The year under audit is Year 2. Company Aquatic Jet Products, Inc. is a manufacturer of jet boats and personal watercraft, with headquarters in northern Florida. Personal watercraft are manufactured at the Florida facility. The companys jet boats are manufactured at a facility in Mexico. Finished goods are sold primarily to independent marine stores throughout the United States. The company, in its ninth year of operations, has experienced two years of declining sales after a period of rapid growth. The overall market demand for watercraft has also declined and many competitors have filed for bankruptcy in recent years. Tough new federal emissions regulations further threaten industry profitability. Business Projection Eager to revive the companys profitability, the board of directors has implemented several new changes, starting with the hiring of a new CEO, lured away from a major competitor. The new CEO is optimistic and ambitious and has set a goal of a 25% increase in sales for Year 2. To help achieve this goal, the CEO has changed the sales staffs compensation from salaried to commission-based. Unhappy with past sales performance, the CEO plans to terminate relationships with several retail customers and identify new outlets for distribution of its product lines. To further protect its bottom line, the board of directors has also restructured the CFO's compensation package, to include a substantial bonus based on the companys net profits. The companys bank, wary of declining trends, has placed strict new covenants on the companys renewed line-of-credit. Auditors This is the second year that the company has engaged your firm to perform the annual audit of its financial statements. The prior audit firm is upset that they have lost the audit. However, they indicate that no disagreements with management have previously occurred. You learn that a senior accountant from the prior audit firm has taken an accounting position with the company. The CFO gives your audit team a tour of the Florida facility. During the tour, you note that parts of the facility may require repair. You also note that the finished watercraft inventory is kept in an open lot outside the facility. The CFO explains that due to its rural location, the company has not had any problems with theft of its products. The CFO comments on the collegiality of the workforce. However, in your tour of the office, you overhear two clerical employees complaining about their rate of pay. Other Issues During the year, the company uncovered an embezzlement by the payroll clerk. According to the CFO, the clerks scheme was to add hours to her timesheet after approval, during processing of the timecards. While the accounting department is not required to take vacations, the company was fortunate to discover the theft while the employee was out sick for two days. The CFO indicates that while this discovery was unexpected, the company is confident that this was an isolated occurrence.

Based on the information in the Company Profile of Aquatic Jet Products, indicate by clicking the appropriate box next to each item whether the item would most likely increase audit risk.

Profile Information	Increase Audit Risk? Y/N
Finished goods are sold primarily to independent marine stores throughout the United States
Tough new federal emissions regulations further threaten industry
The companys bank, wary of declining trends, has placed strict new covenants on the companys renewed line-of-credit
The prior audit firm is upset that they have lost the audit
A senior accountant from the prior audit firm has taken an accounting position with the company
Finished watercraft inventory is kept in an open lost outside the Florida facility
In your tour of the office, you overhear two clerical employees complaining about their rate of pay.