Schedule 1
THE LAKESIDE COMPANY
INCOME STATEMENT
		For Year Ending December 31, 2007				For Year Ending December 31, 2008
		Company Stores	Distributorship	Lakeside Totals		Company Stores	Distributorship	Lakeside Totals
Sales		2,526,000	2,646,000	5,172,000		2,658,000	3,120,000	5,778,000
Sales Returns and Discounts		(131,000)	(194,000)	(325,000)		(168,000)	(233,000)	(401,000)
	Net Sales	2,395,000	2,452,000	4,847,000		2,490,000	2,887,000	5,377,000
Cost of Goods Sold		(1,518,000)	(1,566,000)	(3,084,000)		(1,608,000)	(1,827,000)	(3,435,000)
	Gross Profit	877,000	886,000	1,763,000		882,000	1,060,000	1,942,000
Salaries, Commissions, Bonuses		(581,000)	(335,000)	(916,000)		(641,000)	(380,000)	(1,021,000)
Advertising and Selling Expense		(91,000)	(112,000)	(203,000)		(89,000)	(127,000)	(216,000)
Rent Expense		(96,000)	(18,000)	(114,000)		(121,000)	(25,000)	(146,000)
Depreciation Expense		(33,000)	(12,000)	(45,000)		(34,000)	(12,000)	(46,000)
Other General and Administrative		(81,000)	(93,000)	(174,000)		(102,000)	(93,000)	(195,000)
Interest Expense		(52,000)	(35,000)	(87,000)		(70,000)	(44,000)	(114,000)
	Income Before Income Taxes	(57,000)	281,000	224,000		(175,000)	379,000	204,000
Income Taxes		23,000	(112,000)	(89,000)		70,000	(152,000)	(82,000)
	Net Income	(34,000)	169,000	135,000		(105,000)	227,000	122,000
Retained Earnings, January 1, 2008				193,000				257,000
Cash Dividends				(71,000)				(67,000)
Retained Earnings, January 1, 2008				257,000				312,000

						Schedule 2
THE LAKESIDE COMPANY
BALANCE SHEET
		As of December 31, 2007			As of December 31, 2008
Current Assets
	Cash		68,000			71,000
	Accounts Receivable - Distributorship	293,000			388,000
	Allowance for Doubtful Accounts	(19,000)	274,000		(24,000)	364,000
	Inventory - FIFO costing;
	Lower of cost of market		786,000			946,000
Total Current Asssets			1,128,000			1,381,000
Land, Buildings and Equipment
	Land		149,000			149,000
	Buildings and Equipment	337,000			348,000
	Accumulated Depreciation	(143,000)	194,000		(179,000)	169,000
Total Land, Buildings, and Equipment			343,000			318,000
Intangible Assets
	Leasehold Improvements	208,000			211,000
	Accumulated Depreciation	(86,000)	122,000		(96,000)	115,000
TOTAL ASSETS			1,593,000			1,814,000
Current Liabilities
	Notes Payable - Current		20,000			20,000
	Notes Payable - Trade		549,000			696,000
	Accounts Payable - Cypress		156,000			166,000
	Accrued Expenses and Taxes Payable		106,000			135,000
Total Current Liabilities			831,000			1,017,000
Notes Payable - Long Term			355,000			335,000
TOTAL LIABILITIES
Stockholders' Equity
	Common Stock - 10,000 shares issued		10,000			10,000
	and outstanding, $1.00 par value
	Additional Paid-In Capital		140,000			140,000
	Retained Earnings		257,000			312,000
TOTAL STOCKHOLDERS' EQUITY			407,000			462,000
TOTAL LIABILITIES AND			1,593,000			1,814,000
	STOCKHOLDERS' EQUITY

Case Questions:

Using the financial information provided above for Lakeside Company, Perform the following analytical procedures for 2007 and 2008

Current ratio

# Days inventory on hand

Receivables collection period

Debt-to-total assets

Times interest earned

Profit Margin

Return on Assets

Return on Equity

** What is your overall assessment of the significance of the ratios in 2007 and 2008?

**What is your overall assessment of the change in ratios from 2007 to 2008?

Using the financial information that you prepared in Question #1, compare your calculations to the industry averages provided below:

RATIOS INDUSTRY AVERAGE 2008 LAKESIDE 2008

Current ratio 1.73

# Days inventory on hand 65

Receivables collection period 11

Debt-to-total assets 13%

Times interest earned 30 times

Profit Margin 2.93

Return on Assets 6.09

** What is your overall assessment of the comparison of the ratios for Lakeside in 2008 as compared with the industry average?

Inherent risk is a measure of the firms assessment of the susceptibility of material misstatement before considering the effectiveness of internal control. Briefly comment of the following areas that are inherent in auditing a business such as the Lakeside Company:

Lakeside holds an inventory of high technology items: consumer electronic equipment.

Lakeside distributes merchandise to retail stores.

Lakeside sells on credit throughout two states.

Lakeside rents a number of its stores

Lakeside has a large amount of debt.

Lakeside is considering going public

An audit program is designed to generate appropriate evidence on which the auditor can base an opinion. How does the auditor know when sufficient evidence has been accumulated?

What is the quality of the evidence that is gathered by analytical procedures? More specifically, how competent is evidence provided by analytical procedures compared with other types of evidence?

In performing analytical procedures, how extensive should an auditors knowledge of a clients industry be and how does the auditor go about getting this type of information?

Assume that price competition with other CPA firms was an important factor in securing this audit engagement. What are the potential problems for a CPA firm that can arise from acquiring clients through price competition?

The following is a summary of observations from the review of the trial balance and general ledger for Lakeside Company for 2007 and 2008:

The sales for Store Three have increased by approximately 94% since the previous year. At the same time, the cost of the goods sold has dropped from 58.5% of sales (which is consistent with the other stores) to only 50.3% of sales. Also, the inventory held by this store has risen by over 50%.

Comment on significance: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

There was a gain on disposition of fixed assets $14,000.

Comment on Significance:

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The companys two bank credit lines now have a total balance that exceeds the $750,000 maximum that was indicated in the earlier case:

Comment on Significance:

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The long-term notes payable increased by $50,000

Comment on Significance:

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Cash flow from operations declined significantly in 2008

Comment on Significance:

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