Part I The purpose of Part I is to perform preliminary analytical procedures as part of the audit planning process. You have been asked to focus your attention on two purposes of analytical procedures: obtaining an understanding about the clients business and indicating where there is an increased likelihood of misstatements. Required Refer to the financial statement data in Figure 8-9 for the current year and prior two years. Analyze the year-to-year change in account balance for at least five financial statement line items. Document the trend analysis in a format similar to the following: Account Balance % Change 20152016 % Change 20142015 Net sales Calculate at least Integrated Case Application Pinnacle Manufacturing: Part II 9-40 (Objectives 9-6, 9-7) In Part I of the case, you performed preliminary analytical procedures for Pinnacle. The purpose of Part II is to identify factors influencing risks and the relationship of risks to audit evidence. Figure 9-7 Stanton Enterprises Evidence-Planning Worksheet to Decide Tests of Details of Balances for Accounts Receivable During the planning phase of the audit, you meet with Pinnacles management team and perform other planning activities.
You encounter the following situations that you believe may be relevant to the audit: You also observe that new computerized manufacturing equipment has been installed at Solar-Electro. The machines have been stamped with the words, Product of Welburn Manufacturing, Detroit, Michigan. 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. During 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. While standing in line at a vending machine, you see a Pinnacle vice president wearing a golf shirt with the words Todd-Machinery. You are familiar with the company and noticed some of its repairmen working in the plant earlier.
You tell the man you like the shirt and he responds by saying, Thank you. My wife and I own the company, but we hire people to manage it. 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 while 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. Required Review Part I of the case and the situations in Part II and identify information that affects your assessment of acceptable audit risk. Note that only some of the situations in Part II will relate to acceptable audit risk. Classify the information based on the three factors that affect acceptable audit risk. External users reliance on financial statements Likelihood of financial difficulties Management integrity Assess acceptable audit risk as high, medium, or low considering the items you identified in requirement a. (A risky client will be assessed as a low acceptable audit risk.) Justify your response. Identify inherent risks for the audit of Pinnacle using the information from Parts I and II. For each inherent risk, identify the account or accounts and the relevant audit objectives that may be affected. Inherent Risk Account or Accounts Affected Relevant Audit Objectives Look at the file i sent for the whole assignment