Houseco, and 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 suggest 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 companys unaudited results show earnings per share of $1.21, once cent more than the most optimistic analysts had projected. He pointed out to Jones that sales are up over 38 percent compared to the previous year and net income has increased by 54% as well. All is well.

Jones is beginning the risk assessment analytical procedures for the 20X8 audit to obtain information to help plan the nature, timing and extend of other audit procedures. More specifically ,he wants to identify areas that may represent specific risks relevant to this years audit.

Using the balance sheet and income statement attached to identify accounts that may represent specific risks relevant to this years audit. For each area, briefly note why you think it represents a risk.

Houseco Balance Sheet
						VERTICAL ANALYSIS
Period Ending		December 31, 2006	December 31, 2007	December 31, 2008		December 31, 2006	December 31, 2007	December 31, 2008
		Dollars (000's Omitted)
Assets
	Cash	$ 63	$ 514	$ 885		0%	1%	1%
	Accounts receivable	14,402	27,801	51,076		33%	43%	43%
	Inventory - RM	2,682	9,182	18,049		6%	14%	15%
	Inventory - WIP	491	638	4,151		1%	1%	4%
	Inventory - FG	6,589	9,757	16,935		15%	15%	14%
	Total inventories	9,762	19,577	39,135		23%	30%	33%
	Other current assets	708	1,449	3,015		2%	2%	3%
	Fixed assets (net)	18,267	15,900	24,029		42%	24%	20%
Total Assets		$ 43,202	$ 65,241	$ 118,140		100%	100%	100%
Liabilities
Current Liabilities
	Accounts payable	$ 7,344	$ 15,072	$ 13,288		17%	23%	11%
	Accrued liabilities	3,127	5,468	4,710		7%	8%	4%
	Current portion LT debt	2,707	900	1,250		6%	1%	1%
	Income taxes payable	1,554	2,619	3,782		4%	4%	3%
Total Current Liabilities		14,732	24,059	23,030		34%	37%	19%
	Bank debt	14,800	19,841	62,057		34%	30%	53%
	Deferred income taxes	685	1,254	1,881		2%	2%	2%
Total Liabilities		30,217	45,154	86,968		70%	69%	74%
Stockholders' Equity
	Common Stock	7,775	7,775	7,903		18%	12%	7%
	Retained Earnings	5,210	12,312	23,269		12%	19%	20%
Total Stockholder Equity		12,985	20,087	31,172		30%	31%	26%
Total Liabilities and Stockholder Equity		$ 43,202	$ 65,241	$ 118,140		100%	100%	100%
Houseco Income Statement
						VERTICAL ANALYSIS
Period Ending		December 31, 2006	December 31, 2007	December 31, 2008		December 31, 2006	December 31, 2007	December 31, 2008
		Dollars (000's Omitted)
	Gross Sales	$ 78,428	$ 133,504	$ 183,767		103%	104%	101%
	Less: Returns and allowances	2,284	5,270	2,644		3%	4%	1%
Net sales		76,144	128,234	181,123		100%	100%	100%
	Cost of goods sold	46,213	70,756	94,934		61%	55%	52%
Gross margin		29,931	57,478	86,189		39%	45%	48%
	Selling, advertising, R&D expenses	20,105	42,600	64,285		26%	33%	35%
Income from operations		9,826	14,878	21,904		13%	12%	12%
	Interest expense	1,930	1,584	3,189		3%	1%	2%
Income before taxes		7,896	13,294	18,715		10%	10%	10%
	Income taxes	3,807	6,189	7,761		5%	5%	4%
Net income		$ 4,089	$ 7,105	$ 10,954		5%	6%	6%
EPS		0.46	0.78	1.21
RATIOS
	Current Ratio	1.7	2.1	4.1
	Quick Ratio	1.0	1.2	2.3
	Receivable turnover	5.3	6.3	4.7
	Days' slaes in ending receivables	68.1	57.1	76.6
	Inventory turnover	4.7	4.8	3.2
	Days' sales in ending inventory	76.0	75	112.5
	Interest expense/Debt	0.11	0.08	0.05