5. With specific reference to Vectus’s corporate governance arrangements, you need to assess the likelihood of the potential reliance that could be placed on the overall control environment. Your conclusion should be supported by at least THREE factors.
6. Based on your understanding of the client and assessment of the client’s business and audit risks, would you undertake the audit? Why?
“Vectus Biosystems Limited” engages in the field of development activities and medical research in Australia. Vectus Biosystems is responsible for scientific observations associated to metabolic change as a result of salt intake which came into discovery by Dr Karen Duggan in 2003. In 2005 the company was officially formed by Dr Duggan’s discovery via orally deliverable drug. It is further depicted that company “holds patents around vasoactive intestinal peptide and its fragments” for treating “cardiovascular fibrosis” and “systolic blood pressure” (Vectusbiosystems.com.au 2018).
The main discourse of the report aims to provide the overview of the industry in which it operates and also present a recent development which has been brought in this industry. The second section of the report aims to follow a number of regulations and legislative requirements for therapeutic goods. In this section the study has identified and briefly discussed four legal requirements for pharmaceutical goods. The third section of the study has identified four significant business risk factors into the auditors need to consider for Vectus group engagement. It further aims to describe the different types of risk potential associated to maturity misstatements in the financial report. The evaluation of annual report published by the company in 2017 the study has identified four accounting concerns and also reflected an in-depth understanding of Vectus group and its operating environment. The fifth section of the report has stated on corporate governance and arrangements made by the company in order to assess the potential reliance which could be placed on the control environment. This particular aspect is supported by three factors. The final section of the study has shown the understanding of the client and assessment of client’s business and audit risks and provide the rationale for undertaking the audit.
“Vectus Biosystems Limited” is recognized for its drug discovery and development operating in North Ryde, Sydney. The companies is further seen to use platform technology across a library of more than 200 small molecules with varying degrees and anti-fibrotic properties. Till date Vectus has been able to identify drug targets with specific activities in “heart, kidneys, lungs and liver”. The company’s main compoun
d VB0004 is seen to be having the potential in terms of anti-hypertensive properties and anti-fibrotic activities in kidneys and heart. The main aim of the company is discerned with the treatment of disease associated to fibrosis in liver along with “pulmonary fibrotic diseases” and “non-alcoholic steatohepatitis (NASH)” (Vectusbiosystems.com.au 2018). The platform named “Accugen Pty Limited” comprises of the regents and software which quantitate the “qPCR reactions” which is measured with the amount of DNA or RNA in a particular sample. It is believed by the company that Accugen system offers better time, cost and accuracy advantages and able to precisely quantify the PCR in compared to the present systems. The present recent major development by the client includes gaining the patents around the “Vasoactive Intestinal Peptide (VIP)” along with the fragments as a therapeutic candidate for treating systolic blood pressure (Vectusbiosystems.com.au 2018).
The present standings of the biotechnology industry in Australia it still considered to be in growth phase of economic life cycle more number of companies launching their products in the market. In addition to this, the industry value-added growth is expected to be “2.6% which is annualized over a period of 10 years through 2022-23”. This is considered to be slightly going past the expectation of annualized GDP growth of 2.5% over the time period. This also suggests that the industry is outperforming in terms of economy. This is discerned with increased demand for commercialized products which are output of biotechnology research. Moreover, the increasing wealth and income along with aging population has promoted the customer demand for biopharmaceuticals to eliminate the problems associated to old age (Ibisworld.com.au. 2018).
Identification of legal requirements for pharmaceutical goods
“The Therapeutic Goods Act” is discerned to set out the regulations and orders depicted with the requirement for inclusion of “therapeutic products in the Australian register of therapeutic goods”. The various legislations are seen to be set out for advertising, product appearance, product labeling and guidelines to appeal. In addition to this, some of the main provisions are included with scheduling of substances which will be able to ensure the best possible standard for storage of therapeutic goods. These regulations are in compliance are covered under relevant “State or Territory legislation”. Some of the main legislative instruments include group orders, therapeutical goods order, manufacturing principles and guidelines, product information, single therapeutic goods order, specifications, listing notices and orders which require therapeutic goods. Some of the main standards identified with “Therapeutic Goods Act 1989” is discerned with establishment and maintenance of national level control for ensuring efficacy, safety, punctuality and quality of therapeutic goods. The regulations for that include the method of classification of drugs and poisons which are clearly specified in schedules of poison standards and provisions on various types of labels and list of products which are to be exempted from these provisions and recommendations (Legislation.gov.au 2018). The regulatory guideline for pharmaceutical companies in Australia need to abide by five acts and regulations, among these four are mentioned below as follows:
- “Therapeutic Goods Act 1989”
- “Therapeutic Goods Regulations 1990”
- “Therapeutic Goods (Medical Devices) Regulations 2002”
- “Therapeutic Goods (Charges) Regulations 1990”
Business risk factors which needs to be considered for Vectus Group
Some of the main areas pertaining to the business risk for the company are identified as follows:
Such type of risk is principally based on the cash and term deposits held by the group. There is a significant amount of risk in case the counterparty is not able to discharge the obligations in respect of the instrument. Based on the information available in the balance sheet it needs to be discerned that the maximum exposure of credit risk in 2017 is $ 516253 and in 2016 $ 4453971 (Griffiths 2016).
The concerns associated to the liquidity risk is related to the working capital and the financial charges. These are considered with the principal repayments on the debt instruments. Such risks are also possible for the company in case the company fails to meet its financial obligations (Hsieh, Lin and Chang 2018).
Interest rate risk
This risk is considered with the fluctuations in the interest rate which is inherent in the financial market and arise as a result of asset and liability bearing variable interest rates. In addition to this, the exposure of the company to such as risk is considered with the effective weighted average interest rate for the closest financial assets (Irene and Bunyasi 2017).
Financial instrument risk
It needs to be understood that the group is exposed to several risks arising as a result of using financial instruments. These risks are mainly associated to financial statements depicted by the company.
Auditing Risk concerned to four accounts
The risks pertaining to that accounting areas are associated to the factors in which auditors provide an appropriate audit opinion on statements of financials. Therefore, the different nature of risk is associated to the factors considered with omission in financial statements and material misstatement. Henceforth, audit risk is comprised of identification of important nature of businesses risk (Lundin et al. 2015). The particular consideration of business risk in Vectus Biosystems Limited are listed below as follows:
A significant consideration of the liability risk factor can be discerned with balance sheet published by the organization. It needs to be understood that there is an increased possibility that the company has understated the liability considerations. This is due to the fact that there is no signs of disclosing or recognizing provisions in the financial statement. In addition to this, the different types of contingencies associated to the disclosures may not be able to review the exact amount which is obtained from the tax authority. Lastly, it needs to be noted that there is no presence of long-term borrowings pertaining to the annual report of the company thereby increasing the concern for conducting audit work (Niemi, Knechel, Ojala and Collis 2018).
Financial results of the subsidiary
There is a higher possibility that the subsidiaries of “Vectus Biosystems Limited” are more susceptible to manipulation. The main intention is considered to influence the market price prior to the sale the goods is made. It needs to be for the depicted that the company uses a technology known as Accugen. This is noted to be owned by the subsidiary, “Accugen Private Limited”. This particular technology is seen with the benefits associated to accuracy, cost and time. The main investments of Vectus are seen in the area of subsidiary for commercialization which may overstate or understood the value of the subsidiaries. Furthermore, a high probability is also inherent with states that the organization is prone to comic mistakes in terms of total worth of the subsidiary (Seyam and Brickman 2016).
This area of business risk has been identified with a significantly lower revenue in both 2017 and 2016. At present, the recognition pertaining to the sales revenue is dependent on certain estimates which are as per the operating sites. These estimates are discerned to be biased and may not be realistic in nature. This is due to the fact that the assumptions are mainly based on selling price. The effects of the provision of pricing and plausible revisions may not be disclosed properly in the income statement of the company (Curtis et al. 2017).
There is a high possibility that the assets of “Vectus Biosystems Limited” may be overstated because of “depreciation of property, plant and equipment” which had to be immediately expensed in the income statement of the company. In addition to this, the cost incurred in the present financial year may not be recoverable as the assets of the organization is significantly overstated in nature. In addition to this, the current assets base the organization significantly higher in contrast to the noncurrent assets. It is to be understood that there is a greater possibility that the cash and cash equivalents may have been overstated in order to establish an effective position for liquidity of the business.
The aforementioned illustration shows that these are the four main areas of business risks associated to Vectus, which needs immediate action before the auditors start their audit process (Vectusbiosystems.com.au. 2018).
Likelihood of potential reliance which could be placed on overall control environment
It needs to be also understood that the board of corporate governance for “Vectus Biosystems Limited (Vectus or the Company)” is dependent on ensuing the high standard of “corporate governance practices” which are associated with initiatives as suggested with the compliance of “Australian Securities Exchange (ASX) Corporate Governance Council’s third edition of the publication, Corporate Governance Principles and Recommendations”. The board of Vectus ‘s forward the main assessment for the corporate report as per “Audit and Risk Management Committee”, which is seen to be responsible towards monitoring and reviewing of the process relating to risk management, financial management and auditing. It needs to be also understood that the committee of the board consists of three nonexecutive directors and most of the directors are not independent directors. This is due to the fact that Vectus believes that the most appropriate qualified directors are non-independent and they depict greater expertise in accounting and financial control (Vectusbiosystems.com.au. 2018).
Before approving the financial statements, the board ensures that the records have been adequately upheld by the company. Both the CEO and CFO give the assurance that the financial statements complies to the appropriate accounting standards this presents a true and fair view of the performance and financial position. Moreover, though opinion of CFO and CEO confirms that the risk management and Internal control procedures are effective in nature as per risks of financial nature. The main recommendations listed in 7.2 section of the CG statement clearly depicts that the management is prompt in designing and implementing the report associated to the company’s risk adequacy elements relating to the internal control systems. In addition to this, the management of Vectus holds itself responsible for measuring the key risk relating to audit and monitors the risk management protocols as internal compliance and control systems (Vectusbiosystems.com.au. 2018).
It needs to be also understood that the company does not follow any particular audit function. However, it is relied on the continuous process of achieving higher quality of effectiveness pertaining to “risk management and internal control environment” which is considered as part of the monthly reviewing actual versus the differences in budgetary constraints related to expenses and revenues. Therefore, it can be concluded that the chances of potential reliance need to be given on overall control system which is to be taken into account with the following factors:
- Vectus compliance is considered with the third edition of “Australian Securities Exchange (ASX) Corporate Governance Council’s” CG Principles and Recommendations
- Striving for continuous improvement in the area of internal control and risk management environment
- Ensuring the compliance of appropriate accounting standards during addressing the financial risks
Rationale for undertaking the audit after assessment of client’s business and audit risks
The identification of different types of key audit matter and key audit risk has been able to depict that company has been making losses since 2017. This has exposed Vectus with greater risk which are mainly associated to the areas of going concern. The important assessments from the report has related to proactive initiative taken by the company in attaining a better financial position and approach towards assessment of the audit. Henceforth, these initiatives are considered as the main rationale for undertaking audit in the company (Elsayed 2017).
It is to be understood that mitigation of the risk concerns and audit procedure has been included after considerable assessment of estimating the outflows and inflows of cash. Due to this, the company considers effect of planned accumulation of capital compared to quantum and timing. Moreover, Vectus has used the pertinent group knowledge and applied the same in various types of capital raising initiatives which are conducive in addressing various concerns of the company (Vectusbiosystems.com.au. 2018).
The response to the considerable judgments are able to ascertain whether the research and development is in compliance with relevant accounting standards. This is also ensured to the meetings with management which needs to be had for cutting out the audit process. The meeting is based on varied nature of accounting norms pertaining to the expenses along with cost capitalization of research and development in Vectus. In addition to this, the major process of management is insured with has been updated with the relevant audit procedure with determination of total spendings on R&D which has been able to meet the “AASB 138 recognition criteria”. There have been significant meetings held among the audit and management team with the present research and development team which evaluates the special areas in need of development (Vectusbiosystems.com.au. 2018).
The information collected from the various sources for conducting the audit procedure like product development and contracting the key suppliers was not identified with any inconsistencies as per the decision of the management. It is to be further understood that future possibilities for R&D activities will be able to adhere to the criteria for capitalization. In addition to this, the assessment of material misstatement is resolved with an effective internal control procedure followed by the group. The relevant accounting policies apply to the group are further seen to be approved by the directors of the company (Vectusbiosystems.com.au. 2018).
Some of the important assessments of the industry have been able to show that biotechnology industry in Australia it still considered to be in growth phase of economic life cycle more number of companies launching their products in the market. The industry value-added growth is expected to be “2.6% which is annualized over a period of 10 years through 2022-23”. This is considered to be slightly going past the expectation of annualized GDP growth of 2.5% over the time period. The regulatory guideline for pharmaceutical companies in Australia has identified that the regulations are in compliance are covered under relevant “State or Territory legislation”. Some of the main legislative instruments include group orders, therapeutical goods order, manufacturing principles and guidelines, product information, single therapeutic goods order, specifications, listing notices and orders which require therapeutic goods. Business risk factors which needs to be considered for Vectus Group are seen with Credit Risk, Liquidity risk, Interest rate risk and Financial instrument risk. The important depictions on Auditing Risk concern to four accounts are discerned with Liabilities, Financial results of the subsidiary, sales revenue and assets It needs to be also understood that the board of corporate governance for “Vectus Biosystems Limited (Vectus or the Company)” is dependent on ensuing the high standard of CG practices. The company does not follow any particular audit function. However, it is relied on the continuous process of achieving higher quality of effectiveness pertaining to “risk management and internal control environment” which is considered as part of the monthly reviewing actual versus the differences in budgetary constraints related to expenses and revenues.
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