You are an audit manager in DV & Co, responsible for the audit of CN Co, a listed company operating in the pharmaceutical industry. You are planning the audit of the financial statements for the year ending 31 December 2019, and the audit partner, Nana Dei, has sent you this email: To: Audit manager From: Nana Dei, Audit partner Subject: Audit planning – CN Co Hello I would like you to start planning the audit of CN Co. The company’s finance director, Norvisi, has sent to me this morning some key financial information discussed at the latest board meeting. I have also provided you with minutes of a meeting I had with Norvisi last week and some background information about the company. Using this information I would like you to prepare briefing notes for my use in which you: 

i. Identify and explain FOUR risks of material misstatement to be considered in planning the audit; 

ii. Recommend the principal audit procedures to be performed in respect of the acquired ‘Cold Comforts’ brand name; and 

Background information CN Co is a pharmaceutical company, developing drugs to be licensed for use around the world. Products include medicines such as tablets and medical gels and creams. Some drugs are sold over the counter at pharmacy stores, while others can only be prescribed for use by a doctor. Products are heavily advertised to support the company’s brand names. In some countries television advertising is not allowed for prescription drugs. The market is very competitive, encouraging rapid product innovation. New products are continually in development and improvements are made to existing formulations. Four new drugs are in the research and development phase. Drugs have to meet very stringent regulatory requirements prior to being licensed for production and sale. Research and development involves human clinical trials, the results of which are scrutinised by the licensing authorities. It is common in the industry for patents to be acquired for new drugs and patent rights are rigorously defended, sometimes resulting in legal action against potential infringement. Minutes from Ali Stone’s meeting with Norvisi CN Co has approached its bank to extend its borrowing facilities. An extension of GHC10 million is being sought to its existing loan to support the on-going development of new drugs. Our firm has been asked by the bank to provide a guarantee in respect of this loan extension. In addition, the company has asked the bank to make cash of GHC3 million available in the event that an existing court case against the company is successful. The court case is being brought by an individual who suffered severe and debilitating side effects when participating in a clinical trial in 2018. In January 2019, CN Co began to sell into a new market – that of animal health. This has been very successful, and the sales of veterinary pharmaceuticals and grooming products for livestock and pets amount to approximately 15% of total revenue for 2019. Another success in 2019 was the acquisition of the ‘Cold Comforts’ brand from a rival company. Products to alleviate the symptoms of coughs and colds are sold under this brand. The brand cost GHC5 million and is being amortised over an estimated useful life of 15 years. CN Co’s accounting and management information systems are out of date. This is not considered to create any significant control deficiencies, but the company would like to develop and implement new systems next year. Management has asked our firm to give advice on the new systems as they have little specialist in-house knowledge in this area. Key financial information (GHC’000) 2019 – Projected 2018 – Actual unaudited audited Revenue 40,000 38,000 Operating profit 8,100 9,085 Operating margin 20% 24% Earnings per share 25c 29c Net cash flow (1,200) 6,000 Research and development cash outflow in the year (3,000) (2,800) Total development intangible asset recognised at the year end 50,000 48,000 Total assets 200,000 195,000 Gearing ratio (debt/equity) 0•8 0•9

Required: Respond to the email from the audit partner. 

Answer rating: 100% (QA)

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