Shuyue Yao: Alpine Cupcakes Audit Risk Assessment Report and Analysis

This report provides a comprehensive analysis of the audit risk assessment for Alpine Cupcakes Inc. The assessment, conducted by Garcia and Foster, CPAs, evaluates preliminary analytical procedures and ratio analysis, identifying potential audit errors and inadequate documentation. The report examines account fluctuations, ratio analysis, and their implications, including the evaluation of risks like rising sugar prices, fictitious sales, and large wage expenses. It also discusses the impact on specific accounts such as Cost of Goods Sold, Sales Revenue, and Wage Expense, and suggests anti-fraud audit procedures like trend analysis, scrutiny of vendors, and sales-to-cash reconciliation. Furthermore, the report assesses the audit risk based on the company's financial ratios and industry benchmarks, highlighting potential areas of concern and recommending specific audit procedures to mitigate these risks.

W/P Issue Audit
Implication
3.1 The Sales revenue between the year 20X1 and 20X2 almost remains the
same, however the Cash balances have increased from $331,295 to
$542,659. Reason for such inverse relationship to be known.
Inadequate
Documentation
2.1 No change in the value of Long Term Assets between 20X1 and 20X2,
however the value of Depreciation Expense has changed.
Audit error
2.1 No fraud risk being recognized on the basis of integrity of the owner. Audit error
2.1 Purchases to be also considered as higher level for risk of material
misstatement due to fluctuation in price.
Inadequate
documentation
3.1 Audit Risk has been set to Low, whereas Inherent Risk is High, Control
Risk is Moderate and Detection Risk is High. Audit Risk cannot be Low in
such a case.
Audit error
3.1 Medical Insurance expense has drastically reduced. Reason for the same
should be known
Inadequate
documentation
3.1 The Purchases are increasing, Inventory levels are increasing and the
Sales are almost constant. This may lead to increasing blockage of funds
and negative working capital.
Inadequate
documentation
Assignment Part ONE :

Assignment Part TWO
The different types of risks that Alpine Cupcakes may face are :
1. Rise in Sugar Price: Any rise in the price of Sugar would lead to higher Purchase cost and lower
profits for Alpine Cupcakes. This might lead to the following situations :
● Fictitious purchases being booked or purchases being made from fictitious vendors and
diversion of funds through fictitious vendors
● Undue pressure from management to increase sales in order to generate more profit
leading to fictitious sales being recorded

The accounts that would be affected are :
● Cost of Goods Sold: Ingredients (Profit and Loss)
● Accounts Payable
The audit team should focus on performing Anti-Fraud Procedures over Cost of Goods Sold :
Ingredients. This may includes Audit Procedures such as :
● Trend Analysis of Market Price of Sugar and comparing with the prices at which sugar is
being bought by Alpine
● Scrutiny of any new Vendors being introduced, verifying that the Lowest-One quotation
Vendor is being selected and comparing the lowest-one quotation price with the
prevailing market price to conclude on its authenticity
2. Fictitious Sales and Large Cash Balances kept: Alpine Cupcakes has a total Cash balance of $
542,658 as at 3/31/20X2 out of the Asset total of $ 1,142,843.35, being 47% of the total assets.
Since the realization of Sales is being done through Cash, there exists a Risk of Fraud in Revenue,
Trade Receivables and Cash balance of Alpine Cupcakes. Even though the owner has highest
integrity as concluded by the Auditor, this alone cannot be the reason to scope out Risk of
Material Misstatement due to Fraud. Fictitious Sales could lead to situations such as :
● Genuine Sales not being booked, and the Cash realized from such sales being diverted
for personal gains

● Fictitious Sales being booked against which “dirty money” is pumped into the business
as Cash realization of such fictitious sales, layering the source of such money and turning
dirty money into legitimate money. This would also lead to overstatement of Revenue.
The accounts that would be affected are:
● Sales Revenue: Corporate Accounts, Sales Revenue: Storefront
● Cash: Storefront, Cash: Corporate Accounts, Cash: Payroll
● Trade Receivables
The audit team should focus on performing Anti-Fraud procedures over Sales Revenue and Cash
balances realized. The audit procedures can include:
● Performing Sales to Cash Reconciliation: Reconciling the total sales made in the year
with the amount of Cash received during the year to ensure that all Cash received
against the Sales have been recorded
● Scrutiny of the source of Cash balances
● Physical cash count as at the Year end at each location to confirm the existence of Cash
balances
● Performing a Inventory Consumption Reconciliation to ensure that no fictitious Sales are
being booked: The amount of ingredients purchased, ingredients consumed for making
the finished goods and the finished goods made during the year are reconciled. Opening
Inventory + Goods Produced in Current Year – Closing Inventory = Sales made during the

year. This will help the auditor to recognize any fictitious sales which are made during
the year where actual goods have not been sold.
3. Large amount of Wage Expenses: Any change in labor laws, revision of minimum wages, would
affect the amount of Wages paid. The Wage Expense represents around 79% (including wage tax
expense) of the total expenses, hence is a material significant expense. The risks involved are:
● If in future the sales of Alpine Cupcakes fall, the wages expense will still have to be
incurred due to the permanent nature of workers. Thus, this poses a risk to Alpine
Cupcakes and should be monitored.
● Non-Compliance of Labor laws, labor tax amounts not being regularly paid
● Dummy employees existing in system through which funds are diverted out of business
The accounts which would be affected are :
● Wage Expense, Wage Tax Expense
● Wage Taxes Payable
The audit procedures which could be followed are :
● Analysis of Average Employee cost per head between current year and previous year to
analyze reasons for increase and decrease in cost
● Comparison of Sales recorded at Stores and comparing it with the Wages expense
recorded for that store to check the authenticity of Sales and Wage expense recorded

● Tracing of the Wage disbursement to the Bank accounts of the Workers on a test check
basis for Two months (or higher period, based upon judgment) to ensure that no
dummy employees exist or whether the same employee is being paid money through
two or more different bank accounts.
Ratio Analysis of the company for assessing Audit Risk
Ratio analysis is very much useful as it helps in assessing whether the two figures have moved
consistently with each other .If the ratios does not move parallel to each other than it is a matter of risk
and concern involved into it.If the ratio moves parallel according to the industry than no audit risk is
involved into it.
The ratio analysis of the company is done here in below:

Alpine Cupcakes Inc
Year 2012 2011
Industr
y
$ $
Current Ratio 1.95 1.36 1.57
Quick Ratio 21.75 6.70 5.67
Gross Profit Percentage 82.49 82.95 75.05
Net Profit Percentage 9.50 8.35 5.87
Asset Turnover ratio 0.56 0.71 0.45
Current Ratio of the company means the current assets divided by current liability of the company .If the
current ratio of the company is less than one than it is a alarming point and worries .As analysis done in
the table above the current ratio of the company is greater than one which is a good sign but it is
greater than the industry parameter which contains the audit risk involved into it.
Quick Ratio of the company means the current assets-inventory if any divided by current liability of the
company .If the Quick ratio of the company is less than one than it is a alarming point and worries .As
analysis done in the table above the current ratio of the company is greater than one which is a good
sign but it is greater than the industry parameter which contains the audit risk involved into it.
Gross Profit of the company means the Gross Profit divided by Sales *100 of the company .As drawn
analysis from the above chart the gross profit percentage of the company is at good position and also

greater than industry parameters.As the profit ratio is not equal to the industry parameters there is a
chance of audit risk involved into it.
Net Profit of the company means the Net Profit divided by Sales *100 of the company .As drawn analysis
from the above chart the gross profit percentage of the company is at good position and also greater
than industry parameters.But as analysed that the profit ratio is not equal to the industry parameters
there is a chance of audit risk involved into it.
Asset Turnover ratio means the sales revenue/capital employed *100 .It means how many $ of sales are
generated by each $ of assets .It also shows how efficiently that the company is utilizing its assets.There
is a decrease in asset ratio as compared from last yuear means the proportionate increase in capital
without increase of any sales. But as analysed that the asset ratio is not equal to the industry
parameters there is a chance of audit risk involved into it.