Auditing & Assurance: Evaluating Audit Procedure at Trunkey Creek Wines (TCW)

This report evaluates the audit procedure at Trunkey Creek Wines (TCW) and provides recommendations for effective internal controls and risk control measures. The report evaluates the ratios and additional information associated with the four accounts listed by the audit partner, John Richards. The report also considers the additional risk pertaining to the overall operations of the business and provides recommendations for effective risk control measures. The concerns for TCW are recognised as per Controls Overridden by the CEO and management, Overreliance on Detective Controls vs. Preventative Controls, Segregation of the duties and Informal and Formal Controls related to the accounts payable and purchases.

Running head: AUDITING & ASSURANCE
Auditing & Assurance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary
The main aspects of the study have evaluated the different types of the audit concerns in TCW.
In order to answer the various issues related to audit 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 overall concerns for TCW
was recognised as per Controls Overridden by the CEO and management, Overreliance on
Detective Controls vs. Preventative Controls, Segregation of the duties and Informal and Formal
Controls related to the accounts payable and purchases.

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Table of Contents
Introduction......................................................................................................................................3
Question 1A.....................................................................................................................................3
Question 1B.....................................................................................................................................6
Question 2A.....................................................................................................................................8
Question 2B...................................................................................................................................10
Conclusion.....................................................................................................................................13
References......................................................................................................................................14

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Introduction
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.
Question 1A
The consideration of the risks of audit are considered with audit measures with account of
concern, analysis and audit risk.

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Account Analysis 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
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

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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.
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

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(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).
Question 1B
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

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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).
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

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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)
Question 2A
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

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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.

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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).
Question 2B
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

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(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).

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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.

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