Risk Assessment Report for Auditing Treasury Wine Estates (Australia)

This report provides a comprehensive risk assessment of Treasury Wine Estates (TWE), an Australian stock exchange-listed company and a major player in the wine industry. The analysis identifies and evaluates various risk factors that could negatively impact audit planning and procedures. It examines inherent risks, such as inventory valuation complexities, discount practices, and foreign exchange transactions, and their potential for material misstatements. The report also assesses control risks, including information security, cyber threats, and customer preference changes, while analyzing the corporate governance structure, including the role of the audit committee, and evaluating engagement risks. Furthermore, it incorporates industry and organizational analysis, including financial performance metrics like revenue, profitability, and key ratios, and addresses fraud risk and related-party transactions. The report concludes with recommendations for audit procedure adjustments to ensure effective and efficient auditing, highlighting the overall effectiveness of TWE's governance and controls. This report is a great example of how to assess risk in financial statements.

Auditing & Assurance Services
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Executive summary
Main focus of this report is on identifying the risk factors that can have a negative impact on
audit planning and audit procedure. This report has identified different factors associated with
internal control risk, inherent risk and performance risk to make sure that appropriate changes
in audit procedures are need for effective and efficient auditing. On an overall analysis it can
be said that to overall governance and control of Treasury Wine Estates Limited is effective
and efficient and chances of negative impact due to inherent risk for internal control risk on
audit planning is minimum.
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Contents
Executive summary....................................................................................................................2
Introduction................................................................................................................................4
Inherent risk...............................................................................................................................5
Complex transactions.................................................................................................................7
Control risk.................................................................................................................................7
Corporate governance and audit committee...............................................................................7
Engagement risk.........................................................................................................................8
Fraud risk and related party transactions...................................................................................9
Analytical review.......................................................................................................................9
Impact on audit planning..........................................................................................................11
Recommendation......................................................................................................................11
Conclusion................................................................................................................................12
Reference..................................................................................................................................13
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Introduction
The function of auditing is very important for internal and external development of a business
organization. Conclusions made through the auditing process will help the business
organization to identify deficiencies in business operations and internal controls and prepare
strategies for improvement. The main focus of this report would be on identifying a different
inherent risk factor associated with an Australian stock exchange listed organization. In
addition to that business environment in which such business organization is operating will
also be evaluated for identifying external factors that can have a negative impact on business
operations. For this report Australian stock exchange company selected is Treasury Wine
Estate. This organization is one of the largest producers of wine in the world and it is
Australian stock exchange listed company. This organization was founded in 2011 and it has
become one of the fastest-growing business organization in this industry. Internal and
external analysis of this organization will be conducted in order to identify risk factors. The
main reason behind the occurrence of inherent risk is the complexity of business activities
that result in complex financial statement preparing the process. The external environmental
analysis will help in identifying the complex business activities that are undertaken by
Business organizations in the wine industry so that the level of inherent risk in business
organizations can be identified.
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Inherent risk
Inherent risk can be defined as the risk factor that arises due to factors other than the failure
of control. In the previous section, it identifies that the management of the company has
followed effective procedures and policies in order to maintain internal control. Therefore it
is also important to identify inherent risk factors that arise irrespective of effective and
efficient internal control procedures adopted by an organization. The main reason of inherent
risk factors is the complexity of activities undertaken by the business organization that will
result in complex preparation of financial statements (Sirois, Bédard & Bera, 2018). This can
be analysed with the help of key audit matters discussed by the auditor in an annual report.
Key audit matters are the matters for which auditor is not able to procure audit evidence due
to the complex nature of business transactions. Following are some of the inherent risk
factors that can affect reporting requirements of AASB-
Valuation of inventory- Valuation of inventory is very complex for a business organization
operating in the food and beverage industry as different methods can be used for such
valuation. Valuation of the stock is totally dependent on Estimation and judgment of the
management as the value of wine that has been kept for a long period of time inform of
harvested grapes will increase significantly (Cordoş & Fülöp, 2015). Therefore it can be said
that if the management of Treasury Wine Estates is keeping wine inform of harvested grain
for a long period of time then its value will also increase. Therefore it would be very difficult
for an auditor to examine the accuracy of inventory valuation due to lack of knowledge and
the general practice of valuation based on estimations and judgment of management. This
type of complexity will definitely increase the inherent risk factors in the preparation of
financial accounts.
For this purpose and auditor should evaluate the procedures used by management for
valuation of inventory in past financial years. The auditor is required to make sure that the
same policies and procedures are adopted over the period of time and these evaluation
practices are common in the industry.
The practice of recording discount on sale- it is the general practice in this organization to
record discount or rebate to a particular client after the inventory is reached the customer
warehouse. On the other hand sale invoice is prepared by the management at the point of
dispatch to customer warehouse from their own warehouse. Rebate and discount are recorded
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by management on the basis of historical data and past rebates provided by management to
their clients (Knechel & Salterio, 2016). This type of practice is also complex as compared to
other common practices used by Business organizations in this industry. Complexity in the
financial recording will definitely impact the inherent risk factor.
Auditor of the organization is required to analyse the accuracy of assumptions made by a
business organization with respect to discount and rebates. The auditor should also make sure
that management has recorded sales and rebate amount at the time of payment by the client
(Chambers & Odar, 2015).
Foreign exchange transaction- Complexity of recording transactions in relation to foreign
exchange can also be very complex and increases the chances of inherent risk. This
organization has been exporting a certain percentage of its total production in the global
market. Payments are made by clients in their own currency and this payment is converted by
the organization into Australian dollar. rules and regulations applied by Australian accounting
standard board on the recording of foreign exchange transactions are very complex and it is
important that management is the following these principles with accuracy (William Jr,
Glover & Prawitt, 2016). The auditor is required to ensure that all the policies and procedures
are followed effectively.
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Complex transactions
Auditors risk also increases if there is complex transactions recorded by the business
organization. There is a probability that auditor of the company would not be able to identify
material misstatements if financial statements are complex. Following are some of the
complex transactions in case of Treasury Wine Estates Limited-
Foreign exchange transactions- management is selling its product and services to customers
all across the world which increases the complex nature of financial statements due to risk of
foreign exchange (Treasury Wine Estates, 2018).
Financial assets- During the financial year under consideration management also had some
financial assets at the end of financial year which is very complex and subjective on part of
management to value and record. Complexity in valuation process will increase audit risk.
Control risk
Control risk can be defined as the risk of material misstatement due to inefficient or absence
of internal controls in a particular business organization. According to the description of
internal controls are provided by directors in director’s report it can be said that effective and
efficient internal controls are implemented by the organization. Primary function of
identifying internal control risk in the organization lies with internal audit and risk
department. Apart from effective and efficient governance, following are some of the control
risk factors identified in the process of audit-
Information security/ cyber/ fraud threat- significant amount of business operations in this
organization are dependent on information security and increasing cybercrime will definitely
require effective and efficient data security management (Christensen, Glover, Omer &
Shelley, 2016).
Changing preference of customers- Management should also implement internal controls that
helps business organization to estimate the changes in preference of customer in order to
make sure that production level is in accordance with the demand.
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Corporate governance and audit committee
Governance- Internal control can also be identified by analysing the governance structure of
the organization to identify risk factor and prepare a strategy for integration. According to the
annual report issued at the end of 2018, management of the company has developed an
internal audit and risk committee that is directly reportable to the board of directors (Mozell
& Thach, 2014). A key focus of this committee is to make sure that efficient internal controls
are applied by management to mitigate the impact of negative factors and these internal
controls are actually used in performing business activities.
Engagement risk
This type of risk arises at the time when auditor is accepting the audit engagement.
Engagement risk can be defined as the risk of auditor not understanding the scope and
objective of audit for business organization under consideration for audit. For understanding
the scope and objective of this audit management is required to undertake effective and
efficient analysis of the wine industry in Australia.
Basic Industry analysis will be undertaken for evaluating the inherent risk factors that can
create problems for Treasury Wine Estates. General statistical data in this industry will be
analysed. On the basis of the financial performance of this industry in the year 2018, it can be
said that overall revenue generated in this industry has decreased by 1% as compared to 2017
(Wine Australia, 2019). In addition to that exports made by Australian wine, the organization
has increased by 10% in financially 2018. It clearly shows that export sale in this industry is
increasing whereas the amount of decrease in the domestic sale has not been very significant
(Anderson & Aryal, 2015). On an overall analysis of revenue generated by this industry, it
can be said that there is a scope of growth and development in the future as exports sales are
increasing on a yearly basis.
Organizational analysis- Overall revenue generated by this organization has decreased from
$2534.2 million to %2496.4 million dollars (Wine Australia, 2019). Overall sales of the
organization have decreased by 1.5% to which is in accordance with the market as the
majority of sales of this organization are domestic sales. Organizational analysis is also in
accordance with the market analysis as total earnings before interest and taxes has increased
by 17% in the year 2018 as compared to 2017 irrespective of the fact that overall revenue
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generated by the organization has a decrease (Wine Australia, 2018). On the basis of this
analysis, it can be said that the internal control employed for controlling the overall cost of
operation is very effective and they are able to improve net profitability in respective of fall
in total revenue.
On the basis of this industry analysis it can be said that the engagement risk will be minimum
in this scenario. From the perspective of auditor, there are sufficient information available
with respect to environment in which Treasury Wine Estates Limited is operating (Brigham,
Ehrhardt, Nason & Gessaroli, 2016).
Fraud risk and related party transactions
According to the governance policies established by the organization the management has
prepared fraud and corruption policies. It means that management has zero tolerance
approach for corruption and corporate frauds. Auditor of the organization is also identified
different business transactions that are prone to fraud such as cash management. After
detailed investigation of visa business transaction auditor has identified that there is no risk
associated with probability of fraud in this organization.
Proper disclosures are provided by management of the company with respect to business
transactions entered into with related parties in note 30 of note to consolidated financial
statements (Treasury Wine Estates, 2018). Risk of misstatement in related party transactions
is also minimum.
Analytical review
Particular 2017 2018
Interest coverage ratio 9.24 8.72
Current ratio 2.35 2.15
Quick ratio 1.05 0.80
Receivable turnover ratio 4.66 5.14
Inventory turnover ratio 1.69 1.46
Debt to equity ratio 0.17 0.25
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Net profit ratio 11.20 14.83
Interest coverage ratio- According to this ratio management of the organization has sufficient
profits for recovering its interest on long term liabilities in both the financial year under
consideration. There is no risk associated with payments with respect to long term liability in
the organization (Robinson, Henry, Pirie & Broihahn, 2015).
Current ratio and quick ratio- These ratios helps in understanding liquidity position of a
business organization with the help of comparing quick assets and current assets with current
liabilities in the organization. This is described as short term liquidity position as identify
payment capabilities of the organization in next 12 months from the balance sheet date. In
both the financial years total current ratio is higher than 2 which shows that management has
more than sufficient current assets for making payments with respect to current liabilities.
Total quick asset is also higher than 1 in 2017 but it has decreased to 0.80 (Brigham,
Ehrhardt, Nason & Gessaroli, 2016). An overall conclusion it can be said that liquid position
of this organization is strong.
Receivable turnover ratio- Overall receivable turnover ratio is also increasing over the period
of 12 months which shows that total number of time that management has collected its
average receivables has increased in past 12 years. The risk of bad debts will decrease with
effective and efficient cash collection from customer strategy of the company.
Inventory turnover ratio- Management efficiency ratios shows efficiency of management to
sell its entire inventory in a particular accounting period. in both the financial years inventory
turnover ratio is less than to that depict that overall inventory lying at the end of financial is
very high and it will definitely increase overall cost associated with closing inventory (Cao,
Chychyla & Stewart, 2015).
Net profit ratio- net profit ratio of this organization has also improved by 30% in the financial
year 2018 which represent that a management has implemented significant internal controls
to make sure that they are able to control cost of operations.
Debt to equity ratio- One of the major concern in this business organization is its capital
structure (Nobes, 2015). Debt to equity ratio of 0.17 and 0.25 shows that majority of capital is
financed through equity sources which can be harmful from long term perspective of the
company.
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Implication on audit planning
Main focus of this report was to identify internal control risk, inherent risk and Audit risk in
order to make sure that auditor is able to identify material misstatement during the process of
audit. All of these activities are undertaken at the time of audit planning which will help in
preparing a proper strategy for conducting the process of audit. Impact on audit planning
would be as follows-
Inherent risk- After analyzing the inherent risk factors it can be said that management have
established proper governance and control over business processes and it will definitely
reduce the impact of inherent risk on audit planning.
Internal control risk- Efficiency and effectiveness of internal controls implemented by
organization are also very strong and they are expected to have minimum impact on audit
planning.
Overall audit planning
Test payment cycle- Auditor of the organization is required to focus on PPP cycle i.e.
Purchases, Payables and Payments for evaluating the controls on business transactions in
relation to credit sales. This will help in identifying the accuracy level of supply chain
management strategies adopted by the organisation.
Test of control- Auditor of the organization should be focuses on identifying the effectiveness
and efficiency of internal controls during the process of audit planning. This will help auditor
to prepare strategies to regarding sample to be selected for conducting audit procedures on
business transactions. Sample size should be larger if efficiency of controls in low.
Recommendation
According to the analytical review following are the recommendations that should be
followed by management of the company-
Management should focus on increasing the quick assets to ensure that quick ratio is at least
one for all the financial year in future.
Total inventory lying at the end of a financial year should also be reduced by decreasing the
production level in accordance with the demand of product in market.
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Management should continue with the current cost controlling strategies as profitability of the
organization has increased in 2018.
In future any capital requirement should be fulfilled with the help of external source of
financing to improve debt to equity ratio.
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Conclusion
On an overall analysis can be concluded that the external environment of Australian wine
manufacturing industry is very effective and overall revenue of this industry are expected to
increase in the future. Negative factors emitted by these industries are very limited and might
not have any significant impact on Treasury Wine Estate. According to the opinion presented
by auditor and director in annual report ending 2018, internal control procedures adopted by
the organizational effectiveness and able to mitigate any kind of negative impact on business
operations. There is some complex nature of transactions recorded by a business organization
that increases with the probability of inherent risk which is described in this report.
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Reference
Anderson, K., & Aryal, N. R. (2015). Growth and cycles in Australia’s wine industry: A
statistical compendium, 1843 to 2013. University of Adelaide Press.
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment:
Theory and Practice, Canadian Edition. Nelson Education.
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment:
Theory and Practice, Canadian Edition. Nelson Education.
Cao, M., Chychyla, R., & Stewart, T. (2015). Big Data analytics in financial statement
audits. Accounting Horizons, 29(2), 423-429.
Chambers, A. D., & Odar, M. (2015). A new vision for internal audit. Managerial Auditing
Journal, 30(1), 34-55.
Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding audit
quality: Insights from audit professionals and investors. Contemporary Accounting
Research, 33(4), 1648-1684.
Cordoş, G. S., & Fülöp, M. T. (2015). Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting & Management Information Systems/Contabilitate si
Informatica de Gestiune, 14(1).
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Mozell, M. R., & Thach, L. (2014). The impact of climate change on the global wine
industry: Challenges & solutions. Wine Economics and Policy, 3(2), 81-89.
Nobes, C. (2014). International classification of financial reporting. Routledge.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Sirois, L. P., Bédard, J., & Bera, P. (2018). The informational value of key audit matters in
the auditor's report: Evidence from an eye-tracking study. Accounting
Horizons, 32(2), 141-162.
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Treasury Wine Estates. (2018). Annual report 2017-2018. Retrievable at:
https://www.tweglobal.com/-/media/Files/Global/Annual-Reports/2018-Annual-
Report.ashx
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A
systematic approach. McGraw-Hill Education.
Wine Australia. (2018). Production, sales and inventory 2016–17. Retrievable at:
https://www.wineaustralia.com/getmedia/ad0915a4-dfb3-40b4-a556-3b08b9f61880/
Australian-Wine-Production-Sales-Inventory-Report-2016-17
Wine Australia. (2019). Production, sales and inventory 2017–18. Retrievable at:
https://www.wineaustralia.com/getmedia/735b7324-ba8d-4fbd-967a-
197d490be5e8/MI_PSI_Report_2017-18
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