ACC568 The Preparation of Audit Plan of Trunkey Creek Wines

Ratio

Unaudited (2018)

Audited (2017)

Audited (2016)

Return on equity

10.80

17.5

15.2

Return on beef production assets

1.67

-0.82

-3.45

Return on grapes 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

23.67

17.89

15.2

Days in inventory to wine

367

423

53.24

Current ratio

2.8

2.54

2.66

Quick ratio

1.18

1.15

1.2

Debt to equity ratio

0.54

0.63

0.67

Days in account receivable (wine)

50.2

60.65

53.24

Days in accounts receivable (beef)

57

36

24

Accounts

Analysis

Risk related to audit

Audit steps for risk mitigation

Accounts receivables

Accounts receivable is the adequate classification of the items related to the amount that is owed to the company from their customers. For the audited financial statement, it can be seen that total number of days in accounts receivable for wine has increased from 53.24 in year 2016 to 60.65 in year 2017. On other hand, days in accounts receivable for beef is increasing consistently from 24 days in year 2016 to 57 days in year 2018.

This increase in number of day’s receivable depicts that the credit control system of TCW is not efficient. It is certainly possible that the represented figures might not be adequately evaluated. Existence is the major risk related to accounts receivable along with assertion of completeness that all the amounts pertaining to the accounts have not been recorded (Andon et al., 2015). In addition to this, the valuation also poses a considerable amount of risk as they are required to be held as net realizable value.

For testing the risks, auditor is required to develop the specific procedures for understanding the cycle of transactions. In addition to this, the reasonability of the methodology employed by company should also be determined.

Investments

Investments are represented by the accounts such as return on equity and time interest earned. Return on equity has increased initially from 15.2 in year 2016 to 17.5 in year 2017 and thereafter declined to 10.80 in year 2018. Time interest earned on other hand has reduced considerably from 8.1 in year 2016 to 7.51 in year 2017 and 6.67 in years 2018. 

There can be misrepresentation of related party transactions so that the perception of market about the financial performance of company can be improved. The effects of investment might not be adequately disclosed by the disclosures provided.

It is required by auditor to perform the assessment of investment accounts by tracing a sample of individual accounts to supporting documents for verification of figures presented.

Property assets

Evaluation of property assets is done by analyzing the return on production of wine and beef. Return on assets of beef production has improved in recent year compared to return on wine production. Property assets are the amount that is invested in property for production of goods.

The expenses incurred on such assets can be capitalized fraudulently and there exists a risk of associated control and material misstatement.

Capitalization of all the cost related to the properties and using of assets continuously should be recorded correctly. The complexities of computation of book value of assets should be recognized.

Marketing expense

It is the account that tracks and records all the expense relating to the different marketing activities. It can be seen from the table above representing the figures of market expense that it has increased considerably from 15.2 in year 2016 to 17.89 and 23.67 in year 2017 and 2018 respectively.

There can be existence of factors of risk of fraud and there is the possibility of fewer disclosure of policies relating to marketing expense.

The source documents should be adequately verified and the correct basis of expenses should be verified.

Effective control

Alleviation of risk

Test of control

Master file of suppliers

Master file has contributed in the form of better process of accounts payable and the risk of sourcing inputs from wrong suppliers have reduced by automatic rejection of unapproved suppliers (Simnett et al., 2016).

Auditors should be engaged in performance of control total and exercise the stringent controlling relating to security.

Electronic payment

Implementation of system of making electronic payment and generation of electronic invoice ensures that the accounting record is complete and accurate. 

Applications making the payment should be adequately controlled. For easy identification of any errors, auditors should cross check all the records and accordingly evaluate them.

Computer ordering system

The error of probability has reduced due to the independent scrutiny done by the computer system.

Auditors should scrutinize the preparation of depicts along with observing the mails send internally as well as externally. Sample testing should be done for tracing the transactions made to different parties (Fernandez et al., 2016).

Weakness

Justifications

Incorrect payment that would create difficulty in preparation of statutory accounts.

It is possible that the information is not reviewed adequately. Management is not actively engaged in performing periodic review of such accounts (Arens et al., 2014).

Lack of accounts reconciliation

Management does not perform the reconciliation on timely basis. This would lead to comprising the accuracy and validity of data.

Inadequate documentation and lack of authority delegation

There is lack of assurance that their payment is being made to correct person involved. In addition to this, there is limitation over the quality about the verification of accounts (Marques etal., 2016).

Weakness

Justifications

Lack of segregation of duties

If the entire purchasing process is controlled by the book keeper and somewhat to the extent of managing director could lead to weakness in the internal control system of purchase account (Chan & Vasarhelyi, 2018).

Making of payment

If only bookkeeper has the responsibility of deciding about who the payment should be made, there would be chances of occurrence of fraud. 

Accuracy issue

Invoices should be evaluated for the issue relating to mathematical accuracy as there is a chance for errors due to that.