Week 3 Scenario:

You are the senior auditor assigned to the team performing an audit for Restorative
Pharmaceutical Corporation (RPC), a 10-year-old publicly held corporation listed on the New
York Stock Exchange which specializes in anti-aging products such as vitamins protein
infused beverages, and dietary supplements. RPCs corporate office is located in San Diego,
CA.
The audit firms lead and senior audit manager and firm partner, Scott Payne, CPA, has
requested that you develop two audit/internal control procedures which address the
following issues which emerged during the past three reviews of RPC:
1. The company has an equal balance of equity and debt which compose its capital
structure. It is subject to a number of debt covenants, including its current ratio,
which should be maintained above 1.5 per the debt covenant. The year-end current
ratio attained is 1.45. There is no opportunity to refinance short term debt and
reclassify liabilities to ameliorate the ratio.
2. A number of sample products are provided to fitness centers, health fairs, marathons,
and charitable walking events. A significant stock sample pull amounting to $200,000
for the New York marathon was not recorded as an inventory reduction for this
promotional event, and was discovered during the physical inventory at year end.

Answer Week 3:
Internal Control Procedure
Restorative Pharmaceutical Corporation
Policies and procedures that are put in place to see to it that the Company runs in an
efficient and effective manner are referred to as internal controls. The following is a report that
details the internal control procedures that are aimed at addressing the issues that emerged at the
Restorative Pharmaceutical Corporative Company during the audit that was conducted.
The Restorative Pharmaceutical Corporative Company has an equal balance of equity and
debt, which make up its capital structure. Restorative Pharmaceutical Corporative Company

subject to some debt covenants, including the ratio that the company holds, which should be
upheld above 1.5 per the debt agreement. The current year-end ratio attained by the Restorative
Pharmaceutical Corporative Company 1.45. There is no opportunity to refinance short-term debt
and reclassify liabilities to ameliorate the ratio for the Restorative Pharmaceutical Corporative
Company. The Restorative Pharmaceutical Corporative Company provides some sample
products to fitness centers, health fairs, marathons, and charitable walking events. A significant
stock sample pulls adding up to the Restorative Pharmaceutical Corporative Company did not
document $200,000 for the New York marathon as an inventory discount for this advertising
event. The Restorative Pharmaceutical Corporative Company discovered the amount during the
physical inventory at year-end.

Due to the above findings, the senior auditor found it fit to propose the following two
audit procedures that would go a long way in addressing the issues that emerged due to the
auditing that was carried out at the Company: Physical Audits and Approval authority (Sathe,
Bhalkar, Bhadre, & Mosamkar, 2015).
According to the report, The Restorative Pharmaceutical Corporative Company has an
equal balance of equity and debt, which make up its capital structure (Mussoi Ribeiro, Silva do
Carmo, Lopes Fvero, & Nelson Carvalho, 2016). The report goes on to show that Restorative
Pharmaceutical Corporative Company subject to some debt covenants, including the ratio that it
holds now, which should be kept above 1.5 per the debt covenant (Mussoi Ribeiro, Silva do
Carmo, Lopes Fvero, & Nelson Carvalho, 2016). Since the current year-end ratio attained by
the Restorative Pharmaceutical Corporative Company 1.45 there is a need to step up the approval

authority to safeguard the power of confidentiality within the operations of the Corporation
(Sathe, Bhalkar, Bhadre, & Mosamkar, 2015). Since there is no opportunity to refinance shortterm debt and reclassify liabilities to ameliorate the ratio for the Restorative Pharmaceutical
Corporative Company, it will do the Corporation some good if it will safeguard the assets that it
has against the liabilities that it has (Sathe, Bhalkar, Bhadre, & Mosamkar, 2015). The
Corporation should then wait for the opportune time for it to regain its wealth and bargaining
power.
Since some sample products are provided to fitness centers, health fairs, marathons, and
charitable walking events by the Restorative Pharmaceutical Corporative Company and were not
accounted for it is important that physical audits are conducted to track down the last units of
expenditure that are expended by the Corporation (Mussoi Ribeiro, Silva do Carmo, Lopes
Fvero, & Nelson Carvalho, 2016). There are numerous computer errors that can escape the
human agent and hence the use of the physical auditing will go a long way in tracking down the
expense (Sathe, Bhalkar, Bhadre, & Mosamkar, 2015). Since s significant stock sample pull
adding up to $200,000 for the New York marathon was not recorded for this promotional event
by the Restorative Pharmaceutical Corporative Company there lays some form of discrepancy in
the Corporations system of accounting that ought to be fixed to avert any future failing (Mussoi
Ribeiro, Silva do Carmo, Lopes Fvero, & Nelson Carvalho, 2016). The Restorative
Pharmaceutical Corporative Company discovered the amount during the physical inventory at
year-end, and this means that there could be some human agent that is responsible for the leakage
and the dishonesty (Sathe, Bhalkar, Bhadre, & Mosamkar, 2015). One way of seeing to it that the
corporation does not lose any funds is by conducting physical audits.

REFERENCES
Mussoi Ribeiro, A., Silva do Carmo, C. H., Lopes Fvero, L. P., & Nelson Carvalho, L. (2016).
Manager's Discretionary Power and Comparability of Financial Reports: An Analysis of the
Regulatory Transition Process in Brazilian Accounting. Revista Contabilidade & Finanas USP. , 27 (70), 12-28.

Sathe, A. B., Bhalkar, M. S., Bhadre, R. B., & Mosamkar, S. P. (2015). Management of Internal
Quality Control (IQC) data in a clinical biochemistry laboratory using spreadsheet software.
Somaiya Medical Journal , 2 (1), 31-39.