Pinnacle case study part ii

The business is independently held, however there is a big quantity of debt, so the monetary declaration -might be utilized extensively. Also, management is considering offering the Machine-Tech department, which has the possible to lead to comprehensive usage of the statement by purchasers. 2. Item 6 in the preparation phase indicates prepare for extra financial obligation financing. Possibility of financing problems:

1. The solar power engine service revolves around altering technology, therefore making it inherently more dangerous than other organisation, with a better possibility of bankruptcy.

The first product in the preparation issues raises a concern about the practicality of the division, however not the entire company. 2. Part 1 of the case was that the probability of monetary failure is low, even with the issues of the company. 3. Item 9 in the planning phase needs an existing ratio of 2.0 and if fall listed below that, this could result in the loan being called. Management stability:

No significant issues exist that would cause the auditor to question the integrity of the management.

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Nevertheless, auditor ought to have done customer approval treatment prior to accepting the customer. There are a couple of elements in which fraudulent funding reporting might happen. b. Appropriate audit threat is medium to low due to the fact that of the elements listed in part (a) and the organized boost in funding and the possible offense of the financial obligation covenant agreement. This may be low since this is the first year audit.

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