Assignment

Faculty of Business & Enterprise

Higher Education Division

HBC225/HBC 225N

Assignment

ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

(Week 5 – Week 11)

Semester 1, 2012

© Swinburne University of Technology, 2012

Except as provided in the Copyright Act 1968, this document may not be reproduced in any form without the written permission of the University.

ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

You need to start work on this online based continuous case study from W/B 26^th March. You need to work in pairs (can choose member from other tutorials) and must participate (individually) in online discuss board (please check Blackboard discussion page).

You should be able to answer each week’s requirements after you attended lecture, tutorial and read relevant chapters. Need to put together your case study answers and submit them as your final assignment (ONE pdf or word file) by due date, Monday 14th May, 2012 5pm (don’t submit on a weekly basis!).

Part 1: Week 5 (Chapter 6)

Adelphi Health Care Ltd listed on the Australian Securities Exchange in 2004. Prior to listing, it was a privately held company managing medical centers in New South Wales. The founders of Adelphi are John Simpson and Eddie Gallagher who are both medical practitioners by profession. At the time of going public, John held the position of Chief Executive Officer (CEO) and Eddie was the Chief Operating Officer (COO). The company raised $50 million and moved into research and development of the flu vaccine.

The company’s main product Fluvacs was commercialized in 2007 and it is now sold across Australia. Since 2009, this vaccine is also being distributed in Singapore, Malaysia and the Philippines. The marketing director Anne Tanner has been instrumental in putting in place the local and overseas distribution agreements. Adelphi has agreements with one distributor in each Australian state and one distributor in each of its offshore locations.

In January 2010, John Simpson resigned as CEO and took on the role of Board Chairman. He was replaced as CEO by Ray Wilson who was the CEO of a listed mining group prior to joining Adelphi. Ray has a proven track record of expanding into new projects and markets but has no experience in the health care industry. Eddie Gallagher continues in his COO role but spends more time on the golf course these days. The company has retained the same Chief Financial Officer, Jenny Maxwell. Jenny was offered a 30% increase in salary and a lucrative bonus in the current year as part of the Board’s plan to retain her. Jenny has been with Adelphi since its listing and has put into place extensive processes and controls over the past seven years. She is a perfectionist and prefers to handle important matters on her own, seldom delegating to her finance team.

Since taking over Ray Wilson has decided that the company’s future lies in developing a vaccine for avian (bird) flu. He is of the view that the company is well placed to market the product in Asia with its existing distributor base. A dedicated research team has been hired to work on this vaccine. Management has indicated that initial lab results are promising and are

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e

© 2011 McGraw-Hill Australia Page 1 of 15

ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

confident that clinical trials can be commenced within the next 12 months. As a result, a significant proportion of research and development costs have been capitalized in the current financial year.

In late 2008, the company bought a piece of land in Sydney’s inner west and constructed a purpose built building with offices and research labs. Prior to this, the company was renting premises. The land cost $6.5 million and the building cost $3.5 million. Jenny recently asked a friend who is a real estate agent for an informal valuation and was advised that the property market has lost its momentum and the company’s land and buildings were currently worth about $9 million. Jenny did not mention this to any of the company directors.

You are the audit manager in charge of the audit of Adelphi Health Care Ltd. Your firm has been the auditor for the past three years. Adelphi has been provided with an unqualified opinion since your firm has been the company auditor. You are currently carrying out the audit planning for the financial year end audit.

The client has provided you with the following draft financial information in respect of the year ended 30 June 2011.

Adelphi Healthcare Ltd

Draft Statement of Comprehensive Income

	for the year ended 30 June, 2011
	2011	2010
	$'000	$'000
Revenue	28,715	37,280
Cost of sales	10,880	12,640
Gross profit	17,835	24,640
Operating expenses
Research & development	2,930	11,210
Advertising	1,180	925
Distribution	1,010	1,370
Shipping and handling	465	550
Salaries and wages	7,985	4,840
Depreciation	795	675
Interest	825	725
Other expenses	1,325	180
Profit before income tax	1,320	4,165

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e

© 2011 McGraw-Hill Australia Page 2 of 15

ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

	Income tax expense	395	1,250
	Profit after income tax	925	2,915

Draft Statement of Financial Position

as at 30 June, 2011

	Notes	2011
		2010
		$'000	$'000
CURRENT ASSETS
Cash and cash equivalents		1,040	11,500
Receivables	2	8,615	5,880
Inventories		3,560	1,335
Other current assets		440	565
Total current assets		13,655	19,280
NON-CURRENT ASSETS
Intangibles	3	6,570	-
Property, plant and equipment	4	10,280	10,475
Total non-current assets		16,850	10,475
TOTAL ASSETS		30,505	29,755
CURRENT LIABILITIES
Accounts payable		1,845	2,390
Provisions	5	1,015	775
Total current liabilities		2,860	3,165
NON-CURRENT LIABILITIES
Borrowings	6	10,000	10,000
Provisions	5	365	235
Total non-current liabilities		10,365	10,235
TOTAL LIABILITIES		13,225	13,400
NET ASSETS		17,280	16,355

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e

© 2011 McGraw-Hill Australia Page 3 of 15

ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

EQUITY
Contributed equity	50,000	50,000
General Reserve	10,000	10,000
Accumulated losses	(42,720)	(43,645)
TOTAL EQUITY	17,280	16,355

Notes to the financial statements

Note 1 Summary of significant accounting policies

Receivables

Trade receivables are carried at original invoice value less any provision for doubtful debts. Debts, which are known to be uncollectible, are written off. A provision for doubtful debts is recognized when collection of the full amount is no longer probable.

Inventories

Inventories are measured at the lower of cost and net realizable value. Costs incurred in bringing the product to its present location and condition, are accounted for as follows:

- Raw materials – purchase cost on a first in first out basis; and

- Finished goods and work-in-progress – cost of direct material, direct labour and a proportion of manufacturing overhead based on normal operating capacity

Property, plant and equipment

Cost and valuation

All property, plant and equipment are brought to account at cost.

Depreciation

Depreciation is calculated on a straight line basis to write off the depreciable amount of each item of property, plant and equipment (excluding land) over its expected useful life to the company.

Depreciation periods are:

Buildings 20 years

Plant and equipment 2.5 – 10 years

Intangible assets

Research and development

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e

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ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

Costs incurred on research and development projects are expensed as incurred, unless future recoverability is assured beyond a reasonable doubt, to exceed those costs. Where research and development costs are capitalized, such costs are amortised over future periods on a basis related to expected benefits. Unamortised costs are reviewed at each reporting date to determine the amount (if any) that is no longer recoverable and any amount identified is written off.

		2011	2010
		$'000	$'000
Note 2	Receivables
	Accounts receivable	9,015	6,235
	less Provision for doubtful debts	(400)	(355)
		8,615	5,880
Note 3	Intangibles
	Research and development	6,570	-
Note 4 Property, plant and equipment
	Freehold Land	6,500	6,500
	Buildings	3,500	3,500
	Accumulated depreciation	(700)	(525)
		2,800	2,975
	Plant and equipment - at cost	2,600	2,000
	Accumulated depreciation	(1,620)	(1,000)
		980	1,000
	Total property, plant and equipment	10,280	10,475
Note 5	Provisions
	Current
	Provision for annual leave	1,015	775

Non-current

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e

© 2011 McGraw-Hill Australia Page 5 of 15

ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

Provision for long service leave

365

235

Note 6 Borrowings

Secured bank loan

10,000

10,000

Required

Carry out preliminary analytical procedures based on the draft financial information provided and discuss the impact of your findings on the audit plan.

Part 2:Week 6 (Chapter 7)

This is a continuation of question in Chapter 6, relating to Adelphi Health Care Ltd. However, it may be completed independently of that question. Refer to the background information contained there.

Required

(a) Outline the factors that would affect your assessment of inherent risk associated with the audit of Adelphi Health Care Ltd.

(b) For each of the inherent risk factors you outlined in (a) above, indicate:

(i) whether it increases or decreases audit risk; and

(ii) its effect on your audit procedures.

(c) Your audit partner has asked you to set a preliminary materiality level for the audit of Adelphi Health Care Ltd to be discussed at the planning meeting. The audit partner has asked you to consider and justify the base you think is appropriate in setting planning materiality. You should take into account your assessment of the inherent risk factors in determining planning materiality. Outline how the materiality level will influence the nature and extent of audit procedures planned.