Belmont Pharmaceuticals, a public limited liability company, is a pharmaceutical company which concentrates on medical research and the production of new medicines and remedies designed to improve the quality of life, for all ages. You are an audit manager who is planning the audit of Belmont Pharmaceuticals for the year ended 31 December 20X8. Profit before tax for the year ended 31 December 20X8 is C3.46m.
In the course of planning discussions with the finance director of Belmont Pharmaceuticals, he raised the following issues that have affected the financial statements of Belmont Pharmaceuticals for the year:
(a) During the year ended 31 December 20X8, Belmont Pharmaceuticals spent C8m on researching the relationship between two chemicals. As a result of the research, Belmont Pharmaceuticals identified a new drug that discourages the growth of carcinogenic cells in the body. It stimulates the production of antibodies in the white blood cells of the body’s immune system. Substantial progress has been made in the development of the drug and it is hoped that a drug for a cancer antidote may be possible in the foreseeable future. During the year C15 million has been spent on the project to develop this drug, codenamed project ‘Horizon’. The directors of Belmont Pharmaceuticals have capitalised the costs of C15 million as an intangible non-current asset.
(b) On 30 November 20X7, Belmont Pharmaceuticals received notification from its lawyers of a claim from users of a new type of asthma tablet. At 31 December 20X7, neither the likelihood of the success of the claim nor the amount were known and as a result, no provision was made in the financial statements for the year ended 31 December 20X7. As at 31 December 20X8, the case is still in progress, but the lawyers now advise Belmont Pharmaceuticals that the amount of the claim is an estimated C20 million and that the claimants are very likely to be successful in court.
(c) This year, just prior to the year end, Belmont Pharmaceuticals launched a DIY ‘Check the health of your blood’ voucher, marketing it as ‘a perfect choice…the gift of ensuring life longevity’. Belmont Pharmaceuticals will launch the product on a ‘2 for the price of 1’ basis and launch will be timed for Valentine’s Day on 14 February 20X5. Previous schemes on health schemes vouchers have proved immensely popular previously. The directors will issue C5 million vouchers and they expect an 80% take. Accordingly, the directors have included C4 million in revenue in the year to be December 20X8.
Required
For each of the above issues:
(i) Comment on the matters you should consider; and
(ii) State the audit evidence that you should expect to find, in undertaking planning of the audit working papers and financial statements of Belmont Pharmaceuticals.
