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Integrated Case Application—Pinnacle Manufacturing: Part III 10-36 (Objectives 10-2 , 10-3)

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 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 Pinnacle’s 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.

· Identify changes in account balances or ratios that you believe indicate the potential for fraud, and describe the nature of the potential fraud.

· For each situation, describe whether it indicates a potential fraud risk. For each potential fraud risk, identify the related fraud risk triangle element(s).

Concept Check

· What are the five components of internal control in the COSO internal control framework?

· What is the relationship among these five components?

· How do the COSO principles help an organization assess whether internal controls are designed and operating effectively?