Task 2
gesjima02198v
ABCInherentRiskandMaterialMemoTemplate1.docx
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WP B.2.1 |
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Inherent Risk and Materiality Memo |
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Initials |
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Prepared |
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Reviewed |
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Preliminary Inherent Risk Assessment
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
Days Inventory Increase - Days inventory increased by 19 days in 2015. 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.
Preliminary Materiality
Balance Sheet -
Income statement -
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