12-36 Williams Pharmaceutical Company produces a number of drugs that are regula

Question

12-36

Williams Pharmaceutical Company produces a number of drugs that are regulated by various agencies, including, in the United States, the federal Food and Drug Administration (FDA). These agencies issue licenses that approve drugs for sale and establish specific regulations regarding production quality and inventory security, violations of which can result in fines or the suspension of product licenses. All the drugs are protected under patents filed in various jurisdictions, and Williams markets the drugs in the United States as well as in a number of other countries. The company faces significant competition from other pharmaceutical companies globally.

a. Identify three business risks that are faced by Williams with respect to production processes and inventories.

b.For each of the risks identified in pan (a), state whether the business risk results in a current-period inherent risk of material misstatement of the financial statements (financial reporting risk). I f the business risk results in a financial reporting risk, describe that risk in terms of the type of financial statement misstatement that could occur.

c. Provide examples of how Williams's management might mitigate the risks (e.g., specific controls) identified in pan (b) as financial reporting risks.

d. For each risk identified in part (b) as a financial reporting risk, describe substantive auditing procedures that might be used by the auditors if management did not have controls to mitigate the risk.

Explanation / Answer

Ans....
a. Business risks are coherent in any manufacturing business. In the case of Williams the three business risks faced with respect to production processes and inventories are :
1. Cancellation of license by the Federal FDA due to non-compliance of any procedure or method during production,
2. Robbery of the inventory
3.Competitors of the company losing the patent rights due to non-compliance.
b. Yes, for each of the risks identified above, there is a financial reporting risk. The financial statement misstatement that could occur would be :
For risk 1 & 3 the the risk would be regulatory and legislative non-compliance risk and risk of loss of company reputation,and for risk 2 it would be overstatement of inventory and cash.
c. The designing of various controls is the primary solution to mitigate financial reporting risks. These controls should be internal and external and should be installed with the help of internal auditors and also tested for quality. Various types of application controls include:
Input Controls,
Processing Controls,
Output Controls,
Integrity Controls,and
Management Trail.
All of the above controls can be used in risk mitigation.
d. The Auditors can undertake various activities for ensuring that proper controls are in place. In addition, they can also :
1. Discuss the Financial Statements with the Management and External Auditors. In this case,reviewing the key ratios regularly is very important.
2. Regularly review the patents and copyrights,
3. Regularly check for renewed license,
4.Regularly review the loss due to theft of inventory and measures taken for accomodating this loss in the financial statements so that financial statements potray a fair and accurate financial position fo the business.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.