In Part 1 of the case, you performed preliminary analytical procedures for Pinnacle (pp. 257-259).

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 meet with Pinnacle's management team and perform

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 titled, "EPA Regulations Encouraging Solar-Powered Engines Postponed?".

After reading this 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 yers. 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 discussions with the Pinnacle controller, you learn that Pinnacle employees did a

significant amount of the consturction 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 year's financial statements, you note that one

customer, Auto-Electro, accounts for nearly 15% of the company's accounts receiveable balance.

You investigate this recieveable 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 that you like his 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 that there is significant turnover in the

internal audit department. You conclude the turnover is only present at the higher-level positions.

9. While reviewing Pinnacle's long-term debt agreements, you identify several restrictive

covenants. Two requirements are to keep the current ratio about 2.0 and debt-to-equity ratio

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 firm's Ontario office, will be coming on-site

to Pinnacle's 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 you if you know anything about the recent inter-company loan from

Welburn to Solar-Electro.

C. Identify inherent risks for the audit of Pinnacle using the information from Parts I and II. For
each inherent risk, identify the accounts and the relevant audit objectives that may be affected.
Inherent Risk			Account or Accounts Affected			Relevant Audit Objectives