Financial Audit Of Trunkey Creek Wines Limited, Essay.

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.

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). 

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.