Case B - Report Value: 20% Due Date: 16-Sep-2018 Return Date: 05-Oct-2018 Length: 3000 words Submission method options: Alternative submission method Task back to top Background You are a manager in...

1 answer below »

Case B - Report


Value:20%Due Date:16-Sep-2018Return Date:05-Oct-2018Length:3000 wordsSubmission method options:Alternative submission method

Task



back to top


Background
You are a manager in the audit division at Miller Yates Howarth (MYH), an accounting firm with offices throughout the major regional centres of NSW and Queensland. Although a medium sized firm by national standards, MYH is the second largest regional accounting firm in Australia. Most of MYH’s audit clients are in the agriculture, mining, manufacturing and property industries. All those industries are currently under pressure, either from a downturn in commodity prices or fierce competition from overseas competitors. Ratios extracted from an unaudited set of financial reports at 30 June 2018 together with audited comparatives for the year ended 30 June 2017 and 2016 are set out below for your review.


You are gathering information to prepare the audit plan of Trunkey Creek Wines Limited for the year ended 30 June 2018. Trunkey Creek Wines (TCW) is one of MYH’s most significant and longstanding clients. The following information has been gathered to date.


Principal activities of TCW
• growing grapes for wine production;
• production and distribution of red, white and sparkling wines;
• beef cattle production on land surplus to grape production; and
• investment of surplus funds.


TCW was originally a family company incorporated in 1968 and has operated successfully and profitably since that date. In the 1990’s shares were sold to a small number of investors to increase funds for the development and upgrading of the winery and the purchase of additional land for the vineyards. Insufficient rainfall had meant that some land was no longer suitable for wine grape production, as a result, TWC moved into Wagyu beef cattle production on this surplus land. The Wagyu operation is now starting to return a profit.


TWC now find that the 2 degrees increase in temperature at some vineyards is affecting the production of sparkling wine and are now looking at purchasing land in cooler climates. TWC has built up a strong following for their sparkling wine which earns significant profits in both domestic and overseas markets. TWC are currently negotiating the land purchase and part funding in part from medium term bank loans. The remaining purchase price will be sourced from surplus funds.


The Wagyu beef is sold through the Wagyu Selling Group (WSG) in which TWC has shares. These shares form a material part of TWC’s investment portfolio. WSG buys, butchers and sells the Wagyu beef to high end domestic restaurants and regularly sends frozen shipments to Japan and China. TWC are heavily marketing their pinot, both domestically and overseas, as a perfect accompaniment to the Wagyu beef.


The directors of TCW are:



  • Mrs Claire Harewood, Chairman. Mrs Harewood has significant experience in the industry and replaced her husband as chair when he died 10 years ago.

  • Mr Phillip Strange, Chief Executive Officer

  • Mr. Joe Quade

  • Mr Steven Harewood, son of Claire Harewood and has oversight of the Wagyu beef operation

  • Dr Mary Owens

  • Ms Hilary Jones

  • Mr Geoffrey Owens


Your audit partner, John Richards, has approached you and advised that there are several areas he is concerned about and he wants to you to report back to him about these areas before you complete your audit program. These areas and accounts are:
• Accounts receivable
• Investments
• Property assets
• Marketing expense




























































































Ratio



2018 (Unaudited)



2017 (Audited)



2016 (Audited)



Return on equity %



10.80



17.5



15.2



Return on beef production assets %



1.67



-0.82



-3.45



Return on grape and wine production assets %



12.2



14.5



16.2



Gross margin %



24.5



30.00



31.76



Net profit margin%



14.38



20.27



17.85



Marketing expense % of total S & A expenses



23.67



17.89



15.2



Times interest earned



6.67



7.51



8.10



Days in inventory - wine



367



423



460



Days in accounts receivable - wine



50.2



60.65



53.24



Days in accounts receivable - beef



57



36



24



Current ratio:1



2.80



2.54



2.66



Quick asset ratio:1



1.18



1.15



1.20



Debt to equity ratio:1



0.54



0.63



0.67







Internal control


The financial controller at TCW has been refining the system of internal controls and informs you, at the planning stage of the current year's audit, that he has put together an internal control manual for the company. He has stated that this manual will create greater awareness of controls in the company, particularly with management which, in the past, has not been overly conscious of the need to implement and enforce effective internal controls.


Management staff receive bonuses based on certain agreed-upon target ratios which include measures such as targeted monthly sales volumes, variance of actual to budget departmental overheads and profit before interest and tax. The Board takes an active interest in the performance of the company and is quick to request explanations on variances from the agreed-upon monthly budgets.


Two years ago, the company devoted significant time and resources to the development and implementation of a new IT system. All teething problems associated with the implementation phase have now been resolved, and the financial controller is satisfied that the automated controls in place are assisting in producing accurate and complete accounting records. The management accountant also looks after the IT function as the position is not regarded by management as being a full-time job. Once application programs have been tested, strict password control exists over access to the programs. Passwords are not required for access to databases.


To assist in the planning for the current year's audit engagement, you extracted the following information from a review of the systems notes in the permanent file and a perusal of the new internal control manual:



  • There are three section managers, one each for grape production, wine production and beef production. Each can order supplies for their respective operations up to a limit of $10,000 for each order. Orders between $10,000 and $30,000 must be approved by the management accountant. Orders over $30,000 must be approved by the CEO. Orders over $50,000 must be approved by the Board.

  • Orders must be made through the computer ordering system which has direct links to the approved suppliers.

  • Supplier information is contained in a supplier master file. Each supplier has a unique supplier code. If a section manager orders from an unapproved supplier, the order is rejected and sent to the management accountant for approval.

  • The supplier information file is maintained by the accounts clerk. Changes to the file are approved manually by the management accountant.

  • When supplies are received at the winery, the storeman checks the supplies received to the online copy of the order and the delivery docket provided by the supplier. Any discrepancies are noted on the online copy of the order.

  • The delivery docket is filed by the storeman in a folder that is kept at the winery.

  • The invoice is received electronically from the supplier and matched to the order by the accounts clerk. If the order and the invoice match the invoice is included in a payments file.

  • The payments file is approved online by the management accountant once a week and used to generate an ABA file which is then uploaded to the bank by the management accountant.

  • When the payments file is approved by the management accountant, the invoice is automatically recorded as being paid in the accounting system.

  • When services such as repairs are ordered for the winery by the wine production manager, a service order is generated within the computer system and automatically sent to the service provider.

  • When the service has been delivered, the wine production manager or the storeman signs the service delivery docket on the service man’s tablet.

  • The invoice from the service company, with a copy of the signed service delivery docket, is received online by the accounts clerk.

  • The accounts clerk checks the signed service delivery docket to the invoice and the order and adds the invoice to the payments file for final approval by the management accountant.

  • In the case of discrepancies, the accounts clerk contacts the supplier and the wine production manager to resolve the issue. Payments are not made until the issue has been resolved.







Required


Write a report, including a brief executive summary, to your managing partner that addresses the questions below. Where indicated, use the required format to answer that question.


Question 1A 8%
Analyse the ratios and additional information associated with the four accounts listed by your audit partner, John Richards. Identify the potential audit risks and any audit steps that need to be undertaken to reduce audit risk.
Answer this question using the following table:




































Account



Analysis



Audit Risk



Audit Steps to reduce risk

























































































Question 1B 2%
Analyse the ratios and additional information to outline business risks that TWC faces.




Question 2A 7%
Identify the internal controls in the system that are potentially effective, the risk that the control could alleviate and one test of control for each of the identified potentially effective controls.
Answer this question using the following headings:


















Effective control



Riskalleviated



Test of control
























Question 2B 2%
List and justify the weaknesses in internal control for purchases and accounts payable.














Weakness



Justification

















Rationale



back to top


This assessment task will assess the following learning outcome/s:



  • be able to demonstrate risk management methodologies and the role of internal controls in an audit context.

  • be able to design an audit plan and select and apply appropriate audit procedures for a financial statement audit.

  • be able to exercise critical and reflective judgement and appreciate the value of ethical practice.

Answered Same DaySep 30, 2020ACC568Charles Sturt University

Answer To: Case B - Report Value: 20% Due Date: 16-Sep-2018 Return Date: 05-Oct-2018 Length: 3000 words...

Pulkit answered on Oct 02 2020
143 Votes
EXECUTIVE SUMMARY
The report presented provides a review and analysis of the data of the unaudited financial statement of the year 2018 and previous audited two years to evaluate the profitability, liquidity and financial stability of Trunkey Creek Wines Limited. To achieve this objective of analysis and review different accounts are examined on the points of the relative audit risk involved on the basis of the ratios provided for the three years. On analysing the associated risk certain areas need improvement and observation. Also internal control system of the company is gone through for pi
npointing the weakness existing in the same and there have been found some weakness in the internal control system of the newly operated automated computer system in the purchases and accounts payable department which needs to be observed
QUESTION 1 A
    Accounts
    Analysis
    Audit Risk
    Audit Steps to Reduce Risk
    1. Investments
    · The investments portfolio of the company mainly consists of the shares held in the Wagyu Selling Group (WSG) and the investments made of the surplus fund if any.
· No proper ratio in direct relation to the investment information exists.
· The investments generally as per the auditing standards are to be valued at cost or at market value or more properly lower of the cost or net realisable value.
· There should be proper bifurcation of the investment into long term investments and short term investments.
· The terms and conditions as to the investments should be observed to find out what and how the investments of the company are made up of.
    · The major audit risk associated with the investment is whether the related party transactions are properly allocated so as to find out the balance of the investment account.
· The presentation of the investment is done properly or not and is not biased in any manner.
· The requisite documents with respect to the investments is properly kept and the authorisation of the requisite authority obtained before making investments of the surplus fund.
· Proper valuation and disclosure of investment in the books of the company as per the requisite rules and regulations in this regard.
· The audit risk as to the degree of reliance to be placed on the information system in practice.
    · The amount of investment in the Wagyu Selling Group (WSG) can be checked by way of the company’s account in their books.
· Going through the bifurcation of the related party income and expenses.
· The authorisation process to be followed need to be observed and see whether the documents of authorisation for studying the authorisation process followed or not.
· The market trends with respect to the investments need to be studied to observe whether the market price of the investments is correctly estimated. [Eilifsen, A., Knechel, W.R. and Wallage, P., 2001.]
    2. Accounts Receivable
    · On the basis of the ratio analysis of the days in account receivables it can be observed and analysed that the collection from debtors have improved in the wine department as the number of days of accounts receivable have decreased whereas the same has increased in the beef department to a great extent leading to the increase in the possibility of the doubtful debts.
· Accounts receivables shows the amount to be received from the third parties and also in the case of the company shows the amount of credit sales made by the grape, wine and beef activities of the company.
· There should be a proper classification of the amount of Accounts Receivables into current assets and non-current assets.
    · The analysis of the ratio reflects that the number of days of the accounts receivable have increased from the beef activity undertaken by the company and thus increasing the chances of doubtful debts for the company and this chance have increased in 2018 in comparison to previous years the risk in relation to the estimation of the amount of the provisions for doubtful debts have increased.
· The risk of correct and proper valuation of the amount of the accounts receivable and the methods used for the valuation are consistently applied by the company.
· The representation and disclosure of the balances of the accounts receivables of the company is done correctly and truly so as to reflect the true and fair view of the state of affairs of the company.
    · The manner and the basis of the estimation of the amounts of the provisions of the doubtful debts and also the amount of bad debts recognised and recovered if any need to be observed and also the manner the company deals with the respective amounts. The evidences in this regard need to be go through.
· The balances in the accounts receivable can be cross checked by the customers by way of obtaining their confirmation to the same
· The existence of the balances can be judged by going through the transactions randomly.
· The transactions in the respective accounts of the accounts receivable can be checked by random selection of the accounts receivable account to check the trends in the same.
    3. Property Assets
    · The property assets of the company mainly constitute the land purchased for growing grapes and also the production assets held in the grape and wine department and beef department.
· The return on production assets of beef activities have increased in 2018 in comparison to 2016 & 2017 which depicts an increase in the value of production assets.
· The return on production assets in the grape and wine have decreased in 2018 in comparison to the previous years due to the selling of the production assets.
    · The main audit risk in relation to the property asset is with the existence of the property asset in relation to the amount standing against the property assets.
· The increase and the decrease as depicted by the return from the production assets from the beef activity and the grape and wine activity is in real terms or not is to be determined which is difficult to find out.
· The audit risk as to the...
SOLUTION.PDF

Answer To This Question Is Available To Download

Related Questions & Answers

More Questions »

Submit New Assignment

Copy and Paste Your Assignment Here