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INTEGRATED CASE APPLICATION –PINNACLE MANUFACTURING:
PART II
9-37 (Objectives 9-7, 9-8)
In Part I of the case, you performed preliminary analytical procedures for Pinnacle (pp. 245–247). The purpose of Part II is to identify factors influencing risks and the relationship of risks to audit evidence.
During the planning phase of the audit, you met with Pinnacle’s management team and performed other planning activities. You encounter the following situations that you believe may be relevant to the audit:
1. Your firm has an employee who reads and saves articles about issues that may affect key clients. You read an article in the file titled, “EPA Regulations Encouraging Solar-Powered Engines Postponed?” After reading …show more content…

This is an item of consideration of possibilities for Pinnacle to “cook the books” so as to keep in compliance with covenant.
(3) There is a high turnover of employees. After inquiry of the internal audit team, you realize there is significant turnover in the internal audit department. You conclude the turnover is only present at the higher-level positions.
(4) While reading the footnotes of the previous year’s financial statements, you note that one customer, Auto-Electro, accounts for nearly 15% of the company’s accounts receivable balance. This receivable and learn it has been outstanding for several months. This is an inherent risk of being a related party transaction wherein goods could be sold to Auto-Electro, a related party, but Pinnacle has not received collection of receivables because this is just to make the financial statements look good as having the sale. Revenue and Inventory accounts are affected.

(5)There is an ongoing dispute between Pinnacle and Internal Revenue Service.

10-43 (Objective 10-5) In Parts I and II of this case, you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. Your team has been assigned the responsibility of auditing the acquisition and payment cycle and one related balance sheet account, accounts payable. The general approach to be taken will be to reduce assessed control risk to a low level, if possible, for the two main types