Instructions

ABC Appliances Inc.			WP B.2.1
Inherent Risk and Materiality Memo		Initials	Date
	Prepared
	Reviewed

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