Question

Questions:

You ask management for a tour of the Solar-Electro facilities. While touring the ware- house, you notice a section of solar-powered engines that do not look like the ones advertised on Pinnacle’s Web site. You ask the warehouse manager when those items were first manufactured. He responds by telling you, “I’m not sure. I’ve been here a year and they were here when I first arrived."

Based on the above scenario:

What is the Inherent Risk and the accounts that will be affected by this? What is the possibility of an error happening in this case?

Answer 1

There is fraud risk present in this given scenario. This affects Revenue and Inventory Accounts.
The warehouse manager should have records of all inventories when the were manufactured or purchased. But in given scenario, he doesn't have any record of the items when these different solar-powered engines are manufactured. That means the accuracy of Financial Statements and Accounting Records are questionable.
This maybe happening due to incentives or pressure from superiors on warehouse manager.

The company selling a different solar-powered engines that are not ones advertised on Pinnacle’s Web site. So, there is possibility of an error-
that the different model may be cheaper than the advertised model
But,
the company is selling it at same price like advertised ones.
By doing so, the company it generating extra profit in each unit of sale.