Audit Planning and Risk Analysis for Turnkey Creek Wines

This report provides audit planning procedures, high-risk areas, and internal control comments for Turnkey Creek Wines. It also includes ratio computation and major risk areas in accounts receivables, current investment, property assets, and marketing expenses.

Accounting for
Management
Decisions

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
In the given assignment, a report is to be prepared on the audit planning to be made for the audit
of one of the clients, named Turnkey Creek Wines. The audit planning procedures, the high-risk
areas and the comments on the internal control being maintained by the company has been
mentioned in the report which is being prepared for the manager of the audit division of the
accounting firm named Miller Yates Howarth (MYH). Besides this entire ratio computation has
been done and the major risk areas in accounts receivables, current investment, property assets
and marketing expenses has been shown in the below report. Lasly, the weaknesses in the
internal control areas pertaining to purchase and accounts payable has also been highlighted.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Analysis and discussion...............................................................................................................................5
Question 1A.............................................................................................................................................5
Question 1B.............................................................................................................................................7
Question 2A.............................................................................................................................................8
Question 2B.............................................................................................................................................9
References.................................................................................................................................................11
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Introduction
The audit plan for the client Trunkey Creek Wines is to be prepared for the year ended 30th June
2018. TCW is one of the significant clients of MYH for long. The principle activities in which
the client deals in is growing grapes for the wine production, production and distribution of
different types of wines, beef cattle production on the surplus lands and investment of the surplus
funds. The insufficient rainfall has rendered few of the lands to be unsuitable for grape wine
production, which is now being used for beef cattle production. However, due to average
increase of 2% in the temperature, the sparkling wine production is being affected and the
company is looking to purchase some lands in the cooler climates. The Wagyu beef, which is
being produced by the company, is being sold and marketed through Wagyu Selling Group
(WSG) in which TWC has significant shareholding (Alexander, 2016).
Several ratios of the company for the last 3 years have been computed and also the internal
control being maintained in the company in the areas of purchase, procurement, booking of the
orders in the system, invoice verification, payment to creditors, delivery of service, invoicing,
booking the liability and payment to creditors have been discussed in the case study.
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Analysis and discussion
Question 1A
The ratio analysis, the potential audit risk and the audit steps that are needed to be undertaken to
reduce the risk are shown below in the workings:
Account Analysis Audit Risk Audit steps to reduce risks
Accounts
Receivable
In the receivables
scenario, we can see
that the receivables days
has almost been constant
in the wine business but
the same is on the upper
side as the industry
trend is near 30 days
whereas the company in
hand is operating at the
receivable days average
of around 50 days,
which his quite high.
ON the other hand, the
receivable days in case
of beef business has
been increasing
drastically over the last
3 years and has almost
doubled from 24 days in
2016 to 57 days in 2017.
Since the state of
receivable days is
increasing in such a
fashion, it indicates the
audit risk as well as the
business risk on the
collection from the
debtors as to whether to
not the receivables has
been correctly recorded
in the books or not and
why the company has
is not being able to
collect from debtors.
Furthermore, the
auditors also need to
check if there is a
requirement of
providing for bad and
doubtful debts based on
this (Choy, 2018).
Some of the audit steps
which can be conducted to
check the health of the
debtors in the books are
reconciling the sales and
the debtors ledger, the
follow up procedures with
the debtors, the monthly
and quarterly outstanding
balances report with the
debtors, balances
confirmation from
debtors, whether the
debtors have been
correctly and completely
recorded in books, how
the valuation is being
done and what the
disclosures in this respect.
Current
Investment
In terms of investment
made by company, if the
returns on equity is
being analysed, we can
see that the same has
decreased drastically
from 17.5% in 2017 to
10.80% in 2018.
Furthermore the gross
margin has declined to
24.5% from 30% last
The decrease in return
poses a major risk on
the investment being
made by the
stakeholders and if the
company is meeting the
minimum levels of
expectations. This
shows the risk that
either the costs are
increasing
Since the ratios show that
there is a deterioration in
the efficiency of
operations, it is necessary
to check the major costs
incurred, the management
decisions, the pricing of
goods and why all of a
sudden, the profitability
has been so low. It needs
to be checked if the costs
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year as well as the net
profit ratio is also
showing a downward
trend and is at 14.38%
in 2018 as against
20.27% in the last year
(Dichev, 2017).
tremendously or the
company is not being
able to generate
revenue at good
margins.
are being properly
monitored and approved
by management or if they
pertain to the current
period or future periods.
Property
Assets
In terms of return on the
property assets, we can
see that the return on
beef production assets
was negative in previous
years whereas the same
has been 1.67% in
current year. On the
other hand, the return on
grape wine production
assets has decreased
from 16.2% in 2016 to
12.2% in 2018.
The decrease in the
return on assets is an
indication that the
property is not reaping
the expected benefits
and there are several
factors which are
hindering the growth of
the returns. The risk
here is that the business
continuity and going
concern needs to be
checked and also if
there are any risks on
the company
(Jefferson, 2017).
This risk can be checked
by checking the returns
and what the major
reasons for the decrease in
returns from the land, is it
because of natural reason,
or market pressure or
internal policies. It can
also be due to decrease in
demand, low productivity
or accounting policy such
as that of charging
depreciation, etc.
Marketing
Expenses
For this head, the ratio
of marketing expenses
as a percentage of total
SG&A expenses has
been calculated and
found to be increasing
continuously since last 3
years and is at 23.67%.
The major risk is what
are the marketing
expense heads which
are increasing, whether
it is approved and
whether the accounting
is done correctly in the
books, is it really
required and if yes,
then why the positive
impact in not seen in
terms of sales,
productivity,
profitability and
growth, why all of
them are falling down.
This risk can be checked
in terms of quantum of
marketing expenses that
has been increased over
the year and what the new
heads under which the
expenses are being
incurred, is it approved by
the management and if
yes, on what basis. It also
needs to be checked if the
bookings have been done
for current period only or
also for the future periods
as well.
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Question 1B
In case the other ratios of the company are being analysed, we can foresee the below mentioned
business risks that TWC faces:
1. Current Ratio and Quick Ratio: The current ratio shows the measure to which or the
capability of the company to pay the short-term liabilities on time. It shows if the
company would be able to pay off its current liabilities on time or it would default. For
TCW, the current ratio has been increasing and is currently standing at 2.80 times, which
is way above the ideal standard of two times. It shows that the company would be able to
pay off its creditors in time. Similarly, the quick ratio is 1.18 times which much above the
ideal trend of one is. This shows that the company possess enough short-term liquid
assets to meet the short-term liabilities. However, it also poses the risks at the same time
like if the current assets are not being misutilisd and if the company is not carrying too
much cash in its books and missing the opportunity cost of interest (Chron, 2017).
2. Debt to equity ratio: The debt equity ratio shows the proportion of debt capital and the
own capital in the total capital of the company. The debt comes at low cost whereas the
equity comes at a higher cost so more the proportion of debt in the capital, lower the
weighted average cost of capital. The ideal industry standard is 2:1, whereas for the given
company TCW, the same is 0.54 and has been in the decreasing trend since the last 2
years. In a way, it is good that the company is not having enough debt capital but it needs
to be seen if it is meeting the target margin and the expectation of the shareholders in
terms of returns or else the debt capital should be raised to lower the cost of capital.
3. Times Interest earned: This is an important measure of company’s ability to repay the
debt principle and the interest component in time. More the ratio, better it is for the
company as it shows the credibility of the company in paying off its debt on time without
faltering. For the given company, it has decreasing and it currently 6.67 times, which is a
cause of concern. It depends upon company to company and should be nearly 10-12
times and so it needs to be seen why the profitability is decreasing (Saeidi, 2012).
4. Days in inventory – Wine: The inventory days shows what is the time for which the
inventory is in stock since the time it has been manufactured. The lower the inventory
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days, the better it is for the company. Though it has been decreasing from 460 days in
2016 to 367 days in 2018, but still the number of days for which the inventory is in hand
is way too high considering the industry trend and steps needs to be taken to reduce the
same so that the inventory does not become obsolete (Raiborn, Butler, & Martin, 2016).
Question 2A
There are many internal controls in the system, which are effective and help the company in
alleviating many types of risks to the company’s operation. The test of control for each of these
identified potentially effective controls have also been mentioned below. The test of control is
the audit procedure to check the effectiveness of the client’s control measures to detect and
prevent the material misstatements in the financials. Depending on their effectiveness, eth
auditor may choose to rely on the same.
Effective control Risk alleviated Test of control
Effective management of the
passwords of the IT system in
the company. Post the
implementation of the new IT
system and resolution of all
the teething issues, this is
being managed and
monitored by management
accountant (Bizfluent, 2017).
The IT system holds a
number of finance
configurations and also a lot
of data. If the configurations
are being altered unauthorised
then it may bring upon the
change in functionality and
can adversely affect the
financial accounting and
results altogether. So this risk
is alleviated. Furthermore,
strict password control exists
over access to programs, only
the access to database is
being enabled, so this also
alleviates the risk that
anybody and everybody
cannot pass financial entries
in the books.
Here the test of control ca be
in the form of checking the
authorization of the people
working in finance team and
other people as well. Also, it
can be checked if the entries
have come from other IDs as
well. Certain, big ticket line
items can be checked if the
same has been approved and
whether there are relevant
supporting for the same.
The 2nd internal control is
approval mechanism for the
orders value limit. If the
ordering amount is between $
10000-30000, it needs to be
This ensures that none of the
section managers, be it grape,
wine or beef production
managers do not order
supplied greater than $10000
The order booking can be
checked in the computer
ordering system as it is
directly linked to the
approved suppliers. A test of
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approved by management
accountant and if the value is
beyond $30000, it is to be
approved by company’s
CEO.
And if it is beyond $50000, it
is to be approved by the
Board.
in one go. The value limits
ensured that no wrong use of
authority is being taken and 4
eye principle is being
followed. Furthermore, it also
avoids the unnecessary
blockage of the funds
(Belton, 2017).
control can be conducted as
to if there are necessary
approvals in hand.
The process for receipt of the
goods and invoice
verification with the
electronic copy received from
the supplier and punching of
the invoices in the payment
register is a comprehensive
control for the purchases and
payment to vendors (Gooley,
2016).
This alleviates the risks that
the false purchases are not
recorded in the system, there
is no shortage or discrepancy
in the inventory when it is
being received in the factory
premises and that the invoice
from supplier and the order
received matches and then the
payment is being processed.
Due to this, no false invoices
and no false delivery is
accounted in the system.
The auditor can check
whether the 4 eye principle
was being ensured or not
during receiving or orders
and recording the invoices in
the system. Also, sample
checks can be conducted on
the order copies and the
invoices received
electronically from suppliers
if they are matching.
Question 2B
Besides the robust internal control process in several areas, the company also suffers from
weakness in a number of areas relating to purchases and accounts payable. Some of these are
mentioned below:
Weaknesses Justification
The supplier information file is being
centrally handed by the accounts clerk and
any changes to the file is being approved
manually by the management accountant.
There is no such record maintenance in
system as to how many times the changes
have been done and the management
accountant is the ultimate authority post
which no control is maintained (Werner,
2017)
The approval procedure is manual and hence
there is every chance that the management
accountant holds the ultimate authority to
make the changes in the supplier information
file. There may be a case that a new
unapproved supplier may be added to the file
without any intimation and nobody in the
company would be aware of the same and
hence the records should be maintained in the
system.
The payments file is finally being approved This shows that there is no segregation of
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by the management accountant once in a
week and then he only uploads the ABA file
in the bank portal for the payment.
duties and the company may fall into situation
where the management accountant may also
approve for the unauthorised and unchecked
payments and upload the same in the bank
portal for the payment. The company might
suffer a loss on account of this. Therefore,
there should be proper internal control and 4
eye principle being followed here
(Heminway, 2017).
With regards to the payment of the service as
well as supplier invoices, as soon as the
invoice is being punched in the payments file
and approved by management accountant, it is
being recorded as paid in the accounting
system without proper acknowledgement
system or procedure. This can lead to serious
reconciliation issues in the future with the
creditors.
To avoid the reconciliation issues with the
creditors in the future, the company should
ensure that the acknowledgement is generated
form the bank side and is also captured in the
payments file and is also properly accounted
in the accounting system. Also, the balance
confirmation from the creditors and the
vendors should be asked on a monthly basis
(Trieu, 2017).
There is no control om when the next
purchases of the wine, grape or beef should be
made by the section managers. There should
be a limit on the stock which when reached,
only then the next order should be made
(Linden & Freeman, 2017).
In case this control is not being maintained or
implemented, then the section managers can
send the purchase requisition for any and
every quantity and it would be difficult for the
company to maintain and monitor the stock
levels and thus it can end up having excess
stocks.
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References
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431.
Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
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Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 145. Retrieved from
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from http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
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Saeidi, F. (2012). Audit expectations gap and corporate fraud: Empirical evidence from Iran. African
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Werner, M. (2017). Financial process mining - Accounting data structure dependent control flow
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