Identification of factors influencing risks and the relationship of risks to audit evidence Essay Sample

After executing preliminary analytical processs and be aftering activities for Pinnacle Manufacturing. I have found several factors act uponing built-in hazards and acceptable audit hazard. I have categorized the determiners of acceptable audit hazard into three different factors: external users’ trust on fiscal statements. likeliness of fiscal troubles. and direction unity. All the computations in item are listed at the terminal of this study.

External users’ trust on fiscal statements
Pinnacle is a moderate-sized corporation. with entire assets of $ 115. 434. 790. which suggests a reasonably big figure of external users rely on the fiscal statements. The Board of Directors has considered selling the Machine-Tech division. This sparks up involvement to the users as to happen out the ground behind it. It presently has a debt-to-equity ratio of 0. 66. But. the Board of Directors has decided to raise a important sum of debt to finance the building of a new fabrication works for the Solar-Electro division. This would increase the debt-to-equity ratio. which could bring forth concerns to investors. It is reasonable to measure a low acceptable audit hazard when the external users rely greatly on the fiscal statements. which is the instance in this audit.

Likelihood of fiscal troubles
Its 2012 current ratio and speedy ratio are 1. 93 and 0. 75 severally. Its 2013 current ratio and speedy ratio are 1. 75 and 0. 69 severally. This suggests the company is still healthy in footings of transporting hard currency and hard currency equivalents. even though its current liabilities have increased in 2013. Its Income before Income Tax for 2013. 2012. and 2011 are $ 2. 093. 162. $ 1. 897. 352. and $ 3. 059. 187 severally. There is no important tendency of take downing income. Large sum of debt can convey solvency issues to the company. It presently has $ 2. 067. 643 of short-run debt and $ 24. 420. 090 of long-run debt. It besides has two restrictive compacts of maintaining the current ratio above 2. 0 and debt-to-equity ratio below 1. 0 at all times. As mentioned above. its current ratio is non above 2. 0.

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So. this has the potency of conveying fiscal troubles to the company. One of its divisions. Solar-Electro. is in an inherently hazardous concern as it falls under the engineering class. Thingss turn disused really fast in this industry. so this could take to fiscal troubles as good. Plus. the ordinances of EPA. direction is trusting upon to increase gross revenues of the Solar-Electro division. is potentially non traveling into consequence for at least ten old ages. With the above-named factors for fiscal troubles being considered. it is sensible to measure a medium acceptable audit hazard.

Management Integrity
Pinnacle has an on-going difference with the Internal Revenue Service. Besides. during the circuit of the warehouse. I noticed a subdivision of solar-powered engines that do non look like the 1s advertised on their web site. Finally. there is important turnover at the higher-level places in the internal audit section. This could potentially convey controls issues. so we need to make more research on this affair. Aside from these three issues. at that place does non look to be any job with the direction. Overall. after sing all the three factors. and the fact that we are scrutinizing Pinnacle Manufacturing for the first clip. I believe it is sensible to measure a low acceptable audit hazard. The major grounds as to why we should measure a low acceptable audit hazard are: Its Solar-Electro division could potentially non be run intoing its gross revenues prognosiss for the approaching 10 old ages.

Its Board of Directors has considered selling the Machine-Tech division ; nevertheless the frailty president is committed to doing it profitable. It has non been able to run into one of the loan compact demands of maintaining the current ratio above 2. 0. which could lure direction to pull strings history receivables and payables rating. So. ratings done for history receivables and payables should be carefully examined. Built-in hazard is the measuring of auditor’s appraisal of the likeliness of stuff misstatements being present in an history balance. category of dealing. or revelation before sing the effectivity of internal control ( AICPA. AU-C 200 ) . I will travel over single minutess and balances in relation to built-in hazard in the following few paragraphs. So. utilizing my professional judgement. I have decided some countries of the audit to be inherently riskier than others.

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The built-in hazard with stock list is that it can turn disused rapidly. particularly in an environment of engineering. Since the EPA ordinances are non traveling into consequence for at least ten old ages. its stock list of Solar-powered engines could really good turn obsolete. Besides. stock list demands to be recorded at lower of cost or market. which impacts the rating of stock list. and this has a direct relationship with current assets. This affects the stock list and cost of goods sold history. and it deals with being and rating aims. The computerized fabrication equipment at Solar-Electro has a Welburn cast. which suggests this is a related party dealing. This requires revelation of the dealing in the footers. This affects the equipment history and trades with rating and categorization aims. Pinnacle employees did a important sum of building work for a edifice add-on. This is a non-routine dealing for the company.

Management could seek to capitalise building disbursals which is clearly salary and rewards disbursals. This affects the edifice history and salary disbursal history. This deals with truth and categorization aims. A client. Auto-Electro. histories for about 15 % of the company’s histories receivable balance and it has non made any payments for several months. This affects the aggregation rhythm and history receivable turnover ratio. This could lure direction non to increase allowance for dubious history ; while it should be entering this as bad debt disbursal ; which leads to an addition in the allowance history. The histories affected are histories receivable. allowance for dubious histories. and bad debt disbursal. This deals with realizable value aim.

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The maintenance mans of Todd-Machinery are working in the Pinnacle works. which suggests another related-party dealing. This requires revelation of the dealing in the footers. This affects maintenance/repair expense history and trades with completeness. rating. and categorization aims.

Significant turnover of higher-level places in the internal audit section is a mark of control hazard. This enhances built-in hazard in all the balances and minutess of the company as a whole.

Pinnacle’s long term debt understanding has several restrictive compacts. which requires them to maintain the current ratio above 2. 0 and debt-to-equity ratio below 1. 0 at all times. This could lure direction to make fabricated grosss in the history receivables balance. Other signifiers of material misstatement or deceitful activities could be attempted by direction in this scenario. so they can run into their demands of the restrictive compacts. This affects the history receivable. history collectible. entire debt and equity balances. This deals with being and rating aim.

There is an ongoing difference between the IRS and Pinnacle. So. based on the result. this could potentially impact income revenue enhancement expense/payable history. The aims affected are being and completeness.

There is an intercompany loan from Welburn to Solar-Electro. This is a related-party dealing every bit good. and this affects the notes payable/receivable histories. and the involvement payable/receivable histories. This requires a revelation in the footers. and this deals with completeness and rating aims.

So. these are the factors act uponing acceptable audit hazard and built-in hazard. This requires aggregation of grounds that is sufficient and appropriate to the audit for us to publish an sentiment on the fiscal statements of the Pinnacle Manufacturing Company.

AICPA. “AU-C 200. ” Overall Aims of the Independent Auditor. AICPA. n. d. Web. 20 Apr. 2014.