Needing help solving these two problems with step by step instructions if possible.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 IPerform analytical procedures for different phases of the audit, Chapter 8. Part IIUnderstand factors influencing risks and the relationship of risks to audit evidence, Chapter 9. Part IIIConduct fraud brainstorming and assess fraud risks, Chapter 10. Part IVUnderstand internal control and assess control risk for the acquisition and payment cycle, Chapter 12. Part VDesign tests of controls and substantive tests of transactions, Chapter 14. Part VIDetermine sample sizes using audit sampling and evaluate results, Chapter 15. Part VIIDesign, 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, 2016. Pinnacle is a medium-sized corporation, with its headquarters located in Detroit, Michigan. 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 is relatively new, and Pinnacles top management believes that the Solar-Electro division will be extremely profitable in the future as the focus on global climate change continues and when highly anticipated EPA 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. Pinnacles board of directors has recently considered selling the Machine-Tech division in order to focus more on core operationsengine manufacturing. However, before any sale will be made, the board has agreed to evaluate this years operating results. Excellent operating 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.

9-40 (Objectives 9-6, 9-7) In Part I of the case, you performed preliminary analytical procedures for Pinnacle. The purpose of Part II is to identify factors influencing risks and the relationship of risks to audit evidence. Figure 9-7Stanton Enterprises Evidence-Planning Worksheet to Decide Tests of Details of Balances for Accounts Receivable During the planning phase of the audit, you meet with Pinnacles management team and perform other planning activities. You encounter the following situations that you believe may be relevant to the audit: Your firm has an employee who reads and saves articles about issues that may affect key clients. You read an article in the file titled, EPA Regulations Encouraging Solar-Powered Engines Postponed? After reading the article, you realize that the regulations management is relying upon to increase sales of the Solar-Electro division might not go into effect for at least ten years. A second article is titled, Stick to Diesel, Pinnacle! The article claims that although Pinnacle has proven itself within the diesel engine industry, they lack the knowledge and people necessary to perform well in the solar-powered engine industry. You ask management for a tour of the Solar-Electro facilities. While touring the warehouse, you notice a section of solar-powered engines that do not look like the ones advertised on Pinnacles Web site. You ask the warehouse manager when those items were first manufactured. He responds by telling you, Im not sure. Ive been here a year and they were here when I first arrived. You also observe that new computerized manufacturing equipment has been installed at Solar-Electro. The machines have been stamped with the words, Product of Welburn Manufacturing, Detroit, Michigan. During discussions with the Pinnacle controller, you learn that Pinnacle employees did a significant amount of the construction work for a building addition because of employee idle time and to save costs. The controller stated that the work was carefully coordinated with the construction company responsible for the addition. While reading the footnotes of the previous years financial statements, you note that one customer, Auto-Electro, accounts for nearly 15% of the companys accounts receivable balance. You investigate this receivable and learn the customer has not made any payments for several months. During a meeting with the facilities director, you learn that the board of directors has decided to raise a significant amount of debt to finance the construction of a new manufacturing plant for the Solar-Electro division. The company also plans to make a considerable investment in modifications to the property on which the plant will be built. While standing in line at a vending machine, you see a Pinnacle vice president wearing a golf shirt with the words Todd-Machinery. You are familiar with the company and noticed some of its repairmen working in the plant earlier. You tell the man you like the shirt and he responds by saying, Thank you. My wife and I own the company, but we hire people to manage it. After inquiry of the internal audit team, you realize there is significant turnover in the internal audit department. You conclude the turnover is only present at the higher-level positions. While reviewing Pinnacles long-term debt agreements, you identify several restrictive covenants. Two requirements are to keep the current ratio above 2.0 and debt-to-equity below 1.0 at all times. The engagement partner from your CPA firm called today notifying you that Brian Sioux, an industry specialist and senior tax manager from the firms Ontario office, will be coming on-site to Pinnacles facilities to investigate an ongoing dispute between the Internal Revenue Service and Pinnacle. A member of your CPA firm, who is currently on-site in Detroit at the Welburn division, calls you to see how everything is going while you are visiting Solar-Electro in Texas. During your conversation, he asks if you know anything about the recent intercompany loan from Welburn to Solar-Electro. Required Review Part I of the case and the situations in Part II and identify information that affects your assessment of acceptable audit risk. Note that only some of the situations in Part II will relate to acceptable audit risk. Classify the information based on the three factors that affect acceptable audit risk. External users reliance on financial statements Likelihood of financial difficulties Management integrity Assess acceptable audit risk as high, medium, or low considering the items you identified in requirement a. (A risky client will be assessed as a low acceptable audit risk.) Justify your response. Identify inherent risks for the audit of Pinnacle using the information from Parts I and II. For each inherent risk, identify the account or accounts and the relevant audit objectives that may be affected. Inherent Risk Account or Accounts Affected Relevant Audit Objectives