INTEGRATED CASE APPLICATION –PINNACLE MANUFACTURING:
9-37 (Objectives 9-7, 9-8)
In Part I of the case, you performed preliminary analytical procedures for Pinnacle (pp. 245–247). The purpose of Part II is to identify factors influencing risks and the relationship of risks to audit evidence.
During the planning phase of the audit, you met with Pinnacle’s management team and performed other planning activities. You encounter the following situations that you believe may be relevant to the audit:
1. Your firm has an employee who reads and saves articles about issues that may affect key clients. You read an article in the file titled, “EPA Regulations Encouraging Solar-Powered Engines Postponed?” After reading the article, you realize that the regulations management is relying upon to increase sales of this division might not go into effect for at least ten years. 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 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 warehouse, 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, “I’m not sure. I’ve been here a year and they were here when I first arrived”
3. 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.”
4. 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