After using the fraud triangle and information gathered I have identified the following incentives and pressures, opportunities, and attitudes for Pinnacle to engage in fraudulent financial reporting. The incentive is that Pinnacle’s board is trying to sell the Machine-Tec division and so the President is determined to make it as profitable as possible. The pressure they are facing is that Pinnacle is in the complex situation where they can violate its debt agreements. With their opportunities Pinnacle is involved in multiple related party transactions with some issues related to realizable value existing with inventory in addition to receivables. Lastly, under attitudes, Pinnacle has had problems with the IRS which could be problematic for them later.
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With this fraud risk the accounts likely to be affected would be inventory and accounts receivable.
The first potential fraud would be recording sales in subsequent periods as current sales. The audit technique performed to determine if this is fraud would be to examine shipping documents for sales recorded before the end of the year. The next potential fraud would be the shipping of goods to customers that were not ordered. The audit technique performed to determine if this is fraud would be to examine customer orders for goods shipped before the end of the year.
The changes in accounts that indicate the potential for fraud would be the decrease in the value of depreciation which indicates the possible usage of estimates to exaggerate the amount of income there was. Also there is an 8% increase in the revenue. If this increase was not expected then it was due to the revenue recognition fraud.
The following are the results of the 11 possible fraud risk
With this fraud risk the accounts likely to be affected would be inventory and accounts receivable.
The first potential fraud would be recording sales in subsequent periods as current sales. The audit technique performed to determine if this is fraud would be to examine shipping documents for sales recorded before the end of the year. The next potential fraud would be the shipping of goods to customers that were not ordered. The audit technique performed to determine if this is fraud would be to examine customer orders for goods shipped before the end of the year.
The changes in accounts that indicate the potential for fraud would be the decrease in the value of depreciation which indicates the possible usage of estimates to exaggerate the amount of income there was. Also there is an 8% increase in the revenue. If this increase was not expected then it was due to the revenue recognition fraud.
The following are the results of the 11 possible fraud risk