Assume That You Are the New Audit Senior on the LV

question 53

Essay

Assume that you are the new audit senior on the LV Drug Corporation (LVD)engagement. LVD is a pharmaceutical company that has three successful drugs and a number of drugs in progress in its research and development pipeline. You are considering your audit plan and it is important to identify the inherent risks that LVD has and how they relate to the planning process.
Required:
For each of the following factors, indicate whether it will tend to increase, decrease, or have no effect on inherent risk, and the reasoning for your answer.
a. Dr. Jones is the major shareholder of LVD and its CEO.
b. Your firm has audited LVD for the last four years.
c. There has been high turnover of key accounting personnel during the last two years.
d. The internal audit function reports to the audit committee.
e. LVD has been the subject of lawsuits by users of Framadon who claim that the drug affects their liver functions. LVD is confident that there are no such side effects from the use of Framadon.

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Definitions:

Five Year Bonds

Debt securities issued with a maturity of five years, typically paying interest semi-annually.

Factor Receivables

The financial practice of selling accounts receivable to a third party at a discount to immediately generate cash.

Uncollectible Accounts

Accounts receivable that are recognized as not being collectible, representing losses to the company.

Lending Institution

A financial institution that provides loans to individuals or businesses.