Pinnacle Case Part Iv

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Part IV of Pinnacle case

a .
Incentives/Pressures - Pinnacle’s board is considering selling the Machine-Techdivision, and the president of the division is committed to making it profitable (Part I) - Pinnacle is in danger of violating its debt covenants, the current ratio has fallen from 2.19 to 1.75. (Part II) Opportunities - Pinnacle engages in a number of related party transactions. (Part I) - Realizable value issues exist with inventory and receivables (Part I and II) - There has been turnover in internal audit personnel (Part II) Attitudes/Rationalizations - Pinnacle has had disputes with the IRS (Part II).

The company is in the engine manufacturing business, and has recently expanded into solar engines. The engine manufacturing business is competitive and increasingly outsourced. The solar business depends on developing technology. These characteristics are most likely to affect Inventory to a lesser extent , and accounts receivable fixed assets. and

Pinnacle could overstate revenues in several ways. The auditor would especially focus on the Machine-Tech division because of the incentives identified in part a.

There is a major change in perating expenses O and Income from operations this . If change was not expected, it could suggest revenue recognition fraud. The decline in bad debt expense and increase in depreciation expense, which are management estimates, could suggest the use of estimates to overstate income .

e. Fraud Risk 1 2 3 4 5 6 7 8 9 10 11
Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes

Fraud Triangle Element (if yes)
Motivation (Justify commitment to solar) Opportunity Opportunity (related party transaction) Opportunity (related party transaction) Incentives Opportunity (related party transaction) Attitude/Rationalization Opportunity Opportunity Opportunity (related party transaction)…...

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