Memorandum
To: The Management
From: The Auditor
Date: Oct 20, 2017
Subject: Audit Planning of Fennec Pharmaceuticals 2017
Enterprise Risk/ Business Risk
This part of the Audit planning consists of risks associated with the Audit of the Company in 2017 as well as auditor concerns during the audit. Business Risk is the risk of a company incurring a loss or experiencing lowering profits. It could be due to any reason such an increase in competition, decreased sales price, higher input costs, economic and political conditions. It can be seen in the statement of comprehensive income that the company has never earned a profit and losses have been increasing in the past years. It is a major business risk that the company might not be able to continue business activities in the future. All subsidiaries of the group have become inactive except Fennec, and this is another alarming situation. It might be possible that this subsidiary may not continue as well (Thibodeau, et al 266).
Information Risk
Secondly, information Risk is a risk of a misstatement about the material in the financial accounts of the organization. Due to the existence of this risk, it is demanded by third parties that an external scrutiny of the accounts of business to be carried out. As of 2016, no such material misstatements existed in the financial statements of the company. However, it might be possible that the management misstates future balances to show more losses to achieve high tax benefits. Hence high scrutiny is required at this point (PCAOB).
Engagement Risk
Engagement Risk is the risk associated with engaging in an audit with a firm that is found unable to pay the audit firm for the services. Due to the poor financial condition of Fennec Pharmaceuticals, it seems that there is a high chance of engagement risk. There are ways through them the engagement risk can be mitigated. It can be eliminated if the audit firm rejects the audit of the assigned company. To mitigate engagement risk in the case of Fennec Pharmaceuticals, it would be better to engage with prior year auditors and take their opinion before concluding (Colbert).
Materiality
Materiality is a threshold and it has been decided by the auditor above that any misstatements are reconsidered for affecting the financial statements. In other words, it can be said that it is the maximum tolerance level of misstatements and misrepresentations. The material is an important aspect of the audit as it helps investors to make their decisions. The figures of Fennec Pharmaceuticals are already in small numbers, and even a slight change in them might lead to a big misstatement. According to ISA 320, it is suggested that use of benchmarks can be done (Thibodeau, et al 305).
In the case of Fennec Pharmaceuticals, misstatements would be considered material if in any case, the figure individually or collectively affects the economic decision of the financial users of these statements. For the Audit of Fennec Pharmaceuticals, the misstatement would be calculated as a percentage of the total loss, total equity, and total assets. Since the company is going to near an alarming situation, it is expected that high misstatements might be dug in the process (Ethridge, et al 26).
Audit Risk (IR*CR*DR)
Inherent Risk
Audit risk is the major concern for the auditor. Audit risk is detection risk and the result of inherent risk and control risk. All these risks are concerned with the auditor. Hence critical evaluation is imperative. Inherent risk is a risk of material misstatement in the financial statement for Fennec Pharmaceuticals that is usually based on judgments and estimations (IFAC).
It seems least likely that the Fennec Pharmaceuticals would face an inherent risk as it is operating at a small level with small figures under consideration. Since the company is under consideration of going concern level, extra care is required by the auditor in case of mitigating inherent risk in the audit of Fennec Pharmaceuticals. To mitigate the inherent risk, it is planned that an experienced team of professionals will carry out the audit of Fennec Pharmaceuticals. Juniors or inexperienced teams pose a greater inherent risk. They would only be used in minor tasks of the audit (Browning).
Control Risk
Another audit risk of apprehension is the control risk at the organizational level. In case of lazy accounting practices or inappropriate use of accounting standards, a misstatement might arise in the financial statements of the company. If the company is expected to be a going concern shortly, it is important that all accounting transactions should be completed by the prescribed accounting standards. Consequently, a strong control mechanism is important. In the case of Fennec Pharmaceuticals, it is observed that no records exist of the negligence of management related to control risk. As per previous auditors, a minimum level of control risk was faced by the company (Ethridge, et al 30).
It is important to make sure proper documentation is done for every task at Fennec Pharmaceuticals. The losses of Fennec Pharmaceuticals are major concerns. Hence all documentation regarding them is important to justify their existence to forecast the future performance of the company as auditors must either declare Fennec Pharmaceuticals a going concern or not. Information lost due to the negligence of employees would not be tolerated at all. As part of the audit, management and employees would be asked for measures they have taken to mitigate control risk. If employees are smart enough to hide their negligence, then the control risk would be higher as it would become difficult to detect control risk (Loughran).
Detection Risk
Detection risk is the last risk associated with an audit of a firm that material misstatements would not be identified by application of normal audit procedures. Therefore, advance testing would be applied to omit detection risk. Such risk cannot be mitigated until sufficient procedures are not performed. It is likely that misstatements and misrepresentations could not be detected as they were smartly made by the makers of financial statements (Marsh, et al 14)
It is very common that misstatements are left undetected. To mitigate this risk, proper substantive testing would be applied, and appropriate analysis of each assertion of the financial statement be done. Use of trend analysis and ratios would be done to make sure something important is not missed and left undetected (Ethridge, et al 31).
Moreover, the right use of audit procedures at the right place would be done such as to confirm sale occurrence would be tested and confirmed. Detection risk cannot be completely omitted, but the use of right audit procedures and professional skepticism can reduce it to the lowest level. Apart from this, an appropriate sampling method is also essential. The sampling method for consecutive years would not be used in the audit. There are many chances that transactions might be missed in the case of inappropriate sampling procedure (Marsh, et al 16).
Conclusively, a thorough understanding of the pharmaceutical industry would help in mitigating all risks. This is because the experience of the specific industry makes it easier to detect what possibility of risks or frauds might exist in the firm. Auditors who are experienced in the pharmaceutical industry are engaged in the audit of Fennec Pharmaceuticals (Wong 279). Moreover, the computerized processing of the clients’ transactions makes it less risky as chances of mistakes are dropped. Finally, Fennec Pharmaceuticals is surrounded by some regulations, so being in the pharmaceutical industry, it is mandatory the organization follow these regulations.
Work Cited
Browning, Jason P. “Define Engagement Risk in an Audit.” Bizfluent. Bizfluent, 26 September 2017. Web.18 October 2017. https://bizfluent.com/info-10036621-define-engagement-risk-audit.html.
Colbert, Janet. ” Engagement Risk.”Questia. The CPA Journal, 2016 Web. 18 October 2017. https://www.questia.com/magazine/1P3-9343065/engagement-risk.
Ethridge, et al. “Engagement Risk: Perceptions and Strategies from Audit Partners.” Journal of Business & Economic Research 5.4 (2007): 25-32.
IFAC.” Materiality in Planning and Performing.” IFAC. International Fedreation of Accountannts, 2016. Web.18 October 2017. http://www.ifac.org/system/files/downloads/ISA_320_standalone_2009_Handbook.pdf.
Loughran, Maire. “How to Assess Detection Risk In An Audit.”Dummies. Dummies, 2017. Web.18 October 2017. http://www.dummies.com/business/accounting/auditing/how-to-assess-detection-risk-in-an-audit/.
Marsh, et al. “Engagement risk: a preliminary analysis of audit firms’ client acceptance decisions.” Academy of Accounting and Financial Studies Journal 11.1 (2007): 12-18.
PCAOB. “AS 2105: Consideration of Materiality in Planning and Performing an Audit.” PCAOB. PCAOB, 2015. Web.18 October 2017. https://pcaobus.org/Standards/Auditing/Pages/AS2105.aspx.
Thibodeau, et al. Auditing & Assurance Services. 7. New York: McGraw-Hill Education, 2017.
Wong, Raymond. “ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment.” Technical Articles (2017): 262-312.
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