Pinnacle case study part ii Essay

The company is privately held, but there is a large amount of debt, so the financial statement -may be used extensively. Also, management is considering selling the Machine-Tech division, which has the potential to result in extensive use of the statement by buyers. 2. Item 6 in the planning phase indicates plans for additional debt financing. Likelihood of financing difficulties: 1. The solar power engine business revolves around changing technology, therefore making it inherently more risky than other business, with a better chance of bankruptcy. The first item in the planning issues raises a concern about the viability of the division, but not the entire company. 2. Part 1 of the case was that the likelihood of financial failure is low, even with the issues of the company. 3. Item 9 in the planning phase requires a current ratio of 2.0 and if fall below that, this could result in the loan being called. Management integrity: No major issues exist that would cause the auditor to question the integrity of the management. However, auditor should have done client acceptance procedure before accepting the client. There are a few factors in which fraudulent financing reporting may occur. b. Acceptable audit risk is medium to low because of the factors listed in part (a) and the planned increase in financing and the potential violation of the debt covenant agreement. This might be low because this is the first year audit. c. 1. Inherent Risk: No effect on inherent risk 2. Inherent Risk: The primary concern is the possibility of obsolete inventory, which affects the valuation of inventory at the lower of cost or market. Account Affected: Inventory, cost of goods sold Audit Objectives: Transaction-related 3. Inherent Risk: There is potential related party transaction, which could  affect the valuation of the transaction, which could affect the valuation of the transaction and may require disclosure as a related party transaction. Account affected: Manufacturing equipment, footnote Audit objectives: Transaction-related, presentation and disclosure-related 4. Inherent Risk: This involves a nonroutine transaction where there is a risk that materials, labor, and overhead are incorrectly applied to the property accounts. Account affected: Property accounts, inventory, cost of good sold Audit objectives: balance-related 5. Inherent Risk: There may be a major collection problem with outstanding receivables of 15% from a customer for several months. This could result in an understatement of the allowance for uncollectible accounts. Account affected: Account receivable, bad debt expense, and allowance for uncollectible accounts. Audit objectives: balance-related 6. Inherent Risk: No effect on inherent risk 7. Inherent Risk: There may be a related party transaction, which could affect valuation of the transaction and may require disclosure. Account affected: Account payable, Repairs expense Audit objectives: Transaction-related 8. Inherent Risk: This does not affect inherent risk directly, but it is possible that the turnover of internal audit personnel could increase the risk of fraudulent financial reporting. The turnover may also affect the auditor’s assessment of control risk. Account affected: All accounts Audit objectives: transaction, balance, presentation and disclosure-related 9. Inherent Risk: In addition to affecting AAR, the auditor should be concerned about the risk of fraudulent financial reporting due to incentive to make certain that all debt covenants have been met. Account affected: All accounts Audit objectives: transaction, balance, presentation and disclosure-related 10. Inherent Risk: An ongoing dispute with the IRS might require adjustment to income tax liability or a disclosure in footnotes for a contingency, depending on the status of the dispute. Account affected: Income tax expense and income tax payable Audit objectives: balance-related 11. Inherent risk: This situation involves related party transaction because this transaction was not conducted with an outside party. It is possible that the related receivable and payable might not have been properly eliminated on Pinnacle’s consolidated financial statements. Account affected: Notes payable, notes receivable, interest expense, and interest income. Audit objectives: Transaction and balance-related