Risk assessment and responses for manufacturing inventory.

Sun-house solar Inc. (SHS) is a medium-size private company that develops solar energy systems for sale and installation in private residences. It is privately owned, with the majority of the shares held by the company president, Yong Shu. SHS started up five years ago. Its first two years were mostly involved in research and development. Over the past three years, SHS has been very successful and its customer sales and installations have grown continuously. SHS's main raw material is silicone, which it purchases on the world market so it can keep a one-year supply on hand at its factory in Woodbridge. It also has some purchase commitments for silicone at prices far above the current spot price which it would only use if there was a huge increase in the price of silicone on the world market.

Shu has engaged your audit firm to do the current year's audit because she plans to obtain $20 million in financing to allow further commercialization of the SHS systems. The plan is to turn SHS into a public company and issue shares on the TSX. Your firm has accepted the engagement and assigned you to prepare the audit plan. You have obtained the preliminary general ledger trial balance from SHS chief financial officer. The CFO is a qualified professional accountant with 15 years' experience as a financial officer in various public companies before joining SHS two years ago.

The following is a summary of the accounts that appear in this trial balance as at year-end:

Account Balan ce Cash 10 {1,209 Accounts Receivable 85,019 Allowance for bad debts {15,00} Inventory, finished goods 100,550 Inventory, work in progress 44,555 Inventory, unassemhled solar panels 5?,890 Inventory, raw materials 834,445 Property, plant, and equipment 3300,9913 Accumulated amortization, property, plant, and {901,108} equipment Patents, at co st 1,010,000 Accounts payable {198,009} Warranty provision {30,0 00} Shareholder loan, noninterest hearing {5,400,000} Share capital, common shares 1,000 Retained earnings 1,251,558 Revenue {4,812,202} Cost of goods sold 1,555,502 General administrative expenses 802,500 Research and development expense 190,000 Other expenses 1,489,990