You are a manager in the audit division at Miller Yates Howarth (MYH), an accounting firm with offices throughout the major regional centres of NSW and Queensland. Although a medium sized firm by national standards, MYH is the second largest regional accounting firm in Australia. Most of MYH's audit clients are in the agriculture, mining, manufacturing and property industries. All those industries are currently under pressure, either from a downturn in commodity prices or fierce competition from overseas competitors. Ratios extracted from an unaudited set of financial reports at 30 June 2018 together with audited comparatives for the year ended 30 June 2017 and 2016 are set out below for your review.
You are gathering information to prepare the audit plan of Trunkey Creek Wines Limited for the year ended 30 June 2018. Trunkey Creek Wines (TCW) is one of MYH's most significant and longstanding clients. The following information has been gathered to date.
Principal activities of TCW
• growing grapes for wine production;
• production and distribution of red, white and sparkling wines;
• beef cattle production on land surplus to grape production; and
• investment of surplus funds.
1. Analysis column: You will be analysing the ratios that are directly or indirectly related to each account. Also like Kay said please remember some of the additional information given from the case might also needed to be mentioned here.
2. In here mention and justify (why it is a weakness) Internal control weaknesss for purchase and accounts payble.
Analysis of Key Accounts
Being the audit division manager of MYH, it has been regarded necessary to gather data and information regarding the financial audit of TCW Ltd. The main business operations of TCW Ltd include growth of grapes for wine production, beef cattle rearing, surplus funds investment and wine production as well. This report provides an analysis and discussion of several areas and accounts of TCW Ltd which need to be given more attention in the audit.
There are various steps and procedures of audit that can be performed by the auditor in alleviating the various risks associated with some accounts of TCW Ltd. These have been summarized below.
|
Account |
Analysis |
Audit Risk |
Audit Steps or Procedures |
|
Account Receivable |
Days in accounts receivable – wine Current ratio, Quick asset ratio and Days in accounts receivable – beef are the main financial ratios associated with this account. |
The existence assertion of this account is at risk since TCW Ltd account receivables is comprised of various debtors whose amounts are aggregated. Completeness assertion is also at risk with regard to accounts receivables of TCW Ltd due to the possibility that the company may not have recorded these amounts appropriately. |
The auditor must consider sending confirmations to the various customers of Trunkey Creek Wines (TCW) Limited with a view to verifying the terms of payment as well as the debt’s validity. With regard to completeness, the auditor must look at transactions of Trunkey Creek Wines (TCW) Limited around the cut off dates of its operating period, since he cannot test the records of the company for what is not there. The risk of completeness of accounts receivables is reduced by making an assessment of the sales process of the company. It is a requirement for the auditor to consider determining and evaluating whether TCW Ltd has adopted an appropriate approach of determining the allowance for accounts which are doubtful. |
|
Investments |
Investments ratios are: i. Return on equity ii. Net profit margin iii. Debt to equity |
With regard to investments, TCW faces a risk of existence since Trunkey Creek Wines (TCW) Limited owns numerous investments which need to be verified by the auditor. Additionally, there is a risk of completeness of investments since the amounts may not be properly recorded in the financial records of Trunkey Creek Wines (TCW) Limited in correct amounts. |
Regarding existence assertion risks, the auditor must consider requesting a confirmation from the custodians used by the company for safeguarding the securities. The confirmation must seek to address the types of investments and securities owned by Trunkey Creek Wines (TCW) Limited. The auditor must also examine physically the TCW Ltd investments. The auditor must confirm if these amounts were appropriately recorded. |
|
Property Assets |
The Property assets ratios are: i. Return on beef production assets ii. Return on grape and wine production assets |
The three main assertions at risk regarding property assets of TCW Ltd are Existence, completeness as well as valuation or allocation. This is because the company has several production sections including beef production and production of grapes and wine. The assertion risk of valuation and completeness of property assets may arise if Trunkey Creek Wines (TCW) Limited does not correctly record its property assets in its financial records. |
The auditor must consider physically examining the various production with a view to ascertaining and confirming that the property assets actually exist. The auditor must look at the financial records of Trunkey Creek Wines (TCW) Limited for ascertaining what has not been recorded. The auditor must consider evaluating whether Trunkey Creek Wines (TCW) Limited values its property assets at lower of cost or net realizable value. He must also examine the underlying information that is adopted in making asset valuations. |
|
Marketing Expenses |
Marketing expense percentage of total S & A expenses is the ratio that relates to marketing expenses. |
The existence assertion with regard to marketing expenses is at risk of material misstatements since this may not the correct amounts may not have been recorded. |
Marketing expenses of the company must be reviewed by the auditor with a view to ensuring that they were actually incurred. |
After making an analysis of the ratios of TCW Ltd, various risks relating to its business were observed as discussed below.
There is a risk that TCW Ltd may become less effective since it is making current developments in IT (Chambers & Rand, 2011). There is a possibility of technical failures in the systems, which can lead to disruption of business operations of the company (Rand, Chambers & Andrew, 2011).
This is a risk faced by TCW ltd since it operates in production of wine, which is regulated and governed by very strict agencies which may impose heavy penalties to the company in the event that it does not comply with the provided regulations.
There is a possibility that the operations of TCW ltd may be stopped due to factors which are beyond its control (Porter,
Certain fluctuations in the financial markets in which TCW Ltd operates may have significant impacts on its financial performance. For instance, it may be impacted negatively by changes in rates of foreign exchange since it sells both locally and globally (Scha?ffer, 2008).
TCW Ltd is highly mechanized and computerized and therefore faces a risk of technical failures which may compel it to stop or reduce the capacity of its operations (Wells, 2014).
Every organization faces a human risk since it is run and operated by human beings. For instance, errors, mistakes and recklessness of its employees may have significant impacts on TCW Ltd (VALLABHANENI, 2018).
These are risks which are related to physical harm of the company’s assets, employees and even the visiting clients (Reding & Institute of Internal Auditors Research Foundation, 2013). These include fire, burglary, vandalism and theft.
The industry in which TCW operates is very competitive and therefore faces a risk of being thrown out of the market by its rivals and competitors who may lower their prices far much below that of TCW Ltd (Verschoor, 2008).
The wine production industry in which TCW Ltd operates is constantly affected by new government regulations which are not favorable at times. Thus, there is a risk that TCW Ltd may not achieve its main objectives due to the adverse effects of these regulations (Singleton & Singleton, 2010).
The various potential effective controls of TCW Ltd are summarized in the below table (Arens, 2010).
|
Effective Control |
Risk Alleviated |
Test of Control |
|
Procurement Procedures TCW Ltd only uses approved vendors and suppliers. The computer ordering system of Trunkey Creek Wines (TCW) Limited has direct links to its approved suppliers and any orders made from an unproved supplier are disapproved by the system and must therefore be approved by the management. |
This internal control assists the company in alleviating the risk of favoritism. |
Re-performance The auditor can test the effectiveness of this control by re-performance. He may consider initiating a new order from an unapproved supplier. |
|
Segregation of Duties TCW Ltd has considered to segregate the roles and responsibilities in its various departments. |
Fraud and theft are the risks alleviated by this control measure. |
Observation The auditor can consider making an observation of the various roles played by the various staff in the company. |
|
Access Controls The management of Trunkey Creek Wines (TCW) Limited has established access limits into the various sections of the accounting system. |
The risk alleviated by this control is fraud. |
Inspection The auditor can test the effectiveness of this control through inspection. He can examine the business documents of TCW Ltd in order to ascertain that there is no access granted to unauthorized parties. |
|
Approvals and Authority The company has three section managers, one each for grape production, wine production and beef production. Each can order supplies for their respective operations up to a limit of $10,000 for each order. Orders between $10,000 and $30,000 must be approved by the management accountant. Orders over $30,000 must be approved by the CEO. Orders over $50,000 have to obtain Board’s approval. |
This control helps in reducing the risk of theft and fraud, which may be perpetuated by the company’s employees if given an authority to approve certain business transactions. |
Inspection and Observation In order to test the effectiveness of this control, the auditor must inspect the various policies and procedures of the company that must be followed in regard to approval and authorization of certain matters and transactions of the company. He must also seek to make an observation as to whether or not the set procedures and policies are appropriately adhered to. |
|
Standardized Documentation Trunkey Creek Wines (TCW) Limited has standardized the documents used for financial transactions including inventory receipts and invoices, which is purposed for helping the company maintain consistency in record keeping over the various reporting periods. Through use of a computerized information and accounting system, past records can be easily reviewed when looking for the source of any anticipated discrepancy in the financial records. |
This control assists the company’s management in alleviating risk of misinterpretation of financial items which may even be overlooked in such reviews. |
Re-Performance The auditor must re-perform or initiate a new transaction with an aim of ascertaining the functionality of the computerized accounting system and IT system recently adopted by Trunkey Creek Wines (TCW) Limited (Hayes, Gortemaker & Wallage, 2014). |
After reviewing the internal control system of Trunkey Creek Wines (TCW) Limited, there were various weaknesses that were observed in internal control for purchases and accounts payable. The following table gives a summary of the various internal control weaknesses that have been identified with regarding the company’s accounts payables and purchases.
|
Weakness |
Justification |
|
There is no second person authorization for services received. |
The delivery docket from the service man is only signed by the store man or the production manager. Therefore, there is no another person who is authorized for such an approval in case the manager and the store man are absent (Jubb, 2010). |
|
Lack of adequate separation of responsibilities with regarding payments |
For instance, the file for payments is approved by the management accountant who is also responsible for recording and marking it as paid in the systems of accounting. The ABA file is also not approved by a second person. |
|
The sequence of orders is not considered. |
While making purchase orders, TCW Ltd fails to consider the sequence in which the orders were made, including those that are cancelled. This puts the company at a risk of having misplaced orders that may hinder the transactions related to purchasing from occurring. |
|
The company does not have a goods inwards or receiving department. |
TCW Ltd has not established an independent department for receiving any incoming goods and fixed assets. |
|
Lack of a price lies or catalogue which is independently verifiable. |
TCW Ltd.’s purchasing officers depend solely mainly on their individual knowledge since there is no verifiable and independent list of prices or catalogue that helps in ensuring that the prices of suppliers are accurate. This could make recording of prices to be overstated or understated (Crain, Hopwood, Pacini & Young, 2018). |
|
Lack of appropriate evidence on invoices |
The purchasing system of TCW Ltd lacks an appropriate evidence on invoices that indicate whether various internal checks have been carried out by the authorized staff of the company. |
|
Lack of independent stock checks. |
TCW Ltd has failed to adopt an approach in which the company’s stock is independently checked against the purchase requisition. This may lead to overstocking. |
|
Lack of comparison checks. |
The company does not carry out checks for comparisons between the receiving records and the inspection reports. This could lead to no guarantee as to whether every item of inventory received is in a perfect condition or not, as required. |
Conclusion
As discussed above, there are various audit risks faced by Trunkey Creek Wines (TCW) Limited with regard to the four areas and accounts, which are account receivable, property assets, investments and marketing expenses. TCW Ltd is also faced with several risks regarding its business operations which have been discussed above (Millichamp & Taylor, 2012).
References
Arens, A. A. (2010). Essentials of auditing, assurance services and ethics in Australia: An integrated approach. Frenchs Forest, N.S.W: Pearson Australia.
Chambers, A. D., & Rand, G. K. (2011). The Operational Auditing Handbook: Auditing Business and IT Processes. Hoboken [N.J.: John Wiley & Sons.
Crain, M. A., Hopwood, W. S., Pacini, C., & Young, G. R. (2018). Essentials of Forensic Accounting. Somerset: John Wiley & Sons, Incorporated.
Fiedler, B., & Fiedler, B. (2010). Student guide to accompany Essentials of auditing, assurance services and ethics in Australia: An integrated approach [1st ed.]. Frenchs Forest, NSW: Pearson Australia.
Hayes, R., Gortemaker, H., & Wallage, P. (2014). Principles of auditing: An introduction to international standards on auditing. Harlow: Pearson Education Limited.
Jubb, C. (2010). Assurance & auditing: Concepts for a changing environment. s.l.: Thomson Learning.
Millichamp, A. H., & Taylor, J. R. (2012). Auditing. Andover, Hampshire: Cengage Learning EMEA.
Pickett, K. H. (2013). The internal auditing handbook. Hoboken, NJ: Wiley.
Porter, B., Simon, J., & Hatherly, D. J. (2015). Principles of external auditing. Chichester: Wiley.
Rand, G., Chambers, & Andrew. (2011). The Operational Auditing Handbook: Auditing Business and IT Processes. Wiley.
Reding, K. F., & Institute of Internal Auditors Research Foundation. IIARF. (2013). Internal auditing: Assurance & consulting services. Altomonte Springs, Fla.
Scha?ffer, U. (2008). Management accounting & control scales handbook. Wiesbaden: Deutscher Universita?ts-Verlag.
Singleton, T., & Singleton, A. J. (2010). Fraud auditing and forensic accounting. Hoboken, NJ: Wiley.
VALLABHANENI, S. R. (2018). WILEY CIAEXCEL EXAM REVIEW FOCUS NOTES 2019, PART 1: Essentials of internal auditing. S.l.: JOHN WILEY & SONS.
Verschoor, C. C. (2008). Audit committee essentials. Hoboken, NJ: John Wiley & Sons, Inc.
Wells, J. T. (2014). Principles of fraud examination. Hoboken, NJ: Wiley & Sons, Inc.
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