As suggested by Junior et al. (2014), analysis of financial ratio indicates towards evaluation of financial assertion that is utilized to understand financial health of the business entity. For the given case under consideration, Trunkey Creek Wines Limited’s accounts are to be evaluated based on key financial ratios provided such as the marketing expense, accounts receivables, property assets and investments. The current section of the study presents the audit that the auditor may encounter while identifying material misstatement in financial statements and mentions the steps of audit that need to be carried out to lessen risk of audit. However, this might perhaps happen owing to error (intentional or unintentional). The table mentioned below presents analysis of accounts of the firm TCW and identifies diverse risks of audit related to the same together with steps to lessen the detected risk.
|
Account |
Analysis |
Audit Risk |
Audit Steps to reduce risk |
|
Receivables |
Account receivable indicates towards the specific amount that the TCW owes to all its clients. With the aim to examine financial condition of the firm, the ratio that is to be examined is the account receivables (Simpson et al., 2016). Particularly, in the business concern, the ratio for accounts receivable for the particular division of wine is necessarily 60.65 days and it is 36 days for beef. Essentially, this replicates the total number of days for which a standard customer invoice stays outstanding. |
As the firm TCW markets products on credit, therefore, there remains a risks that are linked to this particular account (Alles et al., 2018). Essentially, there are existence risks otherwise occurrence and risk associated to completeness. Again, the existence risk otherwise occurrence risk indicates towards the validity risk of the firm’s debt (Arens et al., 2014). Conversely, the completeness risk refers towards the risk of incomplete documentation |
Particularly for mitigating the existence else wise occurrence risk, auditors need to track different suspicious in addition to unreturned verifications of valid documentation of accounts (Bédard et al., 2015). In essence, in case of completeness risk, the assessor might consider checking all the sales proceeds and analyze the company’s procedures of business transactions. |
|
Investment |
The investment condition of the firm can be appropriately assessed by the ratio of total number of times firm earns interest from its investment (Wong & Millington, 2014). During the period 2016, the interest accepted by the firm was registered to be 8.10. However, during the period 2017, it was recorded to be 7.51. Therefore, it can be hereby mentioned that investment for the firm TCW has enhanced considerably. Basically, debt to equity ratio reflects overall risk of investment of the firm and higher debt equity ratio replicates risk linked to investment (Kocken & Hulstijn, 2017). |
If the level of risk is high, then it is important on the part of financiers to make planned disbursements. In itself, this would alarm the business enterprise, since this would exert impact on firm’s working capital (Marques, 2018). Particularly, there subsists an inherent risk of occurrence of material misstatement. |
In this case the assessor might perhaps acquire evidence regarding investment undertaken at cost value else wise fair value as has been divulged in the financial assertion (Louwers et al., 2015). Also, they too have the need to identify diverse approaches for ascertainment of fair value according to regulations of the (Generally Accepted Accounting Principles- GAAP). |
|
Property assets |
In a bid to assess audit risk associated to property assets, then the ratio return on firm’s assets of both sections of both wine as well as beef of the firm is to be evaluated. Based on the provided information, it can be recognized that return on beef production of the firm’s asset during the period 2017 has been enhanced to -0.82% from the level -3.45% that was registered during the period 2016. |
The risk that is related to registering of property assets comprises of accurate cost basis registering and intricacy in assets valuation (Liao et al., 2018). |
It is the task of the assessor to inspect whether the firm TCW has capitalized different cost associated to the purchase of firm’s assets together with documentation of preservation and maintenance of firm’s assets. Over and above that the assessor must lessen the intricacy of the evidence of firm’s assets and make it more moderately simple so as to avert gap in the audit procedure and accounting method (Chan & Vasarhelyi, 2018). |
|
Marketing Expense |
Percentage of marketing expenditure of overall S & A expenditure of the firm will reflect examination of marketing expenditure of the TCW firm. Particularly, the audited financial ratio during the year 2017 is roughly 17.89% that has enhanced from 15.2% as recorded during the year 2016. |
Particularly, the risks engaged in the process of audit of firm’s marketing expenditure ratio are essentially the understatement risk, duplicate disbursement risk and inappropriate vendors’ risk (Farooq & de Villiers, 2017). Also, there are also different control risks of accounting in this regard. |
Different steps of alleviating the risk associated to audit of marketing expenditure for the assessor are to carry out a sensible check on records regularly plus timely processing of the expends (Griffiths, 2016). As a division of internal control assessment, the assessor must also validate the vendors on normal basis to avert the fraudulent exercises. |
As rightly indicated by Moroney (2015), business risk indicates towards the risk that is associated to the income variation of the firm. As the firm TCW has considerably stable earnings over the period, they can simply forecast the utility bills of the clientele within a specific range. Particularly, the best means to evaluate business risks is to carry out ratio analysis that would assist in acquiring a quick indication of firm performance in several important areas. It would assist the administration to identify the strength as well as weaknesses from different varied initiatives and stratagems can be fashioned. However, for the firm TCW the financial ratio that are provided and needs to be assessed are mentioned below:
Based on analysis of key financial ratio presented above, diverse kinds of risks can be identified. Essentially, business risk indicates towards the possibility of not getting back a return on invested amount. The identified risks for the selected company TCW are hereby mentioned below:
Strategic risk: Moroney (2015) asserts that strategic risk is essentially that risk that stems from functioning within a particular industry at a specified period of time. Essentially, this can occur owing to alteration in the technology or else change in customers’ tastes as well as preference (Farooq & de Villiers, 2017). For that reason TCW dealing with production of wines as well as beef faces much lesser risk related to strategy. Nonetheless, a new IT system has been put in place and that may possibly lead to certain risks.
Risk of Compliance: Essentially, this specific risk is said to be related to compliance that is to say, adherence to specific bureaucratic otherwise legislative regulations that the firm might perhaps follow (Kocken & Hulstijn, 2017). Essentially, this specific risk is said to be related to compliance that is to say, adherence to specific bureaucratic otherwise legislative regulations that the firm might perhaps follow (Kocken & Hulstijn, 2017) Analysis of the operations of the firm TCW as given in the case study reveals that the company has a proper internal control system, therefore, the risk connected to compliance can be considered to be less.
Financial risk: Risk associated to financial loss is known as financial risk. Analysis of operations of the firm TCW helps in understanding the fact there is a possibility of high financial risk owing to increased adoption of new and advanced IT system (Fuhrmann et al., 2017). Furthermore, the three different segments of grapes, production of wines as well as beef may possibly face the threat of loss of funds.
Risk of Operation: As suggested by Liao et al. (2018), the operational risk is essentially that risk that stems from internal failures in business operations of the firm. Also, this can be seen to occur from different unpredicted external incidences. As TCW engages in the process of production of wine as well as beef, therefore, the operational risk for the firm can be said to be very high.
Reputational risk: Moroney and Trotman (2016) mention that the reputational risk indicates towards the risk of losing reputation and goodwill of the firm or else harmful publicity. In the current case under deliberation, the reputational risk of TCW is said to be high as it functions in multiple sectors.
Internal control in the particular business concern TCW is essentially the procedure that is influenced by the firm’s management, trustees board as well as many other individuals who are accountable for delivering the rational assurance for the realization the firm’s objectives as are mentioned below –
In case of the company TCW, different components of internal control are essentially taken in account according to the standard directives, if –
In case of the firm TCW, business profitability is presented not only as the function of firm’s revenue but also as an appropriate resources management procedure. The Different internal controls that can be identified are hereby presented below:
|
Effective control |
Risk alleviated |
Test of Control |
|
environment of controlling |
There are risks that are removed by controlling overall environment of the firm TCW. This mainly refers to alleviation of operational as well as reputational risk by means of appropriate internal control (Chan & Vasarhelyi, 2018) |
Fundamentally, test of control indicates towards examination of the moral values, administrative skills, reliability and honesty of the workforces |
|
Assessment of risks of operations of the firm |
Control mechanisms indicate towards the fact that the risks that are taken into consideration in this case are necessarily the financial risk and risk of compliance (Cohen & Simnett, 2014). Particularly, assessment of firm’s can help in estimating and predicting risks in advance. |
Intrinsically, assessment of risk indicates towards the establishment of effectual system of control that is varied internal as well as external control mechanisms for the risk related to operations of the firm TCW. |
|
Information as well as communication system |
The specific risk that is alleviated in this regard is the financial risk along with reputational risk. The effectual system of information control and communication asks the firm to take care of privacy, leakage and confidentiality of information shared (Junior et al., 2014). Also, there is need to communicate the requisite information to shareholders of the firm and arrive at decisions keeping in view interest of stakeholders. |
The pertinent information that are needed to be taken for achieving the goals of the management (Bédard et al., 2015). It is the process of checking the information related to the stakeholders and communication to them. |
|
Monitoring |
The operational risk and financial risk are alleviated in this test of control. It is the process of compliance with the various regulations, rules and laws (Alles et al., 2018). |
It indicates towards the control of the efficacy of the business to avert the upcoming issues that might arise owing to lack of able control. |
|
Physical control |
Physical control necessarily encounters 2 different risks. Particularly, the first and foremost risk is associated to the risk of physical damage of firm’s properties, loss as well as theft of firm’s assets (Simnett et al., 2016). Again, another risk is essentially the financial risk that might perhaps stem owing to mistakes in the process of ascertainment of economic lives, depreciation otherwise cost. |
In particular, physical control aids in the process of substantiation of existence of asset. In actual fact, this involves tracking the ledger for the fixed asset for the specific asset, date of purchase, number of specific models else wise serial number. This also includes examination of economic life that is estimated, depreciation rate, acquisition cost. Additionally, there is also a need to verify that whether the administration from time to time assesses the assets’ insurance coverage that are exposed to risks of damages else wise loss (Aguolu et al., 2018). Also, it examines the firm’s asserts that are utilized by the workforces (systems of logging in and logging out). |
System of Purchase:
|
Weakness |
Justification |
|
The systems of purchased of the firm are not effectively controlled separately and this might lead to overstocking. |
Essentially, there is a requirement for maintenance of daily report from various section of purchased with appropriate control. Stocks need to be confirmed with firm’s books of accounts (Simpson et al., 2016). |
|
Founded on reputations of the firm, the suppliers are chosen and are not based on different facets namely different terms, prices as well as time of delivery (Knechel & Salterio, 2016). Furthermore, there exists no process of independently examining purchases against varied orders. |
The procedure of selection of suppliers need to be based on overall quality, level of price as well as time of delivery. There must be signature and cross checking by the inspection official in case of each and every delivery (). |
System of Accounts payable:
|
limitations |
Justification |
|
The manager responsible for overseeing the accounts payable sanctions a balance of firm’s account payables (Arens et al., 2014) |
The balances of accounts payable needs to be confirmed and approved. |
|
In essence, there exists no standard comparison of particularly creditor ledger as well as control accounts that might perhaps direct the way towards diverse errors (Chandler, 2014). |
In a bid to avert errors, there is a requirement for carrying out regular comparison of particularly creditor ledger and firm’s control accounts (Basu, 2016). |
|
Also, there exists no assurance that firm’s deliveries have been accepted and taken into account (Louwers et al., 2015). Also, creditor ledgers are also said to be understated. |
There is need to audit the creditor ledgers on a regular basis and present assurance with of the deliveries that occurs with signed documents for substantiation. |
References
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Chandler, R. (2014). Auditing and assurance. London School of Economics. London.
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