Evaluation of Internal Control System of Audit Clients of MYH

This report evaluates the effectiveness of a system of internal control of the audit clients of MYH. It analyses the audit risks associated with TCW and uses business risks faced by TCW. The report also identifies weaknesses in the internal control system related to accounts payable and purchase accounts.

Running Head: AUDITING
Auditing
Name of the University
Name of the Student
Author Note

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Executive Summary
This report is prepared to evaluate the effectiveness of a system of internal control of the
audit clients of MYH. This analysis is done on the basis of evaluation and the facts of the
given case study. This report also uses the business risks that are faced by TCW. It is also
attributable to both external and internal factors. The funding is generated from the
evaluations of the facts that will help in planning an effective system of audit. Ratio analysis
has been used in analysing the risks that are associated in the mentioned accounts of TCW.
Such analysis will effectively help the management structure in identifying the strenghth and
weakness that are associated with different accounting system. These strengths and weakness
are particular in relation to purchase and accounts payable.

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Table of Contents
Introduction................................................................................................................................3
Answer 1A................................................................................................................................3
Answer 1B..................................................................................................................................7
Answer 2A.................................................................................................................................8
Answer 2b................................................................................................................................10
Conclusion................................................................................................................................12
References................................................................................................................................13

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Introduction
This report is prepared to demonstrate the audit risks in relation to the long standing
and significant audit clients of Miller Yates Howarth(MYH) . The client is Trunkey Creek
wines( TCW). Such risks are normally related to the fraud activities. These risks also include
the efforts that are conducted by the auditors themselves(Barta, 2018). The areas for concern
include investment, accounts receivable , marketing expenses and property assets. The
auditor is required to plan the audit engagement .This can be planned by extracting the
information through reviewing the system notes in the permanent file. Also a new internal
control can be applied to manage the risks associated with it(Vovchenk et al., 2017). The
audit risks have been assessed in relation to the specific accounts . This has been done by the
computation of relevant ratios . The second part of the report represents the analysis of the
internal control systems. Also in this report the weaknesses of internal control system has
been assessed. This is mainly related to accounts payable and purchase account s which have
been identified and evaluated in this report.
Answer 1A
The first questions explains the audit risks that are associated with the TCW. It
analyses the ratios such as gearing ratio, profitability ratio , solvency ratio , efficiency ratios
and liquidity ratio. The financial analysis can be analysed effectively by computing the
ratios(Kraft,2014). This helps in assessing the auditors in understanding the financial position
of an organisation. In this particular case study, the evaluation of the accounts associated
with Turnkey Creek wines is determined by computing the relevant ratios. the accounts
relate to property assets, accounts receivable, marketing expenses and investment. According
to the case study the audit planning indicates that the audit would face numerous material
misstatements while assessing. Due to this the auditors have been burdened by the

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responsibility of identifying such risks. These steps help in reducing such risks. The
implementation of effective internal control would help in reducing the fraud related
risk(Tayeh, Al-Jarrah & Tarhini, 2015). The auditor needs to exercise reasonable care and
skill and maintain professional scepticism while conducting the audit. The following table
contains a list of ratios that have been analysed
Ratio Table
Ratio Unaudited (2018) Audited (2017) Audited (2016)
Return on equity 10.80 17.5 15.2
Return on beef
production assets
1.67 -0.82 -3.45
Return on grapes and
wine production
assets
12.2 14.5 16.2
Gross margin 24.5 30 31.76
Net profit margin 14.38 20.27 17.85
Marketing expense 23.67 17.89 15.2
Days in inventory to
wine
367 423 53.24
Current ratio 2.8 2.54 2.66
Quick ratio 1.18 1.15 1.2
Debt to equity ratio 0.54 0.63 0.67

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Account receivable
Analysis – Accounts receivable is the amount that is due to be paid by thr clients of TCW to
the company. the accounts receivable ratio is evaluated for assessing the financial condition
of the company.( Ngugi, Gakure & Gekara, 2017). From the table it can be seen that the days
in accounts receivables for wine and beef is recorded at 60,65 and 36 respectively. However
in the following year this value has been reduced for beef. This indicates that the time taken
to make the payment by debtors has increased in case of wine as against beef.
Audit risk- On the basis of this case study, the majority of producers by TCW is done on a
credit system. This system attaches a huge amount of risks in the payment made by the
customers. Thus a risk of completeness exists. This represents the risks of firms relating to
the validity. The risk of completeness that exists is the accounts might not file documentation
or file the documents in a correct manner(Barta,2018).
Audit steps to reduce the risk- The accounts receivables days that are increasing should be
viewed and simultaneously discussed with the management. The approval of upper level
management is required to allow the provision of doubtful debts. The process of credit
approval should be reviewed.
Property assets
Analysis- The investment scenario of TCW can be calculated by computing the ratios that
identifies the number of times that the firms are earning compared to the investment made by
the firm. From the table it can be seen that there is an increase in equity return for the audited
financial statements(Long, Chan & Wen-de, 2017). Also it is observed that the return on beef
production of assets has improved. The return on wine and grape production of assets has
improved in the year 2017.

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Audit risk- There are risks related to recording the asset and registering the property assets .
The audit risks associated with this include depreciation charging method. This is recorded by
the accountant and the documentation might not be appropriate. there also can be an incorrect
valuation of the assets. Further there may be incorrect recording of entries which are hidden
in complex structures(Barta,2018).
Audit steps to reduce the risks- The auditor is required to make an assessment of the
effectiveness of the system of internal control. The depreciation should be analysed for
judging the consistency of the method. The relevant ledgers and journals of property assets
should be monitored. In order to determine the existence of the assets, the auditor should
review the acquisition documents.
Investments
Analysis- The investment effectiveness of an organisation can be measured in relation to the
number of times that the company earns in relation to the particular investment(Lee & Lee,
2015). From the table it can be seen that the time earned interest of TCW has declined. It has
declined from 8.1 in the year 2016 compared to the 2017 year when it was 7.5
Audit risk- The financers is required to spend the investment in a planned manner,
considering the level of risks associated on the investment is high. The working capital
would be impacted by the amount of risks that is associated with the investment made.
Audit steps to reduce risk- The auditor is required to make the assessment in realtion to the
investment made by TCW. He is also required to assess whether there has been an unusual
investment done by the company. It should be carefully monitored by the management.
Marketing expenses

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Analysis-The marketing expenses is expressed as a portion of total expenses. Such a ratio
has increased from 15.2 in year 2016 to 17.89 in the year 2017. Such an increase in
percentage indicates the fact that the marketing expenses has increased in the current year.
Audit risk-There was a lack of disclosures of the related third parties transactions and the
data. Such data relates to activities that might change the perception of the stakeholders.
Audit steps to reduce the risk-The auditor is required to evaluate the marketing activities and
then record them. The expenses of all marketing activities need to be properly reviewed in an
analytical fashion(Olefirenko, 2016)..
Answer 1B
Business risks are those kinds of risks that are associated with the fact that there could
be a negative variation on the expected profit or losses of nay business. There are a variety of
factors that impact the business risks of a company(Kozubíková et al., 2014). Through this
case study t can be analysed that the earnings of TCW have been steady for a number of
years.The capacity of the TCW to fulfil its objectives might be susceptible by both external
and internal factors
Return on wine and grape production assets- the total amount of return that s generated
from the production of wine and beef has been reducing consistently. The return on the
production of such items has declined to 14,5 in 2106 compared to 16.2 in 2015. Such a fall
illustrates that the assets have not been efficiently utilised for production purpose
Debt to equity ratio- this ratio is improving. This means that the proportion of debt that is
held by the company in relation to the assets has reduced in 2017 compared to 2016. The
ratio has reduced from 0.67 to 0.63. This indicates that the financial leverage as declined and
hence the business risk has also lowered(Enekwe, Agu & Eziedo,2014).

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Days in accounts receivables beef- From the table it can be seen that there has been an
increase in the accounts receivable days of beef. The days has increased from 24 in year
2016 to 36 in year 2017 with a further increase in year 2018 to 57. This suggests that the time
taken by TCW to recover money from customers has increased significantly.
Gross margin- the gross margin of TCW declined in 2017 from 2016. It declined from 31.76
to 30. Such a fall would make the firm very difficult in retaining a higher percent of sales.
Time interest earned- The interest coverage ratio illustrates the total amount of times that it
takes for the firm to repay its assets.From the table, it can be seen that the interest coverage
ratio is less than one. This indicates that the operating profit cannot generate sufficient cash
so that it can make payments or carry out other operating activities(Tucker, et al., 2016).
Answer 2A
In this section, the internal controls have been identified along with the test o control
for each identified control systems . The following paragraphs makes a list of the
identification of internal control system , test of control and risk alleviated
Risk alleviated
Effective control Risk alleviated Test of control
Computer ordering system This would help in
generating complete records
without any data missing. To
access the program, there
needs to be a password. All
these would help in
mitigating fraud risks(Chan
& Vasarhelyi, 2018)
Auditors must take notice of
the prepaartoin of deposits
and the mail openings of
employees. There should be
sample of resistance that
should be selected. This
sample should be selected for
tracing the recording of

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receipts and deposits that the
company makes to the bank
Electronic invoice from
suppliers-
The electronic invoice from
suppliers should help the
company in avoiding risks .
These risks relate to errors,
late payments and
compliance , which is faced
with manual invoice
generation. Such invoice
stress the data in a cloud
based hub. Electronic
invoices are more efficient at
reducing errors.
The auditors should select a
sample of sales invoices. The
computation of such
invoices should be performed
to check whether there has
been a correct recording or
not(Leitch,2016). .
Online approval of payment
file by management
accountants and uploading it
to the bank
Such system would help in
assessing the completeness
and accuracy of entry
validation and accounting
records. The management
should be able to ensure that
the control system is
effective because the
development of platform
systems would help in
An application control tah
relates to standing data
should be there. There should
also be an online method of
payment. The control of
applications should be
evaluated in such a way that
it helps in detecting material
misstatements.

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reducing the fraud activities
on the employee’s
part(Leitch, 2016)..
Payment restriction until
resolve of discrepancies
Resolving any discrepancies
without making adequate
payment would hinder usual
flow of cash and maintaining
good relation between
production manager of wine
and suppliers(Osis & Asnina,
2018)
The auditors should ascertain
that there should not be
unnecessary payments made
to suppliers
Service order generation and
sending it to automatically to
service provider
This would help in the timely
arrival of receipts of such
orders. Further this would
also help in sending it
automatically to service
provider and avoiding delay
in placing service
orders(Sullivan,2014).
There should be a digit
verification check through
the process of an algorithm.
This ensures that the data is
accurate. The reference codes
should be formatted in a
proper way(Sullivan, 2014).
Answer 2b
This last section discusses about the weaknesses of the internal control system with
reference to the accounts payable and purchase amount.

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Purchase account
Weakness Justification
As per the purchase account of TCW, there
can be an overbearing of stock if it is not
checked in an independent manner against
the stocks that have already been purchased.
Unless a proper accounting of the
sequencing of orders can be done, a
misrepresentation can arise in purchase order.
Cancellation can also take place
As there is no management accountant, here
is a lack of a second person who can account
for the mismatch between order an delivery.
There can be errors in invoice receiving , like
for instance errors mentioning wrong price
and posting in ledgers(Abe et al., 2015).
There can be trial balance errors in preparing
and posting prices and volumes of sales made
by the suppliers.
. Accounts payable
Weakness Justification
Error occurrence in the control account The management accounts might not be
involved in regularly comparing the control
and credit ledger accounts . This could result
in error occurrence as it cn continue without
any detection(Abe et al., 2015).
Material weakness in the accounts There are certain weaknesses that exist in the
accounts payable of TCW.These can be
material and is related to the system of

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internal control.
Conclusion
With the help of this study, it can be concluded that there are various audit risk that
require introduction of various auditing steps to reduce such risks. The financial condition of
TCW has diminished in terms of the return generated on grape and wine. Further the net
profit and gross margin has also reduced. The audit measures that should be undertaken so at
the risks can be reduced has also been discussed. Her are also some business risks that are
associated with the operations of TCW. The assessment of efficiency of internal control
system of organisation suggests that the newly implemented system is an improvement in
reducing the fraud and errors on the employee’s part.

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