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ACC 568 Auditing

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ACC 568 Auditing

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Course Code: ACC568
University: Charles Sturt University

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: Australia

Question:
It provides clarification on a number of the accounts that you have been asked to comment on investments, marketing expenses and property.
Answer:

Solution to 1A
The mechanism of ratio analysis refers to the financial statement assessment for obtaining the financial performance company measurement in the major areas of the business. For the current organization of Trunkey Creek wine that is chosen the accounts which are to be examined includes investments, accounts receivables, marketing expense and property assets. In this section, risk of audit deals is analyzed that deals with the hurdles that the auditor faces at the time of conducting the material misstatement detection of the company (Barnier & Wright, 2017). As identified in the case study, the fraud and error are the two primary factors that lead to misstatement. The below table would help in the examine the financial data of TCW and evaluate the audit risks that are linked along with the recommendation are given to lessen the risk:

Account

Analysis

Audit Risk

Audit Steps to reduce risk

Account Receivable

 The account receivable refers to the sum that the clients of TCW need to pay back. For the organization, the ratio of accounts receivable of wine segment is 60.65 days and for the segment of beef is 36 days. It is the number of days that the invoice of customers are outstanding.

Since, the company TCW transacts their goods on credit; the risks that are associated to this account include risk of completeness occurrence risk and the Existence risk.

For the existence risk and occurrence risk, the auditor of the company needs to lessen  the risk and identify various suspicious  confirmations of the various records of  financial data . For completeness risk, it is the auditor to examine all the proceeds of sales   and get ability for the transaction of the company’s process.

Investment

The investment analysis can be done by interest earning ratio.  In the company of TCW in 2016 the interest earned was 8.10 and for 2017 the same was 7.51 that mean that the investment for the company has increased (Bradbury, Raftery & Scott, 2018). Additionally, the debt equity ratio also represents the investment risk.

There exists the inherent risk in the context of material misstatement. If risk is high, there is a liability to the investors who needs payments.  This can impact the working capital.

If auditor obtain investment data that is at cost or fair value which is shown in the financial statement of. The auditor must also analyze the methods for the determination the fair value according to the GAAP.

Property assets

The ratio of return on production assets for both the segments of wine and beef of TCW is to be examined (Manuj  & Mentzer    2018). According to the information, it is identified that the production returns on asset of on beef for the year 2017 has been risen to -0.8 % from -3.4 % that was in 2016.

The associated risk of the recording of the property assets is the correct cost based on and complexity recording in the assets valuation (Carson, Fargher & Zhang, 2016).

The auditor must reduce the record complexity of the assets and make easy. This would help to avoid the gap in the process of accounting and audit. The assessor needs to analyze if the TCW has capitalized all the cost of the asset purchase and record the various repairs and maintenance of the assets.

Marketing Expense

The Marketing expense percentage is the total S/E expenses of the firm TCW. The audited ratio of 2017 is 17.89% that has been increased from 15.2% from the year of 2016.

The risk in this context are the, duplicate payment risk, understatement risk and risk of inappropriate vendors.

The steps to reduce   risk by the auditor is to regularly check the processing and records the expenses on a timely basis (Ritchie & Marshall, 2015).

Solution to 1B
The business risk that is attached with the business is the risk which is identified with the fluctuation of income of the organization. The process of ratio analysis would help in indicating the various risks that may take place in the organization (Hillson & Murray-Webster, 2017). In the organization of TCW the given ratio must be examined are as under:

Return on equity:The return on equity that breaks down the profitability of the organization  of TCW, in 2017 has increased 17.5 from 15.5 in 2016 (Bailey, Collins, & Abbott, 2017). For the year 2018 the expected unaudited records says that it will fall more to 10.80 in the year 2018.
Return on production assets of beef: The intensity of production and estimation of assets with the total assets business is known as the return on assets. In present scenario of TCW, percentage returns of the beef production. Increased from – 3.45 out of 2016 to 0.82 in 2017. However, as per the unaudited records the return  would rise to 1.67 in 2018.
Return on grape and wine asset production:The return on grape and wine production of the TCW in 2016 was 16.2 that reduced to 14.5 in the year 2017. In 2018 the unaudited record is much less that amounts to 12.2(Bentley-Goode, Newton & Thompson, 2017).
Gross Margin: The gross margin is the total income of TCW after reducing from the cost of goods sold by the total sales (Louwers,  et al., 2015).  If the rate is high, the firm has the ability to hold the units of sales. In TCWs  the gross profit margin in 2016  was 31.76 which fell to 14.5 in 2017; However, the gross margin decreased to 12.2 out of 2018 as per the unaudited report.
Marketing cost over S/A costs: The costs  of marketing is the cash level that has been with the profits from the total of administrative costs considering the end goal for increasing the sales (Knechel & Salterio, 2016). It is an indirect cost. As per the records of 2017 and 2016 that are audited, the marketing cost level has reduced from 2016 in 15.2 to 17.89 in 2017. In 2018 the unaudited record amounted to 23.67.
Times interest earned: The interest earned refers to the coverage ratio that makes the estimation of the organization capacity of the to meet payment of the debts. In the present case the coverage ratio is less than one that means that, the firm not getting sufficient cash from the various operations of the business (Farooq & de Villiers, 2017). The interest that is earned is reducing in the organization of TCW that represents to that there not much generation of cash. In 2017 the interest earned was 7.51; in 2016 was 8.10 and the expected and unaudited interest for 2018 was 6.67.
Days in inventory (wine):The days sales are represented by the days for the sale of the inventories at the determined period. For this case, the inventory refers to the production of the wine. For wine, the days of inventory for 2016 was 460, in 2017 was 423 and in case of the unaudited record the number of days is 367.
Days in accounts receivables (wine): The accounts receivables days is the number of days that the company of TCW would need to get the installments of their sales. If numbers of days are more, it reflects a issue in cash generation. In case there is lesser number of days, it reflects that there is a strict policy of credit that may reduce the revenue (Cohen & Simnett, 2014). Here, the goods is the wine production of TCW. The receivable of days for wine was 53.24 in 2016, 60.65 in the year 2017 and the unaudited record are 50.2.
Days in accounts receivables (beef):The account receivable days for beef in 2016 was 24,  in 2017 was 36 and the unaudited record are 57 in the year 2018.
Current ratio:The current ratio refers is the liquidity ratio estimates the capacity of the firm to accommodate both long term  and short term liabilities. It can be calculated by division of the total of liabilities and assets of the organization. In the given case the aggregate assers to both noncurrent and current assets of the current and of TCW. The current ratio is 2.66 for the year 2016, 2.54 in the year 2017 and the unaudited record is 2.80.
Acid test ratio: The acid -test ratio or quick ratio is the assets that can be converted into cash without changing the value (Junior, Best & Cotter, 2014). The acid test ratio was 1.20 in 2016, 1.15 in 2017 and the unaudited record is expected to be 1.18.
Debts to equity ratio: The debt to equity ratio refers to the financial ratio that shows the financial ratios that demonstrates the extent of shareholders debt and equity  to finance the asset with respect to the equity value (Sadgrove, 2016). Debt to equity ratio was 0.67 in 2016, 0.63 for the year 2017 and the unaudited record is 0.54.

It can be observed from the above analysis, the various types of risks have been identified, and Business risk is the probability of not obtaining the investment return. In case of the company of TCW the identified risks are:
Strategic risks: The strategic risk is the operating risk within a specific industry at a particular time that can take place from change in technology or clients preference change (Cohen, Krishnamoorthy & Wright, 2017). For TCW, they deal with both beef and wine; therefore, risk linked with strategy is much less. Moreover, there has been installation of new IT system that may give rise to some risk.
Risk of compliance: The risk that are related with compliance to regulations of bureaucratic or authoritative that the firm may pursue. For the TCW as there is a sound internal control, the identified compliance risk is less.
Financial risk: It is the monetary risk linked with the loss is known as financial risk. In the present case of TCW, there is large financial risk because of the implications of new framework of IT. Apart from the that since there are three of the segments of grapes, wines and beef  they may experience of loss of money.
Operational Risks: The operational risk is the risk that takes place due to the internal failures that can be a result of the various business activities. The risk may also take place due to the external events that may takes place suddenly. As in the   company TCW operates in both wine and beef the operational risk is more.
Risk of reputations: The risk of reputation refers to that risk that takes place due to the anticipation of loss the reputation of the business or negative fame. The risk of reputation is high in the company of TCW as it works in excess of two sections.
Solution to 2A
The Internal control refers to the objectives confirmation of company in the adequacy and proficiency in operations. It is a systematic assurance financial reporting arrangement which is to be consistent with the laws, strategies and controls.
In TCW the Internal control is the process that is impacted by the organization management  are the group of trustees and various people who gives sensible confirmation for the attainment of the goals of the –

Compliance with the applicable controls and laws
The various effectiveness and efficiency of the tasks
Financial reporting reliability

In the TCW company the inward control components are taken in hand as per the of the standard rules, if –

There is a approval of the appropriate methods has been taken for the costs of capital
Proper insurance scope has been provided for the assets
The evaluation of depreciation is conducted efficiently to every period
The salvage value  and useful life have been determined properly

          In the enterprise TCW, the organization considers the business profitability not just as the function of revenue but also for sound resources management. The identified internal controls  are:

Effective control

Risk alleviated

Test of Control

Controlling environment

The identified risks while control of the TCW environment is the reputational risk and the operational risk.

The test of control is the moral value check, managerial skills, employees working honesty and the company direction.

Risk assessment

In this control system, the risks that have to be examined are compliance risk and financial risk. The assessment risk would help in the prediction of the risk beforehand.

The assessment of risk deals with the setting up of the effective control over the various external and internal control of the risk associated of the chosen company of TCW.

Communication  and Information

The risk that is identified the reputation risk and financial risk. The effective control of communication and information makes the TCW alert to take decisions in ration to the stakeholders.

The relevant information that is and needs to be taken for the achievement of the management goals. It is the verifying process of the data in relation with stakeholders.

Monitoring

The operational risk and financial risk are identified in this control test (Simnett, Carson & Vanstraelen, 2016). It is the method of compliance with the various regulations, rules and laws.

It is the effectiveness control is  to protect the issues that may take place in future for lack in the efficient control.

Physical control

Internal controls of physical control faces two types of risks. The first risk is physical damage risk, theft of loss and assets (Arens, Elder, Beasley & Jones, 2015). The other type of risk is to financial risk that may take place for the error in determination of the cost of depreciation and useful life.

The physical control involves in identification of the fixed asset and verification of that whether the administration reviews periodically the asset with regard to the assets policies of insurance which are exposed to the loss or damages.

Solution to 2B
In case of Purchase system:

Weakness

Justification

The purchase systems of are not controlled independently with the stock that can result in overstock.

There must be a daily report in the purchase department that may have an appropriate control and it must be verified with the stocks in the accounts books.

Based on the past reputations the various suppliers are chosen and not on data like the prices terms and the time of. In addition to this, there is no independent verification on the purchases against the orders.

The selection process of the suppliers should be based on price, quality, and time of delivery. There should be an evident signature of the inspection clerk on each delivery.

 In case of Accounts payable system:

Weakness

Justification

Only the accounts payable manager approves a balance sum of account payables.

Approval and verification of all the balances of the accounts payable.

There is no usual comparison of the control accounts and creditor ledger that in which errors may come up.

For avoiding any type of errors, there should be a usual comparison practice of the control accounts and creditor ledger.

 The  no assurance that the various deliveries have been received and accounted
Moreover, the creditor ledgers are understated.

The ledgers of the creditor are required to be audited daily with a guarantee with sign of the deliveries that takes place.

List of reference
Arens, A. A., Elder, R. J., Beasley, M. S., & Jones, J. (2015). Auditing: The Art and Science of Assurance Engagements. Pearson Canada.
Bailey, C., Collins, D. L., & Abbott, L. J. (2017). The Impact of Enterprise Risk Management on the Audit Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3), 25-46.
Barnier, B., & Wright, C. (2017). The many facets of risk: internal auditors need to consider the variety of perspectives business functions have for managing risks. Internal Auditor, 74(2), 20-22.
Bentley-Goode, K. A., Newton, N. J., & Thompson, A. M. (2017). Business strategy, internal control over financial reporting, and audit reporting quality. Auditing: A Journal of Practice & Theory, 36(4), 49-69.
Bradbury, M. E., Raftery, A., & Scott, T. (2018). Knowledge spillover from other assurance services. Journal of Contemporary Accounting & Economics, 14(1), 52-64.
Carson, E., Fargher, N., & Zhang, Y. (2016). Trends in auditor reporting in Australia: a synthesis and opportunities for research. Australian Accounting Review, 26(3), 226-242.
Cohen, J. R., & Simnett, R. (2014). CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), 59-74.
Cohen, J., Krishnamoorthy, G., & Wright, A. (2017). Enterprise Risk Management and the Financial Reporting Process: The Experiences of Audit Committee Members, CFO s, and External Auditors. Contemporary Accounting Research, 34(2), 1178-1209..
Farooq, M. B., & de Villiers, C. (2017). The market for sustainability assurance services: A comprehensive literature review and future avenues for research. Pacific Accounting Review, 29(1), 79-106.
Hillson, D., & Murray-Webster, R. (2017). Understanding and managing risk attitude. Routledge.
Junior, R. M., Best, P. J., & Cotter, J. (2014). Sustainability reporting and assurance: A historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), 1-11.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.
Manuj, I., & Mentzer, J. T. (2018). Global supply chain risk management. Journal of business logistics, 29(1), 133-155.
Ritchie, B., & Marshall, D. V. (2015). Business risk management. Chapman & Hall.
Sadgrove, K. (2016). The complete guide to business risk management. Routledge.
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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