In the modern world, audit processes are very vital on the part of corporates to thrive in such complicated environment. This is because auditing assists in recognizing all material risks that has made the entire business vulnerable in nature. Besides, it also assists in reflecting whether the depicted financial performance of the company is true and fair. This makes it clear that if proper auditing measures are not implemented by corporates, errors and frauds are more likely to be observed in their financials. Thus, with this report, the auditing measures adopted by TCW has been highlighted so that its material risks can be effectively determined. For such purpose, the company’s internal control mechanisms have been discussed that has played a key role in mitigating the harmful effects of material risks. This assists in making it clear whether the company has been lawful and ethical based on the recent requirements of a corporate’s functioning. Nevertheless, even if corporates have proper risk management approaches within their affairs, the same must be effective and appropriate in nature. In other words, no negligence in such matter must be entertained because it can hamper the usefulness of such auditing measure. Thus, the internal control mechanisms implemented by TCW has been relevantly discussed through this report to evaluate the prevalence of material business risks in its framework of financial reporting.
Ratio evaluation can play a key role in determining the financial performance of a company. Furthermore, it can allow in ascertaining which matters are of crucial importance and that requires immediate actions on the part of the company. With the help of the given table, the accounts of the company that is subject to audit risks have been discussed. With such discussion, it can be analysed whether these risks have affected the financial performance of the company or not (Roach, 2010). Nevertheless, the table also consists of effective audit steps that can be undertaken by the company to get rid of such risks.
|
Account/Heading |
Assessment |
Audit risks |
Steps to mitigate the risks |
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Property assets |
In the company’s property assets, it can be viewed that its ROA (return on assets) have declined when compared to the last few years. In other words, not only in relation to beef but also in production of grape and wine, the company has witnessed the same and this is because of some prime reason that has facilitated in such deterioration in the current year when compared to the last years. |
If the ROA of TCW has witnessed a decline in comparison to the last years, the prime audit risk that can be observed in this scenario is that the company can reflect a better financial position by portraying enhanced sales of beef by it. In other words, such beef sale can be exaggeratedly depicted by the company to reflect a better financial state (Lapsley, 2012). Moreover, such heading has been deteriorating in comparison to the last years and hence, such risk is prevalent. |
If there is a risk that the company may exaggeratedly portray a better financial position by over stating its sales of beef in the current year, the auditor can scrutinize the sales ledgers with the help of proper vouchers and documents to verify the same. This can assist them in checking whether the revenues attained from such sales are in alignment with the orders received from the same. Hence, if there is an immediate of undesired increase in revenues from beef sale, auditors can know about such fact. |
|
Accounts receivables |
In relation to accounts receivable section, the company has depicted a significant enhancement in the number of days in collection of debts. Moreover, the same has increased after comparing the present year’s data with that of the previous year. |
Aging of debtors is a very valuable concern for the auditors because if the same is not ascertained properly, it can result into one major audit risk (Roach, 2010). Besides, since these are at inflated values, the company’s overall performance can get influenced. |
If the auditors can check the aging register of debtors, they can evaluate the reason behind such increment in days collection (Roach, 2010). Besides, they can also compare the allowances for bad debts that has been depicted by the company with that of actual bad debts to evaluate such inflated values. |
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Expenses of marketing |
In comparison to the last few years, it can be seen that the marketing has depicted an upwards trend. Furthermore, the primary reason behind this fact can be attributed to the inflation in the production of beef that has been witnessed by TCW. |
The audit risk that can be feasible in the case of marketing expenses is that such expenses may have been manipulated by the directors to falsely depict their financial performance. For example, it is feasible that the directors have accommodated their own personal expenses or few disallowed costs. |
Auditors can take an effective step by monitoring all the documents related to marketing expenses in order to evaluate whether disallowed or personal expenses are not forming part of the same. Besides, they must ensure that the bills or vouchers or documents asserting the truthfulness of the transaction are of significant value (Kaplan, 2011). |
|
Investments |
The company has experienced a declining trend in relation to times income earned from their investments. |
The major audit risk lying here is that there can be undervaluation of investments by the company to record the same. Further, it may have manipulated the same for its self-interest motives. |
The auditor must make ways to ascertain why the interest earned from investments have fallen in comparison to the last year (Kalpan & Williams, 2013). For such purpose, it can check all the vouchers or receipts associated to the company’s investments. Besides, the auditors can also check whether any investment was disposed off by the company and the same can be verified through contract notes, vouchers, documents, etc. |
The company has been able to sustain its presence in both domestic and international markets and even though it has been facing immense competition challenges from its rivals, yet it has left no strings attached to explore all other sections in the market. However, it can be noted that the financial performance of the company has been witnessing a declining trend in comparison to the last year, which is a negative sign (Hoffelder, 2012). This can be done by evaluating the company’s material ratios so that a thorough analysis on all aspects can be determined.
Firstly, it can be viewed that the number of days of collection of debts have increased in comparison to the last two years. The reason behind this can be attributed to the fact that the company has become incapable of recovering its dues on the part of debtors in proper time. Moreover, if debt recovery has become problematic for the company, it means the smooth flow of operations can be easily impacted and therefore, it results in a major risk 9 Geoffrey et. al, 2016). Secondly, the company has been a failure in offering required return on equity to its investors specially in comparison to the last years. This can be proved by the fact that the company’s ROE (return on equity) has declined by seven percent in comparison to the last years. Therefore, this can result in another business risk as investors will become unwilling to invest their funds in such company. Thirdly, it can be observed that the net profit margin together with the gross profit margin of the company has deteriorated in the current year. The reason behind this can be attributed to the increase in costs or decrease in sales. Hence, this is a sign of major concern for the company because it directly reflects on the financial performance and if the same is ineffective, it may result in a material business risk. Lastly, there is a massive enhancement in the company’s current ratio because of significant increment in its liquid assets (Gay & Simnet, 2005). This is also an area of major concern because it signifies inability on the part of the company to take its liquid assets into best use and therefore, resulting in another material business risk.
|
Efficient Control |
Risk |
Test of Control |
|
The orders of the company are facilitated through online basis. Furthermore, the thorough details of suppliers have been recorded in their master file. Moreover, this recording of suppliers has been only conducted for the suppliers who are approved by the company. However, if an order is placed or assigned to any unapproved supplier, it is required that the order must be effectively terminated and proper information of the same must be provided to the management accountant so that further actions can be taken. |
The primary risk in relation to this case is that the approved suppliers possess the power to alter their agreed upon rates and even some approved suppliers not having registered in the master file can do so. |
The basic test of control is that in relation to approved suppliers, it must be noted that whenever an order is being placed, it is necessary for the department to intimate them with the requisite rates prior to implementation of such rates. This can assist the business in tackling or mitigating the impact of business risks (Elder, Beasley & Arens, 2010). |
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In relation to the company, it can be seen that the employees are offered bonus according to their level of targets attained. For example, if an employee attains or fulfils monthly targets, they can get awards or bonuses. This can motivate the employees in engaging in affairs that can assist in enhancing the company’s sales and benefitting the company on a whole. |
In relation to bonuses, it must be noted that an employee can indulge himself into unlawful practices to obtain the desired targets and additional bonuses as well. This is not effective for the company because this can hamper their goodwill in the market and unethical means on the part of employees can impact financial performance negatively. |
It is required that the management supervises the activities of the employees in an effective way so that they cannot undertake any illegal means to fulfil the targets. Furthermore, the management must look into matters wherein the employees have not assured fraudulent promises to the customers because negligence on their part can hamper the company’s goodwill. Therefore, the management must check the employees’ activities properly and they must check the vouchers and documents so that the actual sales attained can be noted (Elder, Beasley & Arens, 2010). |
|
The company’s department have been assigned the duty of handling several supplies. |
The risk associated to such handling of supplies is that there may be inaccurate order placement by the purchase department. Moreover, if the value of such orders is less than ten thousand dollars, the same is more prone to risk and fraud because the company has not facilitated in the implementation of a process wherein such orders less than $10000 are checked twice. |
The exact requirement of purchases in the company must be determined by checking the orders more than once. Besides, the same must be verified with the company’s records so that there is no place for errors and frauds. Nevertheless, the purchase requisition issued by the purchase department must also be checked more than once so that no problems occur in the future (Coram, Mock, Turner & Gray, 2011). |
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In the wine operations of the company, the departmental manager is responsible of observing the matters associated to repairing. In contrast to this, the management is responsible to observe the ascertainment of all online orders and their payment process so that a conclusion can be attained. |
In relation to repairs, it must be noted that any underlying repair expenses that have not been paid by the company since a long tenure is risky for it. In other words, any underlying repair costs that are long outstanding in nature are risky. Therefore, only upon the termination of services and the company’s process of raising the invoices through the service provider can play a key role in reflecting the accounts department and management accountant’s roles separately (Carcello, 2012). |
It is required that the management accountant must check such repair costs that have remained due from quite a long time (Carcello, 2012). With such test control, the company can get rid of this risk and can also determine the costs incurred in relation to these repairs. |
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The accounts clerk has been matching the received orders with the electronically generated invoices. Further, such invoices on the part of suppliers are matched as per the orders or instructions of the management accountant who is also liable for supervising such payments. |
In relation to alignment of orders with that of invoices, it must be noted that if an order is terminated or cancelled, the same may encounter various problems despite such alignment. Therefore, such risk is a crucial one when it comes to alignment of invoice with that of the orders (Cappelleto, 2010). Moreover, the company has ensured that after the termination of alignment process, the payment file is then transferred or sent to the banking department for requisite permissions. |
The management accountant alone is liable to align the orders with that of the invoices and in relation to this, it must be noted that there must be an extra individual in the payment department who can assist the management accountant in supervising the job effectively. Furthermore, the payments related to defective orders must also be subtracted in the system as early as possible to avoid future complications (Blay, Geiger & North, 2011). |
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The company has an automated IT system that can assist in managing its entire transactions with maximum security. |
There is no experienced individual from the IT department who can oversee the matter and instead, the management accountant is permitted to undertake such job that is very risky because he may not be aware of such technologies and may create extreme complications. |
The company must appoint a professional person from the IT field so that such segment can be properly monitored. Further, presence of another professional from the accounting field can assist in enhancing the supervision process, thereby resulting in minimization of errors and frauds. |
There are few issues in the accounts section like purchases and accounts payable that must be addressed as soon as possible.
In relation to purchase, the first weakness is that there is no checking of the stores file and the justification is that the purchase order is not independently checked with the goods that can result in additional stocking in the warehouses of the company. The second weakness is that there are no separate files made for inferior or lower-quality commodities and the justification behind this is that the clerk has been aligning the order information and their respective bills, and then records it in the payment file (Blay, Geiger & North, 2011). Nonetheless, there can be few inferior goods that have not been accounted by the clerk. The third weakness is that the company has unwilling relied upon the approved suppliers to a large extent and the justification is that such suppliers are offered goods as per their reputation and goodwill but various factors like changes in terms and conditions, change in delivery time, etc are not considered.
In relation to accounts payable, the first weakness is that there is no regular monitoring of payment files and the justification behind the same is that the same must be conducted by the management accountant and verification once a week is not enough in nature. The second weakness is that the company has not conducted reconciliation strategies to such account and the justification is that the accountant has primarily relied on IT system and has failed to draw proper reconciliations to the accounts payable ledgers (Baldwin, 2010). The last weakness is that the higher department has not checked the payment approval process in a proper way and the justification is that only the management accountant is responsible for approving such payments and inform the banks later.
Conclusion
The internal control measures of TCW have been adequately discussed through this report and it can be seen that there are various inefficacies that has resulted in the company’s inefficient performance when compared to the previous years. Furthermore, in the presence of adequate risk management strategies, any company can sustain in the environment because auditors can assist in recognizing material risks and report the same to the department for corrective actions. Nevertheless, in relation to TCW, the company has solely relied on the task of management accountant and not entrusted different duties to different persons. This is a very risky factor because if there are different duties to be fulfilled, there must be proper delegation of responsibility as well. Such reliance has created many risks for the company and that has forced it to lag. Moreover, risk management and auditing measures have come out to be the need of the hour because these can assist in identifying all such issues, thereby assisting in mitigation of such material risks. Overall, this can also assist the company in safeguarding its reputation in the market, thereby creating an opportunity to rise in the future as well.
References
Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.
Blay, A. D., Geiger, M. A. & North, D. S. (2011). The Auditor’s Going-Concern Opinion as a Communication of Risk. Auditing: A Journal of Practice & Theory, 30 (2): 77- 102. Doi: https://doi.org/10.2308/ajpt-50002
Cappelleto, G. (2010). Challenges Facing Accounting Education in Australia. Melbourne
Carcello, J. (2012). What do investors want from the standard audit report? CPA Journal 82 Retrieved from https://www.questia.com/magazine/1P3-2594765681/what-do-investors-want-from-the-standard-audit-report
Coram, P., Mock, T. J., Turner, J. & Gray, G. (2011). The communicative value of the auditor’s report. Australian Accounting Review 21(3): 235-252. Doi: https://doi.org/10.1111/j.1835-2561.2011.00140.x
Elder, J. R., Beasley S. M., and Arens A. A. (2010). Auditing and Assurance Services. Person Education, New Jersey: USA
Gay, G., and Simnet, R. (2015). Auditing and Assurance Services. McGraw Hill
Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons, 30(1), 143-156. https://doi.org/10.2308/acch-51309
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011). Accounting scholarship that advances professional knowledge and practice. The Accounting Review, 86(2), 367–383. https://doi.org/10.2308/accr.00000031
Kaplan, S. & Williams, D. (2013). Do going concern audit reports protect auditors from litigation? A simultaneous equations approach. The Accounting Review, 88 (1), 199-232. Doi: https://doi.org/10.2308/accr-50279
Lapsley, I. (2012). Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management, 9(3), pp. 291-292. https://doi.org/10.1111/1468-0408.00081
Livne, G. (2015, May 12). Threats to Auditor Independence and Possible Remedies. Retrieved from:com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full”> https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full
Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.
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