During the planning phase of the audit, you met with Pinnacles 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 the Solar-Electro 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 Pinnacles Web site. You ask the warehouse manager when those items were first manufactured. He responds by telling you, Im not sure. Ive 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 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 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 the customer has not made any payments for several months. 6. 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. 7. 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. 8. 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. 9. While reviewing Pinnacles long-term debt agreements, you identify several restrictive covenants. Two requirements are to keep the current ratio above 2.0 and debt-to-equity below 1.0 at all times. 10. The engagement partner from your CPA firm called today notifying you that Brian Sioux, an industry specialist and senior tax manager from the firms Ontario office, will be coming on-site to Pinnacles facilities to investigate an ongoing dispute between the Internal Revenue Service and Pinnacle. 11. 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 a. 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 b. 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. c. 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 that may be affected. Please answer a, b and c for 7, 8 & 9.

I don't have Part 1 solution as it was not required.