1. Winery Audit Process Overview
Presented by LCBO Store & Winery Audit Department
VQA Workshops
Prince Edward County – Friday January 17, 2014
Lake Erie North Shore – Thursday January 23, 2014
Niagara Peninsula – Friday January 31, 2014
Thank you Laurie for the opportunity to meet with this group and thank you all for coming. The LCBO Store and Winery audit department has agreed to conduct audits on behalf of VQAO and AGCO in addition to reviewing records for the interests under the LCBO’s responsibilities with various Acts and regulations. AGCO and VQAO have provided audit components that they have requested our audit team to review and report on. Beginning with fiscal , AGCO, LCBO and VQAO agreed wineries would be audited once annually, unless Key Risk Indicators agreed upon with the AGCO, necessitate a second or additional visit. KRI’s include: historical volume of sales, historical volume of wine produced, whether the winery is a VQAO member, if there have been past compliance issues for VQAO or AGCO audit components, if there have been shortages in excess of allowances as defined by Reg 717 of the LCA, if the winery is permitted to import wine and historical findings about completeness of inventory records. KRI’s are weighted in impact to the business practices of the aforementioned parties. Once the KRI’s have been agreed upon, about a month prior to the beginning of our fiscal year in April, a schedule is created and audits are organized for the year.

2. Agenda Preparing for the audit The audit process Pre visit Visit
Typical deficiencies and follow up
Question and answer period
Today we are going to look at the following: Preparing for the audit; The audit process including the Pre-Visit, the Visit; Typical Deficiencies and follow-up; and finally, a question and answer period.
Once the schedule of winery audits has been set for the year and assigned to an auditor, the auditor will contact you, either by phone or , in order to arrange for a convenient time to visit your location. We try to schedule a date that will enable us to complete the audit in a timely fashion with the least amount of disruption to your business. Once a date has been established, a confirmation audit engagement memo will be sent out detailing the requirements of the audit. The confirmation memo is an important document in the process of the audit. It will detail the timeframe of the audit and the agencies that we are representing: LCBO, AGCO and most importantly for this presentation, VQAO. It will also detail what records are necessary to complete the audit. If you use this list to prepare for the appointment, this facilitates the speed of completing the audit and impact of a disruption to your business operation.

3. Preparing for the Audit
Current tank records with volume, variety and vintage
Current inventory of cased goods and off-site warehouse inventory
J10s since last audit and ledgers to support sales data
VQAO Sales Reports, Direct Delivery VQA and non-VQA, Duty Free
Volume of sales and promotional use for the part month up to the day of the audit
Blending and bottling records and disposals
Grape Growers of Ontario reports, weigh bills
The following items are what is needed to be available to an auditor in order to assess and complete the audit. Our goal as auditors is to be able to follow grapes from harvest, to bottle, to sales. And to be able to trace it year over year or visit over visit. Therefore, it is important that items detailed in the engagement memo are made available to the auditor. That includes:
current tank records by volume, variety and vintage and current on/off site warehouse inventory so that we may verify the accuracy of the current inventory status.
Monthly reporting package (J10 and relevant monthly reports) and the sales ledgers and supporting documentation (invoices, sales slips, register tapes) for each applicable sales channel and promotional wine volume;
Part month sales activity through all channels and promotional product used up to the date of the audit (since the last monthly report).
Records to support what blending has occurred and what bottling has been done since the last audit date. Also if you have disposed of wine, we will review supporting documentation for that as well.
GGO reports for any production that has occurred since the last audit date along with the volume of wine produced is also needed.
Transfers are reported directly to VQA and the auditors receive this information in advance of the audit, however, you may want to have those transfer forms and/or sales/purchase slips available in the event, a transfer was overlooked or missed.
Auditors also should have advanced notice of reported disposals. All Disposals are also to be reported to LCBO, specifically according to LCA section 14 which states that A manufacturer who loses any wine other than a loss from lees, evaporation or processing shall report the loss to the Board forthwith. You will need to have evidence of the disposal available so that we can verify the reported amounts during the visit.
So this is what you need to have ready. Each report or record accounts for increases or decreases in your inventory. As we will see later on, each report will plays a role in determining compliance and reporting accuracy with each of the governing bodies that we represent.

4. Preparing for the Audit
Key People:
Winemaker/Owner/Manager in regard to bottling, blending and volumes of bulk wine through harvest or purchase
Bookkeeper in regard to sales information and also in deciphering of said information
Retail Staff in regard to stock locations, recording of promotional inventory and general winery information
Throughout the visit, the auditor will have numerous questions in regard to the status and/or whereabouts of your inventory. So along with the aforementioned reports, it is also recommended that the following people be made available at the time of the audit: winemaker, retail store manager, owner/or general manager, the accountant or bookkeeper. In some cases, these will all be the same person. It is integral to the success of the audit that the key people are available and that they can provide and sometimes, decipher the information needed.

5. The Audit Process – Pre-visit
Review inventory from last audit
Review stage of production from last audit
Review transfers, disposals and other correspondence
Retrieve sales data reported to LCBO
Retrieve data for VQA applications since the last audit
As mentioned previously, in order to complete the audit, auditors need to be able to trace the movement of the wine accounting for increases and decreases in the volume.
We have just covered the list of items you will get ready in advance of the auditor’s visit
But the auditors have work to do too!
They need to establish a starting point for the visit, so they will review the last audit file to find out where inventory was, determine if they need to arrange for offsite warehouse visit, plan their trip to maximize their productive time.
What information they have ahead of the visit is useful to reduce time needed to spend at your business.
From the last audit’s inventory, they can determine what varieties of grapes they might expect to see, whether the last audit the harvest was taken on or not due to being “in progress” at the time of the last visit. Transfers, disposals and other correspondence is also helpful for the auditor to be apprised of additional documentation they may need to review.
Under the LCA sec 16 as a manufacturer you are required to report using the J10 reporting package on:
(a) quantities of wine sold during the next preceding month;
(b) quantities of Ontario grown grapes, cherries, other fruits and concentrates thereof and the concentrated juice of apples grown outside Ontario purchased or used in the production of Ontario wine during the month for which the statement is made; and
(c) quantities of imported grapes or grape product purchased or used in the production of wine during the month for which the statement is made. R.R.O. 1990, Reg. 717, s. 16.
Timely and up to date reporting by the winery to Winery lcbo.com is key to us having this information.
Knowing what applications you have made, is helpful for audit planning as some of the testing needed to complete the audit components for VQAO can be done ahead of time, if the vintage or transfers are already part of our historical files. Again this verification can be done without interrupting your business if we have the information ahead of time.

6. The Audit Process - Visit
Count Inventory
Verify increases to previous inventory
Verify decreases to previous inventory
Compare inventory change to establish loss
Ensure loss is within allowance (LCA Reg 717 sec 13)
Complete audit testing for VQAO, AGCO, LCBO
When we arrive on site, we start by counting and verifying inventory on hand including volumes and varieties currently in bulk, cased goods, on and off site storage and the retail store.
Increases arising from, for example, harvests, purchases wine or bottled wine that was decanted, among others, are verified through GGO reports and VQA transfer forms, purchase receipts and tank records.
Decreases arise from, for example, sales of bulk wine, sales through various channels (retail, direct delivery, LCBO, etc), or disposals, among others. We verify these by review of sales ledgers compared to reporting on J10’s, VQA transfer forms and sales invoices, and any letters to our department regarding disposals or other correspondence. Again, this is where it is so important that the preparation for the audit was complete and that the key people are available to the auditor.
Once we have captured all increases and decreases, we can establish loss which we would expect resulting from normal processing. We compare the volume movement since last audit to the current physical inventory and determine if that loss is within allowances as set forth in Reg 717 sec 13 of the liquor control act. Next slide I will highlight what the regulation defines as allowances. There are also some audit components that are specific to the parties on behalf of which we audit. While many of them are determined and verified in the process of tracing the volume of inventory, some additional verification or testing is needed. As we are here talking to the VQAO members, we will focus more details on those elements specifically and briefly cover the other requirements we look for.

7. Summary of Allowances 5% for first 6 months (October 1 to March 31)
1 ½% for next 6 months (April 1 to September 30)
3% thereafter
Prorated based on timing of audit visit
Before we look at those audit components, as mentioned I want to briefly touch on the Summary of Allowances. According to the LCA act Reg 717 sec 16, a set formula has been established to allow for losses that normally occur in the production of wine, through lees, transfers, fining, racking, bottling and evaporation. Section 16 can be summarized as follows: In the first 6 months, the most loss would occur in processing so 5% of the volume is granted, in the next 6 months, a smaller loss would be typical so 1.5% of the volume is allowed. After that the a 3% loss has been provided for any further production losses according to the legislation. Because the audit occurs at different months of a production year, the allowances are prorated for each year’s production. However, the report which each winery receives at the conclusion of the audit, from the LCBO store and winery department includes the tabulation, with pro rating of what allowances have been used for the audit. The allowances are then compared to the differences in volume we note when tracing the volume change from last audit to the current audit date. .

8. LCBO Audit Criteria Direct Delivery invoicing and fees
Container Deposit remittances
Collection of Special Occasion levies and remittances
Offsite warehouse authorization
Pricing verification
So what are we looking for- When we audit on behalf of LCBO, there are a few key areas we verify. These include:
That requirements for invoicing and pricing as defined in the Direct Delivery authorization are met and that fees collected are remitted – Your direct delivery authorization outlines the pricing and invoice requirements about what information you are to provide to the customer. These sales are made on behalf of LCBO.
That container deposit reporting and remittances are accurate – LCBO has the responsibility to monitor the container deposits program for the province – which includes verifying accuracy of collections of the deposit on bottles sold.
Any special occasion sales are supported, reported and levies are remitted – LCBO is responsible for ensuring levies are appropriately charged and collected for any sales processed to Special Occasion Permit holders.
If finished goods are stored at a location not listed on the manufacturer’s license, that an authorization for offsite storage exists - LCBO is responsible for issuing authorization to store alcohol at premise other than the location listed on the manufacturer’s license. Permission to store alcohol at an offsite location must be requested and approved in advance of storing it there.
That prices charged to regular, or direct delivery customers are consistent to established price lists and if the brand is carried by LCBO are consistent with LCBO retail pricing as well. Pricing of alcohol and integrity of the pricing is also a responsibility of LCBO. Verification that pricing is consistent to customers but also if it is also sold by LCBO and that it is priced above the minimum pricing threshold for alcohol is part of the audit criteria our team are looking at for the LCBO.

9. AGCO Audit Criteria Compliance with Wine Content and Labeling Act
Import records and blending requirements
Production recovery
General record keeping requirements under WCLA and Liquor Licence Act
Compliance with Winery Retail Store Authorization
Made Policy
Rules for wineries located outside DVA
On-site retail store
Non-Grape winery rules
As mentioned, part of our role is to audit on behalf of Alcohol and Gaming Commission of Ontario. For all Manufacturer licenses issued by AGCO, we assess the following items where applicable.
Under the WCLA we verify that requirements for record keeping and blending requirements are met
That production recoveries are in compliance with the Act
And that there is compliance under the WCLA and Liquor License Act for record keeping requirements.
If the manufacturer also has a Retail Store Authorization, which is granted by AGCO, we verify requirements of that authorization are met as well
Specifically that the criteria for primary fermentation and location of the fermentation with respect to sales volume are met for the harvest year
That wineries located outside a designated viticultural area have met the production requirements
That the winery has met the rules regarding minimum grape and fruit planting acreage
That various rules corresponding to fruit, and apple or rice or honey wine manufacturers with retail store authorizations are met.

10. Audit Process - Visit Supporting Documents J10’s VQAO Applications
VQAO transfer forms
Sales documentation
GGO harvest information
Weigh Bills
Brix Reading
SetGo forms
Winemakers notes, tank records, daybook, etc.
As mentioned earlier, the availability and accuracy of supporting documents is extremely important for all aspects of the audit. We have already reviewed their importance in establishing an accurate inventory count and determining loss. Taking that further, we can look at the importance of the supporting documents in the VQA Audit program. As we had previously discussed, the auditor is a representative of three different agencies LCBO, AGCO and VQAO. So looking at the supporting documents, let’s go through the VQA Audit Program and see how they relate to each component.

11. VQA Audit Program
Requirements for the identification of geographical indication prescribed in Table 2 of the Rules
Viticultural and Oenological requirements outlined in Table 2 of the Rules
Minimum brix level requirements as set out in Appendix A of the Rules
Requirements for vintage dating set out in Section 3 of the Rules
The VQA Audit program requires the auditor to verify a number of elements related to the VQA Act in order to verify authenticity and accuracy of applications and wines produced for, intended for and that are currently using the VQA label.
In order to determine the geographical designation of a wine, appellation or sub-appellation, we need to figure out where the grapes came from. GGO reports, weigh bills and SetGo forms will provide that information as well as the auditors knowledge and confirmation with VQAO of where the grower is located.
Further to this, the viticultural and oenological requirements outlined in Table 2 along with the Brix levels are all provided by the GGO reports. It is advisable that the winery provide the most current summary so that there is no information missed as a result of late submissions or a report that has not been updated.
From The GGO report, we also verify that the Brix meet the minimum threshold established in the rules for each variety produced.
From the winemakers notes on blending, transfer forms, and tank records compared to the application, verification of vintage dating is done.

12. Grape Growers of Ontario P
Grape Growers of Ontario P.O BOX 100, VINELAND STATION, ON L0R 2E0 Phone Fax Growers by Processor Report Year: 2013 Report Generated On: 03-Jan-2014
Processor Name
Grower Name
Weigh Bill
Variety
Harvest Date
Net Weight
BRIX
ABC WINERY
NIAGARA PENINSULA
CHARDONNAY (025)
11-Oct-2013
1.5490
22.0
CABERNET FRANC (014)
06-Nov-2013
7.9350
22.7
LENS
PINOT GRIS (086)
30-Sep-2013
5.0220
20.3
21-Oct-2013
4.7040
21.9
SHORT HILLS
15-Oct-2013
6.0350
25-Sep-2013
7.3630
19.5
Processor name – Name of winery;
Grower Name – Gives name of actual grower, let’s audit know the appellation that winery can apply for. e.g. If ABC winery vineyard is in the Short Hills area, then they can apply for estate bottled, ABC Winery Vineyard, Short Hills designation.
Variety – Used to sub-total weights by variety
Net Weight – Tonnes used to calculate recovery for each variety.
Brix – Used to match information on application and verify that the minimum brix (from Appendix A)for that variety have been met.

13. VQA Audit Program
Miscellaneous requirements set out in Section 6 of the Rules including:
Addition of water
Fortifying wine
Chaptalization
Sweetness descriptions, sugar levels, acid levels
Production Recoveries
Information from Wine Transfer Form
Use of terms, descriptions and designations within the winery’s on-site retail store
From the winemakers notes, VQA transfer forms, tank records and the previous audit inventory, the auditor can establish compliance with section 6 of the VQA Act.
From GGO reports and harvest information, we assess the recovery of juice from the pressing of the grapes to determine reasonableness of volumes recouped from the tonnage harvested. We test for reasonability based on the litres produced for the grape variety but also consider the winemaking style being used.
We also test that the wine transfer forms generated from your winery are accurate and feasible with respect to the volume and ratios, the origin and vintage using the harvest information, as well as blending information record in the winemakers records. The information contained within the document is important in determining the veracity of blends, quantities bottled and vintage dating by the recipient winery as well.
We also look at the labels in your retail store in order to assess use of terms descriptions and designations compared to the approvals by VQAO. This may also include signage or promotional material. This is a big part of protecting the VQA brand. We also look at non-VQA products to verify that the protected terms are not being used in a way that might mislead the consumer.

14. VQA Audit Program
Reported litres sold of each VQA product listed on the Vintners Quality Alliance Product Sales Report and corresponding VQA literage fees
Other observations related to VQA Act
Finally, each VQA3003 form for the audit period will be verified for litres sold compared to your sales ledgers and invoices and verify that the corresponding literage fee is submitted.
During the course of the audit, if other concerns are detected, like bottling in excess of application limits, unusual sales, unavailability or unclear blending, bottling and tank records or reporting deficiencies that might affect future VQA applications these observations are also noted in the audit results which are then provided to VQAO for their consideration.
NOTE TO SPEAKER – if asked what an unusual sale might be – out of province, sales to a head office but distributed to a different province/country.

15. Common Deficiencies
Inaccurate reporting of sales volume/ literage fees
Inaccurate information or lack of VQA transfer form
Inaccurate label content compared to approved application
Non-VQA products using VQA descriptors
Bottling deficiencies
No records or incomplete records available
More than approved volume on application
More than one year after approval granted
There are many wineries that rarely have any deficiencies detected. When we do note deficiencies, we have complied a list of the more common ones:
Incorrect reporting of literage fees could be underpayment or overpayment
Incorrect information could be the wrong date, vintage, litres etc.
VQA Labels are checked for compliance in regard to alcohol percentage, appellation, blend etc.
Labels are checked for compliance in regard to the improper use of VQA terms if the product is not a VQA label as well.
Sometimes we find generally, record keeping is not as complete as it should be.
When it comes to verifying bottlings, we see deficiencies in this area.
but also we might find that that more content has been bottled than on the application -Typically a 10% variance in bottling volume estimates is reasonable
or that product has been bottled more than 1 year after the approval was granted. VQA Approvals are valid for a year after status has been granted. Resubmission may be necessary prior to bottling if time has lapsed

16. Common Deficiencies
Unable to verify blending requirements for VQA approvals
Wine makers records are not available/provided
Blending records do not match applications/approvals
Blending records are kept or unclear
Inaccurate sales reporting or missing documentation
It is important that accurate records are retained when blending wine as well so that the Application can be compared to the Winemakers notes/daybook. Common deficiencies here are that the records are not available or provided, that the records do not match the application or records are not being kept at all.
The accurate tracking and recording of sales is also important. This is another area where we find deficiencies and errors either through lack of supporting documents for sales records or interpretation and understanding about reporting of sales activities.
Once a deficiency is found, the auditor, through consultation with the applicable parties i.e. the winemaker, owner etc., will try and arrive at a solution. That may involve a subsequent visit, a recount or follow up. Each of the deficiencies is reported on the VQA Audit Program and submitted to VQAO who will determine the course of action in order to rectify the situation.

17. LCBO Contacts Niagara Sheila Gayman Peter Harris LENS Jeff Dunlop PEC
Trish Moulds
Lorne Martin
GTA and Other
Michael Roberts
Mark Silva
Audit Project Managers
Dianne Scharf
Michael Lyck
Department Manager
Chad McGregor
By being prepared with accurate, organized records from harvest through to sales, preparing in advance of the audit will require a small interruption to your operation. The auditor is there to verify the reporting and operations as required by legislation and as requested by our business partners VQAO, AGCO and LCBO. The auditors have a portfolio that includes winery audits but also audits of LCBO stores and other LCBO audit projects. In many cases, we try to assign auditors based on geography and work load to maximize productivity and travel costs while minimizing our time spent at your operation. Lack of preparation by either party impedes that goal.
Although each of the auditors is assigned a geographical area, they are not limited to that locale and are more than willing to assist with any questions or queries that may arise.
I invite you now to ask questions you may have, or if you think of something after the session today, you can send it to
Thanks again, Laurie, for including us in your workshop session today.