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Integrated Case Application Part 2

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Pinnacle Manufacturing:
A Case Study

Auditing 444
Course Project

Professor Ranauto
August 4, 2013
Pinnacle Manufacturing: A Case Study

Part 2.

Section A.
External users’ reliance on financial statements. * Situation 6.: Raising debt to finance a manufacturing plant for Solar-Electro. * Situation 11.: An intercompany loan to Solar-Electro from Welburn skews the financial statements.

Likelihood of financial difficulties. * Situation 1.: Solar-Electro may not have the experience, knowledge, and regulations necessary to succeed in their industry. * Situation 5.; Auto-Electro comprises a significant portion of Pinnacle’s accounts receivable and have not recently made payments. * Situation 6.: Raising debt for construction may strain Solar-Electro’s cash flows, as well as Pinnacle’s. * Situation 9.: Pinnacle is required to keep its current ratio above 2.0, but it is only at 1.75 and has been declining over the last three years. * Situation 10.: Pinnacle has a dispute with the IRS.

Management integrity. * Situation 7.: A Pinnacle vice president owns Todd-Machinery who provides services to Pinnacle. * Situation 8.: Increased turnover amongst higher-level auditing staff. * Situation 10.: Pinnacle’s dispute with the IRS. * Situation 11.: The intercompany loan to Solar-Electro from Welburn.

Section B.
Pinnacle’s acceptable audit risk is medium. The main reason for giving this audit risk a medium is because of the intercompany loan from Welburn to Solar-Electro. The Solar-Electro division of Pinnacle is what is risky, but Pinnacle has proven itself with the diesel engine, so the company as a whole does not show as being risky.
Section C.
Inherent Risk Account or Accounts Affected
Situation 2: Outdated inventory Inventory; Cost of Goods Sold
Situation 3: Computerized Equipment,

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