Sales System Pharmaceutical firm – Sanofi-Aventis

Pharmaceutical industry is a multi-billion dollar industry. The top 3 biggest spenders are government namely USA, Japan and UK. Sanofi-Aventis is a major pharmaceutical producer with major markets in all 3 countries. It invest heavily on Research & Development on finding treatments for rich-countries diseases like heart attack, obesity, depression related sicknesses and cancer.

At the interim audit, auditors were able to compile the internal control structure of Sanofi-Aventis sales system:

Area 1: Customer orders

1. Sukuyama (Japan) Public Hospital is amongst the top 10% major clients of Sanofi-Aventis. The hospital will faxed in its customer order forms (Sanofi-Aventis’ form). The marketing personnel who is a qualified pharmacists will sign and chop date of receipt and send the copy to credit controller.
2. Credit controller’s assistant will calculate the order value of hospital-client and provide Hospital client credit limit list for approval. Credit controller will evaluate if the hospital deserve to have additional credit based on past pay records. Credit controller will discuss and decide jointly with Chief Executive Officer if client hospital merit additional credit limit. A memorandum to increase customer’s credit issued signed by both CEO & credit controller.
3. Signed customer order forms will be sent to production manager for processing either to start production or take from existing stocks.

Area 2: Delivery to hospital – client

4. Delivery truck-personnel will take the supplies to the vehicle. He will be given goods delivery notes & invoices. Before the goods are loaded on truck, warehouse manager will use bar code machine scanner to scan the product code which is transmitted into computerized inventory system. The inventory information are printed out with details on product codes, quantity, customer order number & date.
5. Invoices are calculated upon receipt of signed copy of customer order by production manager. Marketing staff will insert the quantity ordered & cost per table based on latest or updated price list. Invoice will be auto-calculated & printed out. As earlier mentioned its forwarded to warehouse to be sent together with stocks.
6. Sukuyama Hospital authorized pharmacists will receive the stocks & acknowledge by signing on good delivery note by pharmacists (Sanofi-Aventis). Pharmacists will also issue pre-numbered good received note requiring the delivery staff to sign & insert date.

Area 3: Payment

7. Miss Reiko will have allocated ‘territory’ in Japanese city, Nagoya to care for. Sukuyama is part of her geographical coverage where she is responsible to chase payment. Credit controller will give

Chapter 11 Substantive Tests and Analytical Procedures

Substantive testing (CRV E-Balance; ACCC UO-Disclosure)

-Tests of Details

-Analytical Procedures

How is Analytical Procudure done?

-prior period

-budget vs forecast

-prediction by auditors

-industry information

-elements of Financial statement eg Gross profit vs sales

-financial vs non financial information eg payroll vs number of employees

-ratio analysis

-trend analysis

-proof in total

-own expectation

-expectation vs actual

3 stages of analytical procedure

1. planning stage

understand client's FS

spot possible errors

error looks possible, audit work directed toward the errors

2. during audit process

financial vs non financial information

prior period, budget, forecast, similar industries

3. final review

future AP - going concern?

Drawbacks Analytical Procedures

TEST FOR ERRORS

TEST FOR OMISSIONS

Detection risk - cannot obtain accurate information

Plausibility & Predictability - subjectivity and interpretations

Business specifics - experience and industry specific knowledge to apply AP

Chapter 10 Tests of controls

Sales system

1. ordering

2. despatch and invoicing

3. recording, accounting and credit approval

Purchasing system

1. raise requisitions

2. receipts and invoices

3. accounting records

Stock controls

1. recording incoming and outgoing

2. protection of inventory

3. valuation of inventory

4. recording of inventory

5. inventory movement

6. other tests eg discrepancies book vs actual; discrepancies on authorization; obsolete, damages or slow-moving stock

Cash & Bank

1. receipts

2. payment

3. bank reconciliation

4. petty cash

Salaries & Wages

1. setting

2. payments

3. recording

4. deductions

Non current asset

1. Balance

2. transaction

(eg purchasing, disposal, depreciation, recording the cost, valuation)

Chapter 9 Internal control

1. Control Environment - directors (2points); INEDS; management, organizational structure; assignment; human resource policies

2. Control Activities - approval & control of documents; controls over computerized applications; recalculating arithmetical accuracy of records; maintaining and reviewing control accounts (debtor and creditor ageing) and trial balances; bank reconciliation and budgetary controls; comparing the results of cash, security and inventory counts with accounting records, comparing internal data with external sources of information; Limiting physical access to assets and records eg locks

3. Why internal controls are insufficient?

4. Internal control problems in non-profit organisation

5. Internal control risk (SOAP SPAM)

-Segregation of duties

-organisation structure

-Authorization and approval

-Physical

-Supervision

-Personnel

-Arithmetic and accounting

-Management

6. Documenting internal controls system : narrative notes, flowcharts, organisation charts, internal control questionnaire (ICQ), Internal control evaluation questionnaire (ICE)

7. Computer Based Environment (client's system: input; processing; output; master file); (auditor's system: Audit software eg CAAT; test data; other techniques e embedded audit facilities)

Control Environment - Example 2

How to influence control environment of a banking institution / Implementing control culture in a Banking institution of a Banking institution? (5 marks)

Banking institution likely will have large pool of labour, control environment seeks to influence bank's culture, the way we behave or do things here, attitudes & values.

Directors' communication
BOD could by rotation conduct an in-house training to communicate the bank's values & serious commitment to effective internal control.

NEDs (Non-executive director) participation
Audit committee can work with IA to determine the level of skills required on staff's competence. Then advise Human Resource Department to select new recruits that demonstrates such capabilities.

Management's philosophy
Management & BOD can use mission statement, vision & objectives as tools to communicate the values that Bank believes. Have in place negative & positive disciplines to enforce compliance. Example, if bank staff is reckless risking Shareholder's fund, demotion or warning letter are in order.

Organisation structure
Create a new position, Executive Operating Officer on Quality Assurance to influence policies & balance business risk & controls. The senior post will override reckless cultural behaviour on the user department level.

Human resource policies
Training & recruitment to emphasis/corporate values & ethics to have professional due care when carrying out customer relationship activities such as approving loans, credit risks must reflect the corporate sensitivity in taking risks.

Control Environment - Example 1

Question
EuKaRe
- charity
- support children from disadvantaged backgrounds who wish to take part in sports
- detailed constitution - how income can be spent
- administrative expenses cannot exceed 10% of income
- income from voluntary donations: cash (public - shopping area), cheque sent to HQ, specific clauses attached to them (specific activities eg provision of sports equipment and capital cannot be spent)
- taxation of charities - complicated (only certain expenditure is allowable; some capital treated as income)

EXPLAIN WHY THE CONTROL ENVIRONMENT/ CULTURE/ ATTITUDES MAY BE WEAK AT THE CHARITY EUKARE. (4 marks)

Answer

Management philosophy
A 10% administrative cap signify that management wish to spend a minimum on recording, collecting and banking in donations fund. With tight budget, difficult to implement suitable internal controls. 10% cap is decided by Directors.

Board of directors competence
Volunteers are going out to collect donations. Shocking to see directors are NOT involved to train them. There are no supervisions on the site to coordinate & collect day's donations.

Individual Directors' commitment
Constitution dictates that fund is used for sports focusing on disadvantaged children. Control cultures are weak as Directors failed to exhibit by example on how effective fund should be used.

Human Resource Policies and job description
Volunteers aren't hired. So no job description. Culture is dependent on ethical principles of volunteers. If poor integrity, then control culture is weak. Volunteers dominate culture values.

Attitudes, values and beliefs of workforce
Volunteers sent to shopping malls to collect donations. No training to influence their behaviour and values. Likely control culture is weak since there is no involvement from managers or directors to influence volunteers beliefs and attitudes.

Control Environment

Control environment such as culture, values & attitudes toward internal controls & safeguarding assets.

1. DIRECTORS communication and enforcement of integrity and ethical values.
Essential elements which influence the effectiveness of the design, administration and monitoring of controls.

2. DIRECTORS commitment to competence (willingness to invest in training)
Management's consideration of the competence levels for particular jobs and how those levels translate into requisite skills and knowledge.

3. INEDS participation of those charged with governance (recommend improvements on control activities)
Independence from management, their experience and stature, the extent of their involvement and scrutiny of activities, the information which they receive, the degree to which difficult questions raised and pursued with management and their interaction with internal and external auditors.

4. MANAGEMENT's philosophy and operating style
Management's approach to taking and managing business risks, and management's attitude and actions toward financial reporting, information processing and accounting functions and personnel.

5. Organisational structure (seniority given to quality assurance executive or IA)
The framework within which an entity's activities for achieving its objectives are planned, executed, controlled and reviewed.

6. Assignment of authority and responsibility to quality assurance manager
How authority and responsibility for operating activities are assigned and how reporting relationships and authorisation hierarchies are established.

7. Human resource policies and practices
Recruitment, orientation, training, evaluating, counselling, promoting, compensating and remedial actions (reward pegged to quality & control)