Free Case Study On Alpine Cupcakes Inc. Audit Planning And Risk Assessment

Type of paper: Case Study

Topic: Audit, Risk, Finance, Client, Environment, Control, Business, Threshold

Pages: 3

Words: 825

Published: 2020/12/02

1. (a). Understanding and documenting the client’s environment includes assessing the industry in which that client operates the regulatory environment, and other external factors. Being the auditor, I wish to understand how the client makes money, what products are sold, who customers are, what gives the customer strategic advantage, why does the client obtain new customers ( is it because they have better quality products at low price?), how quickly does a product change, and other circumstances related to clients environment. Furthermore, it is important for the partner and staff to have a clear understanding of the environment as this leads to better end results. The flow of understanding about the environment should be top down structure. The partners should provide appropriate training to the lower level staff for them to have a clear understanding of how the organization functions. Most of audit risk assessment is done by use of a checklist which may not be very effective if the staff do not understand the environment well. Moreover, the method of documentation to be used by the auditor depends on the auditor’s decision. The auditor may choose to use checklists or a memo to document his findings about the environment. Memos are more appropriate because they can provide detailed information about auditor’s findings. The main aim of understanding a client’s environment is to enable carrying of a smarter audit which is effective and efficient.
An important aspect in risk assessment is the understanding and documenting the internal controls used by the client. Internal controls are the policies set by the management in order to guide how certain transactions and authorizations should flow from its initiation to filling. Every organization has internal controls whether they are documented or not. Internal controls determine if an organization is doing the right thing or not. Properly structured internal controls makes an audit easier and there may be less time consumed in assessing risk. If an auditor decides to rely on internal controls of the client, he must perform tests of details from coding to classification of each transaction. Moreover, the auditor may wish to know how the client monitors the financial statements. This will enable the auditor to understand whether the client is in a position to know in the event of misstatements in the financial statements.
(b). Another important aspect to consider is the assessment of materiality in planning and performing of an audit. The auditor is responsible of determining the materiality for the financial statements as a whole. The auditors are responsible of determining the nature, timing and extend of any material misstatement and how they can affect the financial statements hence giving a wrong impression about the client’s financial position. The auditor should ensure that proper materiality threshold levels are used according to different classifications. The auditor should also upon discovery of a material statement revise the financial statement or levels of particular classes of transactions in order to portray a true fair value.
(c). Audit risk is the risk that an auditor expresses an inappropriate opinion on the financial statements. Examples of audit risk may include issuing an unqualified audit report where a qualification is reasonably justified, failing to emphasize a significant matter in audit report and issuing a qualified audit report where no qualification is needed. The audit risk model is the product of inherent risk, control risk and detection risk. Inherent risk is the risk of a material misstatement in the financial statements arising due to error of omission as a result of factors other than the failure of controls. Inherent risk is high where there are high levels of judgement and estimation or where transactions are complex. For example inherent risk may be high in a newly formed financial institution which has a significant trade and exposure in complex derivative instruments. Control risk is the risk of a material misstatement in the financial statements arising due to absence or failure in the operation of relevant controls of the entity. For example in the case of a small organization where segregation of duties is not well defined could lead to control risk. Detection risk is the risk that the auditors fail to detect a material misstatement in the financial statements, In order to reduce detection risk; the auditor must perform all the audit procedures. Audit risk model is used by auditors to manage overall risk of an audit engagement.
(d). Preliminary analytical procedures are used by the auditor to assist to better understand the business and to plan the nature, timing, and extent of audit procedures. They include evaluation of both financial and non-financial information. The main objectives of preliminary analytical procedures are to understand the client’s business transaction and to identify financial statement accounts that are likely to contain errors.
2. When understanding the client’s environment, aspects like the nature of products, type of customers, competitiveness of the business and prices and other circumstances of the client should be considered. Garcia and Foster did not make such considerations while understanding the client’s environment. Garcia and Forster used check list in documenting their clients understanding of client’s environment. The main problem that may be encountered in using this method is that some very crucial risks may not be included in the check list. In most cases, a standardized audit plan is used which may not meet the requirements of certain clients. For example, the check list used by Garcia and Foster may not be appropriate for Alpine Cupcakes, Inc. I would recommend use of a memo and then design an audit plan that suits Alpine Cupcakes, Inc. Moreover, detection risk should also be assessed in this audit.
3. Garcia and Foster did not apply the required materiality threshold levels. Furthermore, they did not compute the materiality threshold for revenue. They only considered total assets and equity. The materiality threshold level for total assets should be 0.3 percent, but instead Garcia and Foster used 1 percent. The percentage threshold for revenue was correctly used at 1percent. By not including revenue materiality threshold could lead to material misstatement of financial statements. By setting a higher materiality threshold could also lead to material misstatement of the financial statements. As a result the financial statements could give misleading information to investors. The correct threshold levels should be used in order to give the financial statements a true and fair picture. All the threshold classifications should be computed and the correct percentages used. Inherent and detection risk should be low because the nature of this business is not complicated. For detection risk, it is the responsibility of the auditor to perform all the audit procedures to ensure that material misstatements are properly identified.
4. The brainstorming process was conducted through the owner only. Brainstorming should include both the senior and low level staff. By brainstorming with the owner of the business is not conclusive evidence that there are little or no material misstatements. Ethical behaviour cannot be used to measure the degree of risk assessment.
5. Garcia and Foster used data from first quarter only. Preliminary analytical procedures should have used data for each quarter of the year. Preliminary analytical procedures should include both financial and non-financial information. In this case only financial information was used. Non-financial information should also be considered in order to have a conclusive audit. The ratio analysis was also done for the first quarter of the year. Cut off procedures are very important for any audit and these are usually done at the end of the year. The last quarter is very crucial in any audit since there could be major transactions performed at or near close of the year which could materially affect financial statements. The ratios can be calculated from a whole year’s consolidated financial statements, and compare the deviations from the previous year.

Work cited

Knapp, Michael C. Contemporary Auditing: Real Issues and Cases. Australia: South-Western Cengage Learning, 2013. Print.
Rittenberg, Larry E, Karla M. Johnstone, and Audrey A. Gramling. Auditing. Mason, Ohio: South-Western, 2011. Print.

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"Free Case Study On Alpine Cupcakes Inc. Audit Planning And Risk Assessment," Free Essay Examples -, 02-Dec-2020. [Online]. Available: [Accessed: 20-Aug-2022].
Free Case Study On Alpine Cupcakes Inc. Audit Planning And Risk Assessment. Free Essay Examples - Published Dec 02, 2020. Accessed August 20, 2022.

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