Audit Report for Trunkey Creek Wines (TCW)

The report highlights the inefficiencies of TCW in the current year and emphasizes the importance of incorporating audit measures to provide a true and fair view of the company's financial well-being. It identifies audit risks and associated steps to mitigate them and suggests measures to improve the company's internal control mechanisms and risk assessment strategies. The report also highlights the impact of business risks on the company's performance and the need to address them.

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AUDITING

Audit
Executive summary
To survive in the current competitive scenario, it is always required for the companies to
maintain a true and fair view of its state of affairs. Keeping in mind the intensity of
competition in the industry, it is harder for the companies to persist their existence if it does
not operate with due diligence and compliance with all the necessary independent statutory
requirements. The identification and assessment of various risks involved needs also to be
taken care of. All this together can be achieved by means of incorporating audit measures in
the company and allows the company to not only survive its existence but also creates
opportunities for it to grow and become capable of dealing with its future obligations.
Trunkey Creek Wines (TCW) is the company to be assessed in the following report so as to
evaluate the fairness of its financial statements and financial well being.
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Audit
Contents
Introduction...........................................................................................................................................3
1A. Risk assessment...............................................................................................................................3
1B. Business risks that impacts the performance of organizations........................................................6
2A.Internal control mechanisms............................................................................................................7
2B. Reasons behind the failures of internal control mechanisms..........................................................8
Conclusion...........................................................................................................................................10
References...........................................................................................................................................11
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Audit
Introduction
Considering the current competitive scenario, audit measures have become essential for the
companies to exist and expand in their industry. It is due to the fact that audit helps in the
detection of existing and probable material risks that can damage the operations and existence
of the company. Audit also helps in disclosing the financial well being of the company and
provides a true and fair view of its state of affairs. Audit eliminates or minimizes the chances
of material misstatements that were due to errors or/and frauds in the company’s financial
statements. The auditing practices and processes incorporated by TCW shall be discussed in
the following report for the purpose of determining and assessing the existing and potential
material risks of the company. The internal control system of the company will be taken into
consideration for the purpose of assessing the material risks and how the same assisted in
eradicating the impacts of such risks. The company’s ethical practices with regards to
compliance of independent statutory requirements and adopting and formulating policies
shall also be determined in the report.
1A. Risk assessment
In the given chart, risks associated with the property assets, investments and accounts
receivables of TCW shall be assessed along with the ways that can be incorporated so as to
mitigate such existing and potential risks.
Account/Heading Assessment Audit risks Steps to mitigate
the risks
Property assets Compared to past
years, in context of
TCW’s property
assets a downward
trend in the return on
assets can be seen.
The return on assets
has not just
deteriorated in the
The prime audit risk
associated with the
fall in return on
assets of the
company is the
chances of the
company to project
increment in beef
sales so as to
The auditor should
scrutinize the sales
ledger and all the
supported
documents so as to
evaluate the overall
beef sales in the
current year for
tracing the presence
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Audit
beef segment of the
company. Both the
wine and production
of grape segment has
witnessed the
deterioration in the
return on assets.
This can be either
due to improper
maintenance or
some significant
reason that was
ignored in the
current year but was
duly taken care of in
the previous years.
represent and
showcase a profound
financial position of
the company
(Kaplan, 2011). This
means that the
company shall
represent a better
financial
performance and
well being by means
of exaggerating its
sale of beef. The
considerate
downward trend in
the return on assets
is significant in the
current year as
compared to the
previous year data
which depicts the
probability of
associated audit
risks (Hoffelder,
2012).
of exaggeration of
such sales by the
company in order to
reflect its better
financial position,
performance and
well being. It will
help them in
assessing the
revenues projected
by the company are
in alliance with the
actual sales that is
evaluated by the
auditors through
sales ledgers,
vouchers and all
other supporting
documents
(Hoffelder, 2012). If
there is any
fabrication in
reporting of beef
sales by the
company, the
auditors shall be able
to trace it and
eliminate such risks
effectively.
Accounts
receivables
Comparing with the
previous year, it can
be easily determined
The major audit risk
lying here is the
aging of debtors. It
In order to mitigate
the risks associated
with the account
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Audit
that there is a rise in
the number of days
of collection of debts
in TCW in the
present year. The
company failed to
realise debts
collection on time in
the previous year
and as a result of
which the number of
days with regards to
collection of debts
got extended.
is always necessary
for the auditors to
effectively evaluate
the aging of debtors
in order to mitigate
risks of bad debts
and future
contingencies
(Geoffrey et. la,
2016). As aging of
debtors are recorded
at inflated values,
the same can hamper
the overall
functioning and well
being of the
company.
receivables of the
company, the
auditors should
probably evaluate
the aging of debtors
effectively. The
reasons owing to
extending the
number of days of
collection of debts
from debtors should
also be necessarily
evaluated. Also, the
actual bad debts of
the company should
be compared with
the provision of bad
and doubtful
company maintained
by the company in
order to determine
the inflation in
values (Geoffrey et.
la, 2016).
Investments The times income
earned from
investments in TCW
has also sloped
down in the current
year if compared the
same with the past
years.
Undervaluation of
investments is the
probable audit risk
in this scenario. The
company shall
undervalue the
investments while
recording the same
so as to fulfil its self-
In order to trace
such material
manipulation of
investments in the
company, the auditor
shall look for the
reasons behind the
declining trend in
times income earned
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Audit
interest motives. from investments
comparing with the
previous years and
should verify all the
associated
documents including
vouchers and
receipts so as to
evaluate the same
(Gay & Simnet,
2015). The auditors
should also find out
that if there has been
disposal of any
investments by
TCW which can also
be assessed by
means of various
documents such as
vouchers, contract
notes, etc.
1B. Business risks that impacts the performance of
organizations
Considering the intense and neck to neck competition faced by the organizations in its
industry in the current scenario, it becomes difficult for them to survive their existence,
inhibit expansion and meet future obligations. TCW is seen to have survived in not only
domestic markets but has also been operating in the global markets despite of the immense
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Audit
and intense competition and challenges. The company has also been able to operate in
multiple sections of the market (Fazal, 2013).
The company has faced various business risks in the current year when compared to its past
years. If the account receivable of the company is considered, it can be seen that there is a
rise in the number of days of collection of debts as compared to previous 2 years. This is
because of the incapability of the company in timely recovering its dues from its debtors. The
smooth flow of operations has been impacted as recovery of debts has become troublesome
for the company (Elder, Beasley & Arens, 2010). This is a probable audit risk for the
company.
TCW has also failed in offering its investors return on equity in the current year which was
unlikely if compared with the past years. It can be understood by the figures that shows that
the return on equity of the company has come down by 7 % in the current year when
compared the same for the previous years.
2A.Internal control mechanisms
Efficient Control Risk Test of Control
As the company makes
online purchases, the
details of the suppliers
are supposed to be
recorded in its master
file. Only, the approved
suppliers and creditors of
the company are
mentioned and recorded
in the master file of the
company. So, in the case
the orders are placed to
unapproved suppliers or
creditors the company
should make sure that the
The risk associated with
this scenario is the power
of approved suppliers to
change the rates that were
agreed by both the parties.
The test of control that can be
applied in this case is the
intimation and implementation of
the rates that were agreed upon
by both the parties which shall
help the companies in the
mitigation of associated business
risks that can impact its
operations severely (Elder,
Beasley & Arens, 2010).
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Audit
order is legitimately and
immediately cancelled
and the appropriate
details regarding the
matter shall be given to
the management
accountant for the
purpose of providing
required treatment to
such transactions.
The staff is provided
bonus when the targets
are achieved or crossed
by them for a period in
the company. This helps
in keeping the employees
motivated, engaged and
encouraged towards
increasing the sales of
the company which aids
in the financial
performance of the
company.
The staff in order to fulfil
his targets for receiving
bonus from the company
can trap himself into
unlawful and unethical
practices by means of
making false promises to
the customers or such
other means that shall
impact the company’s
image and financial well
being of the company
(Merchant, 2012).
The activities of the staff should
be reviewed by the management
in order to eliminate the risks of
unethical practices adopted by
them. The management should
make sure that the staff of the
company is not making false
promises or providing unjust to
the customers about the products
offered by the company which
can hamper the reputation of the
company and its financial
performance negatively
(Cappelleto, 2010).
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Audit
2B. Reasons behind the failures of internal control
mechanisms
The shortcoming in the purchases and accounts payable department of the company needs
immediate treatment. The reasons behind these shortcomings are elaborated below-
The absence of separate maintenance of files for lower quality of goods that are being
purchased is one of the shortcomings of the purchase department. The company provided
justification with respect to absence of such maintenance of records by justifying that it is the
clerk who is responsible for aligning and recording the order information and their associated
bills. Therefore, the chances of missing out on the accounting of certain inferior or low
quality goods may happen (Livne, 2015). Another shortcoming with respect to payment
segment can be the failure or negligence in assessing of the stores file and the explanation
offered for the same was that purchase order of the company was not checked separately with
the goods and as a result of which over stocking in the company warehouses could have
happened (Niemi & Sundgren, 2012) .
Considering the accounts payable of the company, there are two major shortcomings that are
prominent. The company has failed to conduct its reconciliation strategies in its respective
account. The company provided justification on this segment by blaming the accountant for
relying completely on the IT system and not preparing required reconciliations on his own to
the respective accounts payable ledgers (Baldwin,2010). Another shortcoming is the fact that
there has been no monitoring of payment files on a regular basis. The company justified by
blaming it on its management accountant who verified the payment files just once in a week.
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Audit
Conclusion
With the help of the report, the inefficiencies of TCW in the current year are highlighted. The
internal control measures are inappropriate to an extent that the financial well being of the
company has got impacted. The company can overcome its shortcomings and be able to
survive its existence and become capable of meeting its future obligations in the presence of
effective risk management strategies that will help the company in mitigating existing and
potential risks that shall allow it to expand in its industry.
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Audit
References
Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.
Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ,
Melbourne
Elder, J. R., Beasley S. M., and Arens A. A. (2010). Auditing and Assurance Services. Person
Education, New Jersey: USA
Fazal, H. (2013, May 13). What is Intimidation threat in auditing?.Retrieved from:
http://pakaccountants.com/what-is-intimidation-threat-in-auditing/
Gay, G., and Simnet, R. (2015). Auditing and Assurance Services. McGraw Hill
Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-
House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting
Horizons, 30(1), 143-156. https://doi.org/10.2308/acch-51309
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011). Accounting scholarship that advances professional knowledge and
practice. The Accounting Review, 86(2), 367–383. https://doi.org/10.2308/accr.00000031
Livne, G. (2015, May 12). Threats to Auditor Independence and Possible Remedies.
Retrieved from: http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-
independence-and-possible-remedies?full
Niemi, L., and Sundgren, S. (2012). Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review, 21(4), 767-796.
https://doi.org/10.1080/09638180.2012.671465
Merchant, K. A. (2012). Making Management Accounting Research More Useful. Pacific
Accounting Review, 24(3), 1-34. https://doi.org/10.1108/01140581211283904
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