Pharmaceutical Audit and Risk Management

The assignment examines the unique audit risks faced by pharmaceutical companies like CSL due to technological advancements and litigation. It emphasizes the importance of strong internal controls in establishing trust and mitigating these risks. The discussion highlights the collaborative efforts required between management, auditors, and the audit committee to effectively manage audit risk.

AUDIT & ASSURANCE

Commonwealth Serum Laboratories (CSL)
Contents
Introduction.................................................................................................................................................2
Audit risks....................................................................................................................................................3
CSL Ltd.........................................................................................................................................................3
Areas susceptible to audit risks...................................................................................................................4
 Research and development (R & D).....................................................................................................4
Effect of the audit risk on company’s financials..........................................................................................4
Audit process to verify balances of account................................................................................................6
 Contingent liabilities............................................................................................................................6
 Revenue...............................................................................................................................................6
 Deferred Income..................................................................................................................................6
 Acquisition of business........................................................................................................................6
 Liabilities and provisions......................................................................................................................6
 Litigations............................................................................................................................................7
Effect of such risk on the company’s financials...........................................................................................8
Audit procedure to verify account balances................................................................................................8
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11
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Commonwealth Serum Laboratories (CSL)
Introduction
In the year 1916, Commonwealth Serum Laboratories (CSL) was established. The main
objective of the company is related to vaccination services but during the initial stages, it
encountered severe issues that caused massive troubles. However, the hard work of the company
allowed it to become effective in the manufacture of antivenom that gained widespread attention.
Furthermore, other developments of CSL include the production of tetanus vaccines, polio
vaccines, diabetics, etc. All these developments in the field of medicines allowed the company to
prosper in the competitive world, thereby assisting it to become a multi-special organization in
the development of various medicinal items. Moreover, the largest area of operations of the
company is blood plasma derivatives because it is the only organization engaged in the same. In
other words, Australia does not have any other company engaged in the same activity.
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Commonwealth Serum Laboratories (CSL)
Audit risks
Audit risks are those risks that occur because of incapability on the part of auditors to identify
whether the financial statements are free from material misstatements or errors (Messier &
Emby, 2005). In such a scenario, the auditor will clearly provide an ineffective opinion on the
company’s financials. Such material misstatements arise because of faulty internal control
mechanisms in the organization thereby playing a key role in enhancing the risk levels of a
company. Besides, in relation to an auditor, material misstatements are caused due to detection
risks wherein the capability of an auditor to identify major issues is inappropriate (Cappelleto,
2010). Such detection risk arises because of the auditor’s inefficiency and negligence to conduct
the audit process. On a whole, the auditor must look at this issue because it may result in
dangerous situations.
CSL Ltd
The purpose of the study is to evaluate the audit risks of the company, its significant impact upon
the company’s affairs, and several processes that can play a key role in verifying the balances of
accounts affected by such risks.
The company pursues a risk and audit management committee within its framework that allows
it to take into account every audit risk prevailing within the organization especially in segments
like environment, safety, health, compliance, physical assets, etc. Further, many other
committees communicate with this committee so that every key issue is communicated and
addressed effectively (Vause, 2009). This clarifies the fact that the company is having proper
strategies to ensure that every major issue is being taken into account. Moreover, effective
internal control mechanisms are also needed within the company affairs to ensure that market
disclosures, infringement of copyright or trademark, insider trading, etc are taken into due
consideration (CSL, 2016). However, it must be noted that risks can only be mitigated by these
procedures and elimination of the same is not possible. These risks are the inherent risks that
exist in an organization even though proper internal control policies are in place (Hoffelder,
2012).
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Commonwealth Serum Laboratories (CSL)
Areas susceptible to audit risks
 Research and development (R & D)
It has been noticed that people have become more vulnerable to diseases and problems with due
passage of time. As a result, usage of medicines has grown substantially in the current scenario,
thereby enhancing the pharmaceutical industries as a whole. These concerns play a key role in
the development of research and development department as pharmaceutical industries are
inclined towards expending huge resources on this segment in order to survive in the competitive
market (CSL, 2016). On a whole, because of this over reliance on innovative technologies to
sustain in the market, it is not feasible to determine whether money and time expended on
research and development can prove to be successful for the companies.
Effect of the audit risk on company’s financials
It can be observed from the business risks of the company that they pose a huge threat to its
affairs. Besides, it is the moral responsibility of an auditor to utilize his professional capacity and
expertise in evaluating the audit process so that risks can be identified and mitigated as a whole.
Further, owing to immense amounts of resources expended on the research and development
department, it becomes necessary to understand the implication and nature of resources spent and
thereafter, classifies them based on their nature (ACCA, 2016). Besides, there may be some
expenses that can be written off by the company in the upcoming years and therefore,
understanding the nature of such expenses is of significant importance with the help of analytical
procedures and substantive processes (Roach, 2010).
In addition to this, termination of patents also poses a huge threat to the company because when
such patents are expired, it is not assured whether these may be renewed or not. Further, the
company expends huge resources for the same expired patent in order to assure that it is retained.
Due to this concern, there is a risk of material misstatement in the company’s financials (Fazal,
2013). Furthermore, intellectual property rights also play a key role in this regard because there
are various companies wherein more than half of their incomes are derived from only five
particular medicines. Besides, generic medicines also pose additional threats in this regard and
therefore, any kind of research that is intended for the same must be carefully evaluated and
conducted (Hoffelder, 2012). Another area of audit risk is to differentiate research from
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Commonwealth Serum Laboratories (CSL)
development because both these things are separate aspects. The reason behind this can be
attributed to the fact that companies expend huge funds on the development and lesser resources
on research activities. Hence, the auditor must effectively verify this classification of expense
because these are covered under the audit risks, thereby spoiling the entire audit process (Gilbert
et.al, 2005).
In companies wherein more than twenty percent of entire income is expended on such R&D
affairs, they also consider alternative options. In simple words, if patents are terminated and
there is pressure for enhancing innovation measures, there remains no scope for in-house
research facilities. Moreover, many companies are keen to take into account options such as
collaborations, acquisition, merger, etc so that the research expenses are minimized, thereby
playing a key role in enhancing the positive outcomes (Fazal, 2013). Therefore, effective
treatment of these admixed expenses betwixt one or more companies pose a threat, thereby
becoming one of the major challenges. In addition to these, R&D affairs are also sometimes
outsourced, thereby creating a scenario wherein the accounts of third parties must also have to be
taken care after. Further, there may be a related party transaction in relation to this segment that
may be concealed under the disguise of outsourcing affairs and thus, must be highly taken into
account so that it does not become a major issue (Heeler, 2009).
Nevertheless, it may not be mandatory that R&D affairs be only intended towards innovation
measures. This is because such R&D possesses varied roles in different companies. Moreover, in
relation to pharmaceutical organizations, it must be noted that they have started providing
distinct services in order to ensure that their feasibility of growth is more and risk of loss of
patent is minimal. This is because the attraction of new customers is the need of the hour in such
increased competition in the market and R&D can prove to be of immense benefit in this regard.
It is therefore required that any expenses that are made for such concerns must be adequately and
efficiently classified especially after determining the nature of such expenses. Nevertheless,
these can easily become the key areas of material misstatements in the financial statement of a
company. In relation to CSL, it can be seen that the company intends to enhance its research base
and for such purpose, it endeavors to compete for collaborations so that it can enhance its
revenues as a whole.
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Commonwealth Serum Laboratories (CSL)
Audit process to verify balances of account
In relation to financial controls, proper verification measures must be installed so that reasons
behind any variations in the pricing structure can be determined. This verification may play a key
role for the company to sustain its affairs in a way that can fetch better outcomes. Account
balances that must be scrutinized by the company are as under:
 Contingent liabilities
In relation to contingent liabilities, the cost of R&D that may fetch negative outcomes must be
disclosed. Moreover, audit processes include a collection of ample evidence in order to ensure
the prevalence of contingent liabilities. Hence, if such prevalence can be proved, it can result in
better outcomes.
 Revenue
The accounting measures for the recognition of revenue must be carefully evaluated so that it can
be ascertained whether it aligns with the medicines for which the company owns different
patents.
 Deferred Income
Due to the maximum time consumed for the purposes of research, the streams of revenue may be
deferred. Therefore, effective disclosure policies must be in place so that corrective actions can
be implemented.
 Acquisition of business
The key intention behind the acquisition of the company must be carefully evaluated and the
audit processes must also ensure that there is a fair measurement of the price of acquisition
offered by the company.
 Liabilities and provisions
Some of the company’s expenses incurred in the past year may prove to be futile and therefore,
they may not fetch positive outcomes. Furthermore, if such expenses become liabilities, adequate
provisioning must be duly implemented. Besides, the audit processes must ensure proper
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Commonwealth Serum Laboratories (CSL)
disclosure strategies and fair measurement of the accounts (Manoharan, 2011). Therefore, it can
be witnessed that various account balances have been affected because of the R&D expenses,
thereby necessitating verification from all perspectives.
 Litigations
Even though the company assures premium quality goods, it is feasible that few medicines
respond differently on different persons. Therefore, it can be said that the result may be either
negative or positive or both. In grave situations, it can also result in the death of a person,
thereby generating possibilities of legal cases against the company (Livne, 2015). Besides,
encountering such legal battles necessitate an immense amount of resources that may result in a
huge financial loss. Therefore, such litigation poses a threat to the company as an audit risk
because it may become impossible for the auditor to anticipate a number of resources spent in the
past years.
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Commonwealth Serum Laboratories (CSL)
Effect of such risk on the company’s financials
In Australia, CSL is the only producer of blood items and based on the various records, many
scandals have occurred in relation to contaminated blood that may result in the generation of
infectious diseases. This is the reason why the company has prepared many cases as well.
Besides, in 1996, the company accepted that it had admixed blood from international zones with
that of the Australian blood so that rapid distribution can be undertaken. However, this backfired
against the company as its share price declined (CSL, 2016). Nevertheless, the expenses incurred
by the company are depicted in its income statement but additional costs must be disclosed as
contingent liabilities. Moreover, in the case of losses, provisions must be duly framed
(Christensen, 2011).
The major risk of material misstatement present here is that the auditor may offer an ineffective
judgement based on such balances of accounts. The expectation of the auditor of the outcome of
such case may also be distinct from the reality, thereby resulting in a material misstatement.
Therefore, in order to encounter such risk, it must be noted that an auditor must attain an expert
advice from the management so that the list of outstanding litigation cases can be analyzed
(ACCA, 2016). Besides, the solicitors and legal advisors may also authenticate the cases from
the company.
In addition to all this, the penalty amount involved is also a major issue because material
misstatement may happen there as well. This is because the company may encounter a liability to
expend a massive amount that may not be expected by it. Therefore, the auditor must safeguard
such risks by taking into account similar cases so that the accurate amount in such cases can be
known and thereafter, decisions can be taken (ACCA, 2016). Therefore, the financial statements
of the company may suddenly appear to depict bigger liabilities in the form of various litigation
cases, and the auditor may effectively meet this by the implementation of proper audit processes.
Audit procedure to verify account balances
CSL was accused for providing infected blood of Hepatitis C blood. This indicates that the
company suffered from the lack of internal control mechanism and the testing procedure was
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Commonwealth Serum Laboratories (CSL)
ineffective in nature. The audit procedure should provide that the testing must be of high quality
with proper check and must vouch for surprise checks and audits.
Normal and Abnormal Loss – The accounts indicates the balances for the blood quantity or other
medicines that were contaminated or have become sub-standard for utility. The auditor needs to
ascertain the account to evaluate the level normal, as well as abnormal losses and the variations
in the levels needs to be ascertained as it provides a notion of the unfair practices adopted by the
company to have a hold for holding the market share (KMPG, 2010).
Penalties – The payment of penalties in the past, the reason for such penalties and the re-
occurrence possibility of such cases in the present year or such event happening after the date of
balance sheet should come into the procedure of the audit. Such verification will led to sufficient
check that needs to be undertaken by the auditor (KMPG, 2010).
Grievances and claims settled – the grievances of the customers must be audited to ascertain the
status of the complaints that is unresolved and by doing this, the auditor must provide an opinion
about the liabilities that is potential (KMPG, 2010). The amount that is paid towards the claim
must be settled and must be audited to frame an opinion about the future amount that is needed to
be paid by the company in such similar situations.
Legal costs
The amount paid to various parties under the Legal Expense head needs to be audited in an in-
depth manner because every such amount leads to a vital case. This will provide a better
explanation about the various expenses that pertains to the organization.
Hence, there are some accounts that are needed by to be verified by the auditor. In contrast to
this, the auditor must ascertain the possibility of complaints for the similar issues by various
parties. Apart from auditing the case, the auditor should ensure whether the testing is proper and
internal control is enhanced so as to lessen such issues that are repetitive in nature (Gay &
Simnet, 2015).
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Commonwealth Serum Laboratories (CSL)
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Commonwealth Serum Laboratories (CSL)
Conclusion
With the due passage of time, there has been a tremendous advancement in technology,
pharmaceutical companies are exposed to litigations and other related risks that pertains to
health. The elimination of audit risk is a complete effort by the management and the auditor and
needs the coordinated effort of both. The audit and risk committee must perform in tune to the
matter raised by the internal and external auditor that adheres to the internal control and the
action needed to be taken for the major issues. When it comes to pharmaceuticals, strong
internal control mechanism leads to reliability and establishment of a proper risk mitigation
policy of CSL has ensured it as a trusted brand.
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Commonwealth Serum Laboratories (CSL)
References
ACCA 2016, Assessing the risk of material misstatement, viewed 30 August 2017
http://www.accaglobal.com/uk/en/discover/cpd-articles/audit-assurance/material-
misstatement.html
Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ,
Melbourne
Christensen, J. 2011, ‘Good analytical research,’ European Accounting Review, vol. 20, no. 1, pp.
41-51
CSL 2016, Commonwealth Serum Laboratories, viewed 30 August 2017,
http://trove.nla.gov.au/people/1476740?c=people
Fazal, H 2013, What is Intimidation threat in auditing?, viewed 30 August 2017
http://pakaccountants.com/what-is-intimidation-threat-in-auditing/.
Gay, G & Simnet, R 2015, Auditing and Assurance Services, McGraw Hill
Gilbert, W, Joseph J & Terry J. E 2005, The Use of Control Self-Assessment by Independent
Auditors, The CPA Journal, vol.3, pp. 66-92
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press
Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press.
KMPG 2010, An overview of Risk and disclosure, viewed 30 August 2017
https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/KPMG-
pharmaceuticals-disclosures-summary.pdf
Livne, G 2015, Threats to Auditor Independence and Possible Remedies, viewed 30 August 2017
http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-
possible-remedies?full.
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Commonwealth Serum Laboratories (CSL)
Manoharan, T.N. 2011, Financial Statement Fraud and Corporate Governance, The George
Washington University.
Messier, W & Emby, C 2005, Auditing & Assurance Services: A systematic approach, McGraw-
Hill.
Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.
Vause, B 2009, Guide to Analysing Companies, Bloomberg Press
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