In Parts I and II of this case, you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing.

The auditor also assesses fraud risk as part of risk assessment procedures performed during audit planning. You have been invited by the audit partner on the Pinnacle engagement to participate in the fraud brainstorming session conducted as part of audit planning. The purpose of Part III is to identify fraud risks and the response to these fraud risks in the audit of Pinnacle Manufacturing.

Required

Use the fraud triangle and information from Parts I and II of this case to identify incentives/pressures, opportunities, and attitudes/rationalizations for Pinnacle to engage in fraudulent financial reporting.

Identify one or more fraud risks that you believe exist due to the nature of Pinnacles industry. Indicate the accounts most likely to be affected by the identified fraud risks.

Auditors must generally identify a fraud risk for revenue recognition. Indicate at least two ways that Pinnacle might engage in revenue recognition fraud. Identify the specific nature of the potential fraud and an audit procedure that you would perform to determine whether fraud is occurring.

In Part I of this case you performed preliminary analytical procedures on Pinnacles financial statements. Identify changes in account balances or ratios that you believe indicate the potential for fraud and describe the nature of the potential fraud.