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[solution]: Southwest Appliances Inc. WP B.2.1 Inherent Risk and Materiality


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Southwest Appliances Inc.

WP B.2.1

Inherent Risk and Materiality Memo

Initials

Date

Prepared

Reviewed

Preliminary Inherent Risk Assessment

· Management policy of maintaining large inventory to meet customer demand - The auditee maintains large inventories to facilitate sales. However, this increases the risk of obsolete inventory due to slow turnover. Assessing the value of obsolete inventory involves management judgment and increases the risk that inventory valuations will be overstated. Thus, I would recommend careful scrutiny of Southwest's inventory valuation allowance based on the lower of cost or market rule.

·

·

·

·

Preliminary Analytical Procedures

· Days Inventory Increase - Days inventory increased by 19 days in 2015Prelim. This is a fairly large one-year increase and increases the risk of obsolete inventory. We should give some additional attention to valuing the inventory under the lower of cost of market rule.

·

·

·

·

Preliminary Materiality

· Balance Sheet -

· Income statement -


Southwest Appliances Inc.

 

Inherent Risk and Materiality Memo

 


 

Initials

 


 

WP B.2.1

 

Date

 


 

Prepared

 

Reviewed

 

Preliminary Inherent Risk Assessment

 


 


 

Management policy of maintaining large inventory to meet customer demand - The

 

auditee maintains large inventories to facilitate sales. However, this increases the risk of

 

obsolete inventory due to slow turnover. Assessing the value of obsolete inventory

 

involves management judgment and increases the risk that inventory valuations will be

 

overstated. Thus, I would recommend careful scrutiny of Southwest's inventory valuation

 

allowance based on the lower of cost or market rule.

 


 


 


 


 


 

Preliminary Analytical Procedures

 


 


 

Days Inventory Increase - Days inventory increased by 19 days in 2015Prelim. This is a

 

fairly large one-year increase and increases the risk of obsolete inventory. We should give

 

some additional attention to valuing the inventory under the lower of cost of market rule.

 


 


 


 


 


 

Preliminary Materiality

 


 


 

Balance Sheet -

 


 


 


 

Income statement -

 


 

1

 


 

 


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