Ratio analysis: An overview

Ratio analysis is an analytical tool, which helps us to assess the financials of the company. The tools helps us give an overall view of the financials of the company (Uechi et al. 2015). The company selected for the auditing process is the Trunkey Creek Wine Company for which the accounts analyzed are Accounts Receivables of the company, Plant and property and investments of the company. The risks involved in the case of the auditing of financial information and reports are well discussed in the project. Fraudulent reporting of financial statement and errors in the financial report are some of the common primary factors identified in the case study (Bushee, Goodman & Sunder, 2018). Turn Creek Wine Company’s accounts and the different components of the financial report were studied and discussed in the below table. The steps for eliminating and reducing the errors and fraudulent or incorrect reporting is given below:

Account Head	Evaluation/ Analysis	Auditing Risks	Steps for Eliminating Risks Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Accounts Receivables	The amount due to the company by the clients and customers of the company. The amount represent the amount for which payment is yet to be received by the company. The Days of Accounts Receivable for the company is around for the Wine Product is around 60.65 Days and for the product, beef is around 36 Days.	The company transaction and goods are sold under the credit sales approach to its customers. The business risk of the company is high in this case.	The business risk of the company is high the auditor need to carefully reevaluate the amount of sales and the amount of debtors it is able to realize. The auditor needs to carefully recognize different components of the account and provide materiality regarding the same (Gaynor, et al. 2016).
Investments	The analysis of the investment done by the company by the interest-earning ratio. The company had saw an increase in the interest-earning ratio from the year2016-17 from 7.51 times to about 8.10.	The interest-earning ratio for the company depends on the investments done by the company.	The auditor of the company must reassess the investment assets class in which the investment is done. The assets class should be well studied and the same should be checked by the investment policy of the company. The key audit procedure would be to check about the investment assets class and the trend in the return from these investments.
Property Assets	The ratio for return on property assets shows the efficiency in the utilization of the assets of the company. The ratio for the company in the year 2017 is around -0.8% that has shown improvement from the last year figures of around -3.4%	The key risk associated with this type of asset class is regarding the valuation of assets and correctly identification of assets.	The key step involved in this type of auditing would be to reduce the auditing complexity by forming a common financial head and reporting classification. The auditor must also capitalize all the leased assets of the firm, which is classified as operating leases. The capitalization of the same would give a true and fair view of the accounts.
Marketing Expenses	The marketing expense is the total selling expenses for the company. The ratio and the benefit would be calculated by the output the expense is generating in the form of the revenue. The ratio for the company in the year 2017 is around 17.89% and the 15.2% in the year 2016.	The risk associated with such expense would be regarding proper classification and recording of expenses by the company.	The steps to reduce the risk associated with such type of expense is to assess the record for the payments done and analyze whether the expenses payable does not get outstanding by the company (Ibrahim, et al. 2016).

The business risk and the financial risk of the company combined together represents the risk associated with the company. The financial risk refers to the volatility observed in the financials of the company (Bartram, Brown & Waller, 2015). The TWC Company has a much stable and less volatile financials of the company, which give the company an opportunity to stretch and foresee the bills of its clients, which must be in a specified date or a range. The efficient and most commonly used approach for analyzing the financial of the company is the use of the ratio in the financial of the company. The ratio analyzed for the company TWC are as follows:

• Return on Equity:The ratio shows the return for the equity shareholders of the company on the investments done by the stakeholders of the company. The ratio for the company in the year 2017 saw an enhancement from 17.5% to 15.5% in the year 2016. This shows that return on the invested capital for the company was showing a better return (Kijewska, 2016).
• Return on Assets (Production Asset Beef):the ratio shows the efficiency in utilization of the company’s assets. The return from the assets showed a net increase of about -3.45% to 0.82% from the year 2016-17.  The trend in the ratio shows a net efficiency in the utilization of the company’s assets (Idawati, & Wahyudi, 2015).
• Return on Assets (Wine Asset Production):The return on assets for the company shows the production efficiency of the assets. The TCW rate of return on the asset deployed was around 16.2% in the year 2016 and is 14.5% in the year 2017. The company does not well efficiently utilize the assets of the company in this particular group.
• Gross Margin:The gross profit margin shows the operating profit for the company. The estimates for the same was analyzed by taking the total sales of the company and the direct costs involved. The gross profit margin ratio for the company is around 31.76% in the year 2016, which had then shown a decrease in the margin to about 14.5% in the year 2017. The gross margin assumption taken for the year 2018 is around 12.2% (Popescu, 2017).
• Marketing Expenses:The marketing expenses for the company represent the amount of expenses spent for creation of additional revenue and sales. The return in the sales of the company with respect to the marketing expenses for the year 2016 was around 15.2% while in the year2017 the same was around 17.89% and for the year 2018 it is about 23.67%. The increase in the ratio shows a poor trend for the company this shows that the increasing marketing cost and decreasing revenue for the company shows exploitation of financial resources by the company (Ekinci, et al. 2014).
• Times Interest Earned: The ratio for the company shows the amount available for the interest payment of the debt obligation it owes. The ratio is an important solvency ratio for the company. The ratio for the company is declining, from 8.10 times in the year 2016 to 7.51 times in the year 2017, thus shows that the company is not earning sufficient for repayment of finance it has borrowed (Ji, 2017).
• Days in Inventory (Wine): The day’s sales ratio represents the turnover of the inventory of the company. The day it took for the company to transform the inventory into sales was 460 days in the year 2016 to 423 days in the year 2017 and it took 367 days for the year 2018 in the unaudited period.
• Days in Accounts Receivable Ratio (Wine):The days in accounts receivable for the company’s wine product is around 53.24 days in 2016, 60.65 days in the year 2017 and for the year 2018 it is around 50.2 days. This shows that product portfolio o the net has shown an improvement.
• Current Ratio: The current ratio is the proportion of company’s current assets over the current liabilities of the company. The current ratio represents the liquidity ratio of the company. The ratio for the company in the year 2016 is around 2.66 times, whereas it is 2.54 times in the year 2017 and the unaudited ratio is expected to be around 1.18 times (Heikal, Khaddafi & Ummah, 2014).
• Acid Test Ratio: The acid test ratio or the quick ratio for the company is around 1.20 times in the year 2016, 1.15 times in the year 2017 and 1.18 times in the year 2018 (Nobanee & Al Hajjar, 2014).
• Debt to Equity Ratio: The debt to equity ratio represents the total debt of the company with respect to the equity. The more the ratio is the greater is the financial risk of the company. Ratio of debt to equity is around 0.67times in the year 2016, 0.63 times in the year 2017 and 0.54 times in the year 2018. The declining ratio shows the trend that the financial risk of the company is declining (Campbell, Galpin & Johnson, 2016).

The above analysis performed shows that there are various type of risks involved in the company. For the particular company selected some of the key risk found are:

1. Strategic Risk: The risk involves changing and industry structure, which includes changes in technology, consumer taste and preferences, inefficiency by the management in production. In case of the company dealing with the product portfolio like wine and beef, which in this case is not material relating to the strategic risk.
2. Compliance Risk: The risk for the company applies, when the company does not adhere to the standards and guidelines laid by the governing body. The TCW Company complies with all of the internal compliance principles and the risk for the same is negligible.
3. Financial Risk: The risk associated with the exposure of debt and long term borrowings of the company. The company exposure to debt and long term borrowing shows the inherited financial risk in the company.
4. Operational Risk: The operational risk for the company TWC is significantly higher because of the product portfolio exposure in beef and wine. The changing business scenario and inefficient utilization of the assets of the company shows that the operational; risk of the company is high.

The internal controls identified in the system, which are potentially effective are mentioned below:

Effective Control	Risk Alleviated	Test of Control
Environment Sustainability	The risk alleviated due to non-sustainability of environment is the degrading reputational and operational risk of the company (Lo & Kwan, 2017).	The test or the effective way of controlling the same could be by enhancing the skills and development of the employees in maintaining and ensuring sustainability of the same.
Risk Analysis	Risk identified in the company are that of business and financial risk. There should be proper profile analysis of risks involved in the company.	The test for control for the same could be by ensuring that the proper risk analysis along the risk profile of the company should be done.
Identifying Material Information	The information given by the company should be clearly free from material misstatement and error free otherwise the company’s goodwill and credibility will get hampered.	The audit procedure for the same should be done by internal checking of records and information provided. Verification of data and information should be done.
Monitoring	The company’s operations and financials of the company should be well assessed in order to reduce the business risk of the company.	There should be effective monitoring procedures and steps laid down in order to reduce the business and financial risk of the company.
Physical monitoring and controlling	The internal control of the company should be such that the risk assessed in inventory like theft, loss of goods, damage are some of the internal risk associated with the company	Verification and periodical review of the assets of the company should be done in order to avoid exploitation of resources.

Evaluation of Purchase System:

Weakness	Justification
The purchase system is not cross verified with the inventory of the company, which can pile stock of the company.	A daily report should be prepared by the purchase department, which must be analyzed with the stock of the company (Pappalardo & Lusk, 2016).
The breakdown analysis of different supplier with different terms and offers should be reflected in the purchases invoices, which the company do not focus on.	The supplier of the company should be assessed based on factors like the pricing, trade discount, terms of trade and delivery time

Evaluation of Accounts Payable:

Weakness	Justification
The accounts payable or the creditors of the company is not paid at full every time, which affects the credibility of the company.	There should be timely payment of all dues and verification of all outstanding amount should be done.
The creditor’s ledger account should display the actual outstanding amount by the company. The company had understated the account, which shows that financial management by the company is not efficient	The creditors ledger account needs to be audited daily and the account should display the actual outstanding amount (Haimes, 2015).

Reference

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Bushee, B. J., Goodman, T. H., & Sunder, S. V. (2018). Financial Reporting Quality, Investment Horizon, and Institutional Investor Trading Strategies. The Accounting Review

Campbell, T. C., Galpin, N., & Johnson, S. A. (2016). Optimal inside debt compensation and the value of equity and debt. Journal of Financial Economics, 119(2), 336-352.

Ekinci, Y., Ülengin, F., Uray, N., & Ülengin, B. (2014). Analysis of customer lifetime value and marketing expenditure decisions through a Markovian-based model. European Journal of Operational Research, 237(1), 278-288.

Gaynor, L. M., Kelton, A. S., Mercer, M., & Yohn, T. L. (2016). Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), 1-22.

Haimes, Y. Y. (2015). Risk modeling, assessment, and management. John Wiley & Sons.

Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.

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Ji, H. (2017). The Effect of Cash based Interest Coverage Ratio on the Value Relevance of Accounting Information. Global Business and Finance Review, 22, 92-100.

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Nobanee, H., & Al Hajjar, M. (2014). An Optimal Cash Conversion Cycle.

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