Audit Measures and Internal Control Mechanisms of Trunkey Creek Wines

This report discusses the audit measures and internal control mechanisms adopted by Trunkey Creek Wines to determine whether the financials have portrayed a true and fair view of its performance. It also highlights the audit risks encountered by the company and measures that can be adopted to avoid such audit risks.

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Auditing

Trunkey Creek Wines
Executive summary
In the corporate world, thriving amidst such immense and intense level of transactions is very
difficult for all the corporates because these paves a path in the generation of material risks
that can expose them to high dangers. This necessitates audit measures to take place so that
these risks can be effectively identified and the company can be safeguarded on a whole.
With the help of this report, the audit measures implemented within TCW (Trunkey Creek
Wines) Ltd has been taken into consideration. In other words, the auditing processes adopted
by this company has been discussed to determine whether the financials have portrayed a true
and fair view of its performance. Moreover, for such purpose, discussion on calculation of
ratios have been facilitated and thereafter, the audit risks encountered by the company has
also been highlighted. Furthermore, measures that can be adopted to avoid such audit risks
have also been discussed for enhanced understanding.
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Trunkey Creek Wines
Contents
Introduction...........................................................................................................................................3
1A. Evaluation of prime ratios and risks of the company......................................................................4
1B. Business risks that can be encountered by the company................................................................8
2A. Measures of internal control...........................................................................................................8
2B. Justification behind the weakness in internal control mechanism................................................12
Conclusion...........................................................................................................................................14
References...........................................................................................................................................15
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Trunkey Creek Wines
Introduction
In the modern world, audit processes are very vital on the part of corporates to thrive in such
complicated environment. This is because auditing assists in recognizing all material risks
that has made the entire business vulnerable in nature. Besides, it also assists in reflecting
whether the depicted financial performance of the company is true and fair. This makes it
clear that if proper auditing measures are not implemented by corporates, errors and frauds
are more likely to be observed in their financials. Thus, with this report, the auditing
measures adopted by TCW has been highlighted so that its material risks can be effectively
determined. For such purpose, the company’s internal control mechanisms have been
discussed that has played a key role in mitigating the harmful effects of material risks. This
assists in making it clear whether the company has been lawful and ethical based on the
recent requirements of a corporate’s functioning. Nevertheless, even if corporates have
proper risk management approaches within their affairs, the same must be effective and
appropriate in nature. In other words, no negligence in such matter must be entertained
because it can hamper the usefulness of such auditing measure. Thus, the internal control
mechanisms implemented by TCW has been relevantly discussed through this report to
evaluate the prevalence of material business risks in its framework of financial reporting.
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Trunkey Creek Wines
1A. Evaluation of prime ratios and risks of the company
Ratio evaluation can play a key role in determining the financial performance of a company.
Furthermore, it can allow in ascertaining which matters are of crucial importance and that
requires immediate actions on the part of the company. With the help of the given table, the
accounts of the company that is subject to audit risks have been discussed. With such
discussion, it can be analysed whether these risks have affected the financial performance of
the company or not (Roach, 2010). Nevertheless, the table also consists of effective audit steps
that can be undertaken by the company to get rid of such risks.
Account/Heading Assessment Audit risks Steps to mitigate
the risks
Property assets In the company’s
property assets, it
can be viewed that
its ROA (return on
assets) have declined
when compared to
the last few years. In
other words, not
only in relation to
beef but also in
production of grape
and wine, the
company has
witnessed the same
and this is because
of some prime
reason that has
facilitated in such
deterioration in the
current year when
compared to the last
If the ROA of TCW
has witnessed a
decline in
comparison to the
last years, the prime
audit risk that can be
observed in this
scenario is that the
company can reflect
a better financial
position by
portraying enhanced
sales of beef by it. In
other words, such
beef sale can be
exaggeratedly
depicted by the
company to reflect a
better financial state
(Lapsley, 2012).
Moreover, such
If there is a risk that
the company may
exaggeratedly
portray a better
financial position by
over stating its sales
of beef in the current
year, the auditor can
scrutinize the sales
ledgers with the help
of proper vouchers
and documents to
verify the same. This
can assist them in
checking whether
the revenues attained
from such sales are
in alignment with
the orders received
from the same.
Hence, if there is an
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Trunkey Creek Wines
years. heading has been
deteriorating in
comparison to the
last years and hence,
such risk is
prevalent.
immediate of
undesired increase in
revenues from beef
sale, auditors can
know about such
fact.
Accounts
receivables
In relation to
accounts receivable
section, the company
has depicted a
significant
enhancement in the
number of days in
collection of debts.
Moreover, the same
has increased after
comparing the
present year’s data
with that of the
previous year.
Aging of debtors is a
very valuable
concern for the
auditors because if
the same is not
ascertained properly,
it can result into one
major audit risk
(Roach, 2010).
Besides, since these
are at inflated
values, the
company’s overall
performance can get
influenced.
If the auditors can
check the aging
register of debtors,
they can evaluate the
reason behind such
increment in days
collection (Roach,
2010). Besides, they
can also compare the
allowances for bad
debts that has been
depicted by the
company with that
of actual bad debts
to evaluate such
inflated values.
Expenses of
marketing
In comparison to the
last few years, it can
be seen that the
marketing has
depicted an upwards
trend. Furthermore,
the primary reason
behind this fact can
be attributed to the
inflation in the
production of beef
The audit risk that
can be feasible in the
case of marketing
expenses is that such
expenses may have
been manipulated by
the directors to
falsely depict their
financial
performance. For
example, it is
Auditors can take an
effective step by
monitoring all the
documents related to
marketing expenses
in order to evaluate
whether disallowed
or personal expenses
are not forming part
of the same. Besides,
they must ensure
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Trunkey Creek Wines
that has been
witnessed by TCW.
feasible that the
directors have
accommodated their
own personal
expenses or few
disallowed costs.
that the bills or
vouchers or
documents asserting
the truthfulness of
the transaction are of
significant value
(Kaplan, 2011).
Investments The company has
experienced a
declining trend in
relation to times
income earned from
their investments.
The major audit risk
lying here is that
there can be
undervaluation of
investments by the
company to record
the same. Further, it
may have
manipulated the
same for its self-
interest motives.
The auditor must
make ways to
ascertain why the
interest earned from
investments have
fallen in comparison
to the last year
(Kalpan & Williams,
2013). For such
purpose, it can check
all the vouchers or
receipts associated
to the company’s
investments.
Besides, the auditors
can also check
whether any
investment was
disposed off by the
company and the
same can be verified
through contract
notes, vouchers,
documents, etc.
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Trunkey Creek Wines
1B. Business risks that can be encountered by the
company
The company has been able to sustain its presence in both domestic and international markets
and even though it has been facing immense competition challenges from its rivals, yet it has
left no strings attached to explore all other sections in the market. However, it can be noted
that the financial performance of the company has been witnessing a declining trend in
comparison to the last year, which is a negative sign (Hoffelder, 2012). This can be done by
evaluating the company’s material ratios so that a thorough analysis on all aspects can be
determined.
Firstly, it can be viewed that the number of days of collection of debts have increased in
comparison to the last two years. The reason behind this can be attributed to the fact that the
company has become incapable of recovering its dues on the part of debtors in proper time.
Moreover, if debt recovery has become problematic for the company, it means the smooth
flow of operations can be easily impacted and therefore, it results in a major risk 9 Geoffrey
et. al, 2016). Secondly, the company has been a failure in offering required return on equity
to its investors specially in comparison to the last years. This can be proved by the fact that
the company’s ROE (return on equity) has declined by seven percent in comparison to the
last years. Therefore, this can result in another business risk as investors will become
unwilling to invest their funds in such company. Thirdly, it can be observed that the net profit
margin together with the gross profit margin of the company has deteriorated in the current
year. The reason behind this can be attributed to the increase in costs or decrease in sales.
Hence, this is a sign of major concern for the company because it directly reflects on the
financial performance and if the same is ineffective, it may result in a material business risk.
Lastly, there is a massive enhancement in the company’s current ratio because of significant
increment in its liquid assets (Gay & Simnet, 2005). This is also an area of major concern
because it signifies inability on the part of the company to take its liquid assets into best use
and therefore, resulting in another material business risk.
2A. Measures of internal control
Efficient Control Risk Test of Control
The orders of the The primary risk in The basic test of control is that in
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Trunkey Creek Wines
company are facilitated
through online basis.
Furthermore, the
thorough details of
suppliers have been
recorded in their master
file. Moreover, this
recording of suppliers
has been only conducted
for the suppliers who are
approved by the
company. However, if an
order is placed or
assigned to any
unapproved supplier, it is
required that the order
must be effectively
terminated and proper
information of the same
must be provided to the
management accountant
so that further actions
can be taken.
relation to this case is that
the approved suppliers
possess the power to alter
their agreed upon rates and
even some approved
suppliers not having
registered in the master
file can do so.
relation to approved suppliers, it
must be noted that whenever an
order is being placed, it is
necessary for the department to
intimate them with the requisite
rates prior to implementation of
such rates. This can assist the
business in tackling or mitigating
the impact of business risks
(Elder, Beasley & Arens, 2010).
In relation to the
company, it can be seen
that the employees are
offered bonus according
to their level of targets
attained. For example, if
an employee attains or
fulfils monthly targets,
they can get awards or
bonuses. This can
In relation to bonuses, it
must be noted that an
employee can indulge
himself into unlawful
practices to obtain the
desired targets and
additional bonuses as well.
This is not effective for the
company because this can
hamper their goodwill in
It is required that the
management supervises the
activities of the employees in an
effective way so that they cannot
undertake any illegal means to
fulfil the targets. Furthermore, the
management must look into
matters wherein the employees
have not assured fraudulent
promises to the customers
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Trunkey Creek Wines
motivate the employees
in engaging in affairs that
can assist in enhancing
the company’s sales and
benefitting the company
on a whole.
the market and unethical
means on the part of
employees can impact
financial performance
negatively.
because negligence on their part
can hamper the company’s
goodwill. Therefore, the
management must check the
employees’ activities properly
and they must check the vouchers
and documents so that the actual
sales attained can be noted
(Elder, Beasley & Arens, 2010).
The company’s
department have been
assigned the duty of
handling several
supplies.
The risk associated to such
handling of supplies is that
there may be inaccurate
order placement by the
purchase department.
Moreover, if the value of
such orders is less than ten
thousand dollars, the same
is more prone to risk and
fraud because the company
has not facilitated in the
implementation of a
process wherein such
orders less than $10000
are checked twice.
The exact requirement of
purchases in the company must
be determined by checking the
orders more than once. Besides,
the same must be verified with
the company’s records so that
there is no place for errors and
frauds. Nevertheless, the
purchase requisition issued by the
purchase department must also be
checked more than once so that
no problems occur in the future
(Coram, Mock, Turner & Gray,
2011).
In the wine operations of
the company, the
departmental manager is
responsible of observing
the matters associated to
repairing. In contrast to
this, the management is
responsible to observe
the ascertainment of all
In relation to repairs, it
must be noted that any
underlying repair expenses
that have not been paid by
the company since a long
tenure is risky for it. In
other words, any
underlying repair costs
that are long outstanding
It is required that the
management accountant must
check such repair costs that have
remained due from quite a long
time (Carcello, 2012). With such
test control, the company can get
rid of this risk and can also
determine the costs incurred in
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Trunkey Creek Wines
online orders and their
payment process so that a
conclusion can be
attained.
in nature are risky.
Therefore, only upon the
termination of services and
the company’s process of
raising the invoices
through the service
provider can play a key
role in reflecting the
accounts department and
management accountant’s
roles separately (Carcello,
2012).
relation to these repairs.
The accounts clerk has
been matching the
received orders with the
electronically generated
invoices. Further, such
invoices on the part of
suppliers are matched as
per the orders or
instructions of the
management accountant
who is also liable for
supervising such
payments.
In relation to alignment of
orders with that of
invoices, it must be noted
that if an order is
terminated or cancelled,
the same may encounter
various problems despite
such alignment. Therefore,
such risk is a crucial one
when it comes to
alignment of invoice with
that of the orders
(Cappelleto, 2010).
Moreover, the company
has ensured that after the
termination of alignment
process, the payment file is
then transferred or sent to
the banking department for
requisite permissions.
The management accountant
alone is liable to align the orders
with that of the invoices and in
relation to this, it must be noted
that there must be an extra
individual in the payment
department who can assist the
management accountant in
supervising the job effectively.
Furthermore, the payments
related to defective orders must
also be subtracted in the system
as early as possible to avoid
future complications (Blay,
Geiger & North, 2011).
The company has an There is no experienced The company must appoint a
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Trunkey Creek Wines
automated IT system that
can assist in managing its
entire transactions with
maximum security.
individual from the IT
department who can
oversee the matter and
instead, the management
accountant is permitted to
undertake such job that is
very risky because he may
not be aware of such
technologies and may
create extreme
complications.
professional person from the IT
field so that such segment can be
properly monitored. Further,
presence of another professional
from the accounting field can
assist in enhancing the
supervision process, thereby
resulting in minimization of
errors and frauds.
2B. Justification behind the weakness in internal control
mechanism
There are few issues in the accounts section like purchases and accounts payable that must be
addressed as soon as possible.
Purchase
In relation to purchase, the first weakness is that there is no checking of the stores file and the
justification is that the purchase order is not independently checked with the goods that can
result in additional stocking in the warehouses of the company. The second weakness is that
there are no separate files made for inferior or lower-quality commodities and the
justification behind this is that the clerk has been aligning the order information and their
respective bills, and then records it in the payment file (Blay, Geiger & North, 2011).
Nonetheless, there can be few inferior goods that have not been accounted by the clerk. The
third weakness is that the company has unwilling relied upon the approved suppliers to a
large extent and the justification is that such suppliers are offered goods as per their
reputation and goodwill but various factors like changes in terms and conditions, change in
delivery time, etc are not considered.
Accounts payable
In relation to accounts payable, the first weakness is that there is no regular monitoring of
payment files and the justification behind the same is that the same must be conducted by the
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Trunkey Creek Wines
management accountant and verification once a week is not enough in nature. The second
weakness is that the company has not conducted reconciliation strategies to such account and
the justification is that the accountant has primarily relied on IT system and has failed to draw
proper reconciliations to the accounts payable ledgers (Baldwin, 2010). The last weakness is
that the higher department has not checked the payment approval process in a proper way and
the justification is that only the management accountant is responsible for approving such
payments and inform the banks later.
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Trunkey Creek Wines
Conclusion
The internal control measures of TCW have been adequately discussed through this report
and it can be seen that there are various inefficacies that has resulted in the company’s
inefficient performance when compared to the previous years. Furthermore, in the presence
of adequate risk management strategies, any company can sustain in the environment because
auditors can assist in recognizing material risks and report the same to the department for
corrective actions. Nevertheless, in relation to TCW, the company has solely relied on the
task of management accountant and not entrusted different duties to different persons. This is
a very risky factor because if there are different duties to be fulfilled, there must be proper
delegation of responsibility as well. Such reliance has created many risks for the company
and that has forced it to lag. Moreover, risk management and auditing measures have come
out to be the need of the hour because these can assist in identifying all such issues, thereby
assisting in mitigation of such material risks. Overall, this can also assist the company in
safeguarding its reputation in the market, thereby creating an opportunity to rise in the future
as well.
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