Evaluation of Ratios and Audit Measures

The discourse of the report is aimed to evaluate the audit procedure at Trunkey Creek Wines (TCW). As per the given information the internal control functions at TCW is related to define the system of internal control and create greater awareness of controls in the company. These are mainly related to the factors such as enforcing effective internal controls. The management staff at Trunkey Creek Wines (TCW) is depicted to receive bonus as per the target ratios. This will further include the monthly sales volumes, variance of actual to budget departmental overheads and profit before interest and tax. The board of the company further aims to take active interest pertaining to the performance and also request for the explanations as per the variance from the monthly budgets.

The first section of the study will evaluate the ratios and additional information associated with the four accounts listed by your audit partner, John Richards. This part of the study will also consider the any appropriate audit measures which needs to be implemented for the audit risks. This will recommend the audit measures with account of concern, analysis and audit risk. The second part of the study will further consider the additional risk pertaining to the overall operations of the business. The latter section of the study will provide explanation in the internal controls and also recommend the effective risk control measures for the associated test of controls. This will be stated by points grouped under weakness and provide justification for the same.

The consideration of the risks of audit are considered with audit measures with account of concern, analysis and audit risk.

Account	Analysis Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Audit Risk
Accounts receivable	The accounts receivable factors have been depicted in form of ratio for Days in accounts receivable for wine and Days in accounts receivable for beef. In addition to this, as per the 2017 audited report there has been a decrease of Days in accounts receivable for wine by 21%. This shows that the company has been able to considerable reduce the accounts receivable time which is a positive aspect of the company. However, in terms of Days in accounts receivable for beef the accounts receivable amount has increased from 36 days to 57 days.	The audit risk pertaining to Trunkey Creek Wines (TCW) is identified with the major concern in Days in accounts receivable for beef. It needs to be discerned that the Days in accounts receivable for beef the accounts receivable amount has increased from 36 days to 57 days. Trunkey Creek Wines (TCW) is discerned to sell beef on credit and therefore the accounts receivable can take a substantial part of the balance sheet. The auditor needs to understand how the companies will misstate about the accounts receivable as per the unqualified opinion of the financial statement. This will in turn allow the accounts in determining the risks and tracing the errors before an auditor. This can lead to serious concerns which are related to the existence risk. As the accounts receivable in the selling of beef is considered with the aggregation of smaller accounts. The auditor is able to send a confirmation for the verifiability of the payments and debt validity.
Investments	The principle activities associated to the investment in TCW is seen with growing of the grapes for the production of wine. In addition to this, the investments made by the company are considered in form of the distribution and production of the red, white and sparkling wines. The production of the beef cattle as per the surplus land for the grape production is also considered as one of the major investment made by the company. The investments associated to the red, white and sparkling wines. In addition to this, the investment made as per surplus funds needs to be also taken into consideration.	There may be several types of the audit risk related to the valuation of the investments. In general, the significant concerns for the investment of the entities are depicted with the type of investment which is made by the company. The significant areas of concerns for the investments are discerned in terms of whether the valuation of the investments is based on fair valuation.
Property assets	The property assets as per the various types of property assets needs to be taken into account as per audit clients of MYH who are considered as the second largest accounting firm of Australia. The audit clients of MYH is depicted with agriculture, manufacture, mining and property industries.	Some of the major risk pertaining to the property assets are seen in terms of acquiring fixed assets, depreciating fixed asset, disposition of fixed assets and effectively managing the fixed assets. There may be several problems with recording fixed assets in an accurate manner. In addition to this, some of the major areas of concern are also associated with the acquisition date of the fixed assets and ensuring whether they are acquired within the appropriate period. The main form of the risk in recognition criteria for the PPE are also derived from the adherence to the Conceptual Framework for Financial Reporting. It needs to be also ensured whether the depreciation charges pertaining to the entities are seen to be appropriate in nature. In addition to this, there has been major types of the concerns which are evident with the disposal method followed for the properties (Cannon & Bedard, 2016).
Marketing expense	The market expense of the company is seen with total percentage of S&A expenses. On comparing the marketing expense of total S&A for the 2017 audited statement and 2018 unaudited segment. There has been a total percentage decrease of 24%. This is considered as a positive sign toward the financial efficiency of the company.	The significant nature of the concerns associated to the marketing expenses needs to be discerned in terms of the primary risk concerning the material misstatements related to the expenses related to the sponsors and advertisers (Gonzalez et al., 2018).

As per the analysis of the ratios of 2017 9 (Audited) and 2018 (unaudited). The changes in ROE is seen with decrease of 62%. This shows that the degree of operating leverage has not favored the sales of Trunkey Creek Wines (TCW). The net effect on the degree of operating leverage of the company has significantly affected the performance of the business in terms of generating a higher ROE. Return on beef production assets ratio has suggested that there has been considerable amount of increase in the unaudited report of the company. This has been able to suggest that there is considerable amount of scope for the company in generating more revenue by focusing on the beef production assets. It needs to be also considered that the return on beef production assets is seen with the percentage increase of the production assets for the beef production. Therefore, in the section of the production assets the business risk of the company is significantly low (Maina, 2017). The percentage of the return on grape and wine production assets needs to be identified as per decrease of 19%. It needs to be also discerned that the important nature of the concerns associated with the Return on grape and wine production assets associated to the business risk is significantly high. This is evident with decrease in the Return on grape and wine production assets by 19%. The gross margin of the company is also seen to pose a considerable amount of concern on the profitability aspect of the company. This is depicted in terms of the decrease in the company by 22% (Malekpour & Karney, 2014). Therefore, due to the decreasing profit of the company there may be lesser interest of the shareholders. Some of the important considerations for the Net profit margin is also depicted with an overall decrease of 41% from 2017 to 2018. The increase in the market expenses by a total of 24% is also associated to a considerable amount of threat of the company which needs to be seen with the effect on the business in several domains. The most notes business considered due to this is depicted with the higher cost of sponsors and advertising of the products (Abdullatif & Kawuq, 2015).

Evaluation of Additional Business Risks

The decrease in the times interest earned ratio is depicted with several types of the concerns which needs to be identified with the several types of the depictions as per reducing ability of Trunkey Creek Wines (TCW) in generating sufficient cash from the operating activities. In this aspect, the company needs to use the liquid cash available in hand to make up for the difference of the borrowed funds. The days in inventory for wine has significantly reduced (Alles et al., 2018). This shows efficient inventory management of the company for wine. The accounts receivable for the days in accounts receivable – wine has also reduced which is a major positive aspect. However, the main business risk pertaining to the Days in accounts receivable – beef with increase 37% is seen with overstocking (Amoush, 2017). There needs to be adequate measures taken by the company which will be able to ensure better inventory cycle count for beef. The increase in the current ratio by 9% have been able to suggest that the business has been able to maintain stuffiest amount of liquid cash to support the operating assets. Similarly, the increase in the quick assets ratio is also seen with a positive change. The decrease in the debt ratio of the company needs to be taken as the main form of efficiency of Trunkey Creek Wines (TCW) in supporting the outstanding liabilities with the equity of the shareholders (Knechel & Salterio, 2016).

Ratio	2018 (Unaudited)	2017 (Audited)	Percentage Change
Return on equity %	10.8	17.5	-62%
Return on beef production assets %	1.67	-0.82	149%
Return on grape and wine production assets %	12.2	14.5	-19%
Gross margin %	24.5	30	-22%
Net profit margin %	14.38	20.27	-41%
Marketing expense % of total S & A expenses	23.67	17.89	24%
Times interest earned	6.67	7.51	-13%
Days in inventory – wine	367	423	-15%
Days in accounts receivable – wine	50.2	60.65	-21%
Days in accounts receivable – beef	57	36	37%
Current ratio:1	2.8	2.54	9%
Quick asset ratio:1	1.18	1.15	3%
Debt to equity ratio:1	0.54	0.63	-17%

Table: Percentage change in values of the audited and unaudited estimation

(Sources: As created by the author)

The definite measure which needs to be taken for the internal controls has been defined as per the effective control and alleviation of the risk.

Effective Control	Risk Alleviated
Controls Overridden by the CEO and management	In the given situation, each of the suppliers has been able to limit their supplies to a total limit of $ 10,000 for each order. The management is seen to be responsible for designing, implementation and maintenance pertaining to the internal controls. In the given situation the major initiative taken by the management is associated with CEO approving the orders which are over $ 30,000. In addition to this, all the orders over $ 50,000 needs to be approved by the board (Clikeman & Liu, 2017). Therefore, it shows the re-evaluation approach taken by the shareholders, Board of Directors and CEO to take an active role in overriding any instance of audit fraud (Coetzee, 2016).
Overreliance on Detective Controls vs. Preventative Controls	Despite of the internal control measures such as the application of the detective controls there may be detrimental impact on the performance of the organizations. The use of an effective internal control system will not only aid in the detective control measures but also aid the preventive measures of control. In the given situation the orders which will be made through the computer ordering system needs to have a direct link of the approved suppliers (Barnier, 2015). Moreover, the information related to the suppliers needs to eb taken into cooperation as per the different types of the measures of the information which are directly seen as per the preventive controls associated to the supplier code. Every suppliers are needed to have a unique code of the supplier which will show whether an order is rejected and sent to the management accountants for the final approval. This is directly seen as a preventive measure taken by the company which will applied before the purchase is made (Vovchenko et al., 2017).
Segregation of the duties	In general, it is not possible for an individual for proceeding with all the formalities such as authorization of transactions, recording and taking into custody the accounts which are impacting the assets of transactions. The smaller corporations are further required to implement the compensating controls which will ensure that the various types of the objectives set by the company are duly met. In the given situation the segregation of the duties can be identified with the significant nature of separation of duties as per accounts clerk, store man and accountant. This segregation of duties has ensured that the organization will considerably face less difficulty in supervision and monitoring of the governance functions (CIA & Jim Pelletier CIA, 2016).
Informal and Formal Controls	The key to the maintenance of Informal and Formal Controls is depicted with addressing of the major concerns relating to entity level vs. at the activity level. Such level of activities is discerned to be less formal in nature and monitored at a regular interval. In this case the formal risk alleviation measure with the informal controls relates to the preparing invoice to the payments which needs final approval by the management account. The formal control measure needs to be seen with the resolving the issues for the payments (Jespersen, A. H., & Hasle, 2017).

The justification for the weaknesses in internal control for purchases and accounts payable are listed below as follows:

Weakness	Justification
Poor weather conditions in the purchased land region	It needs to be depicted that lack of rainfall made the wine grape production unsuitable in nature. This needs to be considered as per unsuitability of the land for the wine grape production and decreased profit (Robbins & Meyer, 2016).
Cost of purchasing of additional land in cooler climates	The increase in temperatures in some of the vineyards had affected the production of the sparkling wine and TCW is looking forward to buying of additional land in colder areas. It needs to be understood that company has not only bear the losses pertaining initial purchasing of the land in the hotter region but also incur losses for the purchasing of the additional land pertaining to a cooler region (Reason, 2016).
High Debt associated to purchase	The high amount of debt considered with the purchasing of the land has been depicted in terms of the current negotiation terms of purchasing of land as a part of the medium-term bank loans. The remaining funds needs to be sourced as per the surplus finds. Therefore, the net impact of the accounts payable of the firm is also seen to be affecting the surplus funds (Green, 2016).
High payables considered with the investment portfolio	It needs to be also seen that the present negotiations of the purchase of land forms a part of the material. The high amount of domestic and frozen shipments of the company are also subject to a high amount of payable which may have detrimental effect on the future prospect (Mercuri & Neumann, 2016).
No checking and comparison of the reports	It needs to be depicted that the company has not followed the appropriate measure to compare the inspections of the reports. This may lead to severe consequences including no guarantee for the items received in good condition. The purchase officer is further seen to rely on the personal knowledge and there may not independent price list to ensure accuracy in the prices set by the suppliers. This may lead to overstating of the recorded prices. It needs to be also noted that there was no provision made for evidence on the invoices for indicating the different types of the internal checks which had been performed (Griffiths, 2016).
Accounts payable system	The major trade concerning this approach needs to be depicted in terms of the reconciliations which exceeded the total amount which was initially approved by the accounts payables manager. The non-regularity in the comparison of the creditor ledgers and control accounts could’ve also resulted in prolonged errors in the long term without detection. The accounting department did not take any measures for the sequence of cancelled dockets which led to errors in the delivery process and overstatement of the creditor’s ledger (Venkatadri et al., 2018).

Conclusion

The important consideration of the risks of audit shows that there had been several instances pertaining to reducing accounts receivable time for wine by 21%. This shows that the company has been able to considerable reduce the accounts receivable time which is a positive aspect of the company. However, in terms of Days in accounts receivable for beef the accounts receivable amount has increased from 36 days to 57 days. However, the audit risk concerning the Days in accounts receivable for beef the accounts receivable amount has increased from 36 days to 57 days. There may be significant incidence of misstatement in the accounts receivable as per the unqualified opinion of the financial statement. This will in turn allow the accounts in determining the risks and tracing the errors before an auditor. The audit risk for the investment were identified with the. The significant areas of concerns for the investments are discerned in terms of whether the valuation of the investments is based on fair valuation method. The significant nature of the audit risk concerning the property assets needs to be evaluated with the acquiring fixed assets, depreciating fixed asset, disposition of fixed assets and effectively managing the fixed assets. There may be several problems with recording fixed assets in an accurate manner. These problems needs may include recognition of the fixed assets which do not comply with the Australian accounting standards. It needs to be considered that the mitigation of the audit risk should be followed by effective use of the liquid cash to compensate the decreasing times interest earned ratio. The company also needs to consider the business risk pertaining to the Days in accounts receivable – beef which is identified to increase by 37% and lead to problems of overstocking.

Internal Control Functions and Recommended Risk Control Measures

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