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The risk assessment should be presented as a memo to file. The memo should identify the users of the financial statement and their reliance on the financial statements, the likelihood of the client having financial difficulties, and the integrity of management.

Next, your memo will establish the acceptable audit risk as low, medium, or high, with a justification for your selection. The memo should then address the inherent risk and the associated account(s) with each of the 11 situations discussed in the problem.

	2011		2010		2009
ASSETS	Dollar Value		Dollar Value		Dollar Value
CURRENT ASSETS
Cash and cash equivalents	$ 7,721,279		$ 7,324,846		$ 8,066,545
Accounts receivable: Trade	14,008,633		9,586,325		8,879,352
Less: Allowance for bad debts	(966,468)		(966,468)		(942,943)
Inventory	32,236,021		25,537,198		25,271,503
Prepaid expenses	119,081		106,353		102,650
Deposits	53,197		36,853		29,092
Total current assets	53,171,743		41,625,107		41,406,199
PROPERTY, PLANT, AND EQUIPMENT
Land	11,490,036		11,490,036		4,159,580
Automobiles	266,071		220,313		220,313
Accum. depreciation: Automobiles	(198,218)		(166,835)		(122,769)
Office equipment	5,494,707		5,238,368		4,924,055
Accum.depreciation: Office equipment	(2,962,472)		(2,136,395)		(1,417,025)
Manufacturing equipment	13,918,820		11,543,824		11,179,813
Accum. depreciation: Manufacturing equipment	(3,319,983)		(2,796,754)		(2,429,272)
Manufacturing building	41,106,800		38,056,625		38,056,625
Accum. depreciation: Manufacturing building	(11,098,836)		(8,410,681)		(7,074,110)
Office building	13,262,479		13,025,447		13,025,447
Accum.depreciation: Office building	(5,696,357)		(4,428,418)		(2,253,925)
Total property, plant, and equipment	62,263,047		61,635,530		58,268,732
TOTAL ASSETS	$ 115,434,790		$ 103,260,637		$ 99,674,931
LIABILITIES AND STOCKHOLDERS' EQUITY
			-		-
CURRENT LIABILITIES
Note payable: Bank	$ 11,459,080		$ 10,257,598		$ 9,631,600
Accounts payable: Trade	12,969,686		9,460,776		7,586,374
Current portion of long-term debt	3,916,739		41,070		41,070
Accrued payroll and withholding taxes	1,593,276		1,263,461		1,238,454
Accrued interest	229,575		196,545		178,478
Federal income taxes payable	244,792		307,354		265,619
Total current liabilities	30,413,148		21,526,804		18,941,595
LONG-TERM DEBT	24,420,090		22,342,006		22,379,920
STOCKHOLDERS' EQUITY
Common stock: $1 par value
Authorized: 1,500,000 shares
Issued and outstanding: 1,000,000 shares	1,000,000		1,000,000		1,000,000
Additional paid-in capital	15,717,645		15,717,645		15,717,645
Retained earnings	43,883,907		42,674,182		41,635,771
Total stockholders' equity	60,601,552		59,391,827		58,353,416
			-		-
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 115,434,790		$ 103,260,637		$ 99,674,931

	2011		2010		2009
	Dollar Value		Dollar Value		Dollar Value
Sales	150,918,731		148,764,555		144,860,245
Sales Returns and Allowances	181,103		178,518		173,832
Cost of Sales*	109,284,780		106,255,499		101,988,165
Gross Profit	41,452,848		42,330,538		42,698,248
OPERATING EXPENSES-Allocated
Salaries-Management	2,281,266		2,387,993		2,295,081
Salaries-Office	315,169		296,681		306,856
Licensing and certification fees	190,650		172,883		162,279
Security	550,603		637,580		630,353
Insurance	93,197		103,842		108,491
Medical benefits	23,721		29,453		28,810
Advertising	162,512		178,009		165,678
Business publications	6,989		5,555		774
Property taxes	22,585		178,009		175,692
Bad debts	841,699		1,034,060		992,094
Depreciation expense	5,336,783		4,641,982		4,367,565
Accounting fees	273,956		297,777		299,789
Total operating expenses-Allocated	10,099,130		9,963,824		9,533,462
OPERATING EXPENSES-Direct
Salaries-Sales	14,970,669		15,327,777		14,904,392
Wages Rental	491,794		595,389		575,725
Wages-Mechanics	1,113,539		1,339,626		1,333,411
Wages-Warehouse	4,891,065		5,340,271		5,473,249
Garbage collection	27,649		29,771		37,969
Payroll benefits	2,657,889		2,937,730		2,894,300
Rent- Warehouse	802,855		764,346		758,345
Telephone	32,402		45,173		57,867
Utilities	262,393		267,005		274,365
Postage	89,763		133,518		151,278
Linen service	17,282		12,350		16,083
Repairs and maintenance	166,985		168,405		178,213
Cleaning service	89,800		81,589		78,088
Legal service	396,016		190,540		152,238
Fuel	286,547		341,192		279,512
Travel and entertainment	103,389		103,842		100,479
Pension expense	228,555		237,350		127,011
Office supplies	149,828		148,340		171,109
Miscellaneous	300,188		105,931		144,012
Total operating expenses-Direct	27,078,608		28,170,145		27,707,646
Total Operating Expenses	37,177,738		38,133,969		37,241,108
Operating Income	4,275,110		4,196,569		5,457,140
Other Expense-Interest	2,181,948		2,299,217		2,397,953
Income Before Taxes	2,093,162		1,897,352		3,059,187
Federal Income Taxes	883,437		858,941		1,341,536
Net Income	1,209,725		1,038,411		1,717,651

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