Audit Report to Managing Partner, John Richards - Finance Report

This audit report, prepared for the managing partner of Miller Yates Howarth (MYH), analyzes the audit plan for Trunkey Creek Wines (TCW) Limited, a significant client involved in wine production, cattle farming, and investments. The report examines the audit risks associated with key accounts including accounts receivable, investments, property assets, and marketing expenses, detailing potential misstatements and outlining audit procedures to mitigate these risks. Furthermore, the report identifies and discusses various business risks faced by TCW Limited, such as strategic, compliance, operational, financial, technological, and human risks, providing a comprehensive overview of the challenges and potential impacts on the company's financial performance and operations. The analysis includes specific examples and potential consequences for each risk category, offering a thorough assessment of the company's overall risk profile.

Running head: AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 1
Audit Report to Managing Partner, John Richards
Name
Professor
Institution
Date
Introduction

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 2
As the manager in the audit division at Miller Yates Howarth (MYH), I have gathered
information for the primary purpose of preparing the audit plan of Trunkey Creek Wines (TCW)
Limited, which is one of our most significant and longstanding business clients. The primary
activities carried out by Trunkey Creek Wines (TCW) Limited are growing of grapes for
production of wine, production of beef cattle, investment of surplus funds and production as
well as distribution of white, red and sparkling wines. This report seeks to analyze and discuss
various areas and accounts with regard to the audit of Trunkey Creek Wines (TCW) Limited.
These are investments, accounts receivable, marketing expense and property assets.
Question 1A
Audit risk refers to the risk of the possibility that the financial statements of a company
may still be misstated materially, even though it has been stated in the audit opinion that the
financial statements and financial information presented therein are free from any material
misstatements and errors (Institute of Chartered Accountants in England and Wales, 2010).
Upon analyzing the ratios and additional information that is associated with the four accounts
listed above, there are various potential audit risks which have been identified with regard to
each account. The table below gives an explanation of each of these audit risks, as well as audit
steps and procedures that need to be undertaken for reducing the audit risks.
Account Analysis Audit Risk Audit Steps or
Procedures
1. Account
Receivable
The ratios that are
directly or
indirectly related
There is a risk of
existence of the
account receivable
With regard to risk of
existence of account
receivable, the auditor

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 3
to accounts
receivable are:
i. Days in
accounts
receivabl
e – wine
ii. Days in
accounts
receivabl
e – beef
iii. Current
ratio
iv. Quick
asset ratio
for Trunkey Creek
Wines (TCW)
Limited. This is
because the
company’s accounts
receivable are
composed of many
smaller amounts
which are
aggregated to arrive
at the account
receivable’s figure
or amount.
Additionally, the
company’s accounts
receivable are at a
significant risk of
completeness since
the company may
not have recorded all
the account
receivables.
Besides, there is a
must consider sending
confirmations to the
various customers of
Trunkey Creek Wines
(TCW) Limited with a
view to verifying the
terms of payment as
well as the debt’s
validity. These
confirmations must be
sent by the auditor under
his control and should
make a follow up on any
confirmations which
may not be returned or
may seem suspicious.
For those confirmations
which remain
unreturned, the auditor
will need to carry out
alternative audit
procedures such as
phone or fax

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 4
risk of valuation and
allocation of account
receivable. This is
because Trunkey
Creek Wines (TCW)
Limited should hold
the account
receivables as net
realizable value.
There is a potential
risk that the
company has not
properly estimated
the collectability of
the receivables and
may not have
reduced the balance
by an allowance for
doubtful accounts.
correspondence as well
as examining subsequent
cash receipts of the
company.
With regard to
completeness, the
auditor must look at
transactions of Trunkey
Creek Wines (TCW)
Limited around the cut
off dates of its operating
period, since he cannot
test the records of the
company for what is not
there. The risk of
completeness of
accounts receivables is
reduced by making an
assessment of the
company’s sales process
and confirming that the
company is able to
process transactions in

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 5
the period of operation.
With regard to valuation
and allocation, the
auditor must consider
determining and
evaluating whether
Trunkey Creek Wines
(TCW) Limited uses a
reasonable methodology
for estimating allowance
for doubtful accounts
and he must also carry
out an audit of the
underlying information
which is used in making
the accounting estimate.
2. Investments The ratios that are
directly or
indirectly related
to investments
are:
i. Return
on
The main audit risk
related to
investments is
existence since
Trunkey Creek
Wines (TCW)
Limited owns
There are several audit
procedures that should
be performed by the
auditor in an effort to
reduce audit risks
associated with
investments. For

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 6
equity
ii. Net
profit
margin
iii. Debt
to
equity
numerous
investments which
need to be verified
by the auditor.
Additionally, there is
a risk of
completeness of
investments since
these may not be
recorded in the
books of Trunkey
Creek Wines (TCW)
Limited in correct
amounts.
instance, regarding
existence assertion risks,
the auditor must
consider requesting a
confirmation from the
custodians used by the
company for
safeguarding the
securities. The
confirmation must seek
to address the types of
investments and
securities owned by
Trunkey Creek Wines
(TCW) Limited. The
auditor must also
examine physically the
investments of Trunkey
Creek Wines (TCW)
Limited if the company
maintains custody of its
securities.
With regard to

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 7
completeness, the
auditor must consider
confirming whether the
company has properly
recorded the amount of
its investments in its
financial records.
Furthermore, he must
ensure that dividend and
interest related to
investments is recorded
in the financial
statements of Trunkey
Creek Wines (TCW)
Limited as revenue.
3. Property
Assets
The ratios which
are directly or
indirectly related
to property assets
include:
i. Return
on
beef
Existence,
completeness and
valuation or
allocation are the
main audit risk
assertions that are
related to property
assets with regard to
With regard to risk of
existence of property
assets, the auditor must
consider physically
examining the various
production with a view
to ascertaining and
confirming that the

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 8
produc
tion
assets
ii. Return
on
grape
and
wine
produc
tion
assets
Trunkey Creek
Wines (TCW)
Limited. This is
because the
company has several
production sections
including beef
production and
production of grapes
and wine.
The assertion risk of
valuation and
completeness of
property assets may
arise if Trunkey
Creek Wines (TCW)
Limited does not
correctly record its
property assets in its
financial records.
property assets actually
exist.
With regard to
completeness, the
auditor must look at the
financial records of
Trunkey Creek Wines
(TCW) Limited for
ascertaining what has
not been recorded.
With regard to valuation
and allocation, the
auditor must consider
evaluating whether
Trunkey Creek Wines
(TCW) Limited values
its property assets at
lower of cost or net
realizable value. He
must also examine the
underlying information
which is used in making
valuing the assets.

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 9
4. Marketing
Expense
The ratio which is
directly or
indirectly related
to marketing
expense is
marketing
expense
percentage of
total S & A
expenses.
The main audit risk
related to marketing
expense is existence,
since Trunkey Creek
Wines (TCW)
Limited may have
included amounts of
expenses that were
not actually incurred.
The auditor must review
the marketing expenses
of Trunkey Creek Wines
(TCW) Limited in order
to ensure that were
actually incurred and
they have been recorded
appropriately. He should
examine carefully
vouchers related to
expenses of marketing
activities.
Question 1B
Business risk refers to the likelihood that a company will not achieve its goals and
objectives, and may not generate the desired financial results. Business risk is influenced by
factors such as price per unit, volume of sales, cost of inputs, competition, government
regulations and the overall economic climate (Cosserat & Rodda, 2009). After analyzing the
ratios and additional information, it has been noted that there are several business risks faced by
Trunkey Creek Wines (TCW) Limited. These are discussed below.
a. Strategic Risk
Trunkey Creek Wines (TCW) Limited faces the risk of its strategies becoming less
effective. This may cause the company to struggle in order to be able to reach its

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 10
objectives and set goals. This may occur if the company’s implementation does not
proceed according to its original plan or model (Wells, 2014). For instance, Trunkey
Creek Wines (TCW) Limited is in the process developing and implementing a new
Information Technology system. Although the financial controller is happy and satisfied
with the functionality of the system, there is a possibility that the system will develop
issues in future, which may hinder it from performing the expected roles thus bringing
consequential inconveniences to the company. This may adversely affect the financial
performance of Trunkey Creek Wines (TCW) Limited (Gay & Simnett, 2018).
b. Compliance Risk
This refers to the risk that arise in industries which are highly regulated. Trunkey Creek
Wines (TCW) Limited partly operates in the wine industry which is very highly
regulated. For instance, the company must ensure adherence to the three tier distribution
system which requires the manufacturing company to sell wine products to a wholesaler
or retailer, who in turn makes a sale to the end consumer or customer (Russell & ASQ
Quality Audit Division, 2013). The manufacturer is not required to sell wine directly to
the final consumer. With regard to this, there is a risk that Trunkey Creek Wines (TCW)
Limited may fail to understand these requirements and become non-compliant to the
state specific laws of distribution, which may cause it to pay heavy penalties and fines
(Fiedler & Fiedler, 2010).
c. Operational risk
Trunkey Creek Wines (TCW) Limited also faces operational risk. This is because the
company’s day to day operations may be curtailed materially or stopped, due to various
factors which may be uncontrollable to some extent (Reding & Institute of Internal

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 11
Auditors Research Foundation, 2013). For instance, the substantial increase in
temperature may stop the operations of Trunkey Creek Wines (TCW) Limited in its
production of sparkling wine. Due to this, the company has to look for and purchase land
in localities with a cooler climate (Fiedler & Brenton Andrew, 2010).
d. Financial Risk
Since Trunkey Creek Wines (TCW) Limited sells its products both locally and
internationally, it faces a risk of lower profits that may result from significant
fluctuations in the financial markets and foreign exchange rates (Maroun, 2018). These
risks may cause Trunkey Creek Wines (TCW) Limited to lose income or even generate
negative cash flows, which can even lead to closure of the company due to insolvency
(Verschoor, 2008). In addition to this, Trunkey Creek Wines (TCW) Limited partly uses
debt to finance its operations. For instance, the company is funding the land purchase in
part from medium term bank loans. This is risky for the company since it is liable for
paying the cost of borrowing, which significantly reduces its net operating profit due to
the high interest expense (Hay, 2014).
e. Technological Risk
Trunkey Creek Wines (TCW) Limited relies much on computerized systems of internal
controls. The company therefore faces a risk since such controls may not be effective in
the event that the system fail to work or become obsolete in future. This may be caused
by possible hardware and software failures as well as malware, which may
inconvenience the company’s operations and efficiency consequentially (Hanson &
Hanson, 2008).
f. Human Risks

AUDIT REPORT TO MANAGING PARTNER, JOHN RICHARDS 12
There are various risks faced by Trunkey Creek Wines (TCW) Limited which are
created by its employees (Key, Riddle & Institute of Internal Auditors, 2012). For
instance, the behavior of the company’s staff in the work place may be risky if they
become non-compliant or incompetent. Additionally, Trunkey Creek Wines (TCW)
Limited may be impacted by the behavior of its employees outside the work place (Jubb,
2010). For instance, if the employees engage in misuse of drugs and substances, they
may not be able to work efficiently as their judgement may be impaired. Another issue
which may cause human risk is the fact that the board of directors of Trunkey Creek
Wines (TCW) Limited is comprised of Mrs. Claire Harewood and Mr. Stephen
Harewood among other members. However, there is a potential conflict of interest since
these two members are related as Stephen is Claire’s son (Pickett, 2013). Furthermore,
there is no segregation of duties since the management accountant is also the controller
and the administrator of the Information Technology function, which has not been
regarded by the company as a full time job (Hayes, Gortemaker & Wallage, 2014).
g. Physical Risks
Like any other business, Trunkey Creek Wines (TCW) Limited faces physical business
risks on its assets, buildings and employees. Such risks include as fire, theft, water
damage and vandalism (Lessambo, 2018). This causes the company to incur costs
related to repairs and replacement. The company may also face legal charges if it is
found liable for the damages to some extent (Takanen, Demott & Miller, 2008).
h. Competitive Risk
Trunkey Creek Wines (TCW) Limited faces the risk that the competition from its peers
in the industry may prevent it from gaining a competitive edge and may consequently