1.Audit risk could be defined as the risk, in which the auditor provides in appropriate audit opinion on the financial statements (Hsieh, Lin and Chang 2018). Hence, audit risk might constitute of any factor leading to material misstatement or omission in the financial statements. Thus, identification of significant business risks result in the detection of audit risk. In case of Vectus Biosystems Limited, the four accounts or areas of concern comprise of the following:
Liabilities:
Considerable concern could be observed in the liability section, which is represented in the balance sheet statement of the organization. This is because there is high possibility that Vectus Biosystems Limited might have understated its liability, since no recognition or disclosure of any provision is made in the financial statements of the organization. Moreover, the contingency-related disclosures might not reveal significantly the precise net amount to be recovered from the tax authority. Finally, it has been identified that there is no presence of long-term borrowings in the annual report of the organization; thus, it is a rising concern for carrying out the audit work.
Table 1: Liability disclosure of Vectus Biosystems Limited for the years 2016 and 2017
(Source: Vectusbiosystems.com.au 2018)
Financial results of the subsidiary:
There is greater chance that the financial results of the subsidiary of Vectus Biosystems Limited might be manipulated. The intention is to influence the market price of shares before the sale of the transaction is made (Niemi et al. 2018). It has been observed that Vectus uses a technology called Accugen, which is owned by its wholly owned subsidiary, Accugen Private Limited. This particular technology is considered to fetch benefits related to accuracy, time and cost. Vectus invests in this subsidiary for commercialization purpose, which might understate or overstate the overall worth of the subsidiary. Moreover, high probability is inherent that the organization might commit mistakes in the total worth of the subsidiary.
Sales revenue:
It has been identified that Vectus Biosystems Limited has made significantly lower revenue in both 2016 and 2017. The firm presently recognizes sales revenue depending on certain estimates in relation to its operating sites. These estimates might lead to biases and the assumptions made might not be realistic in nature by taking into consideration the selling price (Contessotto and Moroney 2014). Due to this, the effects of provisional pricing and any future revisions might not be disclosed adequately in the income statement of the organization.
Figure 1: Sales revenue of Vectus Biosystems Limited for the years 2016 and 2017
(Source: Vectusbiosystems.com.au 2018)
Assets:
There is high chance that the assets of Vectus Biosystems Limited might be overstated due to the depreciation of property, plant and equipment, which needs to be expensed immediately in the income statement of the organization. The cost incurred in the existing period might not be recoverable as well due to which the assets of the organization might be overstated significantly. Moreover, it could be observed that the current asset base of the organization is significantly higher in contrast to non-current assets. There is greater chance that the cash and cash equivalents have been overstated to present an effective liquidity position of the business.
Table 2: Asset disclosure of Vectus Biosystems Limited for the years 2016 and 2017
(Source: Vectusbiosystems.com.au 2018)
Hence, based on the above evaluation, it could be inferred that these four areas are the significant concerns for Vectus Biosystems Limited, which need to be taken into consideration before the auditor undertakes the audit work.
2.The board of Corporate Governance for “Vectus Biosystems Limited (Vectus or the Company)” is relied on the best corporate Governance practices which are seen to be related to the different types of the initiatives which are seen to be relied on the principles are suggested by “Australian Securities Exchange (ASX) Corporate Governance Council’s third edition of the publication, Corporate Governance Principles and Recommendations”. Based on the assessment of corporate report to the board of Vectus has a definite “Audit and Risk Management Committee”, which is seen to be responsible for reviewing and monitoring “financial, audit and risk management processes and reporting”. The committee comprises of three nonexecutive directors and majority of the directors on not made up of independent directors because Company believes that the most suitable qualified directors with greater expertise in financial control and accounting are not non-independent directors (Vectusbiosystems.com.au. 2018).
Prior to approval of the financial statements for a particular financial year, the board of Vectus ensures that records of the company are properly maintained. The CEO and CFO assure that the financial statements are in compliance with relevant accounting standards, which is able to present a true and fair view of the financial position and performance. In addition to this, the opinion of CEO and CFO is able to confirm that the system for the “risk management and internal control” is relied on effective operations as per the financial reporting risks. Based on recommendation 7.2 of the “corporate governance” statement, it can be clearly inferred that management is responsible for implementing, designing and reporting to the company’s risk adequacy elements associated to the internal control system. The management is responsible for reporting to the audit and risk management committee about the key risks and the way it is being monitored as per the company’s risk management framework and internal compliance of the control systems(Griffiths2016).
It has been further depicted that Vectus does not have a particular audit function. The continuous process for improving the effectiveness of risk management and internal control environment is done as per monthly review of the actual versus the variances in budget pertaining to revenue and expenses. Henceforth, it can be concluded that the likelihood of the potential reliance which can be placed on the overall control environment is dependent on the following three factors(Vectusbiosystems.com.au. 2018).
3.The assessment of various types of key audit matter and key audit risk have shown how the company has a history of making losses in 2017 which made it exposed to increased risk to such extent that its ability might be lost, if intends to operate in the form of going concern. The main depictions of the report have stated that there is greater loss magnitude in relation to the cash level and net assets in the organization. Thus, it is considered as a probable risk related to the going concern principle. Despite of the significant auditing risk associated to going concerns, Vectus has been proactive enough in improving the financial condition and adopting a better approach towards audit assessment. These initiatives provide the rationale to undertake the audit (Vectusbiosystems.com.au 2018).
In order to mitigate the going concern risks, the audit procedure has included considerable assessment of estimating cash inflows and outflows to be generated in future. As a result, it takes into consideration the estimated effect of the planned accumulation of capital in relation to quantum and timing. In addition to this, the company has used the pertinent group knowledge, the sector and present standing for the capital raising initiatives thereby addressing the different types of concerns (Vectusbiosystems.com.au 2018).
In order to provide response for the considerable judgments considered to ascertain if research and development is recognized in compliance with appropriate standards of accounting, meetings with the management need to be held for carrying out the audit work. The meeting would be on the various types of accounting norms having association with the expenses along with the capitalization of cost of research and development of the organization. Moreover, the major process of the management has been updated with the help of the auditing procedure determining whether the spending on research and development has been able to meet “AASB 138 recognition criteria” (Vectusbiosystems.com.au 2018). There have been further meetings between the management and the audit team and for evaluating the areas requiring special attention especially in the present research and development stage.
It needs to be observed that the information accumulated from other sources at the time of auditing procedure such as development of the product and nature of contracting the key suppliers did not identify any inconsistency with the management’s conclusion. It is depicted to be likely that in future, the research and development department of the group will be able to meet the criteria for capitalization. Moreover, the identification and assessment of the material misstatement is depicted with the effectiveness of internal control of the group. The appropriate accounting policies for that ensure that the accounting estimates are approved by the directors of the company (Vectusbiosystems.com.au 2018).
References and Bibliographies
Contessotto, C. and Moroney, R., 2014. The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), pp.393-418.
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.
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.
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 population: validation of AUDIT using schedules for clinical assessment in neuropsychiatry. Alcoholism: clinical and experimental research, 39(1), pp.158-165.
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:
https://www.vectusbiosystems.com.au/wp-content/themes/vectusbiosystems/downloads/VBS%20Annual%20Report%202017%20-1.pdf [Accessed 4 May 2018].
Vectusbiosystems.com.au. (2018). [online] Available at:
https://www.vectusbiosystems.com.au/wp-content/uploads/2017/10/VBS-2017-Corporate-Governance-Statement.pdf [Accessed 4 May 2018].
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