Assessment item 3

back to top

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 the audit division at Miller Yates Howarth(MYH), an accounting firm with offices throughout the majorregional centres of NSW and Queensland. Although a medium sizedfirm by national standards, MYH is the second largest regionalaccounting firm in Australia. Most of MYH’s audit clients are inthe agriculture, mining, manufacturing and property industries. Allthose industries are currently under pressure, either from adownturn in commodity prices or fierce competition from overseascompetitors. Ratios extracted from an unaudited set of financialreports at 30 June 2018 together with audited comparatives for theyear ended 30 June 2017 and 2016 are set out below for yourreview.

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

Principal activities of TCW

• growing grapes for wine production;

• production and distribution of red, white and sparklingwines;

• beef cattle production on land surplus to grape production;and

• investment of surplus funds.

TCW was originally a family company incorporated in 1968 and hasoperated successfully and profitably since that date. In the 1990’sshares were sold to a small number of investors to increase fundsfor the development and upgrading of the winery and the purchase ofadditional land for the vineyards. Insufficient rainfall had meantthat some land was no longer suitable for wine grape production, asa result, TWC moved into Wagyu beef cattle production on thissurplus land. The Wagyu operation is now starting to return aprofit.

TWC now find that the 2 degrees increase in temperature at somevineyards is affecting the production of sparkling wine and are nowlooking at purchasing land in cooler climates. TWC has built up astrong following for their sparkling wine which earns significantprofits in both domestic and overseas markets. TWC are currentlynegotiating the land purchase and part funding in part from mediumterm bank loans. The remaining purchase price will be sourced fromsurplus funds.

The Wagyu beef is sold through the Wagyu Selling Group (WSG) inwhich TWC has shares. These shares form a material part of TWC’sinvestment portfolio. WSG buys, butchers and sells the Wagyu beefto high end domestic restaurants and regularly sends frozenshipments to Japan and China. TWC are heavily marketing theirpinot, both domestically and overseas, as a perfect accompanimentto the Wagyu beef.

The directors of TCW are:

Mrs Claire Harewood, Chairman. Mrs Harewood has significantexperience in the industry and replaced her husband as chair whenhe died 10 years ago.

Mr Phillip Strange, Chief Executive Officer

Mr. Joe Quade

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

Dr Mary Owens

Ms Hilary Jones

Mr Geoffrey Owens

Your audit partner, John Richards, has approached you andadvised that there are several areas he is concerned about and hewants to you to report back to him about these areas before youcomplete 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 %	10.8	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	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	8.1
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	2.8	2.54	2.66
Quick asset ratio:1	1.18	1.15	1.2
Debt to equity ratio:1	0.54	0.63	0.67

Internal control

The financial controller at TCW has been refining the system ofinternal controls and informs you, at the planning stage of thecurrent year's audit, that he has put together an internal controlmanual for the company. He has stated that this manual will creategreater awareness of controls in the company, particularly withmanagement which, in the past, has not been overly conscious of theneed to implement and enforce effective internal controls.

Management staff receive bonuses based on certain agreed-upontarget ratios which include measures such as targeted monthly salesvolumes, variance of actual to budget departmental overheads andprofit before interest and tax. The Board takes an active interestin the performance of the company and is quick to requestexplanations on variances from the agreed-upon monthly budgets.

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

To assist in the planning for the current year's auditengagement, you extracted the following information from a reviewof the systems notes in the permanent file and a perusal of the newinternal control manual:

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

Orders must be made through the computer ordering system whichhas 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 managerorders from an unapproved supplier, the order is rejected and sentto the management accountant for approval.

The supplier information file is maintained by the accountsclerk. Changes to the file are approved manually by the managementaccountant.

When supplies are received at the winery, the storeman checksthe supplies received to the online copy of the order and thedelivery docket provided by the supplier. Any discrepancies arenoted on the online copy of the order.

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

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

The payments file is approved online by the managementaccountant once a week and used to generate an ABA file which isthen 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 theaccounting system.

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

When the service has been delivered, the wine production manageror the storeman signs the service delivery docket on the serviceman’s tablet.

The invoice from the service company, with a copy of the signedservice delivery docket, is received online by the accountsclerk.

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

In the case of discrepancies, the accounts clerk contacts thesupplier 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 yourmanaging partner that addresses the questions below. Whereindicated, use the required format to answer that question.

Question 1A 8%

Analyse the ratios and additional information associated withthe four accounts listed by your audit partner, John Richards.Identify the potential audit risks and any audit steps that need tobe undertaken to reduce audit risk.

Answer this question using the following table:

Accounts	Analysis	Audit Risk	Audit steps to reduce risk

Question 1B 2%

Analyse the ratios and additional information to outlinebusiness risks that TWC faces.

Question 2A 7%

Identify the internal controls in the system that arepotentially effective, the risk that the control could alleviateand one test of control for each of the identified potentiallyeffective controls.

Answer this question using the following headings:

Effective Control	Risk alleviated	Test of control

Question 2B 2%

List and justify the weaknesses in internal control forpurchases and accounts payable.

Weakness	Justification

Assessment item 3

back to top

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 the audit division at Miller Yates Howarth(MYH), an accounting firm with offices throughout the majorregional centres of NSW and Queensland. Although a medium sizedfirm by national standards, MYH is the second largest regionalaccounting firm in Australia. Most of MYH’s audit clients are inthe agriculture, mining, manufacturing and property industries. Allthose industries are currently under pressure, either from adownturn in commodity prices or fierce competition from overseascompetitors. Ratios extracted from an unaudited set of financialreports at 30 June 2018 together with audited comparatives for theyear ended 30 June 2017 and 2016 are set out below for yourreview.

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

Principal activities of TCW

• growing grapes for wine production;

• production and distribution of red, white and sparklingwines;

• beef cattle production on land surplus to grape production;and

• investment of surplus funds.

TCW was originally a family company incorporated in 1968 and hasoperated successfully and profitably since that date. In the 1990’sshares were sold to a small number of investors to increase fundsfor the development and upgrading of the winery and the purchase ofadditional land for the vineyards. Insufficient rainfall had meantthat some land was no longer suitable for wine grape production, asa result, TWC moved into Wagyu beef cattle production on thissurplus land. The Wagyu operation is now starting to return aprofit.

TWC now find that the 2 degrees increase in temperature at somevineyards is affecting the production of sparkling wine and are nowlooking at purchasing land in cooler climates. TWC has built up astrong following for their sparkling wine which earns significantprofits in both domestic and overseas markets. TWC are currentlynegotiating the land purchase and part funding in part from mediumterm bank loans. The remaining purchase price will be sourced fromsurplus funds.

The Wagyu beef is sold through the Wagyu Selling Group (WSG) inwhich TWC has shares. These shares form a material part of TWC’sinvestment portfolio. WSG buys, butchers and sells the Wagyu beefto high end domestic restaurants and regularly sends frozenshipments to Japan and China. TWC are heavily marketing theirpinot, both domestically and overseas, as a perfect accompanimentto the Wagyu beef.

The directors of TCW are:

Mrs Claire Harewood, Chairman. Mrs Harewood has significantexperience in the industry and replaced her husband as chair whenhe died 10 years ago.

Mr Phillip Strange, Chief Executive Officer

Mr. Joe Quade

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

Dr Mary Owens

Ms Hilary Jones

Mr Geoffrey Owens

Your audit partner, John Richards, has approached you andadvised that there are several areas he is concerned about and hewants to you to report back to him about these areas before youcomplete 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 %

10.8

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

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

8.1

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

2.8

2.54

2.66

Quick asset ratio:1

1.18

1.15

1.2

Debt to equity ratio:1

0.54

0.63

0.67

Internal control

The financial controller at TCW has been refining the system ofinternal controls and informs you, at the planning stage of thecurrent year's audit, that he has put together an internal controlmanual for the company. He has stated that this manual will creategreater awareness of controls in the company, particularly withmanagement which, in the past, has not been overly conscious of theneed to implement and enforce effective internal controls.

Management staff receive bonuses based on certain agreed-upontarget ratios which include measures such as targeted monthly salesvolumes, variance of actual to budget departmental overheads andprofit before interest and tax. The Board takes an active interestin the performance of the company and is quick to requestexplanations on variances from the agreed-upon monthly budgets.

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

To assist in the planning for the current year's auditengagement, you extracted the following information from a reviewof the systems notes in the permanent file and a perusal of the newinternal control manual:

There are three section managers, one each for grape production,wine production and beef production. Each can order supplies fortheir respective operations up to a limit of $10,000 for eachorder. Orders between $10,000 and $30,000 must be approved by themanagement accountant. Orders over $30,000 must be approved by theCEO. Orders over $50,000 must be approved by the Board.
Orders must be made through the computer ordering system which hasdirect links to the approved suppliers.
Supplier information is contained in a supplier master file. Eachsupplier has a unique supplier code. If a section manager ordersfrom an unapproved supplier, the order is rejected and sent to themanagement accountant for approval.
The supplier information file is maintained by the accounts clerk.Changes to the file are approved manually by the managementaccountant.
When supplies are received at the winery, the storeman checks thesupplies received to the online copy of the order and the deliverydocket provided by the supplier. Any discrepancies are noted on theonline copy of the order.
The delivery docket is filed by the storeman in a folder that iskept at the winery.
The invoice is received electronically from the supplier andmatched to the order by the accounts clerk. If the order and theinvoice match the invoice is included in a payments file.
The payments file is approved online by the management accountantonce a week and used to generate an ABA file which is then uploadedto 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 theaccounting system.
When services such as repairs are ordered for the winery by thewine production manager, a service order is generated within thecomputer system and automatically sent to the serviceprovider.
When the service has been delivered, the wine production manager orthe storeman signs the service delivery docket on the service man’stablet.
The invoice from the service company, with a copy of the signedservice delivery docket, is received online by the accountsclerk.
The accounts clerk checks the signed service delivery docket to theinvoice and the order and adds the invoice to the payments file forfinal approval by the management accountant.
In the case of discrepancies, the accounts clerk contacts thesupplier 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 yourmanaging partner that addresses the questions below. Whereindicated, use the required format to answer that question.

Question 1A 8%

Analyse the ratios and additional information associated withthe four accounts listed by your audit partner, John Richards.Identify the potential audit risks and any audit steps that need tobe undertaken to reduce audit risk.

Answer this question using the following table:

Accounts

Analysis

Audit Risk

Audit steps to reduce risk

Question 1B 2%

Analyse the ratios and additional information to outlinebusiness risks that TWC faces.

Question 2A 7%

Identify the internal controls in the system that arepotentially effective, the risk that the control could alleviateand one test of control for each of the identified potentiallyeffective controls.

Answer this question using the following headings:

Effective Control

Risk alleviated

Test of control

Question 2B 2%

List and justify the weaknesses in internal control forpurchases and accounts payable.

Weakness

Justification