Auditing and Assurance Report: Business Risk Analysis of Vectus

This report provides an overview of the auditing and assurance aspects related to Vectus Biosystems Limited, a biotechnology company. It begins with an industry overview and a discussion of recent developments. The report then outlines legal requirements for pharmaceutical goods, identifying key regulations like the Therapeutic Goods Act. Furthermore, it examines significant business risk factors, including credit risk, liquidity risk, and interest rate risk, which auditors must consider. The report identifies auditing risks associated with liabilities, the financial results of subsidiaries, sales revenue, and assets. Finally, it assesses the likelihood of potential reliance on the control environment and provides a rationale for undertaking the audit based on the client's business and audit risks.

Running head: AUDITING & ASSURANCE
Auditing & Assurance
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Executive Summary
The main discourse of the report aims to provide the overview of the industry in which Vectus
operates and also present a recent development brought in this industry. The report has further
suggested the regulations and legislative requirements for therapeutic goods. In this section the
study has identified and briefly discussed four legal requirements for pharmaceutical goods. The
next section of the study has identified four significant business risk factors into the auditors
need to consider for Vectus group engagement. Some of the main findings include that his
concerns associated to 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.

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Table of Contents
Introduction......................................................................................................................................3
Industry Overview...........................................................................................................................4
Identification of legal requirements for pharmaceutical goods.......................................................5
Business risk factors which needs to be considered for Vectus Group...........................................6
Auditing Risk concerned to four accounts.......................................................................................7
Likelihood of potential reliance which could be placed on overall control environment.............10
Rationale for undertaking the audit after assessment of client’s business and audit risks............12
Conclusion.....................................................................................................................................13
References......................................................................................................................................15

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Introduction
“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.

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Industry Overview
“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 compound 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

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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”

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 “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:
Credit Risk
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).
Liquidity risk
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).

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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:
Liabilities
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). The
disclosure of liability of the company in 2016 and 2017 is illustrated below as follows:

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Table: “Disclosure of liability for Vectus Biosystems Limited in years 2016 and 2017”
(Source: Vectusbiosystems.com.au 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).
Sales revenue

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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).
2016 2017
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000 $75,066
$49,337
Sales revenue pof Vectus Biosystems Limited
Figure: Figure illustrating revenue from sales for Vectus Biosystems Limited in 2016 and
2017
(Source: Vectusbiosystems.com.au 2018)
Assets
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

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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.
Table: Disclosure of assets for Vectus Biosystems Limited in 2016 and 2017
(Source: Vectusbiosystems.com.au 2018)
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

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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

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potential reliance need to be given on overall control system which is to be taken into account
with the following factors:
i. Vectus compliance is considered with the third edition of “Australian Securities
Exchange (ASX) Corporate Governance Council’s” CG Principles and
Recommendations
ii. Striving for continuous improvement in the area of internal control and risk management
environment
iii. 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).

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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).
Conclusion
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

14AUDITING & ASSURANCE
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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References
Curtis, E.M., Moon, R.J., Harvey, N.C. and Cooper, C., 2017. The impact of fragility fracture
and approaches to osteoporosis risk assessment worldwide. Bone, 104, pp.29-38.
Elsayed, A.A., 2017. The Audit Risk Model, the Signal Detection Theory, and the Information
Manipulation Theory.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Hsieh, Y.T., Lin, C.J. and Chang, H., 2018. Audit Firm Office Size and Client Acceptance
Decisions.
Ibisworld.com.au. (2018). Biotechnology – Australia Industry Research Reports | IBISWorld .
[online] Available at: https://www.ibisworld.com.au/industry-trends/market-research-reports/
thematic-reports/biotechnology.html [Accessed 8 May 2018].
Irene, M. and Bunyasi, G., 2017. Effects of Risk Assessment and Internal Audit Standards on
Financial Performance of State Owned Corporations in Kenya: A Case Study of the Ministry of
Labour Social and Security Services. Journal of Finance and Accounting, 1(1), pp.1-13.
Legislation.gov.au. (2018). Therapeutic Goods Amendment (2017 Measures No. 1) Act 2018 .
[online] Available at: https://www.legislation.gov.au/Details/C2018A00007 [Accessed 8 May
2018].
Lundin, A., Hallgren, M., Balliu, N. and Forsell, Y., 2015. The use of alcohol use disorders
identification test (AUDIT) in detecting alcohol use disorder and risk drinking in the general
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Niemi, L., Knechel, W.R., Ojala, H. and Collis, J., 2018. Responsiveness of auditors to the audit
risk standards: Unique evidence from Big 4 audit firms. Accounting in Europe, 15(1), pp.33-54.
Seyam, A.A. and Brickman, S., 2016. The new requirements relating to going concern evaluation
and disclosure provide a critical improvement to the financial statements taken as a
whole. International Journal of Business and Economic Development (IJBED), 4(1).
Vectusbiosystems.com.au. (2018). [online] Available at:
http://www.vectusbiosystems.com.au/wp-content/themes/vectusbiosystems/downloads/VBS
%20Annual%20Report%202017%20-1.pdf [Accessed 6 May 2018].
Vectusbiosystems.com.au. (2018). [online] Available at:
http://www.vectusbiosystems.com.au/wp-content/uploads/2017/10/VBS-2017-Corporate-
Governance-Statement.pdf [Accessed 6 May 2018].
Vectusbiosystems.com.au. (2018). Vectus Biosystems » About Us . [online] Available at:
http://www.vectusbiosystems.com.au/about-us/ [Accessed 8 May 2018].
Vectusbiosystems.com.au. (2018). Vectus Biosystems » Technology . [online] Available at:
http://www.vectusbiosystems.com.au/technology/ [Accessed 8 May 2018].