Auditing & Assurance: Financial Risk Analysis of Trunkey Creek Wines

This report provides a detailed analysis of audit risks encountered by auditors during the detection of material misstatements in Trunkey Creek Wines' (TCW) financial statements. It assesses risks associated with various accounts, including accounts receivables, investments, property assets, and marketing expenditure, using financial ratios such as gearing ratio, profitability ratio, efficiency ratio, solvency ratio, and liquidity ratio. The analysis identifies specific risks related to completeness, validity, and valuation of assets, as well as potential issues with internal control mechanisms. The report also discusses the impact of external factors on TCW's ability to achieve its objectives and suggests steps to mitigate identified risks. Furthermore, weaknesses in the firm's internal control mechanisms related to accounts payable and purchase accounts are identified and analyzed, offering insights for improved audit planning and risk management. Desklib provides access to similar solved assignments and past papers for students.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the University
Name of the student
Authors note

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AUDITING AND ASSURANCE
Executive summary
The report elucidates illustratively regarding risk of audit that essentially are encountered by
auditors while they engage in the process of detection of material misstatements in financial
assertions. It can be hereby mentioned that the misstatements might perhaps happen owing to
intentional (that is the deliberate mistakes) otherwise unintentional errors. This piece at hand
presents a critical analysis of different risks associated to operations of enterprises by
undertaken important financial ratio. Report replicate risks of undertaking operations of a
business by TCW that is necessarily attributable to different internal as well as external
factors. Outcomes generated from analysis of current case under consideration can aid in
effectual audit planning. The use of key financial ratio can help in understanding relative
magnitude of two different numerical values derived from financial statements of business
enterprises. Essentially, there are many standard financial ratio that are used in this study to
evaluate the overall financial health of a firm. This analysis helps in comprehension of
weaknesses of business enterprise under deliberation and thereby helps the management of
the firm to devise and develop strategies and support implementation of the devised strategies
and initiatives.

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AUDITING AND ASSURANCE
Table of Contents
Introduction:...............................................................................................................................3
Task 1A......................................................................................................................................4
Task 1B:...................................................................................................................................10
Task 2A:...................................................................................................................................12
Task 2B:...................................................................................................................................15
Conclusion:..............................................................................................................................17
References................................................................................................................................18
Introduction:
The current report under consideration is used to elucidate in detail risks of audit that
are faced by the audit clients of particular Miller Yates Howarth (also simply referred to as
MYH) that is in essence Trunkey Creek Wines Limited (TCW). In essence, this kind of risks

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AUDITING AND ASSURANCE
are necessarily attributable to different fraud actions otherwise activities that are undertaken
by the assessors. However, there are specific areas that auditors take into consideration for
analysis namely, investments made, receivables of the firm, property assets as well as
marketing expenditure. It is crucial for assessors to plan engagement of audit by means of
extraction of requisite information by assessing perpetual notes in the permanent file and
following a specific module and mechanism of internal control for the business enterprise.
Analysis of risks of audit associated to particular accounts are carried out by enumeration of
pertinent financial ratios and based on the outcomes the risks are detected and steps are
outlined for lessening the detected risks. The following part of the report elucidates in detail
about evaluation of systems of internal control mechanisms and detects diverse measures of
alleviation of identified risks. Moreover, weaknesses of the firm’s mechanism of internal
control linked to accounts payable and accounts for purchase are identified and analysed in
the present report.
Discussion in detail
Task 1A
The study at hand intends to provide explanation for risks of audit related to different
accounts of the firm TCW by means of evaluating important financial ratios namely gearing
ratio, profitability ratio, efficiency ratio, solvency ratio as well as liquidity ratio. In this
regard, it can be hereby mentioned that pecuniary statements can be assessed effectually by
means of enumeration of the pertinent ratios that aids the evaluator in comprehension of
financial health and financial condition of the enterprise (Kellenberg & Levinson, 2016).
According to the given case study, analysis of diverse accounts of TCW is assessed by means
of key ratios. In essence, the planning of audit for the present case reflects the fact the auditor
would encounter material misstatements whilst assessment of the accounts of the firm. It is

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AUDITING AND ASSURANCE
for this reason, the auditors are delegated with the responsibility of recognition of diverse
risks and consequently suggesting different steps of elimination of identified risks. In
essence, the key components of risks of audit are intrinsic difficulty in the process of
detection of these kinds of risks due to characteristics of scam an fraud. Nevertheless, the
process of execution of effectual internal control might assist in the process of decreasing
audit risk ensuing from incidences of fraud (Knechel & Salterio, 2016). Therefore, it is
necessary for auditors to carry out planning and implementation of audit with due immense
care and by using skills and maintaining professional scepticism at the time of planning and
undertaking the processes of audit.
The table below mentions different accounts analysed, analysis of the accounts,
specific risks of audit attached to the said accounts and the steps that need to be undertaken
for reduction of risks of audit.
Account Analysis Audit risk Audit steps to reduce
risk
Accounts receivables Accounts
receivable refers to the
money that an
enterprise has the right
to get as it had
delivered the clients
with the ordered
goods/services. As per
the case study, it can be
said that accounts
receivables (for
production of wine)
Analysis of the case
study reveals the fact
that TCW undertakes
marketing of their own
products on credit
terms. Therefore, the
credit system attaches
substantial risks on
disbursements carried
out by the clients. In
essence, it can be
hereby mentioned that
Based on results of the
case study it can be
said that accounts
receivables (in terms of
days) are increasing for
the section of beef
production of the
corporation. Therefore,
the receivables of the
firm need to be
properly reviewed on a
regular basis and need

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calculated is recorded
to be at 6.65, while the
accounts receivables
figure of the firm for
beef production
segment is registered to
be 36. On the whole,
the requisite number of
days of outstanding
invoices of customers
is reflected by the said
numbers (Kokina &
Davenport, 2017).
Analysis of the figures
of accounts receivables
ratio reveals that the
value for the same has
declined for wine,
indicating increase in
efficiency of the firm.
On the other hand, this
ratio is said to have
increased for the
segment of beef,
indicating an
unfavorable financial
situation (signifying
that the firm requires
there subsists certain
amount of risk linked
to completeness of the
firm (Krahel & Titera,
2015). Fundamentally,
this also reflects risks
of firms associated to
essentially validity. As
such, risks associated
to particularly
completeness indicates
that accounts of the
business enterprise
may perhaps not
register and carry out
documentation and
appropriate recording
of firm’s accounts
correctly.
to be discussed with
TCW’s management.
Also, any kind of
allowance particularly
for doubtful debt
provisions needs to be
undertaken without any
kind of validation by
upper echelons of
management (Lisic et
al., 2015).
Furthermore, the
systems of sanctioning
of credit to clients also
need to be assessed in a
proper manner on a
regular basis.

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AUDITING AND ASSURANCE
higher number of days
for collecting the
outstanding amount
that they need to
receive for the
purchases made by
their clients).
Investments On the whole, the
efficacies of investment
of the business
enterprises can be
analysed by proper
enumeration of total
times of interest that is
acquired by any
specific investment
(Louwers et al.,
2015). . As per the
results presented in the
given case study, it can
be said that time
interest acquired for the
firm TCW has
decreased from the
level 8.1 during the
period 2016 to roughly
7.5 during the period
Fundamentally, it is
necessary for sponsors
to make payments for
investment actions in a
planned way in case if
the risk levels related
to the actions of
investment is high
(Mala & Chand, 2015).
Essentially, the
working capital of the
firm shall be influenced
by the overall risk
related to investments
carried out.
In particular, it is
necessary for assessors
to analyze investments
undertaken by the firm
TCW. It is important
for auditors to
understand whether the
firm is undertaking any
kind of unusual
investment action that
may perhaps have
lessened overall
interest earned by the
company (Simkin et
al., 2018). In essence,
investments have the
need to be assessed by
the administration as a
specific part of firm’s

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AUDITING AND ASSURANCE
2017. operations.
Property assets The situation in the
arena of investment can
be analysed by the
enumeration of specific
ratios that detected total
number of times that
corporations earn out of
the investment actions
undertaken by them
(Trotman et al., 2015).
Based on the results
provided in the case
study, it can be hereby
stated that there is
enhancement in return
generated particularly
on equity for different
audited pecuniary
assertions.
Furthermore, return
earned by TCW out of
segment of beef
production is said to
have augmented. In
addition to this, return
earned out of the
It can be hereby
mentioned that there
are risks associated to
documentation of
property assets of the
business concern TCW
and difficulties related
to asset valuation. In
essence, the risks of
audit related to
property assets also can
be associated to
specific mechanisms
that are utilized for
depreciation
calculation of the assets
(Weirich et al., 2017).
Owing to improper
process of depreciation
charging the amount of
depreciation recorded
in the financial
statements of the firm
might be wrong.
Particularly, there can
be incorrect process of
It is vital on the part of
the auditors to
undertake analysis of
effectiveness and
control mechanisms. In
this connection, it can
be said that
depreciation need to be
assessed for economic
actions along with their
consistency (Abbott et
al., 2016). Essentially,
there is necessity for
regular assessment of
accounts ledgers along
with journals for
particularly firm
TCW’s property assets.
As such, the clientele
of the firm need to be
enquired regarding any
kind of assets that may
have been removed.
However, for the
purpose of
ascertainment of

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AUDITING AND ASSURANCE
segment of wine as
well as grapes
production is said to
have enhanced during
the period 2017.
valuation of assets and
any incorrect process
of registration (Aziz et
al., 015). Moreover,
there may possibly be
wrong calculation of
firm’s gains/losses on
revaluation of assets.
Analysis and asset
exploration might
perhaps be overstated
that again might show
the way to wrong
representation of data
subsistence of firm’s
property assets,
evaluator needs to
assess documents of
acquirements.
Marketing expenses The marketing
expenditure of the
business concern can
be expressed as a
specific percentage of
the entire amount of
expends enhanced from
the level of 15.2 during
the period 2016 to
approximately 17.9
during the period 2017.
Essentially, this
enhancement in the
It can be hereby
mentioned that there
might perhaps not be
sufficient disclosures
associated to linked
transactions of parties.
The data associated to
this kind of activities
might also be
improperly presented
for developing
situations that can alter
It is crucial for
assessors to undertake
thorough analysis of
different marketing
actions and
substantiate their
registration in the
firm’s files. In essence,
there need to critical
analysis of different
expenditures linked to
marketing actions

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AUDITING AND ASSURANCE
overall percentage
indicates towards the
fact that marketing
expends of the firm
TCW has risen in the
current year as
compared to the year
ago period. The actions
of marketing are
essentially dispersed
throughout the business
concern (Bell et al.,
2015).
stakeholder’s insight. (Boyle et al., 2015).
Task 1B:
As suggested by Byrnes et al. (2018), risks of business indicate towards those risks
that are linked to the fact that there can be negative changeability on the expected loss/gain.
Particularly, there are diverse facets that exert influence on risks of business of the
corporation. Based on analysis of the current case, it can be hereby mentioned that earnings
of TCW were stable to certain extent for quite some years. Further, audit risks that have been
evaluated shows that there might be several external factors that may threaten overall
capability of the firm to accomplish the firm’s objectives (Carson et al., 2016).
Return earned on production of assets (particularly wine and grape)

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AUDITING AND ASSURANCE
Return earned by the firm on both wine as well as grape production: The return
earned from production of two different segments namely beef as well wine is said to have
decreased on a consistent basis. In essence, it can be hereby observed that the return earned
on these items has declined to the level of 14.5 during the period 2016 in comparison to the
figure 16 registered in 2015. This decrease in value reflects that assets have not been
appropriately put to use effectively for the purpose of production. Moreover, this decrease
can also be due to different external facets (Chen et al., 2014).
Accounts Receivables (in terms of days) for the segment of beef production:
Based on the calculations presented in the table it can be hereby stated that there is
stable enhancement in overall number of days associated to accounts receivables particularly
for segment of production of beef. In addition to this, accounts receivables presented in terms
of days has augmented from the level 24 recorded in financial year 2016 to around 36
registered in the financial year 2017. Further, the same is approximated to rise to the level of
57 in the financial year 2018. In essence, this signifies the fact that the time taken by the firm
TCW to collect the amount owed from clientele has augmented substantially (Cohen et al.,
2017).
Analysis of gearing (that is debt-to-equity ratio) of TCW:
The enumerated figure on debt to equity ratio is observed to be increasing. This
indicates towards the fact that overall fraction of debt possessed by the firm TCW in
association to firm’s assets has decreased (Farooq & de Villiers, 2017). Essentially, debt –to-
equity ratio has lessened to approximately 0.63 in financial year 2017 in comparison to the
year ago period. In essence, this decrease signifies the fact that financial leverage of the firm
TCW has declined and thus the related risk of business has lessened.

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AUDITING AND ASSURANCE
Analysis of gross margin of the firm TCW:
It can be hereby witnessed that gross margin of the firm TCW has decreased to
approximately 30 during 2017 in comparison to the figure of 31.7 recorded during the year
ago period. Essentially, this kind of reduction in overall gross margin reflects that the
corporation has the potency to retain higher amount out of sales generated (Knechel &
Salterio, 2016).
Analysis of time interest earned of the firm TCW:
The interest coverage ratio reflects overall time that is taken by the business concern
to pay off for firm’s assets. Based on the figures presented in the case study, it can be hereby
witnessed that interest coverage is lower than 1 that replicates that operating actions of
corporations do not create adequate cash to pay for different supplementary business
operations (Kokina & Davenport, 2017). In essence, this decline in income reflects that
earnings of the firm in cash is low and has declined all through the mentioned period.
Task 2A:
The current segment reflects the fact that effectual system of internal control of the
firm TCW is recognized with test of specific control for different systems of control.
Louwers et al. (2015) suggests that there are diverse elements of internal system of control
that necessarily get influenced by the administration of the enterprise. The table presented
below explains in detail about the system of internal control and diverse tests of control along
with risks that are eliminated.
Effective control Risk alleviated Test of control
Computerized system of
ordering
This can assist in the process of
generation of adequate and at
the same time complete records
Assessors have the need to
observe the process of
preparation as well as