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 Pinnacles accounts receivable and have
not recently made payments.
* Situation 6.: Raising debt for construction may strain Solar-Electros cash flows, as well as Pinnacles.
* 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.: Pinnacles dispute with the IRS.
* Situation 11.: The intercompany loan to Solar-Electro from Welburn.
Section B.
Pinnacles 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Situation 2: Outdated inventory Inventory; Cost of Goods Sold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, manufacturing
manufacturing equipment
Situation 5: Accounts receivable Accounts Receiveable; Bad Debt, Allowance for Uncollectible Accounts
Situation 6: New manufacturing Interest Expense, Long-term Liabilities
plant
Situation 7: Todd-Machinery Accounts Payable, Repairs and Maintenance
Situation 8: Internal audit turnover All accounts
Situation 9: Current ratio All accounts
Situation 10: IRS dispute Income Tax Payable, Cash, Retained Earnings
Situation 11: Intercompany loan Accounts Payable, Cash

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