Essay about pinnacle case study part ii

644 Words Oct 8th, 2013 3 Pages
Pinnacle Case Study
a. External users’ reliance on financial statements:
1. 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
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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

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