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Pinnacle Case Summary

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(1) The auditor has been providing audit service to Pinnacle for three years. Therefore, the inherent risk can be lower as the auditor has adequate previous audit works. Such repeat engagement will lower the inherent risk. This case outlines a number of factors related to fraudulent financial reporting that increase the inherent risk. Most of these factors are concluded by understanding the Pinnacle’s business. Concerning the measurement of performance, Pinnacle has introduced performance review system which will induce improper accounting. In this case, the CEO is remunerated based on share price performance while the employees earn their bonus based on sales level. Additionally, their employees’ job security will be jeopardized if the sales performance continues to be poor. …show more content…
Pinnacle has an objective in attaining the same target profit in FY2014 as in FY2013. However, the sale in first 7 months of FY2014 declined further. Therefore, the management and employees that are under pressure to achieve target have incentive to manipulate sales revenue which will compromise the reliability of financial reporting objective. The employees may record sales even when there is no transaction exists or before they are earned in order to boost sales on book, which in turn increases the profit. To recognize premature revenue, sales are recognized before the goods are shipped which is known as bill and hold sale. Therefore, this will lead to the overstatement of sales revenue which fails to satisfy occurrence assertion. Such attempt is a fraud which will increase the risk of financial misstatement. Overall, the inherent risk in this case will be high contributed by the factors discussed above other than the repeat

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