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 amanager in the audit division at Miller Yates Howarth (MYH), anaccounting firm with offices throughout the major regional centresof NSW and Queensland. Although a medium sized firm by nationalstandards, MYH is the second largest regional accounting firm inAustralia. Most of MYH’s audit clients are in the agriculture,mining, manufacturing and property industries. All those industriesare currently under pressure, either from a downturn in commodityprices or fierce competition from overseas competitors. Ratiosextracted from an unaudited set of financial reports at 30 June2018 together with audited comparatives for the year ended 30 June2017 and 2016 are set out below for your review. You are gatheringinformation to prepare the audit plan of Trunkey Creek WinesLimited for the year ended 30 June 2018. Trunkey Creek Wines (TCW)is one of MYH’s most significant and longstanding clients. Thefollowing information has been gathered to date. Principalactivities 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 companyincorporated in 1968 and has operated successfully and profitablysince that date. In the 1990’s shares were sold to a small numberof investors to increase funds for the development and upgrading ofthe winery and the purchase of additional land for the vineyards.Insufficient rainfall had meant that some land was no longersuitable for wine grape production, as a result, TWC moved intoWagyu beef cattle production on this surplus land. The Wagyuoperation is now starting to return a profit. TWC now find that the2 degrees increase in temperature at some vineyards is affectingthe production of sparkling wine and are now looking at purchasingland in cooler climates. TWC has built up a strong following fortheir sparkling wine which earns significant profits in bothdomestic and overseas markets. TWC are currently negotiating theland 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) 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 significant experience in the industryand replaced her husband as chair when he died 10 years ago. MrPhillip Strange, Chief Executive Officer Mr. Joe Quade Mr StevenHarewood, son of Claire Harewood and has oversight of the Wagyubeef operation Dr Mary Owens Ms Hilary Jones Mr Geoffrey Owens Youraudit partner, John Richards, has approached you and advised thatthere are several areas he is concerned about and he wants to youto report back to him about these areas before you complete youraudit program. These areas and accounts are: • Accounts receivable• Investments • Property assets • Marketing expense Ratio 2018(Unaudited) 2017 (Audited) 2016 (Audited) Return on equity % 10.8017.5 15.2 Return on beef production assets % 1.67 -0.82 -3.45Return on grape and wine production assets % 12.2 14.5 16.2 Grossmargin % 24.5 30.00 31.76 Net profit margin % 14.38 20.27 17.85Marketing expense % of total S & A expenses 23.67 17.89 15.2Times interest earned 6.67 7.51 8.10 Days in inventory - wine 367423 460 Days in accounts receivable - wine 50.2 60.65 53.24 Days inaccounts receivable - beef 57 36 24 Current ratio:1 2.80 2.54 2.66Quick asset ratio:1 1.18 1.15 1.20 Debt to equity ratio:1 0.54 0.630.67 Internal control The financial controller at TCW has beenrefining the system of internal controls and informs you, at theplanning stage of the current year's audit, that he has puttogether an internal control manual for the company. He has statedthat this manual will create greater awareness of controls in thecompany, particularly with management which, in the past, has notbeen overly conscious of the need to implement and enforceeffective internal controls. Management staff receive bonuses basedon certain agreed-upon target ratios which include measures such astargeted monthly sales volumes, variance of actual to budgetdepartmental overheads and profit before interest and tax. TheBoard takes an active interest in the performance of the companyand is quick to request explanations on variances from theagreed-upon monthly budgets. Two years ago, the company devotedsignificant time and resources to the development andimplementation of a new IT system. All teething problems associatedwith the implementation phase have now been resolved, and thefinancial controller is satisfied that the automated controls inplace are assisting in producing accurate and complete accountingrecords. The management accountant also looks after the IT functionas the position is not regarded by management as being a full-timejob. Once application programs have been tested, strict passwordcontrol exists over access to the programs. Passwords are notrequired for access to databases. To assist in the planning for thecurrent year's audit engagement, you extracted the followinginformation from a review of the systems notes in the permanentfile and a perusal of the new internal control manual: There arethree section managers, one each for grape production, wineproduction and beef production. Each can order supplies for theirrespective operations up to a limit of $10,000 for each order.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 mustbe made through the computer ordering system which has direct linksto the approved suppliers. Supplier information is contained in asupplier master file. Each supplier has a unique supplier code. Ifa section manager orders from an unapproved supplier, the order isrejected and sent to the management accountant for approval. Thesupplier 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 storemanchecks the supplies received to the online copy of the order andthe delivery docket provided by the supplier. Any discrepancies arenoted on the online copy of the order. The delivery docket is filedby the storeman in a folder that is kept at the winery. The invoiceis received electronically from the supplier and matched to theorder by the accounts clerk. If the order and the invoice match theinvoice is included in a payments file. The payments file isapproved online by the management accountant once a week and usedto generate an ABA file which is then uploaded to the bank by themanagement accountant. When the payments file is approved by themanagement accountant, the invoice is automatically recorded asbeing paid in the accounting system. When services such as repairsare ordered for the winery by the wine production manager, aservice order is generated within the computer system andautomatically sent to the service provider. When the service hasbeen delivered, the wine production manager or the storeman signsthe service delivery docket on the service man’s tablet. Theinvoice from the service company, with a copy of the signed servicedelivery docket, is received online by the accounts clerk. Theaccounts 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 ofdiscrepancies, the accounts clerk contacts the supplier and thewine production manager to resolve the issue. Payments are not madeuntil the issue has been resolved. Required Write a report,including a brief executive summary, to your managing partner thataddresses the questions below. Where indicated, use the requiredformat to answer that question. Question 1A 8% Analyse the ratiosand additional information associated with the four accounts listedby your audit partner, John Richards. Identify the potential auditrisks and any audit steps that need to be undertaken to reduceaudit risk. Answer this question using the following table: AccountAnalysis Audit Risk Audit Steps to reduce risk Question 1B 2%Analyse the ratios and additional information to outline businessrisks that TWC faces. Question 2A 7% Identify the internal controlsin the system that are potentially effective, the risk that thecontrol could alleviate and one test of control for each of theidentified potentially effective controls. Answer this questionusing the following headings: Effective control Risk alleviatedTest of control Question 2B 2% List and justify the weaknesses ininternal control for purchases and accounts payable. WeaknessJustification Rationale back to top This assessment task willassess the following learning outcome/s: be able to demonstraterisk management methodologies and the role of internal controls inan audit context. be able to design an audit plan and select andapply appropriate audit procedures for a financial statement audit.be able to exercise critical and reflective judgement andappreciate the value of ethical practice.