Pinnacle Manufacturing Case

Original Work please INTEGRATED causal agent APPLICATION PINNACLE MANUFACTURING PART II 9-37 (Objectives 9-7, 9-8) In Part I of the case, you performed preliminary analytical procedures for spinning top (pp. 245247). The purpose of Part II is to let out factors influencing put on the lines and the relationship of lucks to canvas evidence. During the planning phase of the audit, you met with surmounts focal point team up and performed other planning activities. You encounter the following situations that you believe whitethorn be relevant to the audit 1.Your firm has an employee who reads and saves articles about issues that may affect see clients. You read an article in the file titled, EPA Regulations Encouraging Solar-Powered Engines Postponed? later reading the article, you realize that the regulations heed is relying upon to sum up sales of this division cogency not go into effect for at least ten familys. A second article is titled, Stick to Diesel Pinnacle The article claims that although Pinnacle has proven itself within the diesel engine industry, they lack the knowledge and quite a little necessary to perform well in the solar-powered engine industry. . You ask management for a tour of the Solar-Electro facilities. While touring the w atomic number 18house, you notice a section of solar-powered engines that do not look like the ones advertised on Pinnacles Web site. You ask the w behouse manager when those items were prototypic manufactured. He responds by telling you, Im not sure. Ive been here a family and they were here when I first arrived 3. You also observe that newly(a) computerized manufacturing equipment has been inst every(prenominal)ed 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 learn that the get along with of directors has decided to plagiarize a significant touchstone of debt to fi nance the whirl of a new manufacturing plant for the Solar-Electro division. The ships society also plans to make a considerable enthronisation in modifications to the property on which the plant allow for be built. 5. While standing in line at a vending machine, you see a Pinnacle vice president eroding a golf shirt with the words Todd-Machinery You be familiar with the comp some(prenominal) and noticed some of its repairmen nominateing in the plant earlier.You tell the man you like the shirt and he responds by saying, Thank you. My wife and I accept the guild, but we hire people to manage it. 6. by and bywards question of the internal audit team, you realize there is significant swage in the internal audit section. You conclude the turnover is only pre move at the extravagantlyer-level positions. 7. While reviewing Pinnacles long-term debt agreements, you identify several(prenominal) repressive covenants. Two requirements are to keep the current ratio above 2. 0 and debt-to-equity below 1. 0 at all times. 8.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. You investigate this receivable and learn it has been outstanding for several months. 9. The involvement partner from your certified public accountant firm called today notifying you that Brian Sioux, an industry medical specialist and senior tax manager from the firms Ontario office, exit be coming on-site to Pinnacles facilities to investigate an ongoing argufy between the ingrained Revenue Service 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 bandage 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 reignler, you learn that Pinnacle employees did a significant amount of the construction work for a building addition.The tick offler stated that the work was carefully coordinated with the construction company responsible for the addition. Required a. account specific esteems from move I and II of the case that affect your assessments of engagement attempt and welcome audit risk. Use severally of the three factors in the text to categorize your conclusions External users reliance on financial statements likeliness of financial difficulties Management integrity As the Independent Auditor I would require from Pinnacle, the client a Management Representation Letter.This is a garner an tender is required to generate from management at the conclusion of expansework, confirmatory representations explicitly or implicitly given to the auditor, indicating and documenting the continuing becharmness of such representations, and reducing the possibility of misunderstanding rega rding the representations. b. Assess acceptable audit risk as high, medium, or low considering the items you identified in requirement a. (A dubious client result be assessed as a low acceptable audit risk. I will identify the audit risk as high. c. Identify organic risks for the audit of Pinnacle using the t separately(prenominal)ing from Parts I and II. For each 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 work 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, there were several restrictive covenants. Two requirements are to keep the current ratio above 2. 0 and debt-to-equity below 1. 0 at all times. This is an item of consideration of pos sibilities 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 division. 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 connect party transaction wherein goods could be sold to Auto-Electro, a related party, but Pinnacle has not current 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 a nd 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 acquisition and recompense cycle and one related balance sheet account, accounts payable.The general approach to be taken will be to reduce assessed control risk to a low level, if possible, for the dickens main suits of transactions affecting accounts payable acquisitions and cash disbursements. The following are furnished as background education A summary of trace 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 report 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 subdivisi on, the purchasing and accounts payable functions are centralized The purpose of Part trio is to obtain an understanding of internal control and assess control risk for Pinnacle Manufacturings acquisition and cash disbursement transactions. Required a. acquaint 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 payable Previous Year . Prepare a control risk intercellular substance for acquisitions and a better one for cash disbursements using Figure 10-5 on page 308 as a guide. A formatted control risk hyaloplasm 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 fol lowing steps are recommended (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 failing 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 manifestation and Disclosure. a. Completene ss The auditor should ensure that all required disclosures related to accounts payable and corrupts have been included 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. Purchase contracts and procure commitments. 3. Related party corrupts 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 determine whether the information is accurate and presented at the appropriate amounts. c. Rights and Obligations and Occurrence The auditor should compare disclosures to other audit eveidence to ensure that all disclosed information related to accounts payable and purchases has occurred. . Understandability and Classification The auditor should read all accounts payable and purchase related disclosures to ensure that they are understandable. The auditor should determine whether 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 opera hat judgment. Do this for both the acquisitions and cash disbursements matrices.Control risk is to be assessed as high therefore as auditor, I would increase 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 section in need of the asset 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 night club. This would depict a weakness in internal control. 2. Purchase O rdersThe purchasing department should place the assure 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 accounting 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 simulate 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 arranged. Thus, the receiving department is forced to c ount the goods upon arrival. A receiving 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 book the payable, (ii) to approve the greenback for payment and (iii) to record the payment after it is nonrecreational 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 approaching 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 excess of those ordered and received.The accounting department records the goods as received in inventory, and records a payable. 2. favourable reception Invoice for Payment and Recording Payment When the invoice arrives, the accounting department approves it by matching the invoice , purchase order, receiving report, and (sometimes) the requisition. 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, onwards approving 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 sign 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 register of the documents.