(answered) – 1) Southwest Appliance – Inherent risk and Preliminary AnalyticalDescriptionSolution downloadThe Question1) Southwest Appliance – Inherent risk and Preliminary Analytical Procedures. This question is based on the Southwest case included at the end of the assignment.a) Company Overview – Review the description of Southwest Appliances, Inc. and identify four inherent risks based on the information provided. I have listed one potential inherent risk area as an example and you need to add four more to the list. Inherent risks can flow from client’s business risks, the nature of its governance structure, and its strategic plans. However, you need to be clear about how your risks create an increased risk of material misstatementq in the financial statements and not just how they might create risks of lower performance for the firm.Thus, for each inherent risk, describe the feature of the firm you believe affects inherent risk and explain how and why. By “how,” I mean whether in increases or decreases inherent risk. Make sure your “why” addresses a specific risk to the accuracy of the financial statements and whether audit effort should be increased or decreased for specific accounts or related groups of accounts if possible.Limit your inherent risk analysis to the verbal information in the case and not the financial statement data. Part b. covers risks identified using analytical procedures based on the financial data.? 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.????b) Preliminary Analytical Procedures – Review Southwest Appliance’s financial statements, ratios, and industrial data presented after the verbal description of the case at the end of this assignment. Identify four accounts that you believe need additional audit scrutiny and explain why. I have included one example and you will need to add four more to the list.? Days Inventory Increase – Days inventory increased by 19 days in 19X1. 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.????Inherent Risk is the risk with regard to the material misstatement in the financial statement or any transactions during the year which is caused due to reasons other than the internal control of the entity. This risk has to be identified by the auditor so as to find out the extent of the audit procedures to be performedPreliminary analytical procedures are the procedures which have been applied by the auditor for the conduct of an audit at an initial stage. It has been used during the process of audit and helps in the ascertainment of the risk involved. It also helps in getting the understanding of the business and its operations so that the further steps can be carried out.The analytical procedures have been done so as to get sufficient and appropriate audit evidence. The preliminary helps in determining the nature, timing and extent of audit procedures which needs to be performed during the course of an audit.Southwest appliances deals in wholesale home appliances as it deals only in the sale the inherent risk involved is relatively low as the complexity is not much in such type of transactions. So, the inherent risk is relatively low and hence the extent of preliminary procedures adopted will be less time consuming.Description of Southwest Appliance, Inc.History and Corporate StructureSouthwest Appliances,
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