Advanced Auditing and Assurance Report: Vectus Bio-systems Analysis

This report offers a comprehensive analysis of the audit and assurance services provided to Vectus Bio-systems Limited, a pharmaceutical company. The report begins with an executive summary and an introduction to the company's operations, including a recent major development. It then identifies and describes four key legal requirements for pharmaceutical goods, such as the Therapeutic Goods Act 1989, safety standards, listing and pricing regulations, and competition law. The report proceeds to identify and analyze four significant business risk factors, including cybersecurity, global anti-corruption, increasing competition, and taxation risk, detailing how these risks could lead to material misstatements in financial reports. Using the 2017 annual report, it highlights risky accounts and areas of concern. Further, the report assesses the likelihood of reliance on the overall control environment, supported by factors related to Vectus’s corporate governance. Finally, it concludes with a decision on whether to undertake the audit based on the client and business risk assessments.

ACC5AAS
ADVANCED AUDITING AND ASSURANCE
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Executive Summary
This report is based on audit and assurance services provided by auditors to the business organisation
has been discussed. Vectus Bio-systems Limited is the business engaged in the business of
pharmaceutical has been taken for the purpose of this report. This report discusses the profile and
business operations of Vectus and this includes preliminary screening of business organisation.
Pharmaceutical business organisations has to follows The Therapeutic Goods Act 1989, Safety,
Standards and Regulation, Listing and Pricing of the product, Competition Law in Australia and
many other legislations and regulations while conducting business operations. Every business
organisation has its own internal and external environmental factors that impact business operation of
the same. In case of Vectus, Cyber Security, Global Anti-Corruption, Increasing competition and
commercialisation of new products and Taxation Risk are some business risk factors. Sales account,
administration and corporate expenses, cash and cash equivalents and trade and other payables are
risky accounts identified during audit planning. Based in these concerns, decision has been taken not
to take audit of Vectus Bio-systems Limited.
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Contents
Introduction.............................................................................................................................................3
1. Provide an overview of the client’s operations and industry in which it operates. Your overview of
the client’s operations must include at least one recent major development..........................................4
2. Pharmaceutical companies are required to follow a number of regulations and legislative
requirements for therapeutic goods. You need to Identify and briefly describe four (4) legal
requirements (acts/regulations) for pharmaceutical goods......................................................................5
3. Identify FOUR significant business risk factors that the auditor needs to consider for the Vectus
group engagement. Describe how these risks may lead to potential material misstatements in the
financial report........................................................................................................................................7
4: Using the 2017 Vectus annual report, identify at least FOUR accounts/areas of concern. Why do
you consider the chosen areas/accounts to be risky? Your answers should be reflective of your in-
depth understanding of Vectus Group and its environment....................................................................9
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......................................................................11
6: Based on your understanding of the client and assessment of the client’s business and audit risks,
would you undertake the audit? Why?..................................................................................................12
Conclusion.............................................................................................................................................13
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Introduction
With the increasing demand for the drugs that could cure major diseases such as cardiac arrest, brain
stokes diabetes and another such level of diseases, regular research and development are done. Such
research of new formulas to develop a salt which could act as a drug is done by the biotechnical
companies. In this report, we have discussed the working of such company which deals in such
research and development Vectus Bio-system Limited. This report is prepared from the point of view
of an auditor, which would help them in auditing the working of the company. This report includes
introduction to the working of the company, the various rules and regulations that govern the working
of biotechnical and pharmaceutical companies, the business risk involved with such companies, the
area of working which are considered risky considering the annual report for the year 2017, analysis
of the internal work control of the company in accordance to its corporate governance arrangements
and the reasons because of which the auditor undertook the audit if Vectus Bio-system Limited. The
report is ended by providing a conclusion to the finding of the report.
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1. Provide an overview of the client’s operations and industry in which it
operates. Your overview of the client’s operations must include at least one
recent major development.
It is observed that the client company is Research and Development Company. It is engaged in the
medical research and development operations in Australia. From almost 20 years back from now, the
owner of the company Dr Karen Duggan came up with a discovery where there was a metabolic
change occurred from intake of a salt. Such salt enables the reverse of fibrosis which is caused due to
hypertension and any other chronic diseases. A few years later from then, in 2005 Vectus Biosystem
Limited was found considering the discovery of Dr Karen Duggan. The salt was given a form of
medicine since then and further research with such concept was initiated. Today Vectus has patented
its formula with Vasoactive Intestinal Peptide (VIP). Vectus operates as a biotechnological company.
The industry it belongs to is Biotech and Parma and the sub-industry it operates in is a biotech
industry. It provides preclinical substantial animal and human cell toxicity testing services. The
operations of the company also include the development of technology which aims at speeding up and
improving accuracy for measuring the amount of DNA and RNA in the samples which are available
at the laboratories. In the year 2006, the company was able to successfully launch an IPO on the
Australian Stock Exchange (ASX) and had raised a$5.1 million through it (Tabuena, 2012). The
funds that were raised through the IPO are used in the development of the key compound VB0004.
In the resent year there study of toxicology and pharmacokinetic was in process by the company.
Such study is in the process has shown successful trails on animals’ ad it was observed that there
were no side effects after 2000 milligrams per kilo were administered to the second species on daily
basis for seven days. The company is also under regular follow up for developing engagements with
various pharmaceutical companies. During the year the successful good management practice was
completed, which improved the cost efficiency and the yield per dose. The key patent of the company
has now also been granted in the USA, Japan, South Korea, Singapore, China, and Israel and also by
the African Regional Intellectual Property Organisation (Berezhniy, 2017). Also, the company had
made a good progress in Philippines and Europe. Vectus Biotechnology Limited has also received
recognition at the conference attended by the board of the company and the industrial leaders of
Australia, USA and New Zealand had appreciated the efforts made for the noble cause (Anon, 2012).
According to the annual report of the company, it is observed that the company is planning to expand
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its research program in their area of interest which is cardiovascular diseases, non-alcoholic
steatohepatitis and alcoholic steatohepatitis (liver diseases) and pulmonary fibrosis (related to lungs).
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2. Pharmaceutical companies are required to follow a number of regulations
and legislative requirements for therapeutic goods. You need to Identify and
briefly describe four (4) legal requirements (acts/regulations) for
pharmaceutical goods.
The regulations that govern are required to be followed by the pharmaceutical companies for
therapeutic goods are:
The Therapeutic Goods Act 1989- The objectives of The Therapeutic Goods Act, 1989 is to
establish a maintenance system nationally which would control the quality, timely availability, safety
and the efficiency of the goods. The Act is applicable to the following set of goods
- Goods which are used in Australia, whether or not manufactured in Australia.
- Goods which are exported from Australia and
- The goods that are used to provide a framework used by the states and the territories, so that a
uniform approach is followed. This is done to control the availability and the accessibility
along with the safe handling of poison in Australia.
Safety, Standards and Regulation- As it is a well-known fact that any product which is available in
the Australian market and contains or involves biotechnology needs to surpass the safety and standard
regulations. The regulations are maintained in order to provide correct medicinal value to the
customer. A range for the safety and standards which are to maintained are provided by the regulatory
authority (Anon, 2016)
Listing and Pricing of the product- It is found that in Australian market any pharmaceutical product
which is sold is required to be approved from TGA (Therapeutic Goods Administration) and needs to
be prescribed from a doctor. Most of the drugs which are prescribed are sole through the
Pharmaceutical Benefits Scheme (PBS). This is because it helps the customers to purchase them at
the lower price. Hence, for the listing at PBS, a positive recommendation for that drug is required by
the Pharmaceutical Benefits Advisory Committee (PBAC). PBAC is an independent body under
National Health Act, 1943.
Competition Law in Australia- the Competition and Consumer Act, 2010 provides a set of laws for
Australian competition. This body is an independent statutory authority managed by the Australian
Competition and Consumer Commission Act. The regulations of the competition and consumer act,
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2010 is virtually applicable to all the business companies dealing in pharmaceuticals (Ranson, 2010).
The following conduct is the most relevant of the CCA-
1. Mergers and Acquisitions which could lead to substantial reduction of competition
2. Resale price maintenance by the wholesaler who specifies the resale price.
3. Contract and arrangements between the companies which to affect the competition in the market.
4. The cartel behaviour which includes price fixing and restriction on the outcome.
There are some of the legal requirement that is to be considered by the auditor while auditing the
reports and documents of Vectus.
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3. Identify FOUR significant business risk factors that the auditor needs to
consider the Vectus group engagement. Describe how these risks may lead
to potential material misstatements in the financial report.
It is observed that the pharmaceutical companies are facing various legal challenges increasingly.
This industry has recently expanded into the markets and this has increased its risk factor. By
identifying the risks associated with this industry it would be easy for the companies to make
proactive policies and procedures for the working (Lu, Wu & Yu, 2017). If such foresightedness is
not developed by the companies it may reduce the potential of the company financially and legally.
The risks which the auditors of Vectus Biosystem Limited is associated with are:
Cyber Security: According to the research, it is found that in 2004 a group of hackers targeted the
pharmaceutical and biotechnology companies in stealing the non-public data from their emails. Such
data was related to the formulas with the help of which the salt for the medicines and also to attempt
insider trading activities. After the investigation of the crime by the cyber cell, there was no guarantee
given to the victim companies (Sisodia, Soares & Ferreira, 2016). Hence, still in today's time the data
and the confidential information that is shared by the companies over the internet is not safe. This risk
if gets attracted to a company can lead to heavy losses without recovery.
In order to protect the data from hackers, the company provide misstatements in the financial reports
which would not attract them. But this leads to dissemination of untrue information to the
stakeholders.
Global Anti-Corruption: It is observed that the business of pharmaceuticals has been expanded its
virtues internationally also. In order to obtain the license for the setup of this business, there are many
companies who have approached the government officials illegally. There have been records with the
regulatory bodies who have investigated such companies offering any value to the government
officials so that the licence for this business could be obtained (Deby & Tigor, 2018).
Because of such malpractices of a few companies, other companies which work ethically are at risk of
an investigation under Foreign Corrupt Practices Act. In order to keep an eye on the pharma
companies, heavy regulations and vigorous compliances are set up. Hence, the risk of an investigation
may lead to delay in the working of the company.
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The companies associated with the malpractice of corruption would lead to misstatements in the
financial reports to hide such practice.
Increasing competition and commercialisation of new products: With the emergence of new
technology the research and development have increased to a greater extent. This has increased
competition in the market. The commercialisation of the products has increased brand publicity and
the customer is attracted to such specific brands only. This risk can only be curbed when there is an
increase in the sale of the company (Yu & Chan, 2016).
Such risk is prone to display of wrong information. In order to increase the customer’s attention in
the sales of the products, there could be chances that the financial report is manipulated in such
manner which would show wrong information.
Taxation Risk: With the dynamicity of the rules and regulation of this industry there are chances of
regular increment in the taxes that could be levied on them (Rooney & Cuganesan, 2015).
If a company would have a will to get rid of the taxes levied they might show wrong sales and
turnover value so that the tax rate applicable would be less.
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4: Using the 2017 Vectus annual report, identify at least FOUR
accounts/areas of concern. Why do you consider the chosen areas/accounts
to be risky? Your answers should be reflective of your in-depth
understanding of Vectus Group and its environment.
Risky Accounts Reasons
Sales account Sales account is the account that gets affected very easily by both internal and
external business environment. In case of Vectus Bio-systems Limited, sales
revenue is at the very lower side and therefore it is an area of risk involved with
the business operations. From the analysis of business, risks involve with Vectus
Bio-systems Limited and pressure of no of regulations and legislative
requirements, going concern principle is at risk. According to going concern
principle, every business organisation is operating a business to earn a regular
profit (Ethridge & Canfield, 2007). In case of Vectus Bio-systems Limited, it can
be observed that their revenues are decreased to great extent in 2017 as compared
to 2016.
Administration
and Corporate
expenses
From the analysis of income statements of Vectus Bio-systems Limited, it can be
observed that administration and corporate tax expenses during 2017 has been
increased at a great level. There is no control of management on these expenses
and therefore this is a high-risk area or accounts for Vectus Bio-systems Limited.
Administration and corporate expenses ratio is 690,850 / 49,337 x 100 = 1400 %
of sales during 2017 (Niemi, 2018). Vectus Bio-systems Limited has research and
development as its core activity, therefore, their expenses on administration
activities should not be that high. In order to cope up with increasing competition
in the market, this account is at higher risk (Subagyo, 2017). In case of Vectus
Bio-systems Limited, after analysis of administration and corporate expenses, it
can be observed that their internet cost will be at the higher side because of
fluctuating business environment and vast business operations. Another
implication of this risk account is: there must be higher control risk in terms of the
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internal control system of Vectus Bio-systems Limited (Pickett, 2011).
Cash and cash
equivalents
Cash and cash equivalents are a most liquid form of an asset of the business
organisation and are required for day to day business operations. Higher cash and
cash equivalents or liquidity in the business organisation may lead to the weak
internal control system as management has to manage cash and employ multiple
controls on the same. Higher liquidity (beyond the acceptable limit) leads to weak
internal control in the organisation (Gilad, Alon‐Barkat & Braverman, 2016). In
case of Vectus Bio-systems Limited, their cash and cash equivalent balance is at a
higher level and therefore this account or area is at higher risk. Because of higher
cash and cash equivalents in business operations of Vectus Bio-systems Limited,
control cost will be at higher side (Cascarino, 2012.).
Trade and other
payables
In case of Vectus Bio-systems Limited, it can be observed from financial
statements of 2017, that trade and other payables have been reduced to a great
extent in 2017 as compared to 2016. It can be observed that all other activities and
operations of Vectus Bio-systems Limited have been increased but trade and other
payables have shown inverse results (Kim & Yasuda, 2017). In 2016, trade and
other payables are $ 357,590 and in 2017 it is $ 94,865, therefore there is a
decrease of $ 262,725. According to the business environment and business risk
associated with Vectus Bio-systems Limited, this moment is not expected.
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