Auditing Theory and Practice: Analysis of Audit Risks for TCW Company

This report provides a comprehensive analysis of auditing theory and practice, focusing on the identification and assessment of various audit risks. It begins by examining the risks associated with material misstatements, including fraud and error, and emphasizes the importance of ratio analysis in evaluating a company's financial performance. The report uses the TCW Company as a case study, analyzing specific accounts like accounts receivable, investments, marketing expenses, and property assets to identify inherent, control, and detection risks. It also delves into business risks, such as strategic, compliance, financial, operational, and reputational risks, and provides recommendations for mitigating these risks. The report includes an analysis of financial ratios like return on equity, gross margin, and debt-to-equity ratio, offering insights into TCW's financial health and operational efficiency. Overall, the report aims to provide a practical understanding of auditing principles and their application in real-world scenarios, making it a valuable resource for students studying finance and accounting.

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the Student:
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1AUDITING THEORY AND PRACTICE
Abstract
The discussion evaluates the various risk attached with the process of audit that involves issues
that is faced by the assessor at the time of the material misstatements recognition. This may take
place due to fraud or error. The approach that is most ideal is the examination the risk of the
business faced during the process of audit by measuring the key financial ratios that would
enable in obtaining fast of the organization performance evaluation. This may help in assisting
the administration to assess the pros and cons from the various initiatives and strategies can be
processed. The TCW Company in the following discussion has been found out. For the firm for
examining the competence and operational effectiveness of the internal control has been focused
upon that also complies with the assurance motives of TCW.

2AUDITING THEORY AND PRACTICE
Table of Contents
Solution to Question 1A..................................................................................................................3
Solution to Question 1B...................................................................................................................6
Solution to Question 2A................................................................................................................11
Solution to Question 2B.................................................................................................................14
List of reference.............................................................................................................................15

3AUDITING THEORY AND PRACTICE
Solution to 1A
The mechanism of ratio analysis refers to the financial statement assessment for obtaining
the financial performance company measurement in the major areas of the business. For the
current organization of Trunkey Creek wine that is chosen the accounts which are to be
examined includes investments, accounts receivables, marketing expense and property assets. In
this section, risk of audit deals is analyzed that deals with the hurdles that the auditor faces at the
time of conducting the material misstatement detection of the company (Barnier & Wright,
2017). As identified in the case study, the fraud and error are the two primary factors that lead to
misstatement. The below table would help in the examine the financial data of TCW and
evaluate the audit risks that are linked along with the recommendation are given to lessen the
risk:
Account Analysis Audit Risk Audit Steps to reduce
risk
Account Receivable The account
receivable refers to the
sum that the clients of
TCW need to pay back.
For the organization,
the ratio of accounts
receivable of wine
segment is 60.65 days
and for the segment of
beef is 36 days. It is the
Since, the company
TCW transacts their
goods on credit; the
risks that are
associated to this
account include risk of
completeness
occurrence risk and the
Existence risk.
For the existence risk
and occurrence risk, the
auditor of the company
needs to lessen the risk
and identify various
suspicious
confirmations of the
various records of
financial data . For
completeness risk, it is

4AUDITING THEORY AND PRACTICE
number of days that the
invoice of customers
are outstanding.
the auditor to examine
all the proceeds of sales
and get ability for the
transaction of the
company’s process.
Investment The investment
analysis can be done
by interest earning
ratio. In the company
of TCW in 2016 the
interest earned was
8.10 and for 2017 the
same was 7.51 that
mean that the
investment for the
company has increased
(Bradbury, Raftery &
Scott, 2018).
Additionally, the debt
equity ratio also
represents the
investment risk.
There exists the
inherent risk in the
context of material
misstatement. If risk is
high, there is a liability
to the investors who
needs payments. This
can impact the
working capital.
If auditor obtain
investment data that is
at cost or fair value
which is shown in the
financial statement of.
The auditor must also
analyze the methods for
the determination the
fair value according to
the GAAP.
Property assets The ratio of return on
production assets for
both the segments of
wine and beef of TCW
The associated risk of
the recording of the
property assets is the
correct cost based on
The auditor must reduce
the record complexity
of the assets and make
easy. This would help to

5AUDITING THEORY AND PRACTICE
is to be examined
(Manuj & Mentzer
2018). According to
the information, it is
identified that the
production returns on
asset of on beef for the
year 2017 has been
risen to -0.8 % from -
3.4 % that was in 2016.
and complexity
recording in the assets
valuation (Carson,
Fargher & Zhang,
2016).
avoid the gap in the
process of accounting
and audit. The assessor
needs to analyze if the
TCW has capitalized all
the cost of the asset
purchase and record the
various repairs and
maintenance of the
assets.
Marketing Expense The Marketing expense
percentage is the total
S/E expenses of the
firm TCW. The audited
ratio of 2017 is 17.89%
that has been increased
from 15.2% from the
year of 2016.
The risk in this context
are the, duplicate
payment risk,
understatement risk
and risk of
inappropriate vendors.
The steps to reduce
risk by the auditor is to
regularly check the
processing and records
the expenses on a timely
basis (Ritchie &
Marshall, 2015).
Solution to 1B
The business risk that is attached with the business is the risk which is identified with the
fluctuation of income of the organization. The process of ratio analysis would help in indicating
the various risks that may take place in the organization (Hillson & Murray-Webster, 2017). In
the organization of TCW the given ratio must be examined are as under:

6AUDITING THEORY AND PRACTICE
• Return on equity: The return on equity that breaks down the profitability of the
organization of TCW, in 2017 has increased 17.5 from 15.5 in 2016 (Bailey, Collins, & Abbott,
2017). For the year 2018 the expected unaudited records says that it will fall more to 10.80 in the
year 2018.
• Return on production assets of beef: The intensity of production and estimation of
assets with the total assets business is known as the return on assets. In present scenario of TCW,
percentage returns of the beef production. Increased from - 3.45 out of 2016 to 0.82 in 2017.
However, as per the unaudited records the return would rise to 1.67 in 2018.
• Return on grape and wine asset production: The return on grape and wine production
of the TCW in 2016 was 16.2 that reduced to 14.5 in the year 2017. In 2018 the unaudited record
is much less that amounts to 12.2(Bentley-Goode, Newton & Thompson, 2017).
• Gross Margin: The gross margin is the total income of TCW after reducing from the
cost of goods sold by the total sales (Louwers, et al., 2015). If the rate is high, the firm has the
ability to hold the units of sales. In TCWs the gross profit margin in 2016 was 31.76 which fell
to 14.5 in 2017; However, the gross margin decreased to 12.2 out of 2018 as per the unaudited
report.
• Marketing cost over S/A costs: The costs of marketing is the cash level that has been
with the profits from the total of administrative costs considering the end goal for increasing the
sales (Knechel & Salterio, 2016). It is an indirect cost. As per the records of 2017 and 2016 that
are audited, the marketing cost level has reduced from 2016 in 15.2 to 17.89 in 2017. In 2018 the
unaudited record amounted to 23.67.

7AUDITING THEORY AND PRACTICE
• Times interest earned: The interest earned refers to the coverage ratio that makes the
estimation of the organization capacity of the to meet payment of the debts. In the present case
the coverage ratio is less than one that means that, the firm not getting sufficient cash from the
various operations of the business (Farooq & de Villiers, 2017). The interest that is earned is
reducing in the organization of TCW that represents to that there not much generation of cash. In
2017 the interest earned was 7.51; in 2016 was 8.10 and the expected and unaudited interest for
2018 was 6.67.
• Days in inventory (wine): The days sales are represented by the days for the sale of the
inventories at the determined period. For this case, the inventory refers to the production of the
wine. For wine, the days of inventory for 2016 was 460, in 2017 was 423 and in case of the
unaudited record the number of days is 367.
• Days in accounts receivables (wine): The accounts receivables days is the number of
days that the company of TCW would need to get the installments of their sales. If numbers of
days are more, it reflects a issue in cash generation. In case there is lesser number of days, it
reflects that there is a strict policy of credit that may reduce the revenue (Cohen & Simnett,
2014). Here, the goods is the wine production of TCW. The receivable of days for wine was
53.24 in 2016, 60.65 in the year 2017 and the unaudited record are 50.2.
• Days in accounts receivables (beef): The account receivable days for beef in 2016 was
24, in 2017 was 36 and the unaudited record are 57 in the year 2018.
• Current ratio: The current ratio refers is the liquidity ratio estimates the capacity of the
firm to accommodate both long term and short term liabilities. It can be calculated by division of
the total of liabilities and assets of the organization. In the given case the aggregate assers to both

8AUDITING THEORY AND PRACTICE
noncurrent and current assets of the current and of TCW. The current ratio is 2.66 for the year
2016, 2.54 in the year 2017 and the unaudited record is 2.80.
• Acid test ratio: The acid -test ratio or quick ratio is the assets that can be converted into
cash without changing the value (Junior, Best & Cotter, 2014). The acid test ratio was 1.20 in
2016, 1.15 in 2017 and the unaudited record is expected to be 1.18.
• Debts to equity ratio: The debt to equity ratio refers to the financial ratio that shows the
financial ratios that demonstrates the extent of shareholders debt and equity to finance the asset
with respect to the equity value (Sadgrove, 2016). Debt to equity ratio was 0.67 in 2016, 0.63 for
the year 2017 and the unaudited record is 0.54.
It can be observed from the above analysis, the various types of risks have been
identified, and Business risk is the probability of not obtaining the investment return. In case of
the company of TCW the identified risks are:
Strategic risks: The strategic risk is the operating risk within a specific industry at a particular
time that can take place from change in technology or clients preference change (Cohen,
Krishnamoorthy & Wright, 2017). For TCW, they deal with both beef and wine; therefore, risk
linked with strategy is much less. Moreover, there has been installation of new IT system that
may give rise to some risk.
Risk of compliance: The risk that are related with compliance to regulations of bureaucratic or
authoritative that the firm may pursue. For the TCW as there is a sound internal control, the
identified compliance risk is less.

9AUDITING THEORY AND PRACTICE
Financial risk: It is the monetary risk linked with the loss is known as financial risk. In the
present case of TCW, there is large financial risk because of the implications of new framework
of IT. Apart from the that since there are three of the segments of grapes, wines and beef they
may experience of loss of money.
Operational Risks: The operational risk is the risk that takes place due to the internal
failures that can be a result of the various business activities. The risk may also take place
due to the external events that may takes place suddenly. As in the company TCW operates
in both wine and beef the operational risk is more.
Risk of reputations: The risk of reputation refers to that risk that takes place due to the
anticipation of loss the reputation of the business or negative fame. The risk of reputation is
high in the company of TCW as it works in excess of two sections.
Solution to 2A
The Internal control refers to the objectives confirmation of company in the adequacy and
proficiency in operations. It is a systematic assurance financial reporting arrangement which is to
be consistent with the laws, strategies and controls.
In TCW the Internal control is the process that is impacted by the organization
management are the group of trustees and various people who gives sensible confirmation for
the attainment of the goals of the –
• Compliance with the applicable controls and laws
• The various effectiveness and efficiency of the tasks

10AUDITING THEORY AND PRACTICE
• Financial reporting reliability
In the TCW company the inward control components are taken in hand as per the of the standard
rules, if –
• There is a approval of the appropriate methods has been taken for the costs of capital
• Proper insurance scope has been provided for the assets
• The evaluation of depreciation is conducted efficiently to every period
• The salvage value and useful life have been determined properly
In the enterprise TCW, the organization considers the business profitability not just as
the function of revenue but also for sound resources management. The identified internal
controls are:
Effective control Risk alleviated Test of Control
Controlling environment The identified risks while
control of the TCW
environment is the reputational
risk and the operational risk.
The test of control is the moral
value check, managerial skills,
employees working honesty
and the company direction.

11AUDITING THEORY AND PRACTICE
Risk assessment In this control system, the
risks that have to be examined
are compliance risk and
financial risk. The assessment
risk would help in the
prediction of the risk
beforehand.
The assessment of risk deals
with the setting up of the
effective control over the
various external and internal
control of the risk associated
of the chosen company of
TCW.
Communication and
Information
The risk that is identified the
reputation risk and financial
risk. The effective control of
communication and
information makes the TCW
alert to take decisions in ration
to the stakeholders.
The relevant information that
is and needs to be taken for the
achievement of the
management goals. It is the
verifying process of the data in
relation with stakeholders.
Monitoring The operational risk and
financial risk are identified in
this control test (Simnett,
Carson & Vanstraelen, 2016).
It is the method of compliance
with the various regulations,
rules and laws.
It is the effectiveness control is
to protect the issues that may
take place in future for lack in
the efficient control.
Physical control Internal controls of physical
control faces two types of
risks. The first risk is physical
damage risk, theft of loss and
assets (Arens, Elder, Beasley
The physical control involves
in identification of the fixed
asset and verification of that
whether the administration
reviews periodically the asset