3. Inherent risk is a measure of the firms assessment of the susceptibility of material misstatement before considering the effectiveness of internal control. Briefly comment of the following areas that are inherent in auditing a business such as the Lakeside Company: a. Lakeside holds an inventory of high technology items: consumer electronic equipment. b. Lakeside distributes merchandise to retail stores. c. Lakeside sells on credit throughout two states. d. Lakeside rents a number of its stores. e. Lakeside has a large amount of debt. f. Lakeside is considering going public. 4. An audit program is designed to generate appropriate evidence on which the auditor can base an opinion. How does the auditor know when sufficient evidence has been accumulated? 5. What is the quality of the evidence that is gathered by analytical procedures? More specifically, how competent is evidence provided by analytical procedures compared with other types of evidence? 6. In performing analytical procedures, how extensive should an auditors knowledge of a clients industry be and how does the auditor go about getting this type of information? 7. Assume that price competition with other CPA firms was an important factor in securing this audit engagement. What are the potential problems for a CPA firm that can arise from acquiring clients through price competition? 8. The following is a summary of observations from the review of the trial balance and general ledger for Lakeside Company for 2007 and 2008: # Observations from Trial Balance and General Ledger Comment on Significance 1. The sales for Store Three have increased by approximately 94% since the previous year. At the same time, the cost of the goods sold has dropped from 58.5% of sales (which is consistent with the other stores) to only 50.3% of sales. Also, the inventory held by this store has risen by over 50%. 2. There was a gain on disposition of fixed assets of $14,000. 3. The company's two bank credit lines now have a total balance that exceeds the $750,000 maximum that was indicated in the earlier case. 4. The long-term notes payable increased by $50,000. 5. Cash flow from operations declined significantly in 2008.