Reference no: EM132604602

Question - Phantom-CO MEDICAL CASE

Phantom-co Medical, Inc. (Phantom-co Medical) is an established pharmaceutical company. The company has been in operation for fifty years (50) and consists of three core business operations: product sales in its pharmaceutical outlets, product sales to business customers - hospitals and other pharmacies and manufacturing of pharmaceutical items. The company was started as a local family business and has received additional funding over the years from several private investors. Phantom Medical has a wholly owned subsidiary, which provides health office equipment to corporate clients around the country. In addition, the company also holds investments in several private companies with whom it does business. On January 31, 2016, Phantom Medical guaranteed a $25 million debt obligation of one of these investments' Black Brother Partners' for a period of ten years. The Company owns 25% interest in Black Brothers Partners. The company experienced significant sales growth during its history and continues to rapidly expand. Phantom has for many years generated 85% of its revenue through the sale of three specific cold and flu remedies in its pharmaceutical outlets. Despite its many investments, Phantom has lately seen a real growth in the level of competition that it faces in its market and demand for its products has significantly declined. To make matters worse, in the past the company has not invested sufficiently in new product development and so has been trying to remedy this by recruiting suitably trained scientific staff, but this has proved more difficult than anticipated. In addition the company has spent an estimated $17m on refurbishing their existing plant. In order to fund the expansion Phantom has applied for a loan of $22m. It has yet to hear from the bank as to whether it will lend them the money. Additional since January 2015, Phantom sustained a significant decline in its gross margin on product sales due to an increase in the cost of raw materials and failure to monitor compliance with budgetary guidelines. Consequently, some of Phantom's suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery. As a result of the above the company's overdraft balance has grown substantially. The directors have produced a cash flow forecast and this shows a significantly worsening position over the coming 12 months. Phantom Medical has a senior management team composed of seasoned business managers' many of whom have been with the company since inception.

However, during the current year the CFO resigned to work for a competitor and recruited several key Phantom Medical financial professionals to join him at his new company. After several months of searching, a new CFO with a background in retail finance was hired. In addition, the accounting department is currently understaffed due to staff turnover. Further, the new CFO is redesigning the accounting policies and procedures and is replacing the general ledger software to improve the effectiveness of the company's financial reporting systems.

Required -

1. Complete brief SWOT of analysis of Phantom.

2. Identify 4 going concern issues and state how the auditor should respond to each.