Please list 5 inherent risk related items

the assignment requires to list 5 inherent risks from the description of the company that an auditor may take when deciding to accept this new client.

Emphasis Heading 1 Heading 2 Heading 3 Heading 4 Description of Southwest Appliance, Inc. History and Corporate Structure Southwest Appliances, Inc. specializes in supplying a relatively small line of high-quality household appliances to residential construction contractors in a large and growing metropolitan area. Southwest has a large list of customers, mostly custom builders of single-family dwellings and some large builders of single and multiple family units. Southwest basic marketing strategy is always to have inventory available and to sell at competitive prices. At the end of every quarter, the President, Joe Navarro, reviews product costs and adjusts the authorized selling prices of products as necessary. These adjustments are based on Mr Navarro's assessment of what the competition will do as well as what is required to provide competitive profits to the owners. The US wholesale appliance industry has been tracking with the general economy and has been growing at around 2% per year for the last few years. However, since appliance depend on imported parts to produce, the recent increase in tariffs on Chinese goods is starting to slowly increase the prices Southwest pays for appliances Southwest's facilities are in a single warehouse and office building adjacent to a railroad siding. Warehouse personnel simply unload rail deliveries with the forklifts and flat trucks that are used to handle inventory inside the warehouse. Because sales are made on a customer pickup basis, this location allows the company to avoid the expense of maintaining its own vehicles for transportation in and out. Southwest does, n arrangement with the trucking business next door to handle additional deliveries for customers on a freight collect basis (i.c., FOB shipping point). In the cases of customer pickup and the occasional delivery, sales are considered final when the appliances leave Southwest's loading dock. Southwest is incorporated in the same state in which its home office is located. It does business in its home state and three surrounding states. The company's stock is held by almost 300 individuals and businesses but is not yet publicly traded. Currently, Southwest's top management holds over 50% of the stock. The Board wants to expand their business and is anticipating going public with an initial public offering (IPO) within the next year. Executing an IPO will require that the Board make public their historic financial statements and have them auditing as part of the IPO prospectus to potential investors. Southwest currently provides audited financial statements to banks when requesting loans and therefore he had it for each of the last five care Recue Southwest eemall their local Southwest currently provides audited financial statements to banks when requesting loans and, therefore, has had audits for each of the last five years. Because Southwest is small, their local bank insisted that restrictive covenants be added to the firm's last loan agreement. These covenants require that the loan be repaid immediately in full if Southwest's current and debt to cquity ratios fall below specified levels. To help stimulate sales Southwest recently instituted a profit-sharing bonus agreement for its employees. The agreement specifies that employee bonuses will be based on unaudited net income for the past year because of the need to adjust employees' salaries at the beginning of each year. By using unaudited results, the firm can determine the bonus amount in time to include in the first paycheck of the next fiscal year. However, future bonuses are adjusted for any audit adjustments that are made after the bonuses are set based on unaudited data. That is, a current year's bonus will be calculated based on the current year's unaudited financial results plus or minus any adjustments for differences in the audited and unaudited results from the prior year. Individual bonuses are to be based on position and length of service. Southwest's Board of Directors includes their current president, secretary/treasurer, and controller. It also includes two shareholders, who each hold about 5% interest in the firm, and one retired CPA,Jack Washington. While there is no audit committee, the board as all is overseeing the hiring of a new auditor and will rely on the leadership of Mr. Washington the to determine the scope of the audit engagement. Mr. Washington was recruited to the Board last year to help compensate for the fact that the prior president and controller retired during the new year and therefore, the current president and controller have been in their positions for less than one year. The new controller was promoted from within, but the new president was recruited from outside the firm. Southwest's Board of Directors includes their current president, secretary/treasurer, and controller. It also includes two shareholders, who each hold about 5% interest in the firm, and one retired CPA, Jack Washington. While there is no audit committee, the board as all is overseeing the hiring of a new auditor and will rely on the leadership of Mr. Washington the to determine the scope of the audit engagement. Mr. Washington was recruited to the Board last year to help compesate for the fact that the prior president and controller retired during the new year and therefore, the current president and controller have been in their positions for less than one year. The new controller was promoted from within, but the new president was recruited from outside the firm. Southwest will select a new auditor for this year's audit engagement because their previous auditor had been with them for ten years and the Board felt it was time to get new insights into their operations. In addition, they wanted to hire a larger auditor with a more established reputation to support their anticipated IPO. Financial Management Practices Southwest's accountant, Bob Smith, prepares financial statements and various financial statistics for the officers to review monthly. The board reviews similar statistics on a quarterly basis at the regular board meetings and questions the officers closely about what is going on the business. In addition, Mr. Navarro personally follows sales figures and gross profit margins Human Resource Practices All employees are interviewed by their perspective supervisor and at least one of the corporate officers at the time they apply for a job. Most of the key employees have been with Southwest for more than ten years except for the new President and Controller. However, due to the high demand for accountants, Bob Smith, and most of the accounting staff, have been with Southwest for less than 3 years. Southwest's background checks on new employees include contacting references and doing a criminal records check. They also have new employees fill out an 1-9 and provide documents confirming that they can legally work in the US Southwest has a complete set of policies and procedures manuals that employees are required to use. Management is aggressive about keeping them up to date and insuring that new employees are properly trained in the policies and procedures that affect their duties. Management also requires employees to attend brief review seminars once a year on the policies and procedures that affect their positions. Information Systems Overview Southwest's accounting and inventory management processes are supported by a network of personal computers with units at locations in the offices and warehouse, and a central server to handle all accounting and inventory files. Printers are in areas in which printed documents and other records are needed routinely. The computer system is used to control and process most transactions, to print documents, prepare accounting records, and prepare periodic financial statements. Southwest uses commercial software recommended by the previous auditor. They purchased the system two years ago and have updated it once since the original purchase. The software firm that supplied the system provide support and they have not had any significant problems with it. Only employees with jobs requiring computer data entry or access to file information and reports are given accounts and passwords. Passwords are required to enter the system and access is keyed to individual accounts such that employees only have access to the information they need to perform their duties. Normal access to the files and data input takes place via the software, which subjects any input to various logical and numerical tests. Most input is backed up by paper trails of source documents and other business papers Southwest has their data files synchronized with a cloud service provider so that all data transactions and files are automatically backed up to the cloud as they occur