Ratio analysis is an analytical tool, which helps us to assess the financials of the company. The tools helps us give an overall view of the financials of the company (Uechi et al. 2015). The company selected for the auditing process is the Trunkey Creek Wine Company for which the accounts analyzed are Accounts Receivables of the company, Plant and property and investments of the company. The risks involved in the case of the auditing of financial information and reports are well discussed in the project. Fraudulent reporting of financial statement and errors in the financial report are some of the common primary factors identified in the case study (Bushee, Goodman & Sunder, 2018). Turn Creek Wine Company’s accounts and the different components of the financial report were studied and discussed in the below table. The steps for eliminating and reducing the errors and fraudulent or incorrect reporting is given below:
|
Account Head |
Evaluation/ Analysis |
Auditing Risks |
Steps for Eliminating Risks |
|
Accounts Receivables |
The amount due to the company by the clients and customers of the company. The amount represent the amount for which payment is yet to be received by the company. The Days of Accounts Receivable for the company is around for the Wine Product is around 60.65 Days and for the product, beef is around 36 Days. |
The company transaction and goods are sold under the credit sales approach to its customers. The business risk of the company is high in this case. |
The business risk of the company is high the auditor need to carefully reevaluate the amount of sales and the amount of debtors it is able to realize. The auditor needs to carefully recognize different components of the account and provide materiality regarding the same (Gaynor, et al. 2016). |
|
Investments |
The analysis of the investment done by the company by the interest-earning ratio. The company had saw an increase in the interest-earning ratio from the year2016-17 from 7.51 times to about 8.10. |
The interest-earning ratio for the company depends on the investments done by the company. |
The auditor of the company must reassess the investment assets class in which the investment is done. The assets class should be well studied and the same should be checked by the investment policy of the company. The key audit procedure would be to check about the investment assets class and the trend in the return from these investments. |
|
Property Assets |
The ratio for return on property assets shows the efficiency in the utilization of the assets of the company. The ratio for the company in the year 2017 is around -0.8% that has shown improvement from the last year figures of around -3.4% |
The key risk associated with this type of asset class is regarding the valuation of assets and correctly identification of assets. |
The key step involved in this type of auditing would be to reduce the auditing complexity by forming a common financial head and reporting classification. The auditor must also capitalize all the leased assets of the firm, which is classified as operating leases. The capitalization of the same would give a true and fair view of the accounts. |
|
Marketing Expenses |
The marketing expense is the total selling expenses for the company. The ratio and the benefit would be calculated by the output the expense is generating in the form of the revenue. The ratio for the company in the year 2017 is around 17.89% and the 15.2% in the year 2016. |
The risk associated with such expense would be regarding proper classification and recording of expenses by the company. |
The steps to reduce the risk associated with such type of expense is to assess the record for the payments done and analyze whether the expenses payable does not get outstanding by the company (Ibrahim, et al. 2016). |
The business risk and the financial risk of the company combined together represents the risk associated with the company. The financial risk refers to the volatility observed in the financials of the company (Bartram, Brown & Waller, 2015). The TWC Company has a much stable and less volatile financials of the company, which give the company an opportunity to stretch and foresee the bills of its clients, which must be in a specified date or a range. The efficient and most commonly used approach for analyzing the financial of the company is the use of the ratio in the financial of the company. The ratio analyzed for the company TWC are as follows:
The above analysis performed shows that there are various type of risks involved in the company. For the particular company selected some of the key risk found are:
The internal controls identified in the system, which are potentially effective are mentioned below:
|
Effective Control |
Risk Alleviated |
Test of Control |
|
Environment Sustainability |
The risk alleviated due to non-sustainability of environment is the degrading reputational and operational risk of the company (Lo & Kwan, 2017). |
The test or the effective way of controlling the same could be by enhancing the skills and development of the employees in maintaining and ensuring sustainability of the same. |
|
Risk Analysis |
Risk identified in the company are that of business and financial risk. There should be proper profile analysis of risks involved in the company. |
The test for control for the same could be by ensuring that the proper risk analysis along the risk profile of the company should be done. |
|
Identifying Material Information |
The information given by the company should be clearly free from material misstatement and error free otherwise the company’s goodwill and credibility will get hampered. |
The audit procedure for the same should be done by internal checking of records and information provided. Verification of data and information should be done. |
|
Monitoring |
The company’s operations and financials of the company should be well assessed in order to reduce the business risk of the company. |
There should be effective monitoring procedures and steps laid down in order to reduce the business and financial risk of the company. |
|
Physical monitoring and controlling |
The internal control of the company should be such that the risk assessed in inventory like theft, loss of goods, damage are some of the internal risk associated with the company |
Verification and periodical review of the assets of the company should be done in order to avoid exploitation of resources. |
Evaluation of Purchase System:
|
Weakness |
Justification |
|
The purchase system is not cross verified with the inventory of the company, which can pile stock of the company. |
A daily report should be prepared by the purchase department, which must be analyzed with the stock of the company (Pappalardo & Lusk, 2016). |
|
The breakdown analysis of different supplier with different terms and offers should be reflected in the purchases invoices, which the company do not focus on. |
The supplier of the company should be assessed based on factors like the pricing, trade discount, terms of trade and delivery time |
Evaluation of Accounts Payable:
|
Weakness |
Justification |
|
The accounts payable or the creditors of the company is not paid at full every time, which affects the credibility of the company. |
There should be timely payment of all dues and verification of all outstanding amount should be done. |
|
The creditor’s ledger account should display the actual outstanding amount by the company. The company had understated the account, which shows that financial management by the company is not efficient |
The creditors ledger account needs to be audited daily and the account should display the actual outstanding amount (Haimes, 2015). |
Reference
Bartram, S. M., Brown, G. W., & Waller, W. (2015). How important is financial risk?. Journal of Financial and Quantitative Analysis, 50(4), 801-824.
Bushee, B. J., Goodman, T. H., & Sunder, S. V. (2018). Financial Reporting Quality, Investment Horizon, and Institutional Investor Trading Strategies. The Accounting Review
Campbell, T. C., Galpin, N., & Johnson, S. A. (2016). Optimal inside debt compensation and the value of equity and debt. Journal of Financial Economics, 119(2), 336-352.
Ekinci, Y., Ülengin, F., Uray, N., & Ülengin, B. (2014). Analysis of customer lifetime value and marketing expenditure decisions through a Markovian-based model. European Journal of Operational Research, 237(1), 278-288.
Gaynor, L. M., Kelton, A. S., Mercer, M., & Yohn, T. L. (2016). Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), 1-22.
Haimes, Y. Y. (2015). Risk modeling, assessment, and management. John Wiley & Sons.
Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.
Ibrahim, M. Y., Che-Ahmad, A., Johl, S. K., & Rahman, H. U. (2016). The impact of corporate governance regulations on board independence and quality of financial information reporting: A proposed study. The European Proceedings of Social and Behavioral Sciences EpSBS, 761-768.
Idawati, W., & Wahyudi, A. (2015). Effect of earning per shares (EPS) and return on assets (ROA) against share price on coal mining company listed in Indonesia stock exchange. Journal of Resources Development and Management, 7, 79-91.
Ji, H. (2017). The Effect of Cash based Interest Coverage Ratio on the Value Relevance of Accounting Information. Global Business and Finance Review, 22, 92-100.
Kijewska, A. (2016). Determinants of the return on equity ratio (ROE) on the example of companies from metallurgy and mining sector in Poland. Metalurgija, 55(2), 285-288.
Lo, K. Y., & Kwan, C. L. (2017). The effect of environmental, social, governance and sustainability initiatives on stock value–Examining market response to initiatives undertaken by listed companies. Corporate Social Responsibility and Environmental Management, 24(6), 606-619.
Nobanee, H., & Al Hajjar, M. (2014). An Optimal Cash Conversion Cycle.
Pappalardo, G., & Lusk, J. L. (2016). The role of beliefs in purchasing process of functional foods. Food quality and preference, 53, 151-158.
Popescu, A. (2017). Research concerning gross margin in dairy farming in Romania. Stiinta agricola, (1), 91-94.
Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2015). Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, 488-509.
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