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, 2019, “is a biopharmaceutical company focused on
the development of PEDMARKTM (a unique formulation of Sodium Thiosulfate (“STS”) for the
prevention of platinum-induced ototoxicity in pediatric cancer patients. [Fennec] incorporated
under the Canada Business Corporations Act (“CBCA”) in September 1996. Effective on August
25, 2011, the Company continued from the CBCA to the Business Corporations Act (British
Columbia) (the “Continuance”). The Continuance was approved by [Fennec’s] shareholders at
[its] June 2011 Annual and Special Meeting and by resolution of the Board of Directors on
August 10, 2011. [Fennec has] four wholly-owned subsidiaries: Oxiquant, Inc. and Fennec
Pharmaceuticals, Inc., both Delaware corporations, Cadherin Biomedical Inc., a Canadian
company and Fennec Pharmaceuticals (EU) Limited (“Fennec Limited”), an Ireland company
formed in 2018. With the exception of Fennec Pharmaceuticals, Inc., all subsidiaries
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.
Revised: September 1, 2020 Page 2
EDGAR Instructions: If you go to www.sec.gov, begin your search by entering the
Company’s name in the EDGAR company filings search box on the SEC’s home page.
Topic – Assignment:
Assume that you have just joined Haskell & White and are assigned to the upcoming
2020 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, 2019, as filed February 14, 2020), Proxy Statement (referenced
as the DEF14A, as filed May 11. 2020), the most recent current Quarterly Report on Form 10-Q
(QE June 30, 2020, filed August 5, 2020) as well as other periodic (Qs/Ks, etc.) and/or event
reports (8-Ks), registration statements, etc. on file as necessary. You may also find it worthwhile
to perform a Google, Yahoo, or other search to find information on Fennec. (Note: The Form
10-Q for the interim periods ending September 30, 2020 is due to be filed by the November 10,
2020 statutory due date. While this is just after this assignment is due, you should monitor in the
event the client files earlier than the statutory due date, which they tend to do, in the event there
is any ‘late-breaking” news that may be of significance to your required discussion as described
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 memorandum/narrative for the planning section of the audit working
papers for the 2020 year-end audit file that discusses the following:
Enterprise Risk / Business Risk– those risks that affect the Company’s operations and
overall organizational activities (Chapter 1). 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 (Chapter 1). In preparing this section, consider who the potential
users are of Fennec’s financial statements (known, foreseen, and foreseeable users – See
Textbook Chapter 4) 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
Revised: September 1, 2020 Page 3
Engagement Risk – those concerns that we, the auditors should consider as we review
our client retention decision for the 2020 fiscal year-end audit (Chapter 6). (Note that we
became the auditors of record for the quarter that ended June 30, 2017; and thus, this will
be our fourth annual audit for the Company.) Have there been any changes in the
environment since our last audit for FYE 2019? What factors should we at Haskell &
White consider in making our retention decision to continue on with the 2020 audit?
After all, we need to manage our own Business Risk once we have agreed to continue
with the audit of Fennec.
Materiality – the magnitude of a misstatement or omission that could affect the user of
the Company’s financial statements and related data (Chapters 2 and 6). 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.
Fraud Risk – the risk that management may intentionally prepare financial statements
that are materially misstated and/or omit key disclosures AND/OR that there may be
misstatements resulting from misappropriation of assets (Chapter 6). Giving
consideration to Fraud Risk Factors, such as Incentives/Pressures, Opportunities and
Attitudes/Rationalization as described in Appendix 6B to Chapter 6, what specific risks,
or situations, would you expect to identify from/contribute to a brainstorming session
with members of the engagement team that should be evaluated as part of our audit?
Audit Risk – the risk that we could issue an unqualified/unmodified audit opinion on
financial statements which include a material misstatement (Chapters 2 and 5). Giving
consideration to materiality and fraud risks (above), what are the specific areas on which
we should focus to reduce our audit risk to an acceptably low level?
You are not charged with reaching a conclusion in any of these areas but to identify the key
items affecting the decisions to be made by your supervisors.
Papers should be a minimum of 6 pages, typed, double-spaced (assuming a standard 12-
pitch font). Please do not find yourself writing more than 8-9 pages of narrative. Caution:
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
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