Pinnacle manufacturing: Part IV11-34 â?? Identifying and responding to fraud risksa. Use the fraud t

Pinnacle manufacturing: Part IV11-34 – Identifying and responding to fraud risksa. Use the fraud triangle and information from Parts I through III of this case to identify incentives/pressures, opportunities, and attitudes/rationalizations for Pinnacle to engage in fraudulent financial reporting.b. Identify one or more fraud risks that you believe exist due to the nature of Pinnacle’s industry. Indicate the accounts most likely to be affected by the identified fraud risks.c. Auditors must generally identify a fraud risk for revenue recognition. Indicate at least two ways that Pinnacle might engage in revenue recognition fraud. Identify the specific nature of the potential fraud, and an audit procedure that you would perform to determine whether fraud is occurring.d. In Part I of this case you performed preliminary analytical procedures on Pinnacle’s financial statements. Identify changes in account balances or ratios that you believe indicate the potential for fraud, and describe the nature of the potential fraud.e. Part II of the case includes 11 situations that you encountered in audit planning. For each situation, describe whether it indicates a potential fraud risk. For each potential fraud risk, identify the related fraud risk triangle element(s).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 the article, you realize that the regulations management is relying upon to increase sales of the Solar-Electro division might not go into effect for at least ten years. A second article is titled, “Stick to Diesel Pinnacle!†The article claims that although Pinnacle has proven itself within the diesel engine industry, they lack the knowledge and people necessary to perform well in the solar-powered engine industry.2) You ask management for a tour of the Solar-Electro facilities. While touring the warehouse, you notice a section of solar-powered engines that do not look like the ones advertised on Pinnacle’s Web site. You ask the warehouse manager when those items were first manufactured. He responds by telling you, “I’m not sure. I’ve been here a year and they were here when I first arrived.â€3) You also observe that new computerized manufacturing equipment has been installed at Solar-Electro. The machines have been stamped with the words, “Product of Welburn Manufacturing, Detroit, Michigan.â€4) During discussions with the Pinnacle controller, you learn that Pinnacle employees did a significant amount of the construction work for a building addition because of employee idle time and to save costs. The controller stated that the work was carefully coordinated with the construction company responsible for the addition.5) 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. You investigate this receivable and learn the customer has not made any payments for several months.6) During a meeting with the facilities director, you learn that the board of directors has decided to raise a significant amount of debt to finance the construction of a new manufacturing plant for the Solar-Electro division. The company also plans to make a considerable investment in modifications to the property on which the plant will be built.7) While standing in line at a vending machine, you see a Pinnacle vice president wearing a golf shirt with the words “Todd-Machinery.†You are familiar with the company and noticed some of its repairmen working in the plant earlier. You tell the man you like the shirt and he responds by saying, “Thank you. My wife and I own the company, but we hire people to manage it.â€8) 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.9) While reviewing Pinnacle’s long-term debt agreements, you identify several restrictive covenants. Two requirements are to keep the current ratio above 2.0 and debt-to-equity below 1.0 at all times.10) The engagement partner from your CPA firm called today notifying you that Brian Sioux, an industry specialist and senior tax manager from the firm’s Ontario office, will be coming on-site to Pinnacle’s facilities to investigate an ongoing dispute between the Internal Revenue Service and Pinnacle.11) A member of your CPA firm, who is currently on-site in Detroit at the Welburn division, calls you to see how everything is going while you are visiting Solar-Electro in Texas. During your conversation, he asks if you know anything about the recent intercompany loan from Welburn to Solar-Electro.Pinnacle manufacturing: Part V14-34 – Assessment of control risksAssume in Part III that you identified the following as the key controls you want to rely on (even though your answers were likely different from these):1. Segregation of the purchasing, receiving, and cash disbursements functions2. Use of pre-numbered voucher packages, properly accounted for3. Use of pre-numbered checks, properly accounted for4. Use of pre-numbered receiving reports, properly accounted for5. Internal verification of document package before check preparation6. Review of supporting documents and signing of checks by an independent, authorized person7. Cancellation of documents prior to signing of the check8. Monthly reconciliation of the accounts payable master file with the general ledger9. Independent reconciliation of the monthly bank statementsa. Prepare an audit file listing the nine controls or download them from the textbook Web site.b. After each control, identify the transaction-related audit objective(s) that it partially or fully satisfies.c. Immediately below the control, list one audit procedure to test the control. Use the most reliable test of control evidence that you can think of. Write the audit procedure in good form.d. Immediately below the test of control, list one substantive test of transactions audit procedure to test whether the control failed to be effective. Use the most reliable substantive tests of transactions evidence that you can think of.e. Create a separate audit schedule labeled “Acquisitions Substantive Tests of Transactions.†Decide and write one substantive test of transactions audit procedure for each transaction-related audit objective for acquisitions. The audit procedures must be different than the ones in requirement d.f. Using a separate heading labeled “Cash Disbursements Substantive Tests of Transactions,†decide and write one substantive test of transactions audit procedure for each transaction-related audit objective for cash disbursements. The audit procedures must be different than the ones in requirements d and e. The audit schedule should be designed the same as the one in requirementg. Prepare a performance audit program for acquisitions and cash disbursements using all audit procedures in requirements c through f. See Figure 14-6 (p. 462) for a format. To the extent possible, follow the approach in procedure 13 a through e in Figure 14-6 of having “one starting point†procedure followed by other related procedures. Do this for both acquisitions and cash disbursements. Be sure to eliminate any duplicate audit procedures.


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