Devry ACCT444 course project week 3 part 1

INTEGRATED
CASE APPLICATION—PINNACLE MANUFACTURING: PART I
8-40 (Objectives 8-3, 8-4, 8-5)
Introduction
This case
study is presented in seven parts. Each part deals largely with the material in
the chapter to which that part relates. However, the parts are connected in
such a way that in completing all seven, you will gain a better understanding
of how the parts of the audit are interrelated and integrated by the audit
process. The parts of this case appear in the following textbook chapters:
• Part I—Perform analytical procedures for
different phases of the audit, Chapter 8.
• Part II—Understand factors influencing risks
and the relationship of risks to audit evidence, Chapter
9.
• Part III—Understand internal control and
assess control risk for the acquisition and payment cycle, Chapter 10.
• Part IV—Conduct fraud brainstorming and assess
fraud risks, Chapter 11.
• Part V—Design tests of controls and
substantive tests of transactions, Chapter 14.
• Part VI—Determine sample sizes using audit
sampling and evaluate results, Chapter 15.
• Part VII—Design, perform, and evaluate results
for tests of details of balances, Chapter 16.
Background Information
Your
audit firm has recently been engaged as the new auditor for Pinnacle
Manufacturing effective for the audit of the financial statements for the year
ended December 31, 2011. Pinnacle is a medium-sized corporation, with its
headquarters located in Detroit, Michigan. The company is made up of three
divisions. The first division, Welburn, has been in existence for 35 years and
creates powerful diesel engines for boats, trucks, and commercial farming
equipment. The second division, Solar-Electro, was recently acquired from a
high-tech manufacturing firm based out of Dallas, Texas. Solar-Electro produces
state-of-the-art, solar-powered engines. The solar-powered engine market is
relatively new, and Pinnacle’s top management believes that the Solar-Electro
division will be extremely profitable in the future as the focus on global
climate change continues and when highly anticipated EPA regulations make
solar-powered engines mandatory for certain public transportation vehicles.
Finally, the third division, Machine-Tech, engages in a wide variety of machine
service and repair operations. This division, also new to Pinnacle, is
currently in its second year of operations. Pinnacle’s board of directors has
recently considered selling the Machine-Tech division in order to focus more on
core operations—engine manufacturing. However, before any sale will be made,
the board has agreed to evaluate this year’s operating results. Excellent
operating results may have the effect of keeping the division a part of
Pinnacle for the next few years. The vice president for Machine-Tech is
committed to making it profitable.
PART
1
The purpose
of Part I is to perform preliminary analytical procedures as part of the audit
planning process. You have been asked to focus your attention on two purposes
of analytical procedures: obtain an understanding about the client’s business
and indicate where there is an increased likelihood of misstatements.
Required
a.Refer to the financial statement data in Figure 8-9 for the current year and prior two
years. Analyze the year-to-year change in account balance for at least five
financial statement line items. Document the trend analysis in a format similar
to the following:
Account Balance
% Change 2010 –2011
% Change 2009–2010
Net sales

b. Calculate at least five common
ratios shown on pages 232-233 and document them in a format similar to the
following:
Ratio
2011
2010
2009
Current
ratio
c.Based on the analytical procedures calculated
in parts a. and b., summarize your observations about Pinnacle’s business,
including your assessment of the client’s business risk.
d. Go to the Pinnacle link on the
textbook Web site (www.prenhall.com/arens)
and open the Pinnacle income statement, which is located in the Pinnacle Income
Statement worksheet of the Pinnacle_Financials Excel file. Use the income
statement information to prepare a common-size income statement for all three
years. See Figure 8-7 (p. 229) for an example. Use the information to
identify accounts for which you believe there is a concern about material
misstatements. Use a format similar to the following:
Account Balance
Estimate of $ Amount of Potential Misstatement
e.Use the three divisional income statements in
the Pinnacle_Financials Excel file on the Web site to prepare a common-size
income statement for each of the three divisions for all three years. Each
division’s income statement is in a separate worksheet in the Excel file. Use
the information to identify accounts for which you believe there is a concern
about material misstatements. Use a format similar to the one in requirement d.
f.Explain whether you believe the information in
requirement d or e provides the most useful data for evaluating the potential
for misstatements. Explain why.
FIGURE
8-9 Pinnacle
Manufacturing Financial Statements
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g. Analyze the account balances for accounts
receivable, inventory, and short/current long-term debt. Describe any
observations about those accounts and discuss additional information you want
to consider during the current year audit.
h. Based on your calculations, assess
the likelihood (high, medium,
(Arens 245-247)
Arens, Alvin A., Randal Elder, and Beasley. Auditing
and Assurance Services, VitalSource for DeVry University, 14th Edition.
Pearson Learning Solutions, 12/2012. VitalBook file.
The
citation provided is a guideline. Please check each citation for accuracy
before use.