Question

Please list 5 inherent risk related items

Emphasis Heading 1 Heading 2 Heading 3 Heading 4 Description of Southwest Appliance, Inc. History and Corporate Structure Southwest Appliances, Inc. specializes in supplying a relatively small line of high-quality household appliances to residential construction contractors in a large and growing metropolitan area. Southwest has a large list of customers, mostly custom builders of single-family dwellings and some large builders of single and multiple family units. Southwest basic marketing strategy is always to have inventory available and to sell at competitive prices. At the end of every quarter, the President, Joe Navarro, reviews product costs and adjusts the authorized selling prices of products as necessary. These adjustments are based on Mr Navarro's assessment of what the competition will do as well as what is required to provide competitive profits to the owners. The US wholesale appliance industry has been tracking with the general economy and has been growing at around 2% per year for the last few years. However, since appliance depend on imported parts to produce, the recent increase in tariffs on Chinese goods is starting to slowly increase the prices Southwest pays for appliances Southwest's facilities are in a single warehouse and office building adjacent to a railroad siding. Warehouse personnel simply unload rail deliveries with the forklifts and flat trucks that are used to handle inventory inside the warehouse. Because sales are made on a customer pickup basis, this location allows the company to avoid the expense of maintaining its own vehicles for transportation in and out. Southwest does, n arrangement with the trucking business next door to handle additional deliveries for customers on a freight collect basis (i.c., FOB shipping point). In the cases of customer pickup and the occasional delivery, sales are considered final when the appliances leave Southwest's loading dock. Southwest is incorporated in the same state in which its home office is located. It does business in its home state and three surrounding states. The company's stock is held by almost 300 individuals and businesses but is not yet publicly traded. Currently, Southwest's top management holds over 50% of the stock. The Board wants to expand their business and is anticipating going public with an initial public offering (IPO) within the next year. Executing an IPO will require that the Board make public their historic financial statements and have them auditing as part of the IPO prospectus to potential investors. Southwest currently provides audited financial statements to banks when requesting loans and therefore he had it for each of the last five care Recue Southwest eemall their local

the assignment requires to list 5 inherent risks from the description of the company that an auditor may take when deciding to accept this new client.

Answer 1

The five inherent risks are:-

1. Southwest basic marketing strategy is always to have inventory available. Policy of maintaining large inventory to meet customer requirement is very risky. High quantity of inventory can become obsolete if turnover percentage goes down.

2. Dependency on imported parts to produce the appliance. Seeing the case study, currently Southwest Applinace is totally dependent on Chinese goods to produce. If price of the imported parts increase to a high level, it will result in high production cost and to recover this Southwest has to increase the selling price. Due to high selling price it will be very difficult for Southwest Appliance to stand in the competitive market.

Company should find out other alternate methods for raw material rather than depending on a single source.

3. Sales are made on customer pickup basis. Customers if comes to the warehouse or godown to pick the material ordered by them can result in theft and fraud. It can also lead to increase in damage of the stock available in warehouse due to mishandling.

4. Southwest recently instituted a profit sharing bonus agreement for its employees based on unaudited net income for the past year. Doing profit sharing on unaudited net income is risky. While auditing of financial statements of that year if any huge financial error or ommission is founded which effects the profit of the business, then all the calculations of bonus will be void. Also the profit and loss statement of next fiscal year will also be disturbed due to this.

5. Commercial software was purchased by Southwest two years ago and have updated it once since the original purchase. Software should be updated on regular basis so that company is always legally complied and has access to all new rules and regulations time to time as declared by relevant authorities.