This week's assignment will help you demonstrate the value of the planning process for identifying risks and process selection for audit procedures.

• Examine the following case information.
• Identify four areas of risk, then
• Determine the testing that should occur during the audit.

SK Wheels, Inc. wanted to expand its manufacturing operations and showrooms and needed working capital. The company provided the finance company the previous year's audited financial statements, a set of projections, and the current year's statements (unaudited). The fiscal year-end was December 31. After careful review, the finance company gave SK Wheels, Inc. a loan at 8% interest for $1.75 million on July 1, for working capital. The loan had a due date of December 31 of the next year (18-month term) because SK Wheels planned to finance the loan through a stock offer. Interest payments on the loan were due quarterly.

As part of the pre-engagement process, the auditor conducted interviews with some of SK Wheels key personnel and learned:

• The operations expansion and showroom costs were lower than predicted.
• The company expanded its return policy to customers, and sales were slow.
• SK Wheels' officers wanted to show more income and preserve the $120,000 dividend (paid in the previous year) to impress the finance company.
• In the production area, managers met the target of maintaining a 4.0 inventory turnover ratio; However, compared to sales volume, materials/supplies costs went up by 2%. Spreadsheet Provided.