 $6,000 TM = 0.50 $6,055 = $3,028 $3,000 SAD = 0.05 $6,055 = $303 $300 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 20X2 Alpine Audit: Our preliminary risk assessment levels are set as follows: Audit Risk = Low Inherent risk = High Control risk = Moderate Detection risk = High We have set our risk assessment levels for the overall audit in order to reduce our audit risk to the appropriate level. B.1.1: pg.1 of 2 Alpine Cupcakes, Inc. Audit Risk Assessment Memo Audit year December 31, 20X2 Fraud Brainstorming: To comply with AU-C 240, Consideration of Fraud in a Financial Statement Audit, 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, 20X3. Overall we find the client to be highly ethical. Owner Alexis Madison has the highest integrity and has strong ties to the community. Tryg and I concluded that there was little or no risk of material misstatement due to fraud at Alpine and no accounts for which fraud was a concern. Simon Malik Tryg Johnson Understanding of client's environment including internal controls: We reviewed the client's background information retained in our PERM FILE workpapers to understand the company and its inherent risk. We will also perform an understanding of internal controls over the client's processes prior to our test of control procedures (see audit program.) Through performing preliminary analytical procedures, we also assessed any significant changes within the company's accounts and activities (see WPs B.2.1 through B.2.3.) Per discussion with Alexis Madison, there are no significant changes within the company beyond the consideration of issuing debt. SDM Account balances and transaction risk assessment: Per our review of the account balances and transactions, we have assessed a higher level for the risk of material misstatement in the following accounts: Inventory (due to inventory price fluctuations) Revenue (potential fictitious sales could lead to overstated revenues) Accounts Receivable (potential fictitious sales transactions could lead to AR overstatement) We believe that there is a higher likelihood for material misstatements in these accounts. SDM Overall Risk Assessment summary: Based on our preliminary analytical procedures, and knowledge of the client, we assess inherent risk as high, control risk as medium, which makes detection risk high. Simon Malik B.1.1: pg.2 of 2 Alpine Cupcakes, Inc. Preliminary Analytical ProceduresQuarterly Balance Sheet December 31, 20X2 Performed by: SDM 10/1/20X2 as of 3/31/20X2 Current Assets Cash: Storefront Cash: Corporate Accounts Cash: Payroll Accounts Receivable Office Supplies Cooking supplies Inventory: Ingredients Inventory: Cake Boxes and Cupcake cups Inventory: Beverages Total Current Assets Long-term Assets Equipment A/D: Equipment Plant & Property A/D: Plant & Property Land Total Long-term assets Total Assets Liabilities Accounts Payable Taxes Payable Mortgage Payable Notes Payable: Vehicles Total Liabilities Stockholder's Equity Common Stock Retained Earnings Total Liabilities and Stockholder's Equity as of 3/31/20X1 $ Change Reviewed: TKJ 10/30/20X2 % Change 125,498.76 142,293.51 (15,794.75) -11.10% 1 436,100.03 100,215.36 336,884.67 336.16% 1 123,432.43 120,324.46 2,379.00 4,777.00 25,190.66 122,931.81 158,766.71 2,133.00 3,808.00 26,779.44 1,500.62 (37,442.25) 1,246.00 1,969.00 (588.78) 1.22% -23.58% 58.42% 51.71% -2.20% 2 1,423.05 434.95 1,988.10 457.09% $3,340.30 $842,465.69 $2,348.50 $559,711.28 1,991.80 84.81% 150,180.00 82,455.00 330,000.00 82,500.00 125,000.00 440,225.00 $1,282,690.69 150,180.00 66,372.00 330,000.00 69,300.00 125,000.00 469,508.00 $1,029,219.28 0.00 16,083.00 0.00 13,200.00 0.00 0.00% 24.23% 0.00% 19.05% 0.00% 3 3 25,712.00 0.00 $290,673.81 $22,555.53 338,941.34 40,168.65 0.00 $296,909.93 $31,659.28 368,737.86 (14,456.65) 0.00 (6,236.12) (9,103.75) -35.99% 0.00% -2.10% -28.76% 4 5 5 170,921.00 772,828.35 943,749.35 170,921.00 489,560.42 660,481.42 0.00 283,267.93 0.00% 57.86% 6 $1,282,690.69 $1,029,219.28 F - The fluctuation is less than TM ($13,000) and less than a 10% change. F - Footed B.2.1: pg.1 of 3 Alpine Cupcakes, Inc. Preliminary Analytical ProceduresQuarterly Balance Sheet December 31, 20X2 1 - We discussed the fluctuation in the cash accounts with Miguel Lopez, Store Manager and Cash Receipts Accounting. He stated that cash fluctuates drastically depending on the timing of cash receipts and disbursements. The company has tried to keep less in the storefront account and moved more cash to the cash operating account to earn more interest. This is to provide a better management of their money. The company has not had a significant purchase in the past year, so the cash balance has significantly increased. The company plans to purchase some new cooking equipment in the next year to expand the business and take on some new accounts. In addition, the company has paid down some debt. 2 - We discussed the lower AR balance from prior year with Lisa Mercer, Corporate Sales Representative. She noted that the company has seen a slight decline in Corporate Sales primarily due to having two customers reducing their purchases in 20X2. These two customers are: Luigi's Bistro and Mountain Lion Restaurant. In addition, the company has taken new efforts to collect in a timelier manner from their customers. If a customer does not pay in 30 days, Alpine Cupcakes gives them weekly calls to discuss their payment and request that they pay as soon as possible. 3 - Accumulated depreciation increased due to the quarterly depreciation expense. Taking the equipment expense from Q1 20X1 times 4 gives an estimated expense of $16,608. This is close to our accumulated depreciation change. For the plant and property, depreciation expense of $3,300 times 4 quarters gives us $13,200 expected change in the accumulated depreciation plant and property. 4 - We discussed changes in Accounts Payable with Lindsay McKenna. She noted that the company experienced a slight dip in purchase prices and the amount of purchases in Q1 20X2 in all of the vendors' accounts except for Mountain Dairy Company. The company expects sales to increase in Q2, so that payables will be in line with previous year activity with vendors. Milk prices have been increasing so there is a concern that the cost of production will go up with milk and potentially sugar costs throughout 20X2. In addition, Lindsay stated that this change in the account is immaterial to the company's financial statements and is a reasonable fluctuation in this type of business. 5 - We discussed the Long-term liability declines with Miguel Lopez. He mentioned that the company continues to pay down the debt at a normal pace. The change in the account is in line with prior year decreases. From 20X0 to 20X1 mortgage payable decreased by $6,158.82 and the notes payables account decreased by $8,980.26. B.2.1: pg.2 of 3 Alpine Cupcakes, Inc. Preliminary Analytical ProceduresQuarterly Balance Sheet December 31, 20X2 6- The change in retained earnings of $283,267.93 relates to net income over the past 4 quarters. Per our review of the company's quarterly financial statements, net income per quarter is: Q2 20X1 21,375.70 Q3 20X1 87,263.60 Q4 20X1 112,135.17 283,267.93 F Q1 20X2 62,493.46 B.2.1: pg.3 of 3 Alpine Cupcakes, Inc. Preliminary Analytical ProceduresQuarterly Income Statement December 31, 20X2 3 Months 03/31/20X2 Reviewed by: Performed by: SDM 10/1/20X2 TKJ 10/30/20X2 3 Months 03/31/20X1 $ Change % Change $353,739.58 $365,450.08 (11,710.50) Statement of Profit and Loss Sales Revenue: Corporate Accounts Sales Revenues: Storefront Total Sales Revenue Cost of Goods Sold: Ingredients Cost of Goods Sold: Boxes and Cupcake cups Cost of Goods Sold: Beverages Total COGS Gross Profit Interest Revenue Gross Profit Plus Interest Revenue Expenses Wage Expense Tax expense Medical Insurance Expense Auto Insurance Expense Interest Expense Electrical & Gas Service Expense Liability Insurance Expense Telecommunications Expense Cell Phone Service Expense Postage Expense Professional Services Expense Maintenance Expense Office supplies expense Dry Cleaning Expense Storefront Paper Supplies Expense Rental Expense Waste Services Expense -3.20% 80,649.00 434,388.58 66,736.39 60,000.00 425,450.08 59,623.00 20,649.00 34.42% 1 7,113.39 11.93% 1 3,875.55 5,466.50 76,078.44 358,310.14 89.00 3,755.55 5,681.50 69,060.05 356,390.03 65.00 120.00 (215.00) 3.20% -3.78% 24.00 36.92% 358,399.14 356,455.03 216,719.00 17,971.24 8,100.00 1,035.00 3,996.90 1,523.20 3,768.40 472.50 912.00 139.50 2,070.00 1,212.00 8,050.00 398.75 217,791.00 18,077.94 8,100.00 1,035.00 4,197.69 1,708.00 3,693.60 462.00 933.00 135.90 2,122.50 1,132.00 7,342.00 416.15 (1,072.00) (106.70) 0.00 0.00 (200.79) (184.80) 74.80 10.50 (21.00) 3.60 (52.50) 80.00 708.00 (17.40) -0.49% -0.59% 0.00% 0.00% -4.78% -10.82% 2.03% 2.27% -2.25% 2.65% -2.47% 7.07% 9.64% -4.18% 778.25 869.00 (90.75) -10.44% 4,752.00 150.00 4,752.00 150.00 0.00 0.00 0.00% 0.00% B.2.2: pg.1 of 3 Alpine Cupcakes, Inc. Preliminary Analytical ProceduresQuarterly Income Statement December 31, 20X2 Expenses (Continued) Car Maintenance and Fuel Expense Repair Expense Water Expense Soda Machine Repair and CO2 Expense Credit Card Expense Cooking Supplies Expense Banking Fees Selling and Admin Expenses Depreciation Expense: Equipment Depreciation Expense: Plant & Property Total Depreciation Expense Total Expenses Net Income 3 Months Ended 3 Months Ended 03/31/20X2 03/31/20X1 $ Change % Change 995.38 1,026.78 (31.40) -3.06% 372.50 378.75 381.25 373.75 (8.75) 5.00 -2.30% 1.34% 1,156.00 1,128.00 28.00 2.48% 878.31 12,704.00 445.00 288,978.68 897.89 16,880.64 445.00 294,051.09 (19.58) (4,176.64) 0.00 -2.18% -24.74% 0.00% 3,627.00 4,152.00 (525.00) -12.64% 3,300.00 6,927.00 3,300.00 7,452.00 0.00 0.00% 295,905.68 301,503.09 $138,482.90 F $123,946.99 2 - The fluctuation is less than TM ($13,000) and less than a 10% change. F - Footed 1 - The company has experienced an overall increase in total sales of about 2% while COGS overall has increased by 10%. The company has seen an increase in their storefront sales through a recent increase in their Facebook following and more people learning about the company's cupcake quality. The company is seeing more birthday party orders where local customers are picking up their goods on the day of the event. The slight decline in corporate accounts revenue is primarily due to two customers: Luigi's Bistro and Mountain Lion Restaurant. The company expects corporate sales to pick up through the rest of the year. The increase in costs of goods sold is due to both the overall increase in sales and to recent increases in milk and sugar prices. B.2.2: pg.2 of 3 Alpine Cupcakes, Inc. Preliminary Analytical ProceduresQuarterly Income Statement December 31, 20X2 2 - We discussed the significant change in the cooking supplies expense account with Lindsay McKenna. Lindsay said the increase in cooking supplies expense is due to higher prices from their supplier, Rocky Mountain Kitchen Goods. The company is working with Rocky Mountain to try and receive better prices on their cooking supplies purchases. Particularly, the company notices that prices on cooking pans and cooking sheets used in baking the cupcakes increased by 20%. B.2.2: pg.3 of 3 Alpine Cupcakes, Inc. Preliminary Analytical ProceduresRatio Analysis December 31, 20X2 Performed by: SDM 10/1/20X2 Current Ratio ** Quick Ratio** Receivables Turnover Days outstanding in Receivables Inventory Turnover Days of inventory on hand Gross Profit Percentage Profit Margin Return on Assets Return on Equity Debt to Assets Debt to Equity Current Ratio Quick Ratio Receivables Turnover Days outstanding in Receivables Inventory Turnover Days of inventory on hand Gross Profit Percentage Profit Margin Return on Assets Return on Equity Debt to Assets Debt to Equity Alpine Cupcakes, Inc. Q1 20X2 Q1 20X1 % Change 20.522 10.083 104% 19.792 9.551 107% 2.940 2.302 28% 1 1 2, 124.155 2.540 158.571 2.336 -22% 9% 2, , 143.710 4.710 0.144 0.049 0.066 0.264 0.359 156.247 5.161 0.129 0.053 0.083 0.358 0.558 -8% -9% 11% -9% -20% -26% -36% , , 6 Avg 5.55 4.50 2.97 150.08 1.62 441.54 0.31 0.02 0.01 0.04 0.21 0.26 3 , 4, 5, 5, Industry Ratios for comparison March 20X2 March 20X1 Min Max Avg Min 1.05 15.30 5.70 2.02 0.77 14.00 4.54 1.06 1.28 5.68 2.66 1.09 64.30 0.24 92.29 0.01 -0.09 -0.03 -0.04 0.00 -0.05 285.43 3.95 1525.44 0.49 0.10 0.04 0.23 0.74 1.76 Reviewed by: TJK 10/30/20X2 159.54 1.51 458.39 0.33 0.11 0.04 0.08 0.19 0.58 82.83 0.20 87.88 0.10 -0.09 -0.02 -0.16 0.00 0.00 Max 13.76 12.45 4.41 333.76 4.15 1830.71 0.48 1.02 0.29 0.67 0.55 3.99 ** Calculation includes current portion of Mortgage payable and Notes Payable based on the change from prior year. - Fluctuation meets expectations of being less than a 10% change. - The 20X2 ratio is within the expected range of the industry data. B.2.3: pg.1 of 3 Alpine Cupcakes, Inc. Preliminary Analytical ProceduresRatio Analysis December 31, 20X2 Ratios ST Liquidity Ratios: Ability to meet ST Obligations = = Activity Ratios: How effectively assets are managed = = 365 = = 365 Profitability Ratios = ( ) = = = Coverage Ratio: Long term solvency (ability of entity to continue as a going concern) = ( + ) NOTES: 1- Current assets significantly increased primarily due to an increase in corporate cash account of $335,884.72. As noted in our balance sheet analysis (B.2.1), Miguel Lopez says cash fluctuates drastically depending on the timing of cash receipts and purchases. The company has not made any major purchases in the past year but plan to make some purchases in 20X3. In addition, the current liabilities in 20X2 have decreased from prior year primarily due to the timing of paying accounts payable balances and the timing of purchases. 2- The company's receivable collection process is faster than prior year's process. Per our discussion with Lisa Mercer, the company is taking additional steps to have customers pay in a more timely manner through improving their customer relationships and calling customers weekly when they have past due balances. 3 - The company's profit margin has increased since prior year due increases in storefront sales and decreases in the company's selling and administrative expenses. Per discussion with Miguel Lopez, the company has seen great growth and has performed well in relation to the industry competitors as the company has built their reputation for quality cupcakes and has maintained good relationships with vendors to keep costs down. B.2.3: pg.2 of 3 Alpine Cupcakes, Inc. Preliminary Analytical ProceduresRatio Analysis December 31, 20X2 NOTES: 4 - Although the company's ROE has decreased from prior year, they have seen an increase in net income from Q1 20X1 and the retained earnings has increased from 4 quarters of positive net income, which has caused total stockholder's equity to increase by 283,267.93. The company expects to continue to see positive growth in net income through increasing sales and working with vendors to decrease costs. 5 - The company's debt to assets and debt to equity ratios have decreased from prior year due to the decrease in the long-term liabilities along with the decreases in current accounts payable (due to timing of purchases and payments of liabilities). 6 - The company's gross profit percentage is significantly greater than the industry average and maximum. We have requested a time to meet with Miguel Lopez to discuss the difference in the industry and company ratios from our expectations. B.2.3: pg.3 of 3 Alpine Cupcakes, Inc. Cash Narrative Audit Year December 31, 20X2 Garcia and Foster, CPAs Performed by: ARO Date: 02/07/20X3 Reviewed by: TES Date: 02/28/20X3 The following narrative documents client discussions used to obtain an understanding of their cash processes. Each year, we review and update the narrative with the client, as well as walkthrough the cash receipts and cash disbursements processes. To update the narrative for 20X2, I spoke with Miguel Lopez (Store Manager), Lindsay McKenna (cash receipt and bank reconciliation functions), Priscilla Orr (cash disbursements), and Diana Hayes (Assistant Store Manager). Cash Receipts Process On average, about 80% of Alpine's revenues are from sales to business accountsprimarily restaurants, hotels, coffee shops, deli shops, and bulk food service distributors. Customers pay by check as Alpine does not have an online method to receive payments. The Assistant Store Manager (Diana Hayes) sorts the mail each day. To maintain confidentiality of the contents, Diana does not open the mail, but delivers it unopened to the appropriate department. She sends mail received from customers to the Store Manager, Miguel Lopez. Every Friday, Miguel opens the envelopes containing customer payments and writes on the back of each check received an endorsement \"Alpine\". [He explains that his hand would get too tired if he wrote out the entire name.] He throws away any remittance advices sent with the checks. Next, Miguel logs into the accounting system and posts the cash receipts to customers' accounts. He adds up the checks, writes the total amount on a bank deposit slip, paper-clips the checks together and places them on top of his desk as a reminder that he needs to go to the bank. The next business day (usually Monday), either Miguel or Lindsey McKenna (cash receipt clerk) takes the checks to the bank. Miguel explains that he typically withholds $100 cash from the deposit to use for minor office expenses such as coffee and donuts. After making the deposit, Miguel takes the receipt from the bank and places it in his \"in-basket\" so that if there are any problems with the bank he can easily find the appropriate deposit slip. The remaining revenues (approximately 20%) are from storefront sales. Each cupcake sales associate works one day on storefront sales and the remaining time during the week on meeting the needs of his or her assigned business customers. In addition, each sales associate is encouraged to work on attaining new business accounts. Three sales associates work in the storefront on a daily basis. The sales associates answer customer questions and receive customer payments at the cash register. Diana Hayes (Assistant Store Manager) also answers questions and helps out at the cash register. At the beginning of each day, Diana places the necessary cash in the register. Currently, the company keeps $300 from the prior day's sales as the next day's starting cash. The cash is kept in Diana's desk overnight. At the end of the day, one of the sales associates counts up the cash in the register and gives the cash register tape and cash to Diana Hayes. Diana reviews the cash and cash register tape and then gives the cash to Miguel Lopez. Miguel prepares a deposit slip for the week's receipts, and deposits the cash received from storefront sales along with customer receipts into the bank at the beginning of the next business day. Miguel reconciles the bank deposit receipts to the cash register tapes and the company deposit slips on a weekly basis. C.1.1: pg.1 of 3 Alpine Cupcakes, Inc. Cash Narrative Audit Year December 31, 20X2 Cash Disbursements Process The cash disbursements process begins at the origination of a request to purchase an item or service. Most purchase requisitions come from the cupcake specialists Joshua Siedel, Lynn Carzoli, Samantha Hill, Brian Jensen, Carlos Menendez, and Julie Chen. Gabrielle Krause, Chef and Receiving Department Manager, reviews and approves purchases relating to operations and cupcake production. Miguel Lopez approves all administrative purchases. Once Gabrielle or Miguel signs the requisition indicating approval of the purchase, it is forwarded to Priscilla Orr, who places the order. She sends copies of the purchase order to Miguel and Gabrielle. When goods are received, the receiving department counts the items and issues a receiving report, including the date received, vendor, and quantity. Copies of the receiving reports go to Gabrielle Krause, Miguel Lopez and Priscilla Orr. Priscilla records receipt of the items in the inventory control records. Next, she prepares a voucher packet--reconciling items, quantities, vendors, and prices from the approved purchase requisition and receiving report to the vendor's invoice. She then reconciles these amounts with those recorded in the general ledger to make sure inventory is recorded in the proper accounting period. Occasionally Priscilla receives an invoice from an unfamiliar or new vendor who is not in the Alpine A/P system. In that case, she makes sure there is an associated receiving report and purchase requisition, and then adds the vendor information into the accounts payable system. Weekly, Priscilla prepares checks to be signed by Miguel Lopez. On the cash disbursements detail, she includes the check number, the payee and the amount. She accounts for the check sequence each time she writes a new check, making sure the next check is the right number. She shreds any voided checks so that they cannot be misappropriated and reused. Priscilla keeps blank checks on a shelf in her office so that they are available to others if she is out of the office. Miguel reviews the voucher packet documentation and signs the check. Any checks over $5,000 must be co-signed by Alexis Madison. Once the check is signed, Miguel returns the checks to Priscilla for mailing. If Miguel is planning to be out of the office for an extended time, he signs 10 to 15 blank checks in advance and gives them to Priscilla so that the company's business can continue in his absence. Alpine maintains a petty cash box to reimburse employees for small daily expenditures. Diana Hayes (assistant store manager) acts as custodian. To get reimbursed, the employee must have a receipt. Diana keeps the receipts in the box with the cash. At the end of the month, she makes journal entries for the expenses, counts the cash, and replenishes the cash box. C.1.1: pg.2 of 3 Alpine Cupcakes, Inc. Cash Narrative Audit Year December 31, 20X2 Bank Reconciliation Process Lindsay McKenna reconciles the bank accounts monthly. Lindsay begins by inputting the ending cash balances per bank and general ledger into a reconciliation template. She reconciles last month's outstanding check registers, the outstanding checks listed on the last month's bank reconciliation and this month's outstanding check register. This process verifies that all checks clearing the bank are removed from the outstanding check register and also identifies any new checks to be included if they have not cleared the bank. Lindsay lists the outstanding checks on the bank reconciliation including the check number and amount. Any outstanding checks greater than 90 days are voided. Lindsay attempts to follow up with the vendor prior to voiding. If necessary (e.g.the vendor did not receive the check) a new check is issued. Any deposits made at the end of the month that have not cleared the bank as of their bank statement are included as deposits in transit. Lindsay reviews all deposits for five days before month end to ensure they are handled properly in the reconciliation process. Lindsay McKenna reviews the bank statement for any bank charges or other items that have not been recorded as of month end. Other common reconciling items include interest earned, NSF checks deposited, bank fees, Notes receivable and payable and any corresponding interest. An adjusting journal entry is made for any transactions that need to be recorded for month end in relation to the balance per the book. Miguel Lopez reviews and signs off on the reconciliations. Any unreconciled differences older than three months are written off as a miscellaneous expense after a full review and investigation by Lindsay. C.1.1: pg.3 of 3 Alpine Cupcakes, Inc. Cash Receipts, Disbursements and Bank Reconciliation TOC Procedures Memo Audit Year December 31, 20X2 Garcia and Foster, CPAs Performed By: ARO Date: 2/07/20X3 Reviewed By: TES Date: 2/27/20X3 Cash Receipts TOC I discussed with Diana Hayes the need to obtain the October and November Mailroom Control Listings. Per Miguel's discussion, Diana Hayes was unable to perform the mailroom control listing because she did not have enough time and she was out on vacation for one week. Therefore, Diana gave me the October and December contr