Southwest Appliance - Inherent risk and Preliminary Analytical Procedures.This question is based on the Southwest case included at the end of the assignment.

Company Overview - Review the description of Southwest Appliances, Inc. and identify four inherent risks based on the information provided.Inherent risks can flow from client's business risks, the nature of its governance structure, and its strategic plans.However, you need to be clear about how your risks create an increased risk of material misstatementq in the financial statements and not just how they might create risks of lower performance for the firm.

Thus, for each inherent risk, describe the feature of the firm you believe affects inherent risk and explain how and why. By "how," I mean whether in increases or decreases inherent risk. Make sure your "why" addresses a specific risk to the accuracy of the financial statements and whether audit effort should be increased or decreased for specific accounts or related groups of accounts if possible.

Limit your inherent risk analysis to the verbal information in the case and not the financial statement data. Part b. covers risks identified using analytical procedures based on the financial data.

Management policy of maintaining large inventory to meet customer demand - The auditee maintains large inventories to facilitate sales. However, this increases the risk of obsolete inventory due to slow turnover. Assessing the value of obsolete inventory involves management judgment and increases the risk that inventory valuations will be overstated. Thus, I would recommend careful scrutiny of Southwest's inventory valuation allowance based on the lower of cost or market rule.

Preliminary Analytical Procedures - Review Southwest Appliance's financial statements, ratios, and industrial data presented after the verbal description of the case at the end of this assignmentI have included one example and you will need to add four more to the list.

Days Inventory Increase - Days inventory increased by 19 days in 19X1. This is a fairly large one-year increase and increases the risk of obsolete inventory. We should give some additional attention to valuing the inventory under the lower of cost of market rule.