Looking at the balance sheet for HouseCo, we see from the horizontal analysis that there was a very large increase in cash from 2006 to 2007. There was a 716% increase in cash during the year. This represents a risk because there is a big difference compared to the increase in cash from 2007 to 2008 of only 72%. Also, the Work in Progress Inventory account increased by 551% according to the horizontal analysis during 2008. This large increase could pose a risk relevant to the audit, but it does also make sense seeing that the previous year, there was a large increase in raw materials inventory, so these raw materials are now being used in production. \ \ Looking at HouseCos income statement, an area that may represent a risk is the sales returns and allowances. The total for sales returns and allowances for the year ended December 31, 2008 was $2,644, and for the year ended December 31, 2007, the total was $5,270. This could represent a risk because the sales from 2007 to 2008 increased, so the sales returns would also be expected to increase rather than decrease. This discrepancy could represent a potential misstatement. Also, the gross sales in 2008 increased by 38%. This is much less than the increase in accounts receivable of 84%. This may represent a risk since the increase in the amount that they are owed is not proportional to the increase sales that the company made.

Answer rating: 100% (QA)

Based on the analysis of HouseCos balance sheet and income statement here are some areas that require attention and could pose potential risks relevan... View the full answer