Topic - Background:
As discussed in the early chapters of our text, auditors need to assess many risks when accepting a new audit engagement or determining that it is appropriate to retain an audit client for each subsequent year.
This writing assignment will, therefore, be a case study for you to consider several of these risks and the planning attributes for a real company; one that happens to be a client of Haskell & White, and one where I currently serve as the Engagement Partner.
Fennec Pharmaceuticals, Inc. ("Fennec" or the "Company"), with its official office location listed as being in Research Triangle Park, North Carolina, as per its Annual Report on Form 10-K for the year ended December 31, 2016, "is a biopharmaceutical company focused on the development of Sodium Thiosulfate ("STS") for the prevention of platinum-induced ototoxicity in pediatric cancer patients. We incorporated under the Canada Business Corporations Act ("CBCA") in September 1996. Effective on August 25, 2011, the Company continued from the Canada Business Corporations Act to the Business Corporations Act (British Columbia) (the "Continuance"). The Continuance was approved by the shareholders of Fennec at the Company's June 2011 Annual and Special Meeting and by resolution of the Board of Directors on August 10, 2011. We have three wholly-owned subsidiaries: Oxiquant, Inc. and Fennec Pharmaceuticals, Inc., both Delaware corporations, and Cadherin Biomedical Inc., a Canadian company. With the exception of Fennec Pharmaceuticals, Inc., all subsidiaries are inactive."
Fennec's common stock trades on the Toronto Stock Exchange (Canada) under the symbol "FRX" and, since September 13, 2017 it trades on NASDAQ Capital Market in the United States under the symbol "FENC". Prior to September 13, 2017, Fennec's stock traded in the United States on the OTCQB under the symbol "FENCF".
Fennec's filings with the Securities and Exchange Commission (SEC) can be found at the SEC's website through a search of the EDGAR archives at
Topic - Assignment:
Assume that you have just joined Haskell & White and are assigned to the upcoming 2017 audit of Fennec Pharmaceuticals.
In order to get familiar with the entity, you are requested to read information on the client. At a minimum, your supervisors ask you to read the most current Annual Report on Form 10-K (year ended December 31, 2016, as filed March 29, 2017), Proxy Statement (referenced as the DEF14A, as filed May 24, 2017), the most recent current Quarterly Report on Form 10-Q (QE June 30, 2017, filed August 14, 2017) as well as other periodic (Qs/Ks, etc.) and/or event reports (8-Ks) on file as necessary. Fennec also recently filed a Registration Statement on Form S-1 that was amended as an S-1/A on August 31, 2017. You may also find it worthwhile to perform a Google, Yahoo, or other search to find information on Fennec. (Unfortunately, the Form 10-Q for the periods ending September 30, 2017 is due to be filed by November 14, 2017, just after this assignment is due.)
Based on the information you find in the Company's filings with the SEC, and/or any other resource you deem appropriate (such as industry information, news reports, company website, etc.) write a narrative for the planning section of the audit working papers for the 2017 fiscal year that discusses the following:
COMPANY RISKS
Enterprise Risk / Business Risk- those risks that affect the Company's operations and overall organizational activities. In preparing this section, you are primarily to focus on the nature of the Company's business and the related environmental factors which affect it, and your perceptions of the inherent risk factors involved.
Information Risk - those risks of disseminating misstated information to users of the financial statements. In preparing this section, consider who the potential users are of Fennec's financial statements (known, foreseen, and foreseeable users - See Textbook Module C) and those areas that may be (more) susceptible to risks in reporting. What areas might require special attention during our audit so that we minimize our Audit Risk?
AUDITOR CONCERNS
> Engagement Risk - those concerns that we, the auditors should consider as we review our client retention decision for the 2017 fiscal year-end audit. (Note that we just became the auditors of record for the quarter that ended June 30, 2017.) Have there been any changes in the environment since we were appointed? What factors should we at Haskell & White consider in making our retention decision to continue on with the 2017 audit? After all, we need to manage our own Business Risk once we have agreed to continue with the audit of Fennec - our first audit.
- Materiality - the magnitude of a misstatement or omission that could affect the user of the Company's financial statements and related data. Without trying to calculate any "value" for materiality, discuss your observations about the Company that may affect your views on the "qualitative aspects" that should be considered for the level of materiality to be used for purposes of conducting the audit. Consider those balances/transaction cycles you consider to be significant as well as trends, ratios, or other information that would have a bearing on your determination of materiality for purposes of the audit.
- Audit Risk - the risk that we could issue an unqualified/unmodified audit opinion on financial statements which include a material misstatement. Giving consideration to materiality (above), what are the specific areas on which we should focus to reduce our audit risk to an acceptably low level?
Guidance:
Papers should be a minimum of 4 pages, typed, double-spaced (assuming a 12-pitch font). Please do not find yourself writing more than 6 pages of narrative. While there may be many details and "sub-topics" you wish to discuss in your presentation, a better approach will be to focus on a few key topics with well-developed supporting discussion/arguments.
Your paper is to be based on your analyses of the specific conditions of Fennec and your knowledge of auditing gained through early chapters in our text. The concepts were generally introduced in Chapters 1-4. However, you may find information useful in future class discussions and or later chapters of the text (some information for which I encourage you to read ahead). Your ideas need to be clearly identified and supported throughout your presentation.