Analysis Of Financial Ratio And Audit Risks For Trunkey Creek Wines Limited

Analyse the ratios and additional information associated with the four accounts listed by your audit partner, John Richards. Identify the potential audit risks and any audit steps that need to be undertaken to reduce audit risk.

Audit Risks Associated with Trunkey Creek Wines Limited's Accounts

As suggested by Junior et al. (2014), analysis of financial ratio indicates towards evaluation of financial assertion that is utilized to understand financial health of the business entity. For the given case under consideration, Trunkey Creek Wines Limited’s accounts are to be evaluated based on key financial ratios provided such as the marketing expense, accounts receivables, property assets and investments. The current section of the study presents the audit that the auditor may encounter while identifying material misstatement in financial statements and mentions the steps of audit that need to be carried out to lessen risk of audit. However, this might perhaps happen owing to error (intentional or unintentional). The table mentioned below presents analysis of accounts of the firm TCW and identifies diverse risks of audit related to the same together with steps to lessen the detected risk.

As rightly indicated by Moroney (2015), business risk indicates towards the risk that is associated to the income variation of the firm. As the firm TCW has considerably stable earnings over the period, they can simply forecast the utility bills of the clientele within a specific range. Particularly, the best means to evaluate business risks is to carry out ratio analysis that would assist in acquiring a quick indication of firm performance in several important areas. It would assist the administration to identify the strength as well as weaknesses from different varied initiatives and stratagems can be fashioned. However, for the firm TCW the financial ratio that are provided and needs to be assessed are mentioned below:

• Return on equity: As correctly mentioned by Kocken and Hulstijn (2017),the return on equity can be referred to as the technique to assess firm’s profitability that enumerates that specific amount of profit that the firm TCW shall generate with each unit of money from equity of shareholders. For the current case under consideration, return on equity calculated for period 2017 has enhanced to 17.5 from the level of 15.5 as compared to the year ago period of 2016. Nevertheless, it is estimated that return on equity enumerated for the firm would decline to roughly 10.80 in the year 2018 according to unaudited declarations of the firm TCW.
• Return earned by the firm on beef making assets: The return earned by the firm on production assets indicates towards the production power and enumeration of profit out of the firm’s assets invested in operation (Wong & Millington, 2014). However, for the current case under consideration, essentially production indicates towards production of beef of the business concern TCW. The overall percentage of return earned on assets from beef production has enhanced from approximately-3.45 during the year 2016 to around 0.82 during the year 2017. Nevertheless, according to unaudited statements it is predicted that the return from assets of beef production would enhance to 1.67 during the year 2018.
• Return earned on assets such as grape as well as wine production: Return earned assets such as grape plus wine production in the same way signifies overall power of production as well as enumeration of profit with firm’s total assets invested in operation (Kocken & Hulstijn, 2017).For the current case under consideration, production indicates towards grape as well as vine production of the firm TCW. The percentage of return earned by the firm TCW on grape as well as assets from wine production during the year 2016 was registered to be 16.2. However, the same was observed to decline to 14.5 during the period 2017. TCW’s unaudited return that is estimated to be below the prior two year’s figure that is registered to be 12.2.
• Gross margin enumerated for the firm TCW: The gross profit margin of TCW indicates ratio of cost of goods of TCWs deducted from the sales revenue and firm’s total sales (Liao et al., 2018). Essentially, this enumerates overall percentage of the company’s sales that is retained after the firm incurs different direct cost associated to manufacturing of products, specifically, beef as well as vine. In case if the enumerated percentage is observed to be high, then in that case it can be hereby said that the firm can retain higher in terms of its sales (Fuhrmann et al., 2017).As per the given case, the gross margin of the firm TCW was recorded to be the highest during the year 2016 (that is 31.76). However, the same declined to roughly 14.5 during the year 2017. However, the estimated figure for the gross margin is also decreased to around 12.2 for the year 2018. In essence, this advocates that the firm TCW can retain lesser dollars out of its sales.
• Marketing expenditure over S&A expends: As suggested by Griffiths (2016), the marketing expenditures indicates towards total percentage of wealth that is spent out of the earned profit of the firm from firm’s selling as well as administrative expenditure so as to augment sales. Essentially, this can be considered to be an indirect cost of the firm. According to audited accounts for the year 2017 and the year 2016, the total fraction of marketing expenditure is observed to decrease from 15.2 recorded during the year 2016 to around 17.89 registered during the year 2017. Essentially, it estimated that marketing expense ratio would enhance to the level of 23.67 as per the unaudited documentation.
• Times interest earned: As suggested by Cohen and Simnett (2014),the times to interest earned indicates towards coverage ratio which enumerates overall capability of the firm for disbursement of debt amount. If it is observed that the interest coverage ratio is lower than 1, then that implies that the firm is not generating adequate cash from its operations (Chan & Vasarhelyi, 2018).For the current case, the interest earned calculated for the company TCW is declining that reflects that there is not enough cash earnings. During the year 2017 this interest earned was recorded to be 7.51; while in the year 2016 it was registered to be 8.10. However, the estimated figure was recorded to be 6.67 during the period 2018.
• Days in inventory (for particularly wine):Essentially, the days sales reflects the total number of days the firm took for marketing all its stocks  available during a specific time period (Junior et al., 2014). For the current case, the inventory indicates towards the wine production. For the  wine production of the company, the days of inventory registered  for the year 2016 was observed to be 460, while in the year 2017 it was registered to be 423. This indicates increase in ability of the firm to sell its inventory. However, the estimated figure was the same was recorded to be 367 reflecting further decline in the requisite days to sell the firm’s inventory.
• Days in accounts receivables (for wine production):According to Simpson et al. (2016), days in accounts receivables indicates towards the average days that the firm TCW would require to gather the payments made on the sold goods. In case, the total numbers of days are high, in that case it points out that there is a hitch in the process of collection and stream of cash (Alles et al., 2018). Again, if the total numbers of days are low, then that might also indicate that the company has a stringent credit policy that in turn might lower the sales. As per the given case study, the goods indicate towards wine production of the firm TCW. Essentially, the account receivable (in terms of days) for particularly wine was registered to be 53.24 during the year 2016. However, the same increased to 60.65 in the year 2017 and the figures (unaudited) was record to be 50.2.
• Days in accounts receivables (for production of beef):Arens et al. (2014)suggest that the accounts receivables (days) of production of beef indicates towards total days needed for amassing the payments made on the sale of particularly beef. However, an increasing trend in accounts receivables can be observed in this regard. The days of account receivable for the purpose of beef was recorded to be 24 during the year 2016. However, the same was observed to increase to 36 during the year 2017. However, the unaudited figure was recorded to be 57.
• Current ratio: According to Basu (2016),current ratio that is essentially a liquidity ratio assists in the process of enumerating overall capability firm to cope up with different obligations that include both short-term as well as long term obligations. It is essentially the ratio of the current assets and the current liabilities of the firm. For the current case under consideration, the total assets signify both liquid plus liquid assets of the firm TCW. In this case, the current ratio was registered to be 2.66 during the year 2016 that declined to 2.54 in the year 2017(although insignificantly). The unaudited records for the same stood at 2.80.
• Quick asset ratio: As suggested by Marques (2018),the quick ratio or else acid -test ratio points out towards the current assets that can effortlessly converted into liquid cash. For the given case under consideration, the current ratio was registered to be 1.20 during the year 2016, while the same was registered to be 1.15 in the year 2017. The decline in this ratio implies an unfavorable condition of the firm as this suggests that the liquidity condition of the firm has deteriorated. However, the unaudited record was observed to be 1.18.
• Debts to equity ratio: Wong and Millington (2014) suggest that ratio of debt to equity signifies a specific financial ratio that is enumerated to reflect the relative fraction of debt and equity of the firm to fund its operations. Higher debt equity reflects higher risk for the firm as the firm has obligations to pay off the debt amount as well as interest. Debt to equity ratio for the firm TCW was recorded to be 0.67 in the year 2016. However, the figure declined to 0.63 in the year 2017, while the unaudited record was documented to be 0.54.

Based on analysis of key financial ratio presented above, diverse kinds of risks can be identified. Essentially, business risk indicates towards the possibility of not getting back a return on invested amount. The identified risks for the selected company TCW are hereby mentioned below:

Strategic risk: Moroney (2015) asserts that strategic risk is essentially that risk that stems from functioning within a particular industry at a specified period of time. Essentially, this can occur owing to alteration in the technology or else change in customers’ tastes as well as preference (Farooq & de Villiers, 2017). For that reason TCW dealing with production of wines as well as beef faces much lesser risk related to strategy. Nonetheless, a new IT system has been put in place and that may possibly lead to certain risks.

Risk of Compliance: Essentially, this specific risk is said to be related to compliance that is to say, adherence to specific bureaucratic otherwise legislative regulations that the firm might perhaps follow (Kocken & Hulstijn, 2017). Essentially, this specific risk is said to be related to compliance that is to say, adherence to specific bureaucratic otherwise legislative regulations that the firm might perhaps follow (Kocken & Hulstijn, 2017) Analysis of the operations of the firm TCW as given in the case study reveals that the company has a proper internal control system, therefore, the risk connected to compliance can be considered to be less.

Steps to Mitigate Audit Risks

Financial risk: Risk associated to financial loss is known as financial risk. Analysis of operations of the firm TCW helps in understanding the fact there is a possibility of high financial risk owing to increased adoption of new and advanced IT system (Fuhrmann et al., 2017). Furthermore, the three different segments of grapes, production of wines as well as beef may possibly face the threat of loss of funds.

Risk of Operation: As suggested by Liao et al. (2018), the operational risk is essentially that risk that stems from internal failures in business operations of the firm. Also, this can be seen to occur from different unpredicted external incidences. As TCW engages in the process of production of wine as well as beef, therefore, the operational risk for the firm can be said to be very high.

Reputational risk: Moroney and Trotman (2016) mention that the reputational risk indicates towards the risk of losing reputation and goodwill of the firm or else harmful publicity. In the current case under deliberation, the reputational risk of TCW is said to be high as it functions in multiple sectors. 

Internal control in the particular business concern TCW is essentially the procedure that is influenced by the  firm’s management, trustees board as well as many other individuals who are accountable for delivering the rational assurance for the realization the firm’s objectives as are mentioned below –

• Compliance with specific laws as well as regulations  that are pertinent
• Efficiency of firm’s operations (Knechel, 2016)
• Reliability of the system of financial assertions

In case of the company TCW, different components of internal control are essentially taken in account according to the standard directives, if –

• There exists an apt approval of varied procedures that are pursued for the capital expenditures
• Appropriate coverage of insurance is offered for exposure of firm’s assets.
• Depreciation calculation is presented and carried out appropriately for each and every period (Soh & Martinov-Bennie, 2015)
• Particularly, the salvage value along with the useful life are appropriately ascertained

In case of the firm TCW, business profitability is presented not only as the function of firm’s revenue but also as an appropriate resources management procedure. The Different internal controls that can be identified are hereby presented below:

System of Purchase:

System of Accounts payable:

References

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Alles, M., Brennan, G., Kogan, A., & Vasarhelyi, M. A. (2018). Continuous monitoring of business process controls: A pilot implementation of a continuous auditing system at Siemens. In Continuous Auditing: Theory and Application (pp. 219-246). Emerald Publishing Limited.

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Analysis of Business Risks for Trunkey Creek Wines Limited

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