Analyzing Audit Risks And Internal Controls Of Trunkey Creek Wines Limited
- December 22, 2023/ Uncategorized
Identifying potential audit risks and audit steps to reduce them
The report piece at hand has the intention to elucidate in detail diverse audit risks that is encountered by the accounting firm Miller Yates Howarth while assessment of financial assertions of one of its audit clients namely Trunkey Creek Wines Limited (simply referred to as TCW). In essence, these kinds of risks mainly stem from varied fraud actions else wise due to efforts by evaluators. Particularly, certain identified areas that are of discomfort for the evaluators and need to be reviewed are essentially investments of the company, expenses incurred particularly for marketing, varied property resources along with receivables account. It is necessary for the evaluators to properly plan the process of engagement by deducing information by assessment of notes present in permanent file and introducing a guidebook of new systems of internal control. Analysis of risks associated to audit of firm’s accounts can be carried out by enumeration of significant and relatable ratios. In consequence, this can help in outlining varied stages that need to be undertaken for lessening of detected risks (Brierley & Gwilliam, 2017). Moving further, the study at hand also talks about evaluation of efficacies of internal control system and recognizing dimensions of eliminating risks. Additionally, weaknesses and limitations of system of internal control associated to accounts payable and specific accounts of purchase are hereby identified and analysed in this current study.
The first section of the study has the intention to elucidate illustratively risks of audit related to different accounts of the firm TCW by appraising important ratios. Essentially, it can be hereby mentioned that financial statements can be assessed properly by means of working out of relevant ratios and this in turn can help auditors in figuring out financial state of the business concern (Gay & Simnett, 2005). In the current case as well, the accounts of TCW are appraised by means of financial ratios related to accounts (that is to say, property resources, expenditure for activities of marketing, accounts of investments as well as receivables. Assessment of the specified accounts can help in assessment of risks related to audit, particularly threats that might be faced by evaluators while assessing material misstatements (overstatement or understatement) in firm’s accounts (Cannon & Bedard, 2016). Particularly, evaluators are assigned the liability of recognition of these misstatements and threats and are delegated the responsibility of suggesting ways of mitigation of the risks spotted (Bartlett et al., 2016). However, one of the built-in threats of audit risk is the intricacy involved in detection of such risks owing to fraudulent actions. Essentially, the implementation of effectual system of internal control can aid in the process of lessening risks of audit stemming from fraudulent activities. For that reason, it is obligatory for auditors to employ requisite skills, knowledge and maintain attitude of scepticism whilst sketching the plan of audit (Chan & Vasarhelyi, 2018). In essence, analysis of firm’s various accounts; risks of audit attached to specified accounts along with steps of audit for lessening the identified risks are tabulated below:
|
Account |
Analysis |
Audit risk |
Audit steps to reduce risk |
|
Accounts receivables |
Accounts receivables points out towards the money that a business enterprise needs to gather since it had delivered the clientele goods as well as services ordered (Fisher et al., 2016). According to case study provided here, it can be stated that accounts receivables (for wine production) is calculated to be 6.6, whereas accounts receivables of the corporation for beef production section is recorded to be 36. In general, invoices outstanding in terms of days are reflected by the said numbers. Evaluation of figures of accounts receivables ratio reflects that value of accounts receivables has decreased for wine, indicating enhancement in efficiencies of corporation in this area. Conversely, this ratio is said to have enhanced for wine, representing undesirable financial circumstances (indicating that the corporation needs more number of days for acquiring amounts that are outstanding) (Gay & Simnett, 2005). |
Thorough evaluation of the current case replicates that the firm TCW takes on marketing operations on terms of credit. Thus, the system of credit involves risks associated to payments undertaken by customers. There is also saido be risks of completeness (Groomer & Murthy, 2018). Basically, this too involves validity risk. In essence, risks attached to completeness points out towards the fact that the business concern might not have properly registered and documented accounts records appropriately (Gay & Simnett, 2005). |
The current study under reflection presents the fact that receivables of the business (expressed as days) are escalating specifically for the section of beef production of the business concern. For that reason, it is obligatory for the business to correctly assess receivables account frequently and thereafter discuss the results with the executive of the association. Moreover, allowances made for doubtful debt can be appraised before any kind of authorization of executives operating in the higher level of firm’s management (H?bek & Wolniak, 2016).. Further, credit policies of the client company that is TCW can be examined properly. |
|
Investments |
Investment efficiency of firms can be appropriately analysed by means of suitable analysis of interest amount that the client company can get from the investments. The outcomes presented in the current case study aids shows that time interest has dropped during 2017 in comparison to the year ago period (that is to say from 8.1 to 7.5). |
it is essential for the financiers to disburse specific amounts for carrying out investment activities in a methodical way if level and degree of risk associated to investment activities of TCW is high. This risk is also said to exert impact on the working capital of TCW (Hall 2015). |
Auditors might consider analysis of investment actions carried out by TCW. Proper understanding regarding investment activities can help evaluators to assess any kind of atypical investment activity that consequently can adversely exert impact on interest acquired by TCW (Hay et al., 2017). Investment can be evaluated by management of firms as well and include this process of evaluation as a part of their regular doings (Gay & Simnett, 2005). |
|
Property assets |
Property assets usually refer to different tangible assets or in other words property, plant as well as equipment. In essence, this is an expression that is utilized in the area of accounting for referring to assets as well as property that cannot be converted into liquid cash seamlessly. TCW’s systems of management of Property, strategies, and procedures can be regularly assessed and audited to establish whether customary standards of performance with acceptable degree of compliance are being attained (Iyer & Samociuk, 2016). . |
There are possible risks linked to record maintenance of property assets of firms and complicatedness in valuation of assets. Also there exist risks of audit related to employment of appropriate methods that are used for depreciation working out of firm’s assets (Weirich et al., 2017). Because of inappropriate method of depreciation, the total depreciation mentioned in the financial report of the TCW’ might be erroneous. on the whole, there can be inaccurate practice of valuation of TCW’s assets (Aziz et al., 015). Also, there may probably be incorrect estimate of firm’s profits/losses on assets revaluation. Asset investigation might helps in examination of overstatement or understatement that as a result direct towards faulty representation of data (Kend & Basioudis, 2017). |
It is imperative for assessors to take on evaluation of efficacy of TCW’s control system. In this association, it can be stated that it is important to analyze depreciation of property resources (Abbott et al., 2016). In effect, there is need for assessment of accounts ledgers in a regular manner. Also, journals for TCW’s property resources also can be investigated on a day by day basis. by itself, the clients need to be questioned about exclusion of specific assets (Lisic et al., 2016). Also, for determination of property assets’ existence, then auditor (MYH) can appraise documents and records of acquirements of the property assets of the client firm (TCW). |
|
Marketing expenditure |
Marketing outlay of the business can be indicated as a definite percentage of expenditure incurred by the firm. Analysis of facts and figures on operations of the firm reveals that expenditure for marketing activities show upward moving trajectory. In essence, data on expenditure for marketing is observed to have increased in 2017 in comparison to year ago period (that is enhancement from the level of 15.2 in FY-2016 to more or less 17.9 in FY- 2017. in actual fact, this improvement in the overall fraction specifies marketing outlays of TCW has sharply escalated in the present year when compared to the previous period (Bell et al., 2015). |
The main risk associated to audit of marketing expenditure of firms is the insufficient disclosures related to business transactions of other party firms. |
It is central role of assessors to take on detailed analysis of marketing practices and authenticate proper documentation in firm’s files. Critical examination of expenditures of the firm for marketing is also important (Boyle et al., 2015). |
Analyzing business risks faced by Trunkey Creek Wines Limited
Analysis of ratio for assessment of financial condition of the firm is presented below:
Return earned of firm’s resources/assets (chiefly wine and grape)
Return earned by enterprise for wine production as well as grape production: The return acquired from making of two diverse segments specifically beef production and wine production is observed to have dropped on a constant way. Analysis of facts and figures provided in the case divulges that return generated on specific items has dwindled to 14.5 in FY- 2016 from the level of 16 recorded in the prior year that is 2015 (Louwers et al., 2015). . Essentially, this drop off in value indicates that assets of TCW have not been correctly used for firm’s production (O’Grady et al., 2016).
Accounts Receivables (in terms of days) for the division of beef:
Accounts receivables expressed as days has enhanced from 24 observed in 2016 to about 36 in 2017. Accounts receivable is predicted to increase 57 in the upcoming period that is 2018. These imply that required time to accumulate the sum owed from customers has amplified to a large extent (Rahim & Idowu, 2015).
Examination of gearing ratio of TCW:
The calculated figure on gearing ratio (also known as debt to equity) is found to have an upward moving trajectory. In essence, this replicates that by and large portion of debt possessed by TCW in comparison to equity has dropped (F Simnett & Huggins, 2015). Calculated figures show that debt –to-equity has decreased to 0.6 in 2017 as compared to the prior period. Decrease in debt equity ratio reflects less use of debt for funding operations. Also, this decrease is indicative of the fact pecuniary leverage of firm TCW has dwindled and therefore the linked business risk has narrowed.
Examination of gross margin:
Gross margin calculated for TCW has declined to about 30 in 2017 from the level of 31.7 enumerated in previous period. In effect this type of decrease in gross margin suggests that the business concern has the potential to keep hold of greater amount from firm’s sales (Simnett et al., 2016).
Analysis of time interest earned:
Interest coverage ratio enumerated for TCW shows time taken by business enterprise to repay for assets/resources of the firm. Facts and figures mentioned in the provided case study, replicates that interest coverage is beneath 1 that implies that operating activities of TCW do not help in generation of enough amount of cash to make payments for diverse additional business functions (Soh & Martinov-Bennie, 2015). In There is decline in earnings disclose that earnings generated in cash is necessarily low and is said to fall throughout the mentioned period.
Identifying potentially effective internal controls and testing them
The current segment reflects the fact that effectual system of internal control of the firm TCW is recognized with test of specific control for different systems of control. There are diverse elements of internal system of control that necessarily get influenced by the administration of the enterprise (Bartlett et al., 2016). The table presented below explains in detail about the system of internal control and diverse tests of control along with risks that are eliminated.
|
Effective control systems |
Risk elimination |
Test of control |
|
Computerized arrangement of placing order |
This system can help in creation of passable and absolute records of bookkeeping with no omission of any particular data. in reality, there is effective use of password for gaining ease of access to any particular program (Brierley & Gwilliam, 2017). |
Assessors can follow the system of preparation plus management of deposits by members of the staff (Chan & Vasarhelyi, 2018). Intrinsically, there is need for tracking the procedure of documentation of proceeds/receipts with deposits maintained in the bank. |
|
Introduction of Electronic invoice from varied suppliers |
Introducing the system of using electronic invoice from diverse suppliers of the firm can aid in avoiding risks connected to inaccuracy and faults committed (either intentionally or else unintentionally), deferred payout and compliance that are regular with physical invoice (Trotman et al. 2015). |
Sales invoices need to be reviewed on a regular basis by auditors and the listing of invoices can be carried out for assessment of accuracy of recording. |
|
Online system of payment by accountants and uploading requisite documents to various bank |
This particular system can help in encouraging accuracy along with completeness of accounting statement and entry accuracy in records. Management of business enterprises can make certain that control techniques and methods are useful by reason of the implementation of online stages for making pay out. Also, this can help in reducing incidences of fraudulent actions along with theft by workers (Fisher et al., 2016). |
There should be control applications for standing data and business deal involving programmed otherwise online method of payout (Groomer & Murthy, 2018). In essence, implementation of system of control have to be aptly recorded and evaluated by auditors so as to ensure proper system of determination of risks associated to material misstatements of financial assertions (Hall, 2015). |
|
producing service order and carrying out transfer of the same to diverse service providers |
The formation of service order in an automated manner can make possible well-timed production of receipts for orders and distribution of the same regularly to diverse supplier of service. In essence, this can assist in avoiding holdup in delivery orders. (Hay et al., 2014). |
There is necessity for digit authentication by using a method of algorithm so that auditors can be certain about the fact that data input has been carried out properly. Also, the codes for reference of definite order formed internally should be presented in a proper format and in an appropriate style. Basically advancement and improvement of data files in timed bound manner is also necessary (Iyer & Samociuk, 2016). |
|
Limiting payout until and unless discrepancies are set on |
If expenditure and pay outs can be undertaken by the TCW with no probing for inconsistency, then that direct the way towards doubtful cash creation. This in turn might diminish total earnings of the firm generated in cash. Correcting incongruity without the payout can assure that there exist no unusual flow of cash and in that way can facilitate in keeping positive connection between manager and suppliers (Lisic et al., 2016). |
The auditors need to ensure that there exist no unnecessary outlays made to firm’s suppliers. |
|
control of master folder |
Particularly, master folder for suppliers contain information regarding suppliers with a code attached to one of them. This system of maintaining a master folder can ensure maintenance of data dependability, reliability and avert data distortion with usage of this folder (Hay et al., 2017). |
There is requirement for rigorous controls for maintenance of security in business enterprise. In addition, auditors might also reflect on execution of control systems for account of totals and record counts. Fitting practice need to be introduced for data adjustment that can limit power of individuals and help in division of duties appropriately (Louwers et al., 2015). |
Internal control systems connected to accounts payable as well as purchase account are hereby mentioned below
Purchase account:
|
Weakness identified |
Justification for the detected weakness |
|
The purchase account of TCW is said to have the weakness of overstocking. In essence, if firm’s purchases are not regularly assessed individually (that is comparison of stocks with purchase) the it can lead to the issue of overstocking. Also, there can be forged presentation of different purchase order if there is dearth of fitting system of accounting for assessing chain of orders plus the closing orders (O’Grady et al., 2016). |
Actually, in the absence of accountant, there is no one who can give details regarding any type of inconsistency and variation between delivery of products and order placed (Rahim & Idowu, 2015). It is probable that the accountant could fail to remember to carry out comparisons between inspection statement and receiving account. |
|
Errors might also occur in the process of receipts of specific invoices. Specifically inaccuracy can be spotted in the process of assimilation of the incorrect statement of price and particular ledger posting (F Simnett et al., 2016). |
Occurrence of error and miscalculation in trail balance may well be present. Inaccuracy on the part of suppliers in insertion of the price can also affect invoices (Soh & Martinov-Bennie, 2015). |
Accounts payable:
|
Weakness |
Justification |
|
inaccuracy and faults observed in control account |
Management may perhaps not take on relative assessment and comparison of specific control with credit ledger accounts and as a consequence this can direct the way towards to prevalence of mistakes (Simnett & Huggins, 2015). Additionally, there is no guarantee that varied items related to accounts payable are acknowledged and appropriately documented. |
|
Material weakness in different accounts of the firm |
In essence, there exists various weaknesses in payables of the firm. These weaknesses can be indicated to be material. Fundamentally, accounts payable is said to be linked to internal control arrangement (Rahim & Idowu, 2015). |
Conclusion:
Based on analysis presented above it can be said that there subsists diverse evaluation risk that consequently mentions the need for taking on specific steps to diminish overall risks. Especially, the financial status of the TCW is said to have analysed from the point of view of return on firm’s production of grape and wine. Also, it is said to be correct from the viewpoint of profit margin (including both net as well as gross). Additionally, the appropriate audit aspect for elimination of the audit risks is discussed in this present study in detail. Different businesses risks linked to business process of TCW is also illustrated after proper analysis of operations of TCW. Investigation of effectiveness of method of internal control of business concern illustrates that the executed method is designed in a way that it can aid in reducing occurrence of fraud and error mainly by members of staff of the organization.
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