Pinnacle Manufacturing: Part Ivpinnacle Manufacturing: Part Iv

11-34 (Objectives 11-2, 11-3) In Parts I (pp.245–247) and II (pp. 287–288) of this case you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. In Part III (pp. 332–333) of the case, you obtained an understanding of internal control and assessed control risk for acquisition and cash disbursement transactions.

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 IV is to identify fraud risks and the response to these fraud risks in the audit of Pinnacle Manufacturing.

Required

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

Per page 337: Three conditions for fraud arising from Fraudulent Financial reporting and misappropriations of assets are described on SAS 99 (AU 316). These three conditions are referred to as the fraud triangle.

1. Incentives/Pressures. Management or other employees have incentives or pressures to commit fraud.

A. Pinnacle’s board is considering selling the Machine-Tech division, and the president of the division is committed to making it profitable (Part I).

B. Pinnacle is in danger of violating its debt covenants (Part II).

2. Opportunities: Circumstances provide opportunities for management or employees to commit fraud

A. Pinnacle engages in a number of related party transactions (Part I).

B. Realizable value issues exist with inventory and receivables (Part I and II).

C. There has been turnover in internal audit personnel (Part II).

3. Attitudes/Rationalization: An attitude, character, or set of ethical values exist that allows management or employees to...