pinnacle case study part ii
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 company.
2. Part 1 of the case was that the likelihood of financial failure is low, even with the issues of the company.
3. Item 9 in the planning phase requires a current ratio of 2.0 and if fall below that, this could result in the loan being called.
Management integrity:
No major issues exist that would cause the auditor to question the integrity of the management. However, auditor should have done client acceptance procedure before accepting the client. There are a few factors in which fraudulent financing reporting may occur.
b. Acceptable audit risk is medium to low because of the factors listed in part (a) and the planned increase in financing and the potential violation of the debt covenant agreement. This might be low because this is the first year audit.
c.
1. Inherent Risk: No effect on inherent risk
2. Inherent Risk: The primary concern is the possibility of obsolete inventory, which affects the valuation of inventory at the lower of cost or market.
Account Affected: Inventory, cost of goods sold
Audit Objectives: Transaction-related
3. Inherent Risk: There is potential related party transaction, which could affect the valuation of the transaction, which could affect the valuation of the
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 company.
2. Part 1 of the case was that the likelihood of financial failure is low, even with the issues of the company.
3. Item 9 in the planning phase requires a current ratio of 2.0 and if fall below that, this could result in the loan being called.
Management integrity:
No major issues exist that would cause the auditor to question the integrity of the management. However, auditor should have done client acceptance procedure before accepting the client. There are a few factors in which fraudulent financing reporting may occur.
b. Acceptable audit risk is medium to low because of the factors listed in part (a) and the planned increase in financing and the potential violation of the debt covenant agreement. This might be low because this is the first year audit.
c.
1. Inherent Risk: No effect on inherent risk
2. Inherent Risk: The primary concern is the possibility of obsolete inventory, which affects the valuation of inventory at the lower of cost or market.
Account Affected: Inventory, cost of goods sold
Audit Objectives: Transaction-related
3. Inherent Risk: There is potential related party transaction, which could affect the valuation of the transaction, which could affect the valuation of the