Question

For #3,4 and 6 discuss the accounts they affect from the standpoint of inherent risk?

Discuss the level of acceptable audit risk(low,medium,high) you determined for pinnacle and what factors led to your decision?

1. Your firm has an employee who reads and saves articles about issues that may affect key dlients. You read an article in the file titled, "EPA Regulations Encouraging Solar- Powered Engines Postponed? After reading the articde, you realize that the regulations management is relying upon to increase sales of the Solar-Electro division might not go into effect for at least ten years. A second article is titled, "Stick to Diesel, Pinnaclel" The article claims that although Pinnacle has proven itself within the diesel engine industry, they lack the knowledge and people necessary to perform well in the solar- powered engine industry 2. You ask management for a tour of the Solar-Electro facilities. While touring the ware- house, you notice a section of solar-powered engines that do not look like the ones advertised on Pinnacle's Web site. You ask the warehouse manager when those items were first manufactured. He responds by telling you, "Tm not sure. I've been here a year and they were here when I first arrived. Chapter 9 / ASSESSING THE RISK OF MATERIAL MISSTATEMENT 3. You also observe that new computerized manufacturing equipment has been installed at Solar-Electro. The machines have been stamped with the words, "Product burn Manufacturing. Detroit, Michigan." 4. During discussions with the Pinnacle controller, you learn that Pinnacle employees did a significant amount of the construction work for a building addition because of employee idle time and to save costs. The controller stated that the work was carefully coordinated with the construction company responsible for the addition. 5. While reading the footnotes s of the previous years financial statements, you note previous that one customer, Auto-Electro, accounts for nearly 15% of the company's accounts receivable balance. You investigate this receivable and learn the customer has not made any payments for several months. 6. During á 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 considerable investment in modifications to the property on which the plant will be built.

Answer 1

Acceptable risk or not	High, Medium or low	Inherent Risk
1. It is an acceptable risk as just reading the article does not provide the material evidence that it will happen	The risk involved is low.	There is inherent risk of people not having the required knowledge.
2. Acceptable risk as even if the engines are previously manufactured, they won’t change the credibility of the company	It is a low risk	Quality control is an inherent risk here.
3. Not an audit risk	Not applicable	Not applicable
4. Not an audit risk	Not applicable	Not applicable
5. Acceptable risk as the allowance for bad-debts can be created	The risk involved is medium as the amount of accounts receivables may or may not be recovered	Not applicable
6. Not an audit risk	Not applicable	Not applicable
7. Acceptable risk as the Vice president can be the owner of another company	The risk involved is high as the vice president is responsible for taking decisions in the company regarding the client companies	There is an inherent risk of related party transactions
8. Acceptable risk as the turnover is high for the position which is accountable for taking decisions and not for the operational work	The risk involved is medium as the risk is for the change in decisions and not at the operational level which is actually doing the internal audit	There is an inherent risk of the mismatch in the decisions taken.
9. Acceptable risk as the presence of covenants is an acceptable thing in contracts	The risk involved is high as the covenants are asking for ratios to be constant at all times which is not an easy task	There is an inherent risk of financial inadequacy due to which the covenants can be violated.
10. Not a risk	Not applicable	Not applicable
11. Not an acceptable risk	The risk is high as the ignorance about inter company can lead to financial information being presented in a wrong way	There is an inherent risk of financial inadequacy