Key business and audit risk:
In order to make the report more efficient we must identify the key areas of business risk and auditing risk. Business risk can be defined as the risk, which could affect an organization’s ability to achieve its objectives (Gray and Manson, 2007).
Audit risk is defined as the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated (Soltani, 2007). In Gray and Manson (2007)’s book Audit Risk can be split into three separate elements : 1- Inherent risk reflects the auditor’s opinion on the possibility of material misstatement on financial statement. 2- Control risk is the risk that internal control policies and procedures failed to detected or prevented. 3- Detection risk is defined as the likelihood that a material misstatement relating to an assertion will not be detected by the auditor's substantive testing. One should identify key area of what ? because if an auditor looks at each issue to the same extent then resources are spread to thinly and failure to detect material misstatement is more likely. In producing an audit report one is providing an assurance that the financial statement provide a true and fair view on the performance and situation with the entity is facing. Therefore the key areas of business risk will be those that have the potential to have a material effect on the balance sheet or profit statement (Elliott&Elliott, 2008). This has therefore lead to the conclusion that are as such as sales misstatement, valuation of goodwill, valuation of intangible assets and valuation of PPE being the key areas of potential business risk.
Misstatement of assets
The reasoning as to why goodwill and the valuation of intangible assets has been included is because GSK have proceeded with a number of takeovers of smaller entities, including the purchase of Stiefel Laboratories Inc (GSK’s annual report, 2009, p.99). This could have lead to an error being made in the new calculations for goodwill and intangible asset as both of these have increase considerably in the last period. The purchase of the entities could also lead to misstatement on the balance sheet due to likely differences in the accounting policies of the entities. This could lead to the overvaluation of the assets of the purchased entity or of the undervaluation liabilities that the entity balance sheets (Grant&Visconti, 2006). There is an inherent business risk in purchasing another entity in that despite being in the same field as the GSK they have their own specialist areas and therefore by purchasing these entities GSK is increasing its specific risk of this area in the industry. Therefore one has to make sure that project growth and turnover from these subsidiary entities is not overstated as this could provide a significant risk of material misstatement in the financial reports. Also the handling of R&D cost and the future economic benefits which they could bring is an important issue to be reconciled when the entities are purchased. This is a key area for pharmaceutical companies as a misrepresentation of future economic benefits generated could lead to a scandal such as shells misrepresentation of future oil production.
Misstatement in Sales
It is important to verify sales as it is the main source of income for the entity the sales and has surprisingly doubled its rate of growth on the previous period to 16% and total sales of £28,368m. ( GSK’s annual report, 2009, p.9). Therefore one must verify that this increase in growth has occurred and has not been manufactured in order to enhance the perceived growth of the firm. Particular attention should be taken to that of emerging markets and in particular, the respiratory products which noted a 79% increase for Japan and 21% overall from the emerging markets, this is despite a 13% decline in the USA and only a 9% increase in Europe. (GSK’s annual report, 2009,...