Audit Plan And Internal Control Evaluation Report For Trunkey Creek Wines

Answer to question 1A

The report demonstrate the preparation of audit plan of Trunkey Creek wines (TCW) which one of the important and long standing clients of Miller Yates Howarth (MYH). There are some areas in relation to different accounts which are the main concern of the audit partner and the same is addressed in the report. The assessment of the internal control system of TCW has been conducted and its effectiveness has been evaluated by the implementation of proper tools and techniques. In addition to this, analysis of audit risks related to several accounts has been done by the implementation of ratio analysis tool and accordingly rtecommnedi9ng the audit procedures.

Discussion:

Answer to question 1A:

Ratio	Unaudited (2018) Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	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.

Answer to question 1B:

The business risks faced by TCW can be analyzed by the implementation of financial accounting tool of ratio analysis.

Accounts receivable- Looking at the figures of accounts receivable for wine and beef, there seems to be a disproportionate increase in the figures. This is indicative of the fact that customers are delaying the payments due to economic downturn that has increased the risk of bad debts (Louwers et al., 2015). In addition to this, there is deterioration on credit control policies of TCW.
Current ratio- It is observed that the current ratio has increased from 2.66 in year 2016 to 2.8 in year 2018 which is indicative of the fact that management should worry about the company about its going concern aspect. Converting of inventory into cash for super market business can be done in a predictable manner for making the availability of cash to make payments (Fuhrmann et al., 2017).
Return on equity- The declining value of return on equity represents a declining return on each amount of capital that is invested. The future financial performance of TCW seems to be shaky due to the falling value of return on equity.

Answer to question 2A:

This section seeks to evaluate the effectiveness of internal control system of TCW that is presented in the table below:

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).

Answer to question 2B:

The weakness related to internal control system of accounts payable and purchase account are listed below.

For Accounts payable:

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).

For purchase account:

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.

Conclusion

From the analysis of the given case study on the internal control system of TCW, it can be said that there exists several weakness in the modified system. The employment of tool of ratio analysis has contributed in evaluating ad assessing the risks related to different accounts such as property assets, marketing expenses, investment and accounts receivable. Identification of different audit risks has been done by suggesting the appropriate steps taken to reduce such risks. Furthermore, the effectiveness of the internal control system has been evaluated that depicts some weakness.

References list:

Andon, P., Free, C., & O’Dwyer, B. (2015). Annexing new audit spaces: challenges and adaptations. Accounting, Auditing & Accountability Journal, 28(8), 1400-1430.

Arens, A., Elder, R., & Beasley, M. (2014). Auditing and assurance services-An integrated approach; includes coverage of international standards and global auditing issues, in addition to coverage of. Boston: Aufl.

Chan, D. Y., & Vasarhelyi, M. A. (2018). Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.

Edgley, C., Jones, M. J., & Atkins, J. (2015). The adoption of the materiality concept in social and environmental reporting assurance: A field study approach. The British Accounting Review, 47(1), 1-18.

Fernandez-Feijoo, B., Romero, S., & Ruiz, S. (2016). The assurance market of sustainability reports: What do accounting firms do?. Journal of cleaner production, 139, 1128-1137.

Fuhrmann, S., Ott, C., Looks, E., & Guenther, T. W. (2017). The contents of assurance statements for sustainability reports and information asymmetry. Accounting and Business Research, 47(4), 369-400.

Kend, M., Houghton, K. A., & Jubb, C. (2014). Competition issues in the market for audit and assurance services: are the concerns justified?. Australian Accounting Review, 24(4), 313-320.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.

Marques, R. P., Santos, H., & Santos, C. (2016). Evaluating information systems with continuous assurance services. International Journal of Information Systems in the Service Sector (IJISSS), 8(3), 1-15.

Simnett, R., Carson, E., & Vanstraelen, A. (2016). International archival auditing and assurance research: Trends, methodological issues, and opportunities. Auditing: A Journal of Practice & Theory, 35(3), 1-32.

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