You are the senior auditor in charge December 2016 year-end audit for Cleo Patrick Cosmetics Inc (CPCI). CPCI is a large privately-held Canadian company that was founded in 1995 by one of Canada's most well-known hair stylists, Cleo Patrick. Cleo Patrick, is a well-known celebrity hair stylist who has appeared on a variety of television shows such as Entertainment Tonight, and has been the chief stylist for the Oscars and Emmys. The company includes: (1) a small chain of ten upscale salons situated in major cities in Canada and the US and (2) its well-known signature line of professional hair products that are available at select drug stores and retail chains. The core of its business is its signature hair products line, Cleo Patrick True Professional. The True Professional line represents 85% of the company's total revenue.

During the planning phase of the audit, you performed various planning activities and met with CPCI's management team. Here is what you learned:

Your firm has audited CPCI since 2001, when Cleo sold 25% of her company to a group of private investors. The investors receive quarterly dividends that are calculated based upon a combination of sales and net income. The investors, all experienced business people, serve as Cleo's board of directors and give her advice on the strategic direction of the firm.

Your firm has not had any major disputes with CPCI management over accounting issues; however, last year it recommended that CPCI improve the quality of its accounting department - which is understaffed and not well organized.

High-priced mass-market hair products represent a highly competitive super-saturated market. Large multi-nationals, make up about 70% of the market with niche companies such as CPCI making up the remaining 30%. Management does not consider multinationals to be a threat.

From your review of the 2015 annual report and the 3^rd quarter 2016 financial statements, you noted the following financial information:

Nine Months Ended Year Ended Sept 30. 2016 Dec 31. 2015 (unaudited) (audited) (thousands of dollars) (thousands of dollars) Sales $ 350.000 $ 450,000 Net Income 1,000 1,500 Cash 25.000 30.000 Accounts Receivable 25,000 25,000 Inventory 45.000 40.000 Property, Plant, and Equipment 165,000 160,000 Total Assets 285.000 280.000 Current Liabilities $ 45,000 $ 40,000 Identify and describe key business risk (1 mark) Account, most relevant assertion(s) Potential Misstatement (2 marks)