Your firm is auditing CCure (CC). CC has been working on developing a new drug called “NewYou” which began as a cure
for COVID. It has been entirely developed in-house with billions of dollars spent on internal research. No money spent so far
is for actual manufacturing or securing intellectual property rights and the drug has not reached a state of approval that meets
the definition for capitalization under GAAP. CC is very encouraged by recent testing as being completely safe and completely
effective. CC is all-in on the NewYou drug and they have no other drugs or other sources of revenue.
Currently, Ruther Mooch Tanwork is suing CC for $1.5 billion alleging NewYou infringes upon certain intellectual property
rights held by Ruther. CC asserts that the plaintiff’s case against them has no merit. However, rather than letting defense of
the lawsuit distract them from research, CC offered and settled the lawsuit for $1.5 million after the balance sheet date but
before your audit is complete.
CC’s investors are becoming very nervous about the massive investment but has been assured by management that the current
year sales will provide at least $100 million of net income. However, as mentioned above, the FDA has not yet approved the
drug, not even after the end of the year. Also, the debt they have outstanding has no debt reduction requirements until it
becomes due December 31, 2025. It does require interest-only payments at a rate of 7%. Management states that there were no
new borrowings during the year.
CC mentioned that they have acquired, this year, a significant amount of equipment to be used in the manufacture of NewYou.
The staff will migrate from research activities into development, and accordingly there have been no significant changes to the
number of employees nor their pay.
Based on the following trial balance (debits positive, credits in brackets), please perform planning analytics and note the items
which peak your attention (audit risk) as an auditor- including anything that you do not see here which you expect. In your
answer, please indicate a possible reason for the unexpected fluctuation, or if you know it is an error, state so. Also, please list
accounts and activity as appropriate to support your analysis. Finally, in accordance with SAS 99, present any fraud risk
factors identified.
Current Prior Dollar %
Year Year Change Change
Cash 75,000 23,370,002 (23,295,002) -100%
Inventory 250,000 – 250,000 #DIV/0!
Prepaid insurance 75,000 15,000 60,000 400%
Fixed assets 21,600,000 20,000,000 1,600,000 8%
Accumulated deprec. (15,020,000) (15,000,000) (20,000) 0%
Reasearch & development asset 325,000,000 228,000,000
Accounts payable (210,000) (350,000) 140,000 -40%
Debt (None is current) (379,000,000) (380,000,000) 1,000,000 0%
Common Stock (1,000,000) (1,000,000) – 0%
Ret. Earn. (Accum. Deficit) BOY 124,964,998 40,814,998 84,150,000 206%
Revenue (178,270,100) – (178,270,100) #DIV/0!
COS 1,250,000 – 1,250,000 #DIV/0!
Selling expenses 1,500,000 – 1,500,000 #DIV/0!
General & administrative 18,000,000 25,000,000 (7,000,000) -28%
Interest expense 57,000,000 57,000,000
Insurance expense 500,000 1,500,000 (1,000,000) -67%
Depreciation expense 20,000 650,000 (630,000) -97%
(23,265,102) –
OTHER RELEVANT INFORMATION:
Purchase of fixed assets (1,600,000) Borrowings/ repayments of debt none
Sale of fixed assets none Non-cash investing & financing none
Sample Solution
