Houseco, an audit client of Jones, CPA, for the past five years, is a manufacturer of various household products. Approximately four years ago Houseco developed a better toaster than had been available and sales took off, especially during the most recent two years, 20x7 and 20x8. Currently, the company controls approximately 25 percent of the toaster market in the United States. In addition, the company manufactures other products, including vacuum cleaners, floor polishers, and electric fondue pots. Much of the increased sales performance is due to Donald Skaldon, who became the chief executive officer in 20x4. Donald and several other officers were able to accomplish a leveraged stock buyout in 20X6. This seems to have worked out very well since Donald suggests that his net worth grew from less than $300,000 to well over $5 million due to increases in the value of the common stock he holds in the company. He is also excited since the company's unaudited results show earnings per share of $1.21, one cent more than the most optimistic analysts had projected. He points out to Jones that sales are up over 38 percent compared to the previous year and net income has increased by 54 percent. All is well. Jones is beginning the risk assessment analytical procedures for the 20x8 audit to obtain information to help plan the nature (form/type), timing (when), and extent (how much) of other audit procedures. More specifically, he wants to identify areas that may represent specific risks relevant to this year's audit Required: Use the balance sheet and income statement attached to identify TEN accounts/areas that may represent specific risks relevant to this year's audit. For each area, briefly note why you think it represents a risk. Mark the account/area with a number and then put your comments in a "Legend" at the top of each financial statement. Start with number 1 and identify at least TEN risk areas. Each risk area Houseco Balance Sheet Dollars (000s Omitted) 12/31/X6 12/31/X7 12/31/X8 (Audited) (Audited) (Unaudited) 12/31/X6 (Audited) Vertical Analysis 12/31/X7 12/31/X8 (Audited) (Unaudited) Horizontal Analysis OX7-X6)/X6 (X8-X7)/X7 (Audited) (Unaudited) 63 14,402 1% 43% 33% 514 27,801 9,182 638 9,757 19,577 1.449 49,341 15,900 65,241 2,682 491 6,589 9,762 708 24,935 18,267 43,202 885 51,076 18,049 4.151 16,935 39,153 3,015 94,111 24,029 118,140 1% 43% 15% 4% 14% 1% 15% 23% 2% 1% 15% 30% 2% 76% 33% 716% 93% 242% 30% 48% 101% 105% 98% (13%) 51% 72% 84% 97% 551% 74% 100% 108% 91% 51% 81% 42% 100% 3% 80% 20% 100% 100% Assets Cash Accounts receivable Inventories-RM Inventories-WIP Inventories FG Total Inventories Other current assets Total current assets Fixed assets (net) Total assets Liability and Equity Accounts payable Accrued liabilities Current portion UT debt Income taxes payable Total current liabilities Bank debt Deferred income taxes Total liabilities Common stock Retained earnings Total liabilities and equity 15,072 23% 17% 7% 6% 11% 4% 1% 7,344 3.127 2,707 1,554 14,732 14,800 685 30,217 7,775 5,210 43,202 13,288 4,710 1,250 3,782 23,030 62,057 1,881 86,968 7.903 23,269 118,140 900 2,619 24,059 19,841 1,254 45,154 7,775 12,312 65,241 37% 30% 3% 19% 53% 2% 34% 34% 2% 70% 18% 12% 100% 105% 75% (67%) 69% 63% 34% 83% 49% 0% 136% 51% (12%) (14%) 39% 44% (4%) 213% 50% 93% 2% 89% 81% 69% 12% 19% 100% 7% 20% 100% Houseco Income Statement Dollars (000s Omitted) 12/31/X6 12/31/X7 12/31/XB (Audited) (Audited) (Unaudited) 78,428 133,504 183,767 2.284 5,270 2,644 75,144 128,234 181,123 46,213 70,756 94,934 29,931 57,478 85,189 20,105 42,600 64,285 9,826 14,878 21,904 1,930 3,189 7,896 13,294 18,715 3,807 6,189 4,089 7,105 10,954 .46 .78 1.21 12/31/X6 (Audited) 103% 3% 100% 61% 39% 26% 13% 3% 10% 5% 5% Vertical Analysis 12/31/X7 12/31/X8 (Audited) (Unaudited) 104% 101% 196 100% 100% 55% 52% 45% 48% 33% 12% 12% 1% 2% 10% 10% 5% 4% Gross sales Less: Returns and allowances Net sales Cost of goods sold Gross margin Sell, advertising, R&D expenses Income from operations Interest expense Income before taxes Income taxes Net Income EPS Ratios Current Quick Receivable turnover Days' sales in ending receivables Inventory turnover Days' sales in ending inventory Interest expense/Debt Horizontal Analysis 0X7-X6)/X6 (XB-X7)/X7 (Audited) (Unaudited) 70% 38% 131% (50%) 68% 41% 53% 34% 92% 50% 112% 51% 51% (18%) 101% 41% 63% 25% 74% 54% 1,584 7.761 1.7 1.0 5.3 68.1 4.7 76.0 0.11 2.1 1.2 6.3 57.1 4.1 2.3 75.0 0.08 76.6 3.2 112.5 0.05 Houseco, an audit client of Jones, CPA, for the past five years, is a manufacturer of various household products. Approximately four years ago Houseco developed a better toaster than had been available and sales took off, especially during the most recent two years, 20x7 and 20x8. Currently, the company controls approximately 25 percent of the toaster market in the United States. In addition, the company manufactures other products, including vacuum cleaners, floor polishers, and electric fondue pots. Much of the increased sales performance is due to Donald Skaldon, who became the chief executive officer in 20x4. Donald and several other officers were able to accomplish a leveraged stock buyout in 20X6. This seems to have worked out very well since Donald suggests that his net worth grew from less than $300,000 to well over $5 million due to increases in the value of the common stock he holds in the company. He is also excited since the company's unaudited results show earnings per share of $1.21, one cent more than the most optimistic analysts had projected. He points out to Jones that sales are up over 38 percent compared to the previous year and net income has increased by 54 percent. All is well. Jones is beginning the risk assessment analytical procedures for the 20x8 audit to obtain information to help plan the nature (form/type), timing (when), and extent (how much) of other audit procedures. More specifically, he wants to identify areas that may represent specific risks relevant to this year's audit Required: Use the balance sheet and income statement attached to identify TEN accounts/areas that may represent specific risks relevant to this year's audit. For each area, briefly note why you think it represents a risk. Mark the account/area with a number and then put your comments in a "Legend" at the top of each financial statement. Start with number 1 and identify at least TEN risk areas. Each risk area Houseco Balance Sheet Dollars (000s Omitted) 12/31/X6 12/31/X7 12/31/X8 (Audited) (Audited) (Unaudited) 12/31/X6 (Audited) Vertical Analysis 12/31/X7 12/31/X8 (Audited) (Unaudited) Horizontal Analysis OX7-X6)/X6 (X8-X7)/X7 (Audited) (Unaudited) 63 14,402 1% 43% 33% 514 27,801 9,182 638 9,757 19,577 1.449 49,341 15,900 65,241 2,682 491 6,589 9,762 708 24,935 18,267 43,202 885 51,076 18,049 4.151 16,935 39,153 3,015 94,111 24,029 118,140 1% 43% 15% 4% 14% 1% 15% 23% 2% 1% 15% 30% 2% 76% 33% 716% 93% 242% 30% 48% 101% 105% 98% (13%) 51% 72% 84% 97% 551% 74% 100% 108% 91% 51% 81% 42% 100% 3% 80% 20% 100% 100% Assets Cash Accounts receivable Inventories-RM Inventories-WIP Inventories FG Total Inventories Other current assets Total current assets Fixed assets (net) Total assets Liability and Equity Accounts payable Accrued liabilities Current portion UT debt Income taxes payable Total current liabilities Bank debt Deferred income taxes Total liabilities Common stock Retained earnings Total liabilities and equity 15,072 23% 17% 7% 6% 11% 4% 1% 7,344 3.127 2,707 1,554 14,732 14,800 685 30,217 7,775 5,210 43,202 13,288 4,710 1,250 3,782 23,030 62,057 1,881 86,968 7.903 23,269 118,140 900 2,619 24,059 19,841 1,254 45,154 7,775 12,312 65,241 37% 30% 3% 19% 53% 2% 34% 34% 2% 70% 18% 12% 100% 105% 75% (67%) 69% 63% 34% 83% 49% 0% 136% 51% (12%) (14%) 39% 44% (4%) 213% 50% 93% 2% 89% 81% 69% 12% 19% 100% 7% 20% 100% Houseco Income Statement Dollars (000s Omitted) 12/31/X6 12/31/X7 12/31/XB (Audited) (Audited) (Unaudited) 78,428 133,504 183,767 2.284 5,270 2,644 75,144 128,234 181,123 46,213 70,756 94,934 29,931 57,478 85,189 20,105 42,600 64,285 9,826 14,878 21,904 1,930 3,189 7,896 13,294 18,715 3,807 6,189 4,089 7,105 10,954 .46 .78 1.21 12/31/X6 (Audited) 103% 3% 100% 61% 39% 26% 13% 3% 10% 5% 5% Vertical Analysis 12/31/X7 12/31/X8 (Audited) (Unaudited) 104% 101% 196 100% 100% 55% 52% 45% 48% 33% 12% 12% 1% 2% 10% 10% 5% 4% Gross sales Less: Returns and allowances Net sales Cost of goods sold Gross margin Sell, advertising, R&D expenses Income from operations Interest expense Income before taxes Income taxes Net Income EPS Ratios Current Quick Receivable turnover Days' sales in ending receivables Inventory turnover Days' sales in ending inventory Interest expense/Debt Horizontal Analysis 0X7-X6)/X6 (XB-X7)/X7 (Audited) (Unaudited) 70% 38% 131% (50%) 68% 41% 53% 34% 92% 50% 112% 51% 51% (18%) 101% 41% 63% 25% 74% 54% 1,584 7.761 1.7 1.0 5.3 68.1 4.7 76.0 0.11 2.1 1.2 6.3 57.1 4.1 2.3 75.0 0.08 76.6 3.2 112.5 0.05