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).
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 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).
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 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 for manufacturing the therapeutic goods and on the making of conformity assessment body determinations (legislation.gov.au 2018).
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)
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 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.
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].
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: https://www.vectusbiosystems.com.au/about-us/ [Accessed 5 May 2018].
Vectusbiosystems.com.au. (2018). Vectus Biosystems » Investor Centre . [online] Available at: https://www.vectusbiosystems.com.au/investor-centre/ [Accessed 5 May 2018].
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