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Introduction to Vectus Biosystem Limited

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?


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?


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?


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?


6.Based on your understanding of the client and assessment of the client’s business and audit risks, would you undertake the audit? Why?

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.

1. 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.

Regulations for Pharmaceutical Companies in Australia


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 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).

2. 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.

Key Risks Faced by Pharmaceutical Companies Today

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, 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.

3. 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.

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.

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 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.


5. Considering the corporate governance manual of Vectus Bio-systems Limited, the corporate governance manual adopted by the company is formal. The Board of Directors of the company is responsible for regular review of the corporate governance manual. After going through the system formed by the company for compliance with the corporate governance, it could be said that the control system maintained internally could be relied on. This is said after considering the following factors:


Audit and Risk Management Committee Charter- This committee is made considering the risk which is associated with the internal working of the company. It is a well-known fact that any type of risk associated with the company is dangerous for the working of the same. After formation of this committee, Vectus has a complete audit of each and every working department on regular basis and the meeting held are for the discussion of the faults found in the audit (Wright, 2016.). Hence, this strengthens the internal management and control of Vectus.

Continuous Disclosure Policy- In order to maintain the faith and reliance on the stakeholders of the company it is important for the management to disclosure the essential information of time and with correctness. At Vectus Limited under the continuous disclosure policy time of disclosure and the information that is to be disclosed is explained. This helps the internal management to understand the reporting properly.

Shareholder Communication Policy- The shareholders are considered the owners of Vectus Limited. Proper communication of information and any information on demand by them is provided to the shareholders on time. Such work is possible as there is a policy made for it which explains each and every factor related to the communication made (Graham, Bedard & Dutta, 2018).

6. Accepting audit of any business organisation involves many considerations that auditor is required to undertake before giving acceptance to the business entity. There are fundamental principles of auditing are required to be accessed and the decision should be based on those assessed findings. There should not be any potential threat to integrity and professional behaviour for the auditor and this should be assessed before confirming for the audit. In case of Vectus Bio-systems Limited, there are various issues involved in their business operations and in a business environment (Sonu, Ahn, & Choi, 2017). It can be analysed from the business risk assessment and regulations and legislative requirements that Vectus Bio-systems needs to undergo, there is undue influence on the management. Before accepting an audit of Vectus Bio-systems unacceptable risk or in controllable risk needs to be identified and impact of same is required to be assessed. From the analysis of business risk involved with Vectus Bio-systems, it can be observed that their inherited risk is at higher side and this implies that there will be various uncontrollable factors that auditor is required to deal with. Factors related to business operations or business activities of Vectus Bio-systems Limited can be hampered because of uncontrollable factors. Therefore in this situation, auditor or management of Vectus Bio-systems Limited cannot do anything (Sonu, Ahn & Choi, 2017).

Another factor related to Vectus Bio-systems Limited is of the weak control system and control planning by the management of their business operations. Auditors are not responsible for establishing internal control system in the business process of the organisation but management is responsible. In case of Vectus Bio-systems Limited, the internal control system has shown adverse results and therefore is weak in terms of implementation. Therefore it is very risky to give acceptance of audit of Vectus Bio-systems Limited for the current year.

Recommendation: Therefore on the basis of above contention, an audit of Vectus Bio-systems Limited should be accepted. 

Conclusion

At the end of this report, it could be said that Vectus Bio-systems Limited is a biotech pharmaceutical company which does research and development of the salt for curing high-level diseases. The auditor of the company needs to keep in mind many points while performing the audit process. This is because such industry is governed by plenty of rules and regulations for which reporting and documentation need to be proper. Along with this, the risk associated with the business are not easily curable, but they need proper planning for the same. For this coming to the corporate governance of the company, it seems well designed and stable. With such stability and proper management in accordance with the corporate governance policies, it is would lead to the better internal control system. At the end, Vectus Bio-systems Limited needs to majorly focus in commercialising its work done and understand the needs and requirements of the shareholders for a sustainable future.

References

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Ranson, Brian J., 2010. Chapter 11: Retail (consumer) and small business credit risk.(Company overview). Credit Risk Management, pp.11-i.

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Sisodia, Soares & Ferreira, 2016. Modeling business risk: The effect of regulatory revision on renewable energy investment - The Iberian case. Renewable Energy, 95, pp.303–313.

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