Pinnacle Manufacturing Case

overlord Work please INTEGRATED CASE APPLICATION PINNACLE MANUFACTURING PART II 9-37 (Objectives 9-7, 9-8) In factor I of the case, you performed preliminary analytical procedures for top of the inning (pp. 245247). The aspiration of Part II is to identify factors influencing stake of expo originals and the relationship of guesss to analyze evidence. During the planning phase of the visit, you met with spinning tops management team and performed other planning activities. You encounter the sp be- clock time activity 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 secern clients. You read an article in the file titled, EPA Regulations Encouraging Solar-Powered Engines Postp iodind? after(prenominal) reading the article, you realize that the regulations management is relying upon to increment sales of this division might not go into effect for at least ten course of instructi ons. A second article is titled, Stick to Diesel Pinnacle The article claims that although Pinnacle has proven itself within the diesel engine engine industry, they lack the knowledge and people necessary to perform well in the solar-powered engine industry. . You remove management for a tour of the Solar-Electro facilities. While touring the warehouse, you notice a section of solar-powered engines that do not research like the superstars advertised on Pinnacles Web site. You ask the warehouse manager when those items were beginning manufactured. He responds by telling you, Im not sure. Ive been here a year and they were here when I first arrived 3. You also observe that new computerized manufacturing equipment has been installed at Solar-Electro. The machines bring on been stamped with the words, Product of Welburn Manufacturing, Detroit, Michigan. 4. During a meeting with the facilities director, you involve that the board of directors has heady to raise a significant amou nt of debt to finance the anatomical structure of a new manufacturing pose for the Solar-Electro division. The partnership also plans to make a considerable investment in modifications to the property on which the plant give be built. 5. While standing in line at a vending machine, you see a Pinnacle vice president wearing a golf game 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 take the company, but we hire people to manage it. 6. After inquiry of the inwrought audit team, you realize at that place is significant turnover in the internal audit segment. You conclude the turnover is scarce presend at the higher-level positions. 7. While reviewing Pinnacles long-term debt agreements, you identify several restrictive covenants. Two needs are to go by the current ratio above 2. 0 and debt-to-equity on a lower floor 1. 0 at all times. 8.While reading the footnotes of the preceding years financial statements, you note that one customer, Auto-Electro, accounts for nearly 15% of the companys accounts due end. You investigate this receivable and learn it has been outstanding for several months. 9. The engagement partner from your CPA firm called right away notifying you that Brian Sioux, an industry specialist and senior tax manager from the firms Ontario office, will be climax on-site to Pinnacles facilities to investigate an ongoing dispute between the indwelling Revenue avail and Pinnacle. 0. 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 composition 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. 11. During discussions with the Pinnacle ascendancyler, you learn that Pinnacle empl oyees did a significant amount of the construction work for a building addition.The controller express that the work was carefully coordinated with the construction company responsible for the addition. Required a. Identify specific considerations from split I and II of the case that affect your assessments of engagement risk and acceptable audit risk. Use distributively of the three factors in the text to categorize your conclusions External users reliance on financial statements Likelihood of financial difficulties counselling integrity As the Independent Auditor I would require from Pinnacle, the client a Management Representation Letter.This is a letter an auditor is required to obtain from management at the conclusion of theatrework, positivistic representations explicitly or implicitly given to the auditor, indicating and documenting the continuing appropriateness of such representations, and reducing the possibility of misapprehend regarding the representations. b. ev aluate acceptable audit risk as high, medium, or low considering the items you identified in requirement a. (A risky client will be assessed as a low acceptable audit risk. I will identify the audit risk as high. c. Identify inwrought risks for the audit of Pinnacle exploitation the learning from Parts I and II. For each(prenominal) inherent risk, identify the account or accounts that may be affected. (1)Related Parties A reporting entitys affiliates, principal owners, and management also, any members of their immediate families. Points of consideration is a Pinnacle VP owning Todd-Machinery, its repair men working at Pinnacle at the time the auditor was at field work, while standing in front of vending machine. 2) While reviewing Pinnacles long-term debt agreements, in that location were several restrictive covenants. Two requirements are to observe the current ratio above 2. 0 and debt-to-equity below 1. 0 at all times. 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 plane section. You conclude the turnover is only present at the higher-level positions. 4) While reading the footnotes of the previous years financial statements, you note that one customer, Auto-Electro, accounts for nearly 15% of the companys accounts receivable balance. This receivable and learn it has been outstanding for several months. This is an inherent risk of being a tie in party transaction wherein secures 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 achievement and payment cycle and one related balance sheet account, accounts collectible.The general approach to be taken will be to reduce assessed control risk to a low level, if possible, for the two main types of transactions affecting accounts payable acquisitions and silver in disbursements. The following are furnished as background information A summary of key information from the audit of the acquisition and payment cycle and accounts payable in the prior year, which was extracted from the previous audit firms audit files (Figure 10-12) A flowchart description of the story system and internal controls for the acquisition and payment cycle (Figure 10-13,p. 34)the flowchart shows that although each of the companys three divisions has its own receiving department, the pur chasing and accounts payable functions are centralized The purpose of Part III is to obtain an understanding of internal control and assess control risk for Pinnacle Manufacturings acquisition and cash disbursement transactions. Required a. Familiarize yourself with the internal control system for acquisitions and cash disbursements by studying the information in Figure 10-12 and Figure 10-13. FIGURE 10-12 Information for Audit of Accounts collectible Previous Year . Prepare a control risk matrix for acquisitions and a separate one for cash disbursements using Figure 10-5 on page 308 as a guide. A formatted control risk matrix is provided on the textbook Web site. The objectives should be specific transaction-related audit objectives for acquisitions for the first matrix and cash disbursements for the second matrix. See pages 608612 in Chapter 18 for transaction-related audit objectives for acquisitions and cash disbursements. In doing Part III, the following travel are recommen ded (1) Controls a.Identify key controls for acquisitions and for cash disbursements. After you decide on the key controls, include each control in one of the two matrices. b. Include a C in the matrix in each column for the objective(s) to which each control applies. Several of the controls should satisfy multiple objectives. (2) Deficiencies a. Identify key deficiencies for acquisitions and for cash disbursements. After you decide on the deficiencies, include each significant deficiency or material weakness in the bottom portion of one of the two matrices. AnswerDuring 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. Auditing Presentation and Disclosure. a. Completeness The auditor should ensur e that all required disclosures related to accounts payable and procures have been include in the notes to the financial statements. Required disclosures include 1.Payables by type (trade, officer/ employee, affiliates) and term (short-term and long-term) 2. procure contracts and procure commitments. 3. Related party leveragings and payables 4. Expenses by segment b. Valuation, Allocation and Accuracy The auditor should read the footnotes and other information related to accounts payable and purchases to take in whether the information is accurate and presented at the appropriate amounts. c. Rights and Obligations and Occurrence The auditor should equivalence disclosures to other audit eveidence to ensure that all disclosed information related to accounts payable and purchases has occurred. . Understandability and miscellanea The auditor should read all accounts payable and purchase related disclosures to ensure that they are understandable. The auditor should determine wheth er material long-term payables or non-trade payables require separate disclosure. b. Include a D in the matrix in each column for the objective(s) to which each significant deficiency or material weakness applies. (3) Assess control risk as high, medium, or low for each objective using your vanquish judgment. Do this for both the acquisitions and cash disbursements matrices.Control risk is to be assessed as high therefore as auditor, I would growing my risk sampling. Expenditure Cycle A. Internal Control- Purchases The following functions in a purchase transaction should be segregated 1. Purchase Requisition The purchase requisition starts the purchasing cycle. The department in need of the summation or services sends a properly approved, serially numbered requisition to the purchasing department. The requisitioning department should not have the authority to actually place the purchase order. This would indicate a weakness in internal control. 2. Purchase OrdersThe purchasing de partment should place the order only after giving proper consideration to the time to order and the quantity to order. The purchasing department should also obtain competitive bids from various suppliers to make sure that the best price is obtained. The purchase order is issued only after proper approval. For internal control purposes, it is best that pre-numbered purchase orders can be used. There should be multiple copies that will be sent to (i) the requisitioning department (ii) the vendor (iii) the receiving department and (iv) the report department.If the purchase order is canceled, all copies should be recalled and filed so that every purchase order number is accounted for. 3. Receipt of Goods or Services The copy of the purchase order sent to the receiving department serves as an authorization to accept the goods when they arrive. It is preferable that the copy not indicate the quantity ordered. Thus, the receiving department is compel to count the goods upon arrival. A re ceiving report is prepared by this department and forwarded to the accounting department. The goods are forwarded to the requisitioning department .B. Internal Control Accounts Payable The accounting department has three functions (i) to designate the payable, (ii) to approve the invoice for payment and (iii) to record the payment after it is paid by the Treasurer. 1. Recording the Payable The copy of the purchase order sent to the accounting department notifies them that there will be a future cash disbursement. The receiving report is compared with the purchase order and the vendors invoice as to the quantity to prevent payment of charges for goods in oversupply of those ordered and received.The accounting department records the goods as received in inventory, and records a payable. 2. Approving Invoice for fee and Recording Payment When the invoice arrives, the accounting department approves it by matching the invoice, purchase order, receiving report, and (sometimes) the req uisition. When payment is made, the payable is reversed. The accounting department should ensure that the invoice amount is correct, and that it accurately reflects any purchase discounts, before approbatory it for payment. C. Internal Control Cash DisbursementsIt is best for internal control purposes to pay invoices by check. For effective internal control, the functions of approving the payment and signing the checks should be segregated. Approved voucher packets (matched invoice, purchase order, receiving report, and requisition) prepared by the accounting department (Accounts Payable) are received by the Treasurer, who prepares, signs, and mails the checks and cancels all supporting documents after payment. Paid vouchers are returned to the accounting department for posting of the payment and filing of the documents.