Treasury Wine Estates Limited Audit Plan for Year Ended 2017

This report presents a detailed audit plan for Treasury Wine Estates Limited (TWE) for the year ended June 30, 2017. It begins with a business risk assessment, evaluating entity-level, industry-level, and economic risks that could impact TWE's strategies. The report analyzes TWE's financial performance through a preliminary analytical review, including ratio and trend analyses of key financial metrics like profitability, liquidity, and solvency. An inherent risk assessment is conducted, with a specific focus on fraud risks. The report uses data from 2015-2017 to assess the company's performance. The analysis covers revenue, cost of sales, gross profit, operating expenses, and net profit before tax, providing insights into TWE's financial health and potential areas of concern. The report highlights key financial ratios, trend analysis, and interpretations. It also discusses the use of experts in specific technical areas of the audit, such as business planning and impairment assessments.

TREASURY WINE ESTATES LIMITED AUDIT PLAN
Audit Planning Memorandum Date:
Client name: Treasury Wine Estates Limited Prepared by:
Year ended: 30 June 2017 Reviewed by:
1.0 Business Risk Assessment
1.1 Summary of Client Background Information
 Treasury Wine Estates Limited is a global winemaking company founded in 2011. It was formerly operational as a division of the Foster’s Group
and TWE became an officially listed company as the Fosters group split its wine and brewing companies. It is one of the largest publicly listed
wine companies.
 It has its headquarters in Melbourne, Australia and has distribution business across the world. The business is spread across four major
locations which include Asia, Europe, America and Australia and New Zealand.
 The brands dealt with by TWE are different across countries based upon the tastes and preferences of the respective regions. Thus it has to its
list a diverse portfolio of outstanding wine brands with wine sales in more than 100 countries across the world.
 It employs approximately 3,400 winemakers and viticulturists including marketing, sales and support staff around the four continents.
 TWE is viewed as a high performing company with a consistent performance and enhancing sustainability and value addition. Due to its
constant innovations, it is also viewed as the fastest growing company.
1.2 Business Risks – Entity Level
 There are various risks that could have an impact on the achievement of TWE’s strategies. The threats of business survival in wine industry are
numerous. Based on the materiality, a few risks are discussed in this report (Matthew, 2015).
 Constrained grape supply is one such risk. To meet the ever growing demand, TWE is faced with the challenge of restricted availability of
grapes. This is largely dependent on the climatic conditions, agricultural factors such as pests, bad weather conditions, water scarcity,
competing land use and biodiversity loss. Thus TWE is unable to fulfil its demand. Apart from this, grapes on the vine might suffer from smoke
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taint and might get damaged due to collision or overturn.
 Business is dependent largely on the availability of IT infrastructure and installation of such systems and processes that will support the
ongoing growth of the business. If infrastructure is not updated, it could lead to the risk of processing inefficiencies and increasing the costs
and processing time ultimately damaging the business reputation ( Livne, 2015).
 The liabilities are pretty high as accidents and legal actions lead to lawsuits and court proceedings.
 The agricultural risks range from plant diseases, insects infestations and wildfires. Product contamination, leakages, spillages and the
accidental mixings pose the risk of damaging the wine in transit or storage. Transportation, supply chain and logistics issue could lead to delays
(Messier & Emby, 2005).
 Equipment breakdowns are also to be managed on an everyday basis.
 Heavy investment in Research and Development to innovate unique taste and formula which in turn becomes a trade secret to be
safeguarded.
1.3 Business Risks – Industry Level
 TWE is able to achieve its goals and strategies due to the manpower and retention of skilled, motivated and talented workforce. But due to the
increasing competition, it is getting increasingly difficult to retain key leaders and the inability to retain strong relations with key partners due
to mergers and takeovers can lead to a loss of business excellence, increased business risk to deliver the key initiatives (Livne, 2015).
 TWE is a brand led organization and any attempt to damage the brand either due to social media or black market trading, unsatisfactory
supplier performance, product quality and environmental issues can all lead to hamper the brand and pose a challenge for TWE’s ongoing
success. The failure to protect the existing portfolio of brands can have significant financial and reputational repercussions (Hoffelder, 2012).
 TWE’s delivery of key strategic initiatives is dependent upon the performance of its key partners like suppliers, distributors and retailers. Their
optimal performance, market concentration and power are all significant risk areas to the success of TWE’s performance (Mock et. al, 2013).
 Customer needs and preferences keep changing and the success of the business depends on how efficiently it is able to manage the same. The
current and non-current inventory is linked to the forecast customer demand especially in wine business as the product lead time is pretty
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long. The unanticipated changes in customer preferences is a business risk as it can have adverse effects on the ability of the business to
capture growth opportunities and manage the orders and supplies.
 Wine industry is a highly regulated industry which is exposed to the fulfilment and compliance with the various laws and regulations. Expansion
into new markets also means the exposure to the different regulations including taxation, manufacturing, marketing, advertising, distribution
and sale of wine. This requires the ongoing monitoring of the changes and updates in the regulations that can have a significant impact on the
nature of operations in these markets (Ghandhar & Tsahuridu, 2013).
1.4 Business Risks – Economy Level
 TWE has business connections with more than 100 countries around the world. Hence foreign exchange risks from the key offshore markets
are a significant risk area. These foreign exchange rate movements impact the earnings of TWE on a transactional and translational basis
(Moroney & Trotman, 2016).
 Information security is vital for the protection of intellectual property and private data. Due to the advancements in technology and
communication channels, increasing amounts of private data is now stored electronically due to which confidentiality is a major issue and the
increasing rate of cyber crimes necessitate robust data security measures (Gay & Simnet, 2015).
 The exposure of business operations to a number of environmental catastrophes and manmade hazards can lead to the disruption of business
and operations. Politically motivated violence can lead to the loss of key infrastructure, employees being harmed, customer dissatisfaction,
inventory shortages or loss and loss of finance and reputation (Gay & Simnet, 2015).
1.5 Use of an Expert
 The auditors are responsible to express an opinion on the financial statements but a few technical areas in every business require the use of
the services of an expert. In the case of TWE, the use of expert can be considered for the following areas:
 Adequacy of the assumptions and judgements made in relation to the key business planning prospects (Wright & Charles, 2012)
 Impairments and contingences based upon the past experience and expected future performance which an expert in the respective field can
evaluate (Ghandhar & Tsahuridu, 2013).
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2.0 Preliminary Analytical Review
2.1 Formula used
(in words)
Actual Formula 2016
(in numbers)
Actual Formula 2017
(in numbers)
Results
2016
Results
2017
Profitability
Gross profit ratio Gross Profit / Net Sales
Revenue
826 / 2232.6 965.9 / 2401.7 0.3700 0.4022
Net profit ratio Net Profit after tax / Net
Sales Revenue
173.4 / 2232.6 269.1 / 2401.7 0.0776 0.1120
Return on assets Net Profit before
Interest and Tax / Total
Assets
270.4 / 5286.5 414.3 / 5279.3 0.0511 0.0785
Return on equity Net Profit After tax /
Ordinary Shareholders’
Equity
173.4 / 3533.6 269.9 / 3528.6 0.0490 0.0765
Liquidity
Current ratio Current Assets / Current
Liabilities
1827.6 / 761.5 1835.2 / 779.3 2.4 2.35
Quick asset ratio Liquid Assets / Current
Liabilities
(Cash and cash
equivalents plus trade
(256.1+603.4) / 761.5 (240.8+606.5) / 779.3 1.13 1.09
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receivables)
Solvency
Times interest
earned
Net Profit before
Interest and Tax /
Interest expense
(finance cost)
270.4 / 34.8 414.3 / 47.0 7.77 8.81
Debt to equity ratio Total Liabilities /
Shareholders’ Equity
1717.3 / 3533.6 1670.8 / 3528.6 0.486 0.474
2.2 Trend Analysis
The historical data available on the internet and websites has been used for the below trend analysis. The base year is considered as 2015 and the data
for figures for the corresponding two years 2016 and 2017 are arrived at accordingly.
Revenue
Revenue 2015 2016 2017
$ m 1971 2343.3 2534.2
% of
base 100 118.8889 128.5743
Cost of sales
Cost of 2015 2016 2017
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Sales
$ m 1342.7 1517.3 1568.3
% of
base 100 113.0036 116.802
Gross profit
Gross
Profit 2015 2016 2017
$ m 628.3 826 965.9
% of
base 100 131.4659 153.7323
Total operating expenses
Total
Operating
Expenses 2015 2016 2017
$ m 1838.5 2072.9 2119.9
% of base 100 112.7495 115.306
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Net profit before tax
Net
Profit
before
tax 2015 2016 2017
$ m 110.9 249.2 387.2
% of
base 100 124.7069 249.1434
2.3 Interpretation of Financial Analysis
 The trend analysis indicates a constant growth in the revenue, profits and earnings.
 The Gross Profit margin has increased from 37% to 40% for the year 2017. The increase in the net sales revenue and cost of goods sold is also
in line with the increasing gross profit margin. Despite the increasing costs, TWE has been able to achieve the lower Cost of Goods sold by
taking advantage of the acquisition synergies and supply chain optimization leading to savings (English, Guthrie, Broadbent &Laughlin,
2010).
 The Net Profit margin has increased from 7% to 11%. The EBITS has grown t the rate of 36.2% and the margin expanded by 4% which points to
19% and the target margin has been achieved three years ahead of what had been planned for FY 2020.
 All the regions have delivered a double digit EBITS growth and margin acceleration which implies that the strategic initiatives undertaken by
the company are in place.
 Earnings per share are up by 50.2% which is also contributed by the acquisition of the Diageo Wine.
 The Return on Capital employed has witnessed a rock solid growth of 2.3% points to 11.6% which is the highest recorded return in the history
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of TWE.
 The return on assets has seen an increase from 5% to 7% implying a better and more efficient utilization of the assets.
 Current ratio and Quick Ratio have been almost in line with the previous year and is stronger than the industry average indicting the healthy
financial position and stability of the company (Elder, Beasley & Arens, 2010).
 The corporate costs have increased by $6.8 million and the finance costs have also increased owing to the investment in Diageo Wine and the
new IT systems.
 Despite the increasing costs, TWE has been able to deliver increasing NPAT and EPS.
 The lower balance of cash and cash equivalents is due to fact of higher capital expenditure, higher dividends released and the profit growth
across all the regions.
 Higher working capital is drive by higher inventory levels, lower payables and lower receivables reflecting better settlement terms and faster
movement of cash by TWE.
 Thus an overall review of the operating and financial performance indicates a strong growth of TWE in all the areas of operation and the
company is well poised to achieve long term growth (Elder, Beasley & Arens, 2010).
3.0 Inherent Risk Assessment
3.1 Fraud Risk
 Fraud risk is said to exist when all the three factors are present namely, opportunity to commit fraud, incentive to commit fraud and the
attitude to commit a fraud.
 In cases where the company is making ongoing losses or the management is willing to window dress the financial statements and make it look
rosy by the use of unearned revenue or customer and employee dissatisfaction can lead to the occurrence of a fraud (Dauber, 2009).
 But as TWE has displayed a strong financial growth and is also enjoying a positive reputation across regions and also on media, the instances of
committing a fraud get reduced (Dauber, 2009). There is no requirement for the management or the employees to adopt fraudulent
measures to achieve the desired results as the company is already achieving its targets by carrying out ethical business practices.
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 The strong corporate governance framework and the compliance with ASX guidelines mitigate the opportunities and incentives to commit a
fraud. Thus the overall fraud risk for TWE is low.
3.2 Going Concern Risk
 ASA 570 Paragraph 10 requires the auditor to assess the risk regarding the going concern nature of the entity. A company can be said to be at
the risk of going concern if it is having ongoing losses or high debts and poor performance and such indicators which pose a question on the
existence of the company in the future years (Cooper & Coram, 2015).
 TWE is not having any such indicators which point out towards the winding up of the company in the near foreseeable future. It is enjoying
strong profits, revenue and cash position. Thus the going concern risk is low.
3.3 Related Parties Risk
 TWE has a list of subsidiaries and the material ownership interests in the same are disclosed in Note 28 of the Annual Report. The transactions
entered into with the related parties are insignificant in amounts with the Executive and non executive directors and within the normal range
with the employees, customers and suppliers. All the transactions are carried out at an arm’s length price. These transactions include payment
of salaries and benefits and purchase of group products. Some of the directors of TWE who are also directors in these subsidiaries with whom
TWE has carried out transactions believe that they do not have the individual capacity to control or significantly influence the financial policies
of those companies (Cooper & Coram, 2015). Hence the transactions do not fall under the disclosure requirements of the Corporations Act
2001.
 Thus the related parties risk is also classified at a low range.
3.4 Inherent Risk Assessment
# Inherent Risk Accounts and Assertions Affected Reason
1 Derivative Financial Instruments Cash Flow Hedge Gain / (Loss) – Accuracy
Foreign currency translation gain / (Loss) –
Accuracy
Due to the nature of the derivative financial
instruments, the complexity and volatility
attached to the same, the chances of
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Interest and other costs - Accuracy misrepresentation becomes high. Irrespective
of the valuation and disclosure guidelines laid
down, the company should be able to meet its
obligations when it falls due. TWE is thus
exposed to liquidity risk from its core
operating activities (Christensen, 2011).
2 Interest rate risk Bank Overdraft
US Private Placement Notes
Bank Loans
Floating rate agreements including receivable
purchasing agreements, interest bearing
investments, creditors and debtors accounts
offering discounts are exposed to interest rate
risk (Cappelleto, 2010).
3 Foreign Exchange Risk Trade Receivables
Trade Payables
Borrowings
All transactions denominated in foreign
currencies and also earnings from foreign
subsidiaries, revaluation of monetary assets
and liabilities are impacted by this risk
(Christensen, 2011).
4 Credit Risk Cash and cash equivalents
Trade and other receivables
Derivative instruments
The risk of default by any party and setting
limits within which the transaction can take
place, risk of dishonour and such other
volatile risk factors exists (Cappelleto, 2010).
3.5 Inherent Risk Conclusion
 TWE is having risk mitigation policy for each type of the risk discussed above and so it is able to meet the uncertainties and contingencies to
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the extent possible. Due to the systematic set of steps undertaken, the inherent risk can be said to be at a minimum level.
4.0 Control Risk Assessment
4.1 Entity Level Internal Controls
 The Corporate Governance framework is in line with the ASX policies and recommendations.
 The directors are responsible for the implementation of the necessary internal controls that give a true and fair view of the financial
statements that is free from material misstatement.
 The Audit and Risk management committee is also responsible for carrying out the internal audit function to ensure that the controls are in
place and a majority of the directors in this committee are independent directors (Baldwin, 2010).
 Their scope of activities also includes overseeing and reviewing the working of internal controls and identification of new areas wherein
controls are required.
4.2 Control Risk Conclusion
 Thus TWE is having a strong internal control set up and hence the control risk is detected to be low.
5.0 Audit Strategy
5.1 Risk Profile
 Audit risk is a combined function of inherent risk and control risk. In the case of TWE, since inherent risk is assessed to be medium and control
risk is assesses to be low, the overall audit risk can also be judged to be at a low level (Arens, Best, Shailer & Loebbecke, 2013).
 A moderate level of detection risk also requires the collection of moderate to high level of evidence.
5.2 Audit Strategy
 The inherent risks will always exist and hence the reasonable level of preparedness of the company in terms of risk mitigation needs to be
audited. The control risk needs o be audited in terms of the extent of relance that can be placed on the existing internal controls and also the
loopholes in the same (Baldwin, 2010).
 Thus an extensive controls testing can confirm the same and if more reliance can be placed on the internal controls then less substantive
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procedures need to be undertaken. If the control risk is high, then more substantive tests need to be undertaken.
6.0 Overall Materiality
6.1 Base Selected
 For a publicly listed company like TWE, Profit before tax can be used as a base for materiality.
 The financial statements for the year 2017 have reported profit before tax of $387.2 million.
6.2 Overall Materiality
 The relevant base chosen is 5% to 10% of the profits.
 Upon application of this to the profit before tax, the materiality range is calculated between $19.36 million and $38.72 million.
 The overall materiality is set at $29 million which is just the midpoint in this range.
6.3 Relationship to Risk Assessment
 As the detection risk is at a moderate to low level, the materiality has also been set up accordingly to a low to moderate level.
Other Assurance Services
Considering the range and expansion of operations of TWE into various countries, the services of an expert are required in the areas where the audit firm might
not be able to visit physically. Such instances are confirmation of valuations of tangible and intangible assets, and ASA 620 (Using the work of auditor’s expert)
and ASA 600 (Special Considerations – Audits of Group Financial Reports) need to be complied with.
Apart from this, the statutory auditors, KPMG have also provided non audit services and been remunerated for the same. But an undertaking in the annual
report states that none of these non audit services are likely to interfere with the carrying out of the audit functions and both these areas are treated as
independent.
Reference List
Arens, A. A, Best, P. J, Shailer, G. E. P & Loebbecke, J. K. (2013) Assurance Services and Ethics in Australia, 9th ed, Australia: Pearson.
Baldwin, S. (2010) Doing a content audit or inventory. Pearson Press.
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Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ, Melbourne
Christensen, J. (2011) Good analytical research. European Accounting Review. [online]. 20(1), p. 41-51. Available from:
https://doi.org/10.1080/09638180.2011.559030 [Accessed 17 September 2018]
Cooper , B. & Coram, P. (2015) Modern Auditing & Assurance Services. 6th ed. Australia: Wiley.
Dauber, N. (2009) Wiley The Complete Guide to Auditing Standards, and Other Professional Standards for Accountants. NY: John Wiley & Sons.
Elder, J. R, Beasley S. M.& Arens A. A. (2010) Auditing and Assurance Services, Person
English, L., Guthrie, J., Broadbent, J. and Laughlin, R. (2010) Performance audit of the operational stage of long term partnerships for the private
sector provision of public services. Australian Accounting Review. [online]. 20(1), pp. 64
Gay, G. and Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Ghandar, A & Tsahuridu, E. (2013) The Auditing Handbook 2013. Australia: Pearson.
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies [online]. Available from: http://www.financepractitioner.com/auditing-
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best-practice/threats-to-auditor-independence-and-possible-remedies?full [Accessed 29 September 2018]
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527.
Available from https://doi.org/10.2308/accr-50871 [Accessed 17 September 2018]
Messier, W & Emby, C. (2005) Auditing & Assurance Services: A systematic approach. McGraw-Hill.
Mock, T. J., Bedard, J., Coram, P., Davis, S., Espahbodi, R. and Warne, R. (2013) The audit reporting model: Current research synthesis and
implications. Auditing: A Journal of Practice and Theory. [online]. 32, pp. 323-351. DOI: https://doi.org/10.2308/ajpt-50294
Moroney, R., & Trotman, K.T. (2016) Differences in Auditors' Materiality Assessments When Auditing Financial Statements and Sustainability
Reports. Contemporary Accounting Research. [online]. 33(2), p.551-575. Available from: https://doi.org/10.1111/1911-3846.12162 [Accessed 17
September 2018]
Treasury Wine Estates. (2013) Treasury Wine Estates annual report & accounts 2013. Available from:
https://www.tweglobal.com/-/media/Files/Global/Annual-Reports/2013-Annual-Report.ashx [Accessed 17 September 2018]
Treasury Wine Estates. (2014) Treasury Wine Estates annual report & accounts 2014. Available from:
https://www.tweglobal.com/-/media/Files/Global/Annual-Reports/2014-Annual-Report.ashx [Accessed 17 September 2018]
Treasury Wine Estates. (2015) Treasury Wine Estates annual report & accounts 2015. Available from:
https://www.tweglobal.com/-/media/Files/Global/Annual-Reports/2015-Annual-Report.ashx [Accessed 17 September 2018]
Treasury Wine Estates. (2016) Treasury Wine Estates annual report & accounts 2016. Available from:
https://www.tweglobal.com/-/media/Files/Global/Annual-Reports/2016-Annual-Report.ashx [Accessed 17 September 2018]
Wright, M.K. & Charles, J. (2012) Auditor independence and internal information systems audit quality. Business Studies Journal 4(2), 63-84.
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Available from: http://scitecresearch.com/journals/index.php/jrbem/article/viewFile/284/230[Accessed 16 September 20118]
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Appendix
Income Statement
TREASURY WINE ESTATES LTD INCOME STATEMENT
Fiscal year ends in June. AUD in millions except per share data. 2015-06 2016-06 2017-06
Revenue 1848 2233 2402
Cost of revenue 1358 1518 1568
Gross profit 491 715 833
Operating expenses
Sales, General and administrative 789 972 992
Restructuring, merger and acquisition 48 30 26
Other operating expenses 98 102 118
Total operating expenses 935 1103 1136
Operating income -444 -389 -302
Interest Expense 27 35 47
Other income (expense) 582 683 736
Income before taxes 111 260 387
Provision for income taxes 33 80 117
Net income from continuing operations 78 180 270
Other 0 -1
Net income 78 179 269
Net income available to common shareholders 78 179 269
Earnings per share
Basic 0.12 0.25 0.36
Diluted 0.12 0.24 0.36
Weighted average shares outstanding
Basic 661 714 737
Diluted 661 720 745
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EBITDA 222 393 542
Balance Sheet
TREASURY WINE ESTATES LTD (TWE) CashFlowFlag BALANCE SHEET
Fiscal year ends in June. AUD in millions except per share data. 2015-06 2016-06 2017-06
Assets
Current assets
Cash
Cash and cash equivalents 122 256 241
Total cash 122 256 241
Receivables 469 554 476
Inventories 704 904 948
Deferred income taxes 18
Prepaid expenses 25 34 28
Other current assets 105 119 142
Total current assets 1444 1866 1835
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 2037 2308 2734
Accumulated Depreciation -1108 -1154 -1405
Net property, plant and equipment 929 1154 1328
Equity and other investments
Goodwill 35 89 126
Intangible assets 756 972 969
Deferred income taxes 193 252 208
Other long-term assets 793 1044 812
Total non-current assets 2706 3511 3444
Total assets 4150 5377 5279
Liabilities and stockholders' equity
Liabilities
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Current liabilities
Short-term debt 66 4 4
Accounts payable 455 653 662
Deferred income taxes 5 18 51
Other current liabilities 44 82 62
Total current liabilities 571 758 779
Non-current liabilities
Long-term debt 324 627 596
Deferred taxes liabilities 194 274 234
Pensions and other benefits
Minority interest 3 3 4
Other long-term liabilities 10 84 61
Total non-current liabilities 531 987 896
Total liabilities 1102 1745 1675
Stockholders' equity
Common stock 3061 3534 3529
Other Equity 3 18 28
Retained earnings 10 78 100
Accumulated other comprehensive income -27 2 -52
Total stockholders' equity 3048 3632 3604
Total liabilities and stockholders' equity 4150 5377 5279
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