Application Problem. Assume that you are auditing Zap It!, Inc., a skin care products company. Its latest product is an acne removal system involving high tech dehumidifiers and laser beams. The following is information that may help you with your audit:

• The skin care market is highly competitive with several companies battling for market share, which in turn has decreased gross profit percentages.
• Products in this market tend to experience short life cycles with biotechnology advancement
• Selling expenses are composed mainly of advertising and sales commissions. All sales are made on commission.
• The company spent an unprecedented amount on its advertising campaign in the current year.
• Internally, the employee motivation campaign is centered on the phrase, Whatever it takes! in which employees are encouraged to do whatever it takes to satisfy the customer. The phrase is also used to motivate employees and encourage cooperation in the financial and accounting operations of the organization.
• The companys internal audit function is a desirable training ground to ascend to the management function in the company. Internal auditors generally serve about two years on the staff before moving on.
• The audit committee is chaired by the CFO and is composed of the directors of human resources, marketing, production, and R&D.
• The CFO at Zap It! frequently questions auditors as to why they need the information that they have requested and suggests alternative sources of information.

Following is selected financial information associated with Zap It!. You are auditing the 12/31/18 financial statements (all amounts in thousands).

Financial Statement Account	12/31/18 (unaudited)	12/31/17	12/31/16
Inventory	1,500	1,200	1,000
Allowance to Reduce Inventory to Market	115	110	100
Sales	18,000	18,000	16,000
Cost of Goods Sold	9,000	9,000	8,000
Selling Expenses	2,200	2,200	2,000
Administrative Expenses	2,250	2,300	2,000
Loss Due to Market Decline of Inventory	250	270	260

Question

• Prepare a working paper narrative identifying key risk areas (accounts and assertions) in the Zap It! audit. If there are no areas that appear particularly risky, support your conclusion with calculations and reference to background information. If there are areas that appear risky, support your conclusion with calculations and/or reference to background information.