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Audit in pharmaceutical industry

Yuriy Grakovsky
expert on accounting and taxation


Pharmaceutical industry is quite specific area of economy. For example, in terms of trade in medicines, this type of activity absorbed much from "regular" trade - retail and wholesale: the same registers for payment transactions, patents, warehouses, and other attributes of trading activity. But product, which is implemented in pharmaceutical industry, is quite specific, it is essential for health and human life. Accordingly, implementation of this global problem as a whole is subject to process of organizing activities in pharmacies - main links in drug trade, as well as accounting and auditing in industry. This article focuses on audit features in pharmaceutical sector. Since range of issues to be covered by audit is wide enough, we will consider specifics of pharmaceutical industry audit in such accounting areas as inventory records and accounting for cash transactions.

Audit of inventory accounting in pharmaceutical enterprises

When auditing inventory accounting auditor(s) shall fully check inventory at all stages of movement: on supply, storage, use, and disposal. It is advisable to begin checking this part with studying sections of the accounting policies order, which define specific rules for inventory accounting. In this case, auditor should consider the following points:

- form of receiving goods act or purchase invoice, approved for posting pharmaceuticals and medical products (listed in Annex to order of accounting policy) must include props such as batch number from drug manufacturers. As a rule, it is indicated in documents (invoice, waybill) of supplier;

- chosen method of assessing inventory disposal, its validity. We should remind that inventory disposal evaluation is done with one of the following methods (p.6 RSA 9):

- Identified cost;

- Average weighted cost;

- Cost of inventory which was received the first (FIFO);

- Regulatory costs;

- Selling price.

In my opinion, drugstore chain with high level of computers use should apply identified cost method. In this case, despite large volume of work, it is realistic to determine cost of each drug item in their sales, write-off, other disposals. On the other hand, it is useful to see selling price of drugs. In this case application of the sale price method is easy to explain, but with mandatory analytical accounting in accrual terms - Instruction № 291 permits conducting analytical accounting in sums amounts only for retailers, applying sales price method of assessment;

- Availability and forms of acts for reserves write-off (should also be annexed to the accounting policy order), and depending on inventory type (drugs and other goods, supplies, fuel, spare parts, low value items) forms of these documents should be different.

Next, auditor should ensure that contracts for individual material liability are signed with all responsible persons. In cases where it is impossible to distinguish material responsibility of each employee and sign an individual contract, collective (brigade) liability is introduced, as provided in art. 1352 of Labour Code. In any case, when you change materially responsible persons under hiring and firing, going on vacation and returning, etc. it is necessary to provide a complete inventory of material assets. Also full inventory is useful and in other cases under the Order № 419 and Instructions № 69: before preparation of annual financial statements, when theft and abuse, natural disasters, etc. Therefore, auditor must verify inventory in cases provided by law and in correctness of their formulation and incorporate results in accounting registers. Particular attention should be paid to inventory commissions’ participants: in addition to financially responsible persons and employees, they should include managers in sales and procurement, commodities experts, and other specialists who are familiar with drugs types. Also, under inventory of actual availability of drugs, it is necessary to specify batch number from manufacturer, and compare with series in accounting and available items; it will allow concluding on extent of the medical products possible abuse.

An important step in the stocks operations audit is establishing responsibilities of persons who are issued with proxy to receive inventory, as well as checking books registering those proxies to control their use.

We should also note if there is reconciliation of accounting data with data of financially responsible individuals. Confirmation for verification is turnover balance sheet for respective inventory accounts (205, 207, 209, 22, 281, 282), printed according to material responsible persons and signed on particular date.

Auditor should pay attention to another important point - product line for sale. The fact that, in accordance with List #498, pharmacy, in addition to drugs, have the right to buy and sell limited range of products: medical supplies, medical equipment, items and personal care products, insect repellents, disinfectants, etc., all the List № 498 shows such 13 commodity groups. Purchase and sale of such goods is only subject to separate storage and distribution.

Also, auditor will need to analyze movement of goods on positions (for large commodity nomenclature it is expedient to do selectively on individual items). Such analysis is conducted to develop opinions about validity or invalidity of goods of particular denomination.

When auditing stocks consumption one should pay attention to the following:

- when auxiliary materials, spare parts, low value items are consumed, one should check white-off paperwork - as presence of all required props in primary documents (listed in Article 9 of the law on accounting) and presence of direct connection between costs and pharmacy business activity. On write-off the auxiliary materials pharmacy can apply industry norms and standards developed and approved by company. Auditor should verify that such standards exist and write-offs are in accordance;

- In order to prevent corruption of data on turnover costs and other pharmacy costs, auditor should verify validity of the material costs assignment to different types of expenses: general production, administrative, distribution costs, etc.

Auditor also should be required to conduct a complete inventory and to take part in it as a member of inventory board. He also checks completeness and timeliness of results recording for inventories of goods and other inventory items, completeness or timeliness of repayment for shortages and loss by responsible persons.

Of course, auditor should pay particular attention to reliability of determining cost of sold goods. Its definition depends on choice of estimation method of disposal, as mentioned above. With automated accounting is not too difficult, since disposal of inventory evaluation method was originally put into computer as a permanent item. It is also necessary to compare cost of goods sold (drugs, medical supplies, other permitted goods for sale in pharmacies), cost of goods sold with sales prices and trade margins. When calculating is correct, selling price = cost of goods sold (purchase price) + mark-up.

Sources for reserves audit are such primary documents:

- Books of proxies to receive inventory;

-Bills (waybills) for receiving inventory;

- Invoices for internal movement of inventory between company divisions;

- Acts to write-off inventory.

Other sources for reserves audit is ledger data, journals, orders and statements of accounts on inventory, accounts, cost accounting. It is also necessary to use data on stocks, as recorded in section II of Balance "Current assets" on certain date (line 100 "Inventories", line 140 "Goods", etc.), as well as data recorded in Statement of Financial Performance: in line 040 "Cost of goods (works, services), in line 230 "Material costs".

Practice of audits shows typical errors detected during inventory audit in pharmacy chains such as:

- receiving inventories, including medicines, without giving proxy to supplier;

- "outstanding" proxies in the book of proxies;

- accounting suppliers documents, which are not formulated properly: with unspecified fixes, without signature of person responsible for inventories, as well as authorizing signatures without producer’s series number, with wrong name of acquiring company;

- Lack of approved consumption norms for auxiliary materials (detergents, disinfectants, etc.) in enterprise, as well as order approving write-off commission;

- Errors in formulating acts for writing-off such materials - unspecified fixes, no signatures of commission members, financially responsible persons, managers; inventory write-off according to accounting statement;

- Incorrect charges to costs in accounting records for inventories write-off;

- Charges to costs for sold goods in absence of sold goods - this error happens when dispensing into account subsequent payment of medical institutions from budget. Thus data distorts on balance of goods on balance sheet date, and cost of goods sold;

- Failure to conduct an inventory of goods and other supplies, untimely inventory, formal inventory. The following can indicate at formal inventory: only head of pharmacy is included in inventory committee among financially responsible persons, the rest is represented with accounting employees, not including staff with expertise knowledge in pharmaceutical and medical products.

Audit of cash transactions accounting in pharmaceutical companies

When auditing cash transactions accounting, auditor should examine organization of cash circulation as with receiving revenue after drug sales, as with giving cash for various necessary expenses for business. Audit of cash transactions accounting is performed under continuous method, that is, all documents confirming funds receiving and expenditure should be audited continuously. And above all, auditor before reviewing makes cash office inventory in presence of cashier in company and chief accountant (accountant). During cash office inventory, he also checks for clearance of check books for cash money in bank, storage and preservation funds.

During cash transactions audit the auditor shall determine whether contract of liability is signed with all staff performing functions of receiving and giving cash. This also applies to cashier of central cash office in enterprise, as well as pharmacies employees – in units: cashiers, provisors, and pharmacists. If teller functions assigned to other employees (accounting, head (deputy head), pharmacy), with them also needs to be a contract of full liability when dealing with money. However, in the case of such a combination of posts auditor shall conclude whether this combination.

Further, during the audit of cash transactions one should check for approved cash limit. And cash limit must be calculated separately for enterprise cash office and its divisions. They also check cash limit compliance for each unit separately. This procedure (monitoring compliance with limit) is carried out comparing data on cash office balance, formed in journal-order on sub-account 301 "Cash in local currency" for each unit, according to the data presented by company in established limit order. It is also necessary to check validity of data calculation on establishing cash limit balance in cash office and meet deadlines of turning in revenues to bank (which is verified by credit turnover analysis on subaccount 301 in correspondence with debit on accounts 333, 311).

Important part of cash transactions audit is verifying cash reports formulating and accompanying documents: credit and debit cash orders, statements of expenditure for payments. One should keep in mind that corrections, even coordinated, are not permitted in credit and debit cash orders and account statements. These documents must be signed by head of company, chief accountant, cashier, money receiver. There should also be a cash book - numbered, laced, signed by manager and chief accountant with the company seal. If cash book and cash instruments are unsigned, non-formulated completely, it indicates lack of control over funds expenditure by enterprise administration, as well as non proper cash transactions accounting.

Also under cash transactions audit, financial discipline of persons accountable receiving cash with accountability for domestic needs and/or travel expenses, should be checked. They should keep in mind that late accountable payment is added to total cash balance at relevant date, resulting value is compared with the cash limit. Amounts, documented with mistakes (invalid form of cash document, no sealing, etc.) are equal to outstanding payments. You should also check whether there were cases when funds were given to employees who already have outstanding imprest.

Selling drugs in pharmacies, as noted above, is a form of retail with mainly mandatory usage of registers for payment transactions (RPT) and accounting books for payment transactions (ABPT). Therefore, auditor should verify the RPT application in pharmacies - structural units of audited company. He needs to ensure that there are Z-reports at ABPT in days of RPT use and records about payment receipts in days, when RPT was temporarily not used (power outage). In turn, ABPT data (Chapter 2, "Accounting for cash flow and payments amounts") shall be duly reflected in accounting.

It’s known that drugs are not subject to exchange or return (Appendix № 3 to the Resolution № 172). But official document deals about case of high quality goods. If pharmaceutical company failed to prove not guilty in identified defects, pharmacy is obliged to take back medicine and return money to buyer. This operation is carried out through RPT with issuance of fiscal cash refund receipt to buyer. If refund amount is over 100 UAH, it requires the refund act. Auditor also needs to pay attention to these moments.

Sources of cash transactions audit are:

- Approved cash office limits;

- Acts for scheduled and unannounced inventories of cash offices;

- Primary documents for funds accounting;

- Cash reports, cash books;

- Journals-orders on sub-accounts 301, 311, 333, 372;

- ABPT with attached documents.

It is also necessary to use data on funds availability, as reflected in section II of Balance "Current assets" on certain date (line 231 "Cash and cash equivalents in national currency, including cash office), and data reported in Cash flows statement.

The main typical violations identified under cash transactions audit are:

- Lack of approved limits of cash balances, actual limits are exceeded, approved limits overstatement on purpose;

- Conducting cash operations by staff performing control functions, if cashier is in staff;

- Absence of mandatory signatures of debited and credited cash orders, in statements of expenditure for granted funds;

- Presence of corrections in primary cash documents and unspecified corrections in cash reports and cash books;

- turning in advance reports in accounting office not on time;

- Issuance of money in accountability to employees who already have debts on cash accountable;

- Expense report accompanied by documents without confirmation of cash payment;

- Late recording of cash transactions in accounting system;

- Late printout of Z-reports attached to ABPT, incomplete filling in data on received revenue at ABPT;

- Non recording the data on refund to buyer at RPT, invalidity of refunds to buyer, no return acts for refund of goods over 100 UAH;

- No cash inventories at cash offices of company.

Yuriy Grakovsky, expert on accounting and taxation


Code of Labour Laws of Ukraine from 10.12.1971 № 322-VIII

Resolution № 172 - CMU from 19.03.1994, № 172 "On implementation of certain provisions of the Law of Ukraine "On Protection of Consumers' Rights”

Order # 419 - Procedures for Financial Reporting, as approved by Cabinet of Ministers of Ukraine from 28.02.2000, № 419

RSA 9 - Regulation (Standard) of Accounting 9, "Inventories", approved by Order of the Ministry of Finance of Ukraine from 20.10.99, № 246

Instruction # 291 - Instruction on use of Accounts Chart of Accounting of assets, capital, liabilities and business operations for enterprises and organizations, approved by Order of the Ministry of Finance of Ukraine from 30.11.1999, № 291

Instruction # 69 – Instruction on inventory of fixed assets, intangible assets, inventories, cash and documents and calculations approved by Order of the Ministry of Finance of Ukraine from 11.08.1994 № 69

List № 498 - List of products that pharmaceutical institutions and their structural units have right to buy and sell, approved by Order of Ministry of Health of Ukraine from 06.07.2012 № 498

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