INTEGRATED CASE APPLICATION_ PINNACLE MANUFACTURING: PART I 8-39 (OBJECTIVES 8-3,8-4) Introduction This case study is pr

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INTEGRATED CASE APPLICATION_ PINNACLE MANUFACTURING: PART I 8-39 (OBJECTIVES 8-3,8-4) 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 1-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-Conduct fraud brainstorming and assess fraud risks, Chapter 10. • Part IV-Understand internal control and assess control risk for the acquisition and payment cycle, Chapter 12. • 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, 2019. Pinnacle is a medium-sized corporation, with its headquarters located in Detroit, Michi- gan. 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 continues to mature, and Pin- nacle'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 anticipated 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 operat- ing results may have the effect of keeping the division as part of Pinnacle for the next few years. The vice president for Machine-Tech is committed to making it profitable.

Required PART I 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 ana- lytical procedures: obtaining an understanding about the client's business and indicating where there is an increased likelihood of misstatements. a. Go to the Pinnacle link on the textbook website (www.pearsonhighered.com/arens) and open the Pinnacle Financials Excel file. The financial statement data is also shown in Figure 8-9. Using the Excel file, compute percent changes in all Pinnacle Income Statement and Pinnacle Balance Sheet account balances from 2017-2018 and 2018-2019. b. The Excel file also includes a tab with the common ratios shown in Chapter 7 on pages 206-208. Selected ratios for prior years have already been calculated. Calculate FIGURE 8-9 Pinnacle Manufacturing Financial Statements Net sales Cost of goods sold Gross profit Operating expenses Income from operations Other revenues and gains Other expenses and losses Income before income tax Income tax Net income for the year Earnings per share Assets Current assets Cash and cash equivalents Net receivables Inventory Other current assets Total current assets Property, plant, and equipment Total assets Liabilities Current liabilities Accounts payable Short/current long-term debt Other current liabilities Total current liabilities Long-term debt Total liabilities Stockholders' equity Common stock Additional paid-in capital Retained earnings Pinnacle Manufacturing Company Income Statement For the Year Ended December 31 2019 $ 151,137,628 109,284.780 Total stockholders' equity Total liabilities & stockholders' equity 41,852,848 37.397.738 4,455,110 2.181.948 2.273,162 703,437 1,569,725 $1.57 Pinnacle Manufacturing Company Balance Sheet As of December 31 172,278 52.571,743 62.863,047 $115,434,790 2018 $ 148,586,037 106,255,499 42.330,538 38.133.969 4,196,569 $ 12,969.686 15,375819 2,067,643 30,413,148 24,060,090 54,473,238 2019 2018 $ 7,721,279 $ 7,324,846 12,742,165 31,936,021 1,000,000 15,717,645 44.243.907 60.961.552 $115.434,790 - 2.299.217 1,897,352 858,941 1.038,411 $1.04 8.619,857 25,537,198 143,206 41,625,107 61,635,530 $ 103,260,637 $ 9,460,776 10,298.668 1767,360 21,526,804 22,342.006 43.868,810 1.000.000 15,717,645 42.674,182 59,391,827 $ 103,260,637 2017 $144,686,413 101.988,165 42,698,248 37.241.108 5,457,140 2.397.953 3,059,187 1,341,536 1,717,651 $1,72 2017 $ 8.066.545 7,936,409 25,271,503 131,742 41,406,199 58.268.732 $99.674.931 $ 7,586,374 9,672,670 1.682.551 18,941,595 22.379.920 41,321,515 1,000,000 15,717,645 41.635.771 58,353,416 $ 99.674,931

at least five common ratios described in Chapter 7, including at least one ratio from each category. Document the ratios in a format similar to the following: 2019 2018 2017 Ratio Current ratio c. Based on the analytical procedures calculated in parts a. and b., summarize your obser- vations about Pinnacle's business, including your assessment of the client's business risk. d. Open 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 8-4 (p. 243) for an example. Use the information to iden- tify 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 website 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. g. Analyze the account balances for accounts receivable, inventory, and short/current long-term debt. Describe any observations about those accounts and discuss addi- tional information you want to consider during the current-year audit. h. Based on your calculations, assess the likelihood (high, medium, or low) that Pinnacle is likely to fail financially in the next 12 months.