Advanced Auditing and Assurance: Assignment

Running head: ADVANCED AUDITING AND ASSURANCE
Advanced Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

1ADVANCED AUDITING AND ASSURANCE
Table of Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................3
Overview of Operation and Industry...............................................................................................3
Legal Requirements.........................................................................................................................4
Business Risk Factors and their Impact of Material Missstements.................................................6
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

2ADVANCED AUDITING AND ASSURANCE
Executive Summary
The aim of this report is the preliminary assessment of Vectus Biosystems Limited (Vectus) for
audit tender. The first part of the report involves in describing the business operations of Vectus
along with its industry details. The second part involves in describing four major acts or
regulations related to therapeutic goods. The next part of the report explores for major business
risk factors of Vectus and the way they increase potential material misstatements in the financial
statements.

3ADVANCED AUDITING AND ASSURANCE
Introduction
Auditing is considered as the process to examine the financial statements and accounting
documents of the business organizations in order to find that whether there is any material
missstements or not (Knechel and Salterio 2016). Before taking an audit contract, the auditors
are required to take into consideration certain aspects and one of them is evaluation of the audit
client. Audit client evaluation refers to the process of preliminary examination of the business
operations, industry, regulation and potential business risks of the client by examining different
aspects. The main aim of this report involves in the preparation of a client evaluation report of
Vectus Biosystems Limited (Vectus). Vectus is an Australian company registered in Australian
Securities Exchange (ASX) (vectusbiosystems.com.au 2018).
Overview of Operation and Industry
Vectus was established in the year of 2005 and operates in the health and medical
research industry of Australia. The main business operation of Vectus involves in the medical
research and development in Australia. Vectus holds parents in vasoactive intestinal peptide and
its fragments as a therapeutic candidate for the treatment of cardiovascular fibrosis and systolic
blood pressure. The lead compound of Vectus is VB0004 that has potent anti-hypertensive
properties and anti-fibrotic activity in heart and kidneys. The company has intention for the
development of candidates for the treatment of fibrotic level diseases, non-alcoholic
steatohepatitis and pulmonary fibrotic diseases (vectusbiosystems.com.au 2018).
In the recent years, one major operational milestone of Vectus is the application of the
Investigational New Drug (IND) enabling toxicology and pharmacokinetic studies for VB0004

4ADVANCED AUDITING AND ASSURANCE
for meeting all the milestones. In the year 2016-17, the company has witnessed success in animal
trials; the company has also been successful with the initial second species (dog) independent
toxicology trials. From the trial, it can be observed that there was not any adverse effect after the
doses of 2000 milligrams per kilogram for the dogs daily for seven days. This particular success
represents an exposure more than 10,000 times the anticipated therapeutic dose in humans.
Vectus has the target start Phase I human clinical trials in early 2018 (vectusbiosystems.com.au
2018).
Health and medical research (H&MR) industry is a major industry in Australia as $5.9
billion is spent on this industry every year. This particular industry contributes 0.37% towards
the GDP of the country. The main goal of this industry is to deliver better health outcome for
everyone. This industry has been able to generate a total of AUS$11.8 billion. Two major
strengths of this industry are sophisticated public and private healthcare system and innovation
driven enterprises and these are considered as the major drivers of the industry (aamri.org.au
2018).
Legal Requirements
In Australia, the health and medical research companies are required to comply with
certain regulations and legislations for therapeutic goods. The following discussion discusses
about four acts or regulations for the therapeutic goods:
Therapeutic Goods Act 1989: This is considered as a major act for therapeutic goods on
Australia and the act has some major objectives. One major objective of this act lies in providing
for the establishment and maintenance of national system for control related with quality, safety,
efficacy and timely availability of therapeutic goods that are used in Australia and exported from

5ADVANCED AUDITING AND ASSURANCE
Australia. Another objective of this act is to provide a framework for the State and Territories for
the adoption of a uniform approach to control the availability and accessibility and to ensure the
safe handling of poison in Australia (legislation.gov.au 2018).
Therapeutic Goods Regulations 1990: This is also considered as a major act related to
therapeutic goods in Australia and this act is related to the advertisement of therapeutic goods in
Australia. As per this regulation, the companies operating in the health and medical research
industry of Australia are required to comply with certain regulations for their advertisement
purposes. The application of this act can be seen for the advertisement for designated therapeutic
goods published or intended to be published. According to this act, the sponsors of therapeutic
goods must not supply the goods in case the goods do not comply with the requirements of
patient information (legislation.gov.au 2018).
Therapeutic Goods (Medical Devices) Regulations 2002: This is a crucial act for the Australian
health and research companies. It needs to be mentioned that this act has some major principles.
As per this act, companies are required to design and produce the medical devices in such a way
that there is not any compromise of clinical condition or safety of the patients, or the health and
safety of the users or any other person by the devises. In addition, this act also states that any risk
associated with the use of medical devises are acceptable when they are weighed against the
intended benefits to the patients and are compatible with high level of protection
(legislation.gov.au 2018).
Therapeutic Goods (Charges) Act 1989: It is required for the health and research companies of
Australia to comply with this act. This particular act imposes an annual charge on the
registration, listing and inclusion in the Register of therapeutic goods, on obtaining the license

6ADVANCED AUDITING AND ASSURANCE
for manufacturing the therapeutic goods and on the making of conformity assessment body
determinations (legislation.gov.au 2018).
Business Risk Factors and their Impact of Material Misstatements
After the analysis of the annual reports and different other organizational aspects of
Vectus, it can be observed that the company has to face some specific business risk factors and
these factors can lead to the potential material misstatements in the financial reports of the
business. The following discussion identifies four of these business risks factors and the way
they lead to material misstatements in the financial statements of Vectus:
Figure 1: Business Risk Factors
(Source: Knechel and Salterio 2016)
CreditRiskLiquidityRiskInterestRateRiskGoingConcernRisk

7ADVANCED AUDITING AND ASSURANCE
Credit Risk: Business organizations face credit risk due to the reduction or elimination in the
value of the assets due to bad financial condition of the entity to which credit is provided. In
Vectus, credit risk arises from the cash and term deposits. It is the risk in Vectus when the
counterparty fails in discharging the obligation (vectusbiosystems.com.au 2018). It needs to be
mentioned that the complexity in the estimation of credit losses can lead to material
misstatements in the financial statements. It implies that the higher number of inputs and
assumptions can cause material misstatements. In addition, Vectus can face potential material
misstatements due to the increased estimation uncertainty (Czerney, Schmidt and Thompson
2014).
Liquidity Risk: Liquidity risk is another major business risk of Vectus. In Vectus, liquidity risk
arises from the company’s management of working capital along with the finance charges and
principal repayments on the debt instruments. The company encounters this risk at the time to
meet the financial obligation when they fall due (vectusbiosystems.com.au 2018). Liquidity risk
can lead to material misstatements in Vectus. It needs to be mentioned that in the uncertain
economic environment, the reduction in the availability in liquidity in short-term finding can
create problem in the going concern assumption of the company (Brasel et al. 2016). This aspect
can create material misstatements in the financial statements of Vectus.
Interest Rate Risk: In the business operations of Vectus, interest rate risk is considered as
another major risk factor in the company. While conducting the business operations, Vectus is
exposed to the fluctuation in the rate of interest that is inherent in the financial market and arises
from the assets and liabilities bearing variable rate of interest (vectusbiosystems.com.au 2018).
In Vectus, interest rate risk can lead to material misstatements. The company does not have
control in the rate of interest on the financial instruments. Thus, the lack of disclosure of interest

8ADVANCED AUDITING AND ASSURANCE
rates in the financial statements can lead to the development of material misstatements. In
addition, the non-inclusion of the interest rates in the financial statements can lead to the material
misstatements in the company (Johnstone, Gramling and Rittenberg 2013).
Going Concern Risk: Apart from all the above, Vectus is exposed to the risk of going concern
assumption while conducting their business operations and this risk can lead to the material
misstatements of financial statements (vectusbiosystems.com.au 2018). The analysis of the
annual report of Vectus shows that there is uncertainty for the company in the implementation of
certain initiatives that can lead to the failure for the company to continue as a going concern. In
this context, it needs to be mentioned that the company has the record to make huge losses and
this particular aspect indicates towards the increased risk that Vectus may not be able to continue
as going concern in future (DeFond and Zhang 2014).
Conclusion
The above discussion indicates towards the fact that client evaluation is considered as a
major pillar for the success of audit operations. From the above discussion, it can be observed
that the companies operate under health and research industry have to comply with the acts and
regulations of therapeutic goods. From the evaluation of Vectus, it can be observed that there are
many risk factors in the company that can lead to material misstatements of financial statements;
they are liquidity risk, credit risk, interest rate risk, going concern assumption risk and others.
However, it needs to be mentioned that these are common risk factors in the companies and there
is not anything unusual in Vectus. Thus, based on the above discussion, it can be concluded that
the auditing firm can consider the tender of Vectus.

9ADVANCED AUDITING AND ASSURANCE
References
Aamri.org.au. (2018). Health and Medical Research in Australia. [online] Available at:
https://aamri.org.au/wp-content/uploads/2014/06/Health-and-Medical-Research-in-Australia-
2.pdf [Accessed 5 May 2018].
Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding negative
outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The
Accounting Review, 91(5), pp.1345-1362.
Czerney, K., Schmidt, J.J. and Thompson, A.M., 2014. Does auditor explanatory language in
unqualified audit reports indicate increased financial misstatement risk?. The Accounting
Review, 89(6), pp.2115-2149.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting
and Economics, 58(2-3), pp.275-326.
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based approach to
conducting a quality audit. Cengage learning.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Legislation.gov.au. (2018). Therapeutic Goods (Charges) Act 1989 . [online] Available at:
https://www.legislation.gov.au/Details/C2018C00066 [Accessed 5 May 2018].
Legislation.gov.au. (2018). Therapeutic Goods (Medical Devices) Regulations 2002. [online]
Available at: https://www.legislation.gov.au/Details/F2018C00237 [Accessed 5 May 2018].

10ADVANCED AUDITING AND ASSURANCE
Legislation.gov.au. (2018). Therapeutic Goods Act 1989 . [online] Available at:
https://www.legislation.gov.au/Details/C2018C00082 [Accessed 5 May 2018].
Legislation.gov.au. (2018). Therapeutic Goods Regulations 1990 . [online] Available at:
https://www.legislation.gov.au/Details/F2018C00193 [Accessed 5 May 2018].
Vectusbiosystems.com.au. (2018). Vectus Biosystems » About Us . [online] Available at:
http://www.vectusbiosystems.com.au/about-us/ [Accessed 5 May 2018].
Vectusbiosystems.com.au. (2018). Vectus Biosystems » Investor Centre . [online] Available at:
http://www.vectusbiosystems.com.au/investor-centre/ [Accessed 5 May 2018].