bered a sg A product u 1. Your firm has an employee who reads and saves articles about issues that may af fect key clients. You read an article in the file titled, "EPA Regulations Encouraging Colar-Powered Engines Postponed? After reading the article, you realize that the party toAT regulations management is relying upon to increase sales of the Solar-Electro division might not go into effect for at least 10 years. A second article is titled, "Stick to Diesel, Pinaacle!" 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 While reading the footnotes of the previous year's financial statements, you note that one supplier, Auto-Electro, provides over 20 percent of the raw materials used Pinnacle. You investigate Auto-Electro and discovered that the company is con- t of a newy d 31,2019.Hende tis a publady curities and Exh sidering entering Chapter 11 bankruptcy proceedings due to continuing cash flow difficulties 1 While reviewing Pinnacle's long-term debt agreements, you identify several restrictive covenants. Two requirements are to keep the current ratio above 2.0 and debe-to-equity helow 1.0 at all times. The loans become immediately due if the covenants are not met. 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 man- y of its comp Es used in s e Tural markets ho Henderson En aking greater u ment risks. Beca th these acivte within its financ ibility to the d assumptions an ufacturing plant for the Solar-Electro division. The company also plans to make a con- siderable investment in modifications to the property on which the plant will be built. 5, After inquiry of the internal audit team, you realize there is significant turnover in the internal audit department. You conclude the turnover is only present at the higher-level positions. 6. 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, "Tm not sure. I've been here a year and they were here when I first arrived." 7. While standing in line at a vending machine, you see a Pinnacle vice president wear- ing 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, at the client has nt, and equipmen oduction faciltie which expande &. The engagement partner from your CPA firm called today notifying you that Brian Sioux, an industry specialist and senior tax manager from the firm's Ontario office, will be coming onsite to Pinnacle's facilities to investigate an ongoing dispute between the Internal Revenue Service and Pinnacle. but we hire people to manage it." s of the firm vh partner reviev d a. Assess acceptable audit risk as low, moderate, or high using the information provided Required in this assignment and information provided in Part I in Chapter 8 (pp. 267-269). Justify your response. In making your assessment, include your evaluation of the company on the three factors that make up acceptable audit risk. External users' reliance on financial statements Likelihood of financial difficulties Management integrity b. For each of the eight situations listed above, identify any inherent risks for the audit of Pinnacle. Indicate whether the situation indicates the following: An overall financial statement-level risk potentially affecting multiple accounts An assertion-level risk for one or more accounts-indicate the primary balance sheet account affected .No effect on inherent risk c. For each risk identified in part b., indicate whether you believe the risk represents a significant risk. Explain why it is a significant risk and what test(s) you might per- form to address the risk. of material mi Energy. India sts. Alsa iden at below: Model dit risk d. You will be assigned to perform the audit of Pinnacle's accounts payable. For any of the risks that you identified as affecting accounts payable, identify the relevant audit objective(s) affected tical pro s inflnci rment ts thar Chapter 9/ ASSESSING THE RISK OF MATERIAL MISSTATEMENT bered a sg A product u 1. Your firm has an employee who reads and saves articles about issues that may af fect key clients. You read an article in the file titled, "EPA Regulations Encouraging Colar-Powered Engines Postponed? After reading the article, you realize that the party toAT regulations management is relying upon to increase sales of the Solar-Electro division might not go into effect for at least 10 years. A second article is titled, "Stick to Diesel, Pinaacle!" 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 While reading the footnotes of the previous year's financial statements, you note that one supplier, Auto-Electro, provides over 20 percent of the raw materials used Pinnacle. You investigate Auto-Electro and discovered that the company is con- t of a newy d 31,2019.Hende tis a publady curities and Exh sidering entering Chapter 11 bankruptcy proceedings due to continuing cash flow difficulties 1 While reviewing Pinnacle's long-term debt agreements, you identify several restrictive covenants. Two requirements are to keep the current ratio above 2.0 and debe-to-equity helow 1.0 at all times. The loans become immediately due if the covenants are not met. 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 man- y of its comp Es used in s e Tural markets ho Henderson En aking greater u ment risks. Beca th these acivte within its financ ibility to the d assumptions an ufacturing plant for the Solar-Electro division. The company also plans to make a con- siderable investment in modifications to the property on which the plant will be built. 5, After inquiry of the internal audit team, you realize there is significant turnover in the internal audit department. You conclude the turnover is only present at the higher-level positions. 6. 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, "Tm not sure. I've been here a year and they were here when I first arrived." 7. While standing in line at a vending machine, you see a Pinnacle vice president wear- ing 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, at the client has nt, and equipmen oduction faciltie which expande &. The engagement partner from your CPA firm called today notifying you that Brian Sioux, an industry specialist and senior tax manager from the firm's Ontario office, will be coming onsite to Pinnacle's facilities to investigate an ongoing dispute between the Internal Revenue Service and Pinnacle. but we hire people to manage it." s of the firm vh partner reviev d a. Assess acceptable audit risk as low, moderate, or high using the information provided Required in this assignment and information provided in Part I in Chapter 8 (pp. 267-269). Justify your response. In making your assessment, include your evaluation of the company on the three factors that make up acceptable audit risk. External users' reliance on financial statements Likelihood of financial difficulties Management integrity b. For each of the eight situations listed above, identify any inherent risks for the audit of Pinnacle. Indicate whether the situation indicates the following: An overall financial statement-level risk potentially affecting multiple accounts An assertion-level risk for one or more accounts-indicate the primary balance sheet account affected .No effect on inherent risk c. For each risk identified in part b., indicate whether you believe the risk represents a significant risk. Explain why it is a significant risk and what test(s) you might per- form to address the risk. of material mi Energy. India sts. Alsa iden at below: Model dit risk d. You will be assigned to perform the audit of Pinnacle's accounts payable. For any of the risks that you identified as affecting accounts payable, identify the relevant audit objective(s) affected tical pro s inflnci rment ts thar Chapter 9/ ASSESSING THE RISK OF MATERIAL MISSTATEMENT