You are an audit senior at Trumps Auditors Incorporated (B&K), currently involved in the
finalisation stage of the statutory annual audit of Pfixer and its two subsidiaries, Moderney
Medical Scheme and Lohnson and Lohnson which produced vaccines for Covid 19,
Monkey pox and the HIV virus for the financial year ended 30 June 2024.
All the pharmaceuticals are listed on the Johannesburg Stock Exchange (JSE) listed
company in the health care industry of South Africa with Moderney being on the
Alternative Stock Exchange (AltX). They recently branched off their operations to invest
in Neural ink, a brain chip that would help the crippled and visually impaired. Quite
recently a paraplegic had gained full function of their arms, back and legs due to this new
technology.
The final materiality for the 2024 statutory annual audit is set at R3 billion for Moderney
was R1,2 billion for Lohnson and Lohnson for the consolidated financial statements of
Pfixer.
Moderney is an independent non-profit medical scheme governed by the Medical
Schemes Act and regulated by the Council for Medical Schemes. It has assisted United
nations in various wars in the Democratic Republic of Congo, Palestine, Ukraine and
Libya. It has a good record of diligently paying their clients’ qualifying medical costs and
providing excellent service to its members.
By separating medical scheme and administration functions between Moderney and
Lohnson, the Pfixer group of companies has been able to gain a significant competitive
advantage by expanding its offerings to the health care market without contravening the
Medical Schemes Act. These services and products include for example the purchase
and repackaging of vitamins as well as endorsed weight management products leading
to huge profit margins.
Several pharmaceuticals entered into the market reducing Pfixer profit margin. In order
to secure their share prices, Pfixer doubled the actual value of their earnings per share.
You found discovered that the CEO of Pfixer Lucius Black substituted important
ingredients in their vaccines with cheaper less efficient ones. Moreover, they had
exaggerated the efficacy of their vaccines. A decision was taken at a board meeting
before year end, to procure the necessary repackaging and labelling old drugs and
marketing them as new innovations that would cure mental illness. Lucius had a 25 % of
Pfixers while his son held 10%. Lucius emoluments were not disclosed in the notes to
financial statement.
His best friend Vivek headed the audit committee. Lucius and Vivek had extravagant
holidays spending up to R1 million which they justified as necessary since they brought
in billion dollar revenues. Hunter his stepson owned the marketing company that
rebranded and advertised the old drugs as new, exaggerating their efficacy. Hunter gave
his father a lucrative discount. A whistleblower working in the laboratories recently died
in a car crush.
REQUIRED
(a) Determine whether a reportable irregularity exists in terms of the Auditing Profession
Act regarding Pfixers operations (13)
(b) Recommend an audit engagement strategy suitable for this scenario(13)
(c) Discuss the audit evidence and sampling techniques you would use in this case
study(10)
(d) Show how you will use information technology throughout the audit process(9
1 answer
(b) In order to address the potential reportable irregularity and mitigate the risks associated with the current situation at Pfixer, it is recommended to implement a thorough audit engagement strategy. This strategy should include:
1. Conducting a detailed risk assessment to identify and assess the risks of material misstatement in the financial statements, focusing on areas such as revenue recognition, inventory valuation, and related party transactions.
2. Performing substantive procedures, such as analytical procedures, testing of key account balances and transactions, and inquiry of management, to gather sufficient appropriate audit evidence.
3. Enhancing communication with the audit committee and the board of directors to ensure transparency and accountability in the audit process.
4. Considering the possibility of involving forensic auditors or specialists to investigate and assess the nature and extent of the irregularities identified.
5. Reviewing the company's internal controls and governance structures to identify any deficiencies that may have contributed to the irregularities.
(c) In terms of audit evidence and sampling techniques, in this case study, it is important to use a combination of substantive procedures and tests of controls to gather sufficient appropriate audit evidence. Some of the audit evidence and sampling techniques that could be used include:
1. Performing detailed analytical procedures to assess the reasonableness of financial statement amounts and ratios.
2. Conducting tests of detail for key account balances, such as revenue, inventory, and expenses, to verify the accuracy and completeness of the amounts reported.
3. Performing substantive analytical procedures to identify any unusual trends or fluctuations that may indicate the presence of irregularities.
4. Implementing data analysis techniques to identify anomalies or patterns in the financial data that may require further investigation.
5. Conducting inquiries of management and key personnel to obtain explanations and clarifications regarding the irregularities identified.
(d) Information technology can be used throughout the audit process to enhance efficiency, accuracy, and effectiveness. Some ways in which information technology can be utilized in this case study include:
1. Using data analytics tools to analyze large volumes of financial data and identify any irregularities or anomalies.
2. Employing audit software to automate the testing of controls and the sampling process, improving the accuracy and reliability of audit procedures.
3. Utilizing electronic working papers and documentation tools to facilitate the organization and storage of audit evidence.
4. Implementing continuous monitoring tools to detect any potential red flags or fraud indicators in real-time.
5. Using secure communication platforms to facilitate remote auditing procedures and maintain confidentiality of audit information.