Audit Report for Trunkey Creek Wines Limited: Financial Evaluation

This audit report provides a detailed financial analysis of Trunkey Creek Wines Limited (TCW), a client of Miller Yates Howarth (MYH), an Australian accounting firm. The report includes a ratio assessment to identify financial deficiencies and risks, focusing on marketing costs, investments, accounts receivable, and property assets. It assesses business risks related to declining return on equity, gross margin, and net profit margin, as well as liquidity management and debt recovery. The report also examines internal control mechanisms and tests of control related to repairs, supplies management, payment processes, and IT system management, highlighting potential audit risks and suggesting steps to mitigate them. The analysis uses unaudited data from 2018 and compares it with audited data from 2017 and 2016 to provide a comprehensive overview of TCW's financial performance and risk profile.

A DU IT

Audit
Executive summary
Organizations in the corporate world are more likely to empower themselves owing to the
presence of properly explained audit procedures. Hence, possessing effective processes of
audit are compulsory in this era because it assists in detection of material risks in the financial
statements. Moreover, prevalence of internal control mechanisms also facilitates in
smoothening the audit processes. This report has focused on the audit measures adopted by
MYH in its affairs. The company is basically an accounting firm that is headquartered in
Australia. Nevertheless, this report progresses with the evaluation part wherein computation
of ratios is done. After this, the report has discussed the assessment of audit risks together
with the risks and steps to avoid the same. Moreover, enhanced discussion on the company is
also made so that other material business risks can be studied, thereby reflecting all the
mechanisms of internal control and test control in a tabular manner.
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Audit
Introduction
Both audit strategy and audit processes are crucial aspects of identification of material risk of
misstatements in an organization. This can assist companies to become capable of thriving in
this complicated environment. This report has highlighted the processes of audit that must be
present in all the organizations. Further, with this report, risk management mechanisms have
also been reflected together with the role played by the mechanisms of internal control.
Overall, a plan of audit has been established so that the financials can be effectively assessed.
Nonetheless, there has been effective discussion upon various legal measures and the same is
based on the significance of internal control mechanisms (Cappelleto, 2010). Overall, such
mechanisms play a vital role in allowing organizations thrive in this environment and attain
sustainable development on a whole.
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Audit
1A. Ratio assessment
This report has significantly concentrated on aspects like ratio evaluation in addition to the
business material risks associated to the company so that audit processes can be effectively
developed. Further, if the ratios are considered, it plays a key role in determining the
deficiencies and the place at which the company stands. Overall, the relevance of internal
control mechanisms in addition to the drawbacks of the scenario must be appropriately taken
into consideration (Elder et. al, 2010). The following table can be accounted for the
assessment of material ratios and risks associated to the same.
Marketing cost
Analysis Audit Risk Audit steps to reduce risk
The company’s marketing
costs have increased in
comparison to the last two
years and the reason behind
this can be due to increased
exposure of the company
towards its beef operations.
The audit risk here is that
marketing costs consists of
personal expenses of
directors and other costs that
are not allowed. This is
because the proportion of
increment in such expenses
does not go together with
sales increment or present
years return in comparison
to the previous tenures.
The auditor’s group must
monitor all documents and
vouchers of such expense.
Besides, they must observe
whether superior authorities
have permitted such
expenses (Elder et. al,
2010). Further, the personal
expenses bill that are of a
relevant value must be
accounted by the auditors as
well.
Investments
Analysis Audit Risk Audit steps to reduce risk
The times income earned
from this account has
deteriorated in comparison
to the last years.
The audit risk here is that
the same may possess a risk
of material misstatement or
can be undervalued in nature
because the interest on
investments has deteriorated
with due course of time.
Auditors must analyze the
cause behind deterioration in
such interest earned.
Further, investments must be
monitored when it comes to
their disposal process
(Matthew, 2015).
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Audit
Nevertheless, if these have
been disposed, proper
verification of documents
must be made for the same.
In addition, receipts attained
from sale of investments
must be monitored by the
auditors collectively
(Matthew, 2015).
Accounts receivable
Number of debt collection
days has primarily increased
in the year 2018 in
comparison the last year.
Bad debts can reflect an
improper depiction of the
performance of the
company. Further, the aging
of debtors can be misled by
the company as well
(Baldwin, 2010).
The aging register of the
debtors must be verified by
the auditors. In addition, bad
debts must also be analysed
with the allowances for such
bad debts that has been
permitted by the
management (Baldwin,
2010).
Property assets
The return on property
assets has reflected the
upcoming trends:
Return on assets on
production of beef has
reflected a potential
increment that reports at
1.67% in 2018.
Nevertheless, the same
The audit risk in association
to property assets is that the
company must have
increased the sales of beef to
reflect an efficient financial
situation ay(G & Simnet,
2015). Nevertheless, in
relation to the last two years,
the organization is obtaining
In relation to property
assets, the auditor must
evaluate the sales and
revenue aspects to check the
reason behind the sudden
increment in the returns for
beef production ay(G &
Simnet, 2015). In addition,
the sales ledgers must also
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Audit
reported at -0.82% in 2017
and 3.45% in the year
respectively. However, in
opposition to this, the return
on assets in relation to grape
and wine production has
deteriorated in comparison
to the previous year.
negative outcomes in this
framework.
be assessed with the records
of sales order that is for the
attained orders.
As an audit partner, the
company’s return percentage
and its segments must be
checked so that all the
amounts can be effectively
monitored. Further, through
this way, the audit group can
easily come at the
effectiveness of calculation
as well.
The internal control
mechanisms related to the
sales and returns must be
monitored so that it can be
ensured on the part of
auditors whether efficient
sales recognition and
revenue has been undertaken
by the company (Geoffrey
et al. , 2016).
Ratios
Ratio 2018 (Unaudited) 2017 (Audited) 2016 (Audited)
Return on equity
%
10.8 17.5 15.2
Return on beef
production assets
%
1.67 -0.82 -3.45
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Audit
Return on grape
and wine
production assets
%
12.2 14.5 16.2
Gross margin % 24.5 30 31.76
Net profit
margin %
14.38 20.27 17.85
Marketing
expense % of total
S & A expenses
23.67 17.89 15.2
Times interest
earned
6.67 7.51 8.1
Days in inventory
- wine
367 423 460
Days in accounts
receivable - wine
50.2 60.65 53.24
Days in accounts
receivable - beef
57 36 24
Current ratio:1 2.8 2.54 2.66
Quick asset ratio:1 1.18 1.15 1.2
Debt to equity
ratio:1
0.54 0.63 0.67
1B. Business risks that the organization is facing
The company has been focusing to obtain a rapid speed since many years in the domestic and
global markets. Although, there is extreme competition and trends in the entire industry, the
company has been attempting to enhance its grip in the market and this is done by the
experimenting various segments of the market. Nevertheless, from the previously mentioned
ratio disclosures, there has been a decline in the aggregate performance of the organization.
Further, the following factors must also be taken into consideration for a better viewpoint:
1. The company’s ROE (return on equity) has decreased that means it not been capable
of serving the investors in a proper way like the past two terms. Furthermore, the
company’s return on equity has decreased by 7% in comparison to the past tenures. In
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Audit
relation to this, the business risk is associated to drawing on the part of investors
owing to a lesser return on equity (Hoffelder, 2012).
2. The company’s gross margin percentage and net profit margin has also deteriorated in
comparison to the past years that is a negative indicator. This sheds light on the fact
that it has not been able to obtain its profit margin owing to the decrease in overall
sales or significant increment in the overall costs. In addition, the associated business
risk is the declining performance of the company that can seem offending to the
stakeholders in the short-run.
3. The current ratio of the company has increased that highlights effective liquidity
management on its part. In other words, this means that the company has enough
liquidity to cater its short-term debt obligations in the future (Pilbeam, 2009).
However, in contrast to this, if there is too much reliance on current assets, the ratio
will increase to a larger extent and the same cannot be regarded as an effective ratio
because it signifies ineffectiveness on the company’s part to use its liquid assets for
attaining liquid funds to repay short-term debt obligations.
4. The main affair of the company is beef production and in relation to this, it can be
seen that the collection days has increased in comparison to the last years. This sheds
light on the fact that the company is not able to recover funds from the debtors on a
timely basis and therefore, facing complications in managing its own activities.
Furthermore, this also highlights the fact that the company’s financial development is
not optimal in nature and the material business risk in this scenario is that the debt
amounts may increase and thereafter, become impossible to be recovered (Pilbeam,
2009).
2A. Internal control mechanisms
Effective Control Risk alleviated Test of Control
If there is a requirement
of repairs in the wine
operation of the
company, it must be
handled or looked after
by the departmental
manager. Further, it is his
duty to generate online
In association to this, the
audit risk is that there can
be several undue expenses
on the repairing aspects of
the company as there is not
supervision on such
requests that has been
undertaken by the
The repairing function must be
checked by the management staff
twice so that a proper verification
on the requirement and expenses
being incurred on the repair
affairs.
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Audit
orders and final payment
procedure will be
automatically eradicated
by the approval on the
part of the management.
departmental manager
(Rezaee & Kedia, 2012).
Furthermore, the
management accountant
and clerk must come into
light when the services are
vanquished and the
provider has also offered
an invoice to the company.
Management of supplies
have been monitored
department wise
The purchase managers
can place inappropriate
offers below $10000 as
there is no system of
checking the process
twice.
The purchase requisition issued
by managers of department must
be checked twice so that the
actual amount of purchase can be
ascertained (Rezaee & Kedia,
2012).
The company’s invoices
are attained online
through the suppliers and
thereafter, they are
matched with the
received orders. This is
undertaken by the
management accountant
and clerk of the
company.
Although invoices are
matched with the orders,
the issue regarding this can
be that payments received
for the orders may be
deferred in nature. In
addition, after aligning the
order register with that of
purchases, the payments
file is thereafter approved
and sent to the banks.
The responsibility of payment
processes must not be in the
hands of a management
accountant and it must be borne
with another individual who is
primarily involved in the
payments department (Roach,
2010). In addition, any payments
associated to defective orders
must be deducted and prohibited
from being reflected in the
software.
The company has an
automated strategy of IT
in its system including
password protection to
allow program
Although there is an IT
system in the company’s
management, the same is
not supervised by an
experienced professional.
The company must hire or engage
an experienced professional in
relation to management of the IT
department. Further, there must
be an extra managerial personal
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Audit
accessibility. Furthermore, the
organization has offered
this job to a management
accountant who does not
have proper knowledge
regarding the same.
Therefore, this can result
in detection and generation
of various business risks
for the company.
The company does not
have password protection
for the base of IT that is
also a major threat to its
affairs.
who can advice or counsel the
authority of IT department to
smoothen the process. The reason
is that this can assist in
identification of flaws or errors so
that corrective measures can be
taken rapidly.
The IT database must be
protected with the help of a
stronger password and the details
of the department must also be
checked manually so that no
errors can be found later (Roach,
2010).
The staff has received
bonus based on
fulfilment of goals like
monthly sales, etc. This
can be an appropriate
method to involve the
staff in sales promotion.
There can be a possibility
that such staff is involved
in illegal affairs to address
all major goals and attain
maximum revenues.
There must be an appropriate
check on the staff affairs so that
the sales can be promoted on an
effective basis. In addition, the
same must be monitored whether
the staff is not involved in illegal
activities that can hamper the
goodwill of the company. If the
staff has been creating nuisance
to spoil the company’s reputation,
it is not bound upon the company
to address such matter.
The details of suppliers
have been accumulated
in the file of suppliers
and the placed orders are
also undertaken with the
There is a material
business risk that these
approved suppliers may
change their rates as the
same has not been entered
Every time when a particular
order is being placed, the rates
must be confirmed before placing
the orders, thereby assisting in
safeguarding such issues in the
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Audit
assistance of an ordering
system. Moreover, the
same is undertaken for
the approved suppliers
and if any unapproved
suppliers are granted any
orders, the same will be
eradicated and sent to the
accounts department.
in the master file of
suppliers. Therefore, this
can result in hampering the
smooth flow of affairs of
the company, thereby
requiring corrective
measures in the future
(Peirson et. al, 2015).
future.
2B. Justification in association with issues in internal control measures
Accounts payable
Weakness Justification
There is no
continuous check of
payment registers
The payment registers must be regularly monitored and the same
must be conducted by the management accountant only (Needles &
Powers, 2013).
There are no proper
reconciliations to the
payments and
accounts payable
section.
The management accountant must depend on the IT system to
generate file of payments and other aspects as well. However, no
ledgers have been prepared in relation to the same.
There is no check by
the higher authorities
when it comes to
payment approval
process.
The management accountant must be liable for approving the same
and thereafter, uploading it to the banks. Moreover, there must be a
system that can assist in addressing all contingencies.
Purchases
Weakness Justification
Separate files are not The clerk matches the order details and records it in the payment
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Audit
present for lower
quality goods
register later. There may be several items of low quality but the same
is not considered by the clerk. Besides, only paper vouchering is
done.
There is no check of
present registers.
The purchase orders are often not checked properly with the present
items that can result in extra stocking in the warehouses. Therefore,
variations can arise and the same must be considered for facilitating
decision-making processes (Peirson et. al, 2015).
There is unwanted
reliance on the
company’s approved
suppliers
When suppliers are provided orders based on their reputation, other
material aspects like price changes, changes in terms and conditions,
etc are not evaluated. This issue can be problematic in the decision-
making process.
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