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 part (a), state whether the business risk results in a current-period inherent risk of material misstatement of the financial statements (financial reporting risk). If 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 part (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.
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