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.

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Garcia and Foster, CPAS Performed by: SDM Date: 9/15/20x2 Alpine Cupcakes, Inc. 20200 4X Audit Risk Assessment Memobb501 b Audit Year December 31, 20X2 BY A bobn3 aritmoM E (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 Materiality Methodology: Planning materiality (PM) is determined as follows: 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 20X2: 20x1 Total Equity for Alpine Cupcakes, Inc.: $741,409 (B.1.1) udit: Materiality thresholds for the 20x2 PM = 0.01 x $741,409= $7,414 $7,400 TM = 0.50 x $7,400 = $3,700 SAD = 0.05 x $7,400 = $370 Audit Risk Inherent risk Control risk Detection risk Reviewed by: TKJ Date: 2/14/20x3 Determine Inherent Risk, Control Risk, and Detection Risk: internal control environment, we must determine the level of inherent risk (IR), control risk (CR) and detection risk During the planning of the audit, including understanding the client and its environment and understanding the (DR). Application of IR, CR, and DR for 20X2 Alpine Audit: Our preliminary risk assessment levels are set as follows: = 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. Ca Pe Da Fr T e 2 Garcia and Foster, CPAS Performed by: SDM Date: 9/15/20x2 Alpine Cupcakes, Inc. 20200 4X Audit Risk Assessment Memobb501 b Audit Year December 31, 20X2 BY A bobn3 aritmoM E (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 Materiality Methodology: Planning materiality (PM) is determined as follows: 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 20X2: 20x1 Total Equity for Alpine Cupcakes, Inc.: $741,409 (B.1.1) udit: Materiality thresholds for the 20x2 PM = 0.01 x $741,409= $7,414 $7,400 TM = 0.50 x $7,400 = $3,700 SAD = 0.05 x $7,400 = $370 Audit Risk Inherent risk Control risk Detection risk Reviewed by: TKJ Date: 2/14/20x3 Determine Inherent Risk, Control Risk, and Detection Risk: internal control environment, we must determine the level of inherent risk (IR), control risk (CR) and detection risk During the planning of the audit, including understanding the client and its environment and understanding the (DR). Application of IR, CR, and DR for 20X2 Alpine Audit: Our preliminary risk assessment levels are set as follows: = 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. Ca Pe Da Fr T e 2

Answer rating: 100% (QA)

Inherent Risk Inherent risk is the susceptibility of an assertion to a misstatement that could be material before taking into account any related inte... View the full answer