University Audit and Assurance Report: Alpine Cupcakes Analysis

This report presents an analysis of an audit and assurance assignment concerning Alpine Cupcakes, focusing on the evaluation of preliminary analytical procedures. Part 1 assesses the appropriateness of account fluctuation analysis and ratio analysis performed by Garcia and Foster, CPAs, identifying any discrepancies in their explanations and the corresponding audit implications. The analysis includes a comparison of account fluctuations over a 12-month period, highlighting inaccuracies in the auditors' risk assessments, particularly concerning inventory and cash accounts. Part 2 involves the preparation of a memo summarizing the understanding of Alpine Cupcakes' environment and evaluating Garcia and Foster's audit risk, pinpointing specific risks and their potential impact on various accounts such as sales revenue, accounts receivable, and cash accounts, and providing recommendations for revised audit procedures. The report concludes by emphasizing the need for a more logical and thorough risk assessment process to mitigate overall audit risks.

Running head: AUDIT AND ASSURANCE
Audit and Assurance
Name of the Student:
Name of the University:
Authors Note:

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Contents
Part 1:...............................................................................................................................................2
Sub part (a):.................................................................................................................................2
Sub part (b):.................................................................................................................................4
Part 2:...............................................................................................................................................6
References:......................................................................................................................................8

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Part 1:
Sub part (a):
Adopted by PCAOB and approved by Securities and Exchange Commission of the
United States of America AS 2110, identifying and assessing the risk of material misstatement in
financial statements must be followed by the qualified auditors during the course of auditing of
financial statements to ensure that the audit opinion in regards to material misstatements in
financial statements is appropriate and in accordance with the relevant auditing standard
applicable in the country.
Requirements in respect of processes to identify and assess the risk of material misstatements
have been established in AS 2110 and the auditors are under obligation to follow the standard of
auditing to conduct audit efficiently. Taking into consideration the processes necessary to
identify account fluctuations and assess the risk of material misstatements in AS 2110 a brief
discussion on the appropriateness of the account fluctuation analysis is made here (Amzelt,
2017).
As per the auditors, the following three accounts have been identified as highly risky:
I. Inventory for price fluctuation.
II. Revenue expected to be inflated by inclusion of fictitious sales.
III. Accounts receivable again expected to be inflated due to inclusion of fictitious sales
(Blay, Kizirian and Sneathen, 2017).
Now let us, take into consideration the information provided in financial statements to assess
whether the processes and procedures followed by the auditors are in accordance with AS 2110
to assess the account fluctuations (Cassell, Drake and Rasmussen, 2018).

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Firstly, let us check the account fluctuations of few accounts from the financial statements to
assess whether the inventory has really been fluctuated to be included in the list of highly risky
accounts.
As of: 3/31/20x2 12/31/20x1 3/31/20x1 Fluctuation
(year wise)
Cash (Store front) 125,498.
76
135,135.
15
151,293.
51
(25,794.
75)
Cash (Corporate accounts) 293,728.
03
210,019.
06
57,069.
58
236,658.
45
Inventories:
Ingredients 25,190.
66
25,580.
09
26,779.
44
(1,588.
78)
Cake boxes and cupcake cups 1,423.
05
1,190.
10
434
.05
98
9.00
Beverages 3,340.
30
3,260.
80
2,348.
50
99
1.80
The above table containing few specific accounts and the changes in these accounts over a period
of 12 months, i.e. from 20x1 to 20x2. The inclusion of inventory in the above table is mainly due

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to assess whether the account has truly been fluctuated to the extent to be termed as risky
accounts as per AS 2110.
It is clear from the above procedure that fluctuation in the inventory account is significantly
lower as compared to other accounts (as mentioned in the table). Thus, inclusion of inventory
and assessing the same as risky account due to fluctuation in seems not in line as per the
requirements of AS 2110 (Dritsas and Petrakos, 2018).
Over the period of 12 months the cash in corporate accounts have increased by $236,658.45 in
20x2 from 20x1 whereas cash in store accounts have declined by $25,794.75 during the same
period. The fluctuation in these cash balances is extremely high and considering the sensitivity of
cash and its importance for a business organization the fluctuation in these cash balances should
have been included as risky accounts for mainly the extent of fluctuation in these two accounts.
In contrary the fluctuation in inventory balances have been relatively less during the same period
thus, inclusion of inventory as the risky account due to price fluctuation seems quite
inappropriate as per AS 2110 (Mohseni, 2018).
Sub part (b):
The explanation provided by the auditor for the significant improvement in current and
quick ratios is quite right as the overall cash in 20x2 has increase significantly from 20x1 hence,
both these ratios have also improved significantly in 20x2. Significant improvement in current
and quick ratios implies that the ability of the company to pay off its current liabilities by using
its current and liquid assets have improved significantly.

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Improvement in receivables turnover is also a positive news for the management of the company
as it implies that the management has taken necessary steps to improve the ability of the
company to collect its receivables quicker than before.
However, the reason given by the auditors to explain the increase in profitability of the company
is not correct as the storefront sales have decreased in 20x2 as compared to the sales in 20x1. In
fact the reason for increase in profitability is mainly due to the increase in corporate account
sales and decrease in selling and administrative expenses in 20x2 from the respective figures in
20x1 (Polonskaya and Novohackaya, 2019).
The decrease in long term liabilities is certainly one of the reasons for the decrease in company’s
debt to asset and debt to equity ratios in the year 20x2 from the previous year. Thus, the
explanation in this regard by the auditors is quite appropriate.
W/P Issue Audit implications
Account fluctuations. Huge fluctuation in cash
balances
The fluctuation in cash
account is quite huge. Since,
cash account is extremely
sensitive and prone to
manipulation the reason for
such fluctuation must be
analyzed properly (Кочинев
and Kochinev, 2017).
Ratio analysis Inappropriate explanation Though ratio analysis are
mostly correct but in certain

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cases such as the reason
increase in profitability of the
company during the current
year from previous year has
not been correctly explained.
Part 2:
MEMO
To:
From: (name of the student)
Dated: March 02, 2020.
Sub: Understanding the environment of Alpine cupcakes and assessment of audit risk.
Respected sir,
After considering a detailed verification of the financial statements and other information
provided about the Alpine Cupcakes including the background information of the company it is
clear that the operations of company has undergone number of changes since its formation due to
the changes in its market, i.e. mainly due to the expansion of company’s market (ALEXANDER,
2017). The company is expected to implement a large scale advertisement campaign by next year
thus, it is important to expect significant increase in demand for the products of the company.

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Thus, the implications of the same must be considered while conducting the audit of the financial
statements of the company in the future.
In respect of audit risk associated with the audit of the financial statements of the company from
the perspective of the auditors it is clear that the auditors have committed certain mistakes during
the course of auditing. The auditors have identified following three account balances and related
transactions as highly risk.
I. Inventory
II. Revenue.
III. Accounts receivable.
However, the reasons given by the auditors to assess inventory as highly risk account seems
quite incorrect. As per the auditors the inventory has fluctuated significantly hence, it has been
assessed as highly risky item however, a closer look and examination of the books of accounts
shows the fluctuation in inventory was minimum. Instead there were other accounts that have
fluctuated much more. Hence, the assessment of risk in respect of account balances and class of
transactions by the auditor seems quite inappropriate.
Cash account on the other hand has fluctuated heavily as can be seen from the current year end
account balance. However, the auditors have not considered cash account as highly risky. Thus,
considering the illogical assessment of high risk account balances and improper explanation in
ratio analysis the overall audit risk associated with the audit is quite high. Considering the
fluctuations in account balances and on the basis of ratio analysis the following accounts should
have been classified as highly risk accounts and accordingly necessary audit procedures shall be
conducted on these to reduce the overall risks of audit to acceptable limit.

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Cash accounts:
Both cash accounts have fluctuated significantly hence, all cash transactions shall be specifically
Sales:
Sales revenue from store front have declined in the year 20x2 thus, specific attention shall be
given on the account balances to check whether there is any suppression of sales. Also the
auditors are suspecting inclusion of fictitious sales to inflate revenue thus, necessary procedures
shall be conducted to assess the overall sales of the organization.
Accounts receivable:
Accounts receivable will have to be audited carefully considering the overall risk associated with
the sales revenue of the organization.
Regards.
(Name of the student)

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References:
ALEXANDER, D. (2017). Material Misstatement of What? A Comment on Smieliauskas et
al., ‘A Proposal to Replace “True and Fair View” with “Acceptable Risk of Material
Misstatement” ’. Abacus, 48(7), pp.447-454.
Amzelt, A. (2017). Analytical procedures to identify risks of material misstatement due to
fraud. Auditor, 3(14), pp.22-26.
Blay, A., Kizirian, T. and Sneathen, L. (2017). The Effects of Fraud and Going-Concern Risk on
Auditors' Assessments of the Risk of Material Misstatement and Resulting Audit
Procedures. SSRN Electronic Journal, 3(3), pp.15-30.
Cassell, C., Drake, M. and Rasmussen, S. (2018). Short Interest as a Signal of Audit
Risk*. Contemporary Accounting Research, 31(7), pp.1278-1297.
Dritsas, S. and Petrakos, G. (2018). Risk of Material Misstatement in Fluctuated Economic
Environments: The Case of Greece. International Business Research, 11(6), p.243.
Mohseni, A. (2018). Audit Approach to Audit Risk Management, Quantitative Determination of
the Components of Audit Risk and Determine the Impact on the Components of Audit Risk in
Audit Sampling. SSRN Electronic Journal, 3(7), pp.181-301.
Polonskaya, O. and Novohackaya, I. (2019). Risk assessment of material misstatement of
accounting (financial) statements sanatorium organization. SCIENTIFIC DEVELOPMENT
TRENDS AND EDUCATION, 1(1), pp.18-33.
Кочинев, Ю. and Kochinev, Y. (2017). Documenting the Assessment of the Risks of Material
Misstatement. Auditor, 3(12), pp.10-18.

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