Planning Analytical Procedures and Data Reliability Discussion Part I: Planning Analytical Procedures Step 1: Identify Proper Analytical Procedures. The s

Planning Analytical Procedures and Data Reliability Discussion Part I: Planning Analytical Procedures

Step 1: Identify Proper Analytical Procedures. The senior auditor suggests you should use these ratios (on the financial statement level) for planning the analytical procedures as part of the revenue cycle at the company:

Gross margin: (revenues-cost of sales)/revenues

Turnover of receivables: (revenues/average accounts receivable); use the ending accounts receivable

Receivables as a percentage of current assets: (accounts receivable/total current assets)

Receivables as a percentage of total assets: (accounts receivable/total assets)

Allowance for uncollectible accounts as a percentage of accounts receivable: (allowance/accounts receivable)

Identify other relationships or trends that are relevant as part of the planning analytics. Discuss your reasons for your choices.

Step 2: Evaluate the Data Reliability When Developing Expectations. The data you will use to develop expectations in the revenue cycle has been deemed reliable by the audit staff.

Discuss the likely factors the audit team will consider when making this determination.

Step 3: Develop expectations for accounts in the revenue cycle and for the ratios from Step # 1 that you deem as relevant. Since this is a planning analytical procedure, the expectations are not set at a high a high level of precision. Indicate if you expect a ratio to rise, fall, or remain the same, and explain the level of any anticipated rises or falls, or the range of the ratio. Pharma Corp’s financial information is in the first tab of the Excel worksheet, while the information for Novartell and AstraZoro is available in the last two tabs of the file.

Consider both historical trends of Pharmcorp and the industry on the whole.

Step 4 and Step 5: Define and Identify Substantial Unanticipated Variances. Refer to the text for guidance on materiality.

Apply those guidelines to Step 4 of planning the analytical procedures as part of the revenue cycle for Pharmacorp. Define the meaning of a significant difference. Discuss your reasons for these choices. Discuss the qualitative materiality considerations in relation to this case.

Once you have determined the levels of difference you would consider noteworthy, calculate the Step 1 ratios (and any additional trend or ration analysis you deemed necessary), based on Pharmacorp’s financial statement figures. Identify the ratios where you expect a significant difference.

Step 6 and Step 7: Investigate Substantial Unanticipated Variances and Ensure Appropriate Documentation.

Discuss the accounts or relationships you feel should be investigated further using substantive audit procedures. Discuss your reasons for these choices.

Describe the information that should be a part of the auditor’s report or files.

Part II: Substantive Analytical Procedures

You will see three tabs in the Excel file that should be reviewed: the Pharmacorp Segment Information, Pharmacorp’s Geographic Information, and Pharmacorp’s Other Revenue Information. These tabs display excerpts from Pharma Corp’s footnote disclosures regarding segment, geographic, and other revenue information. Examine these disclosures and discuss the operating segments and geographic regions where the company does business.

Which operating segments generate the most revenue for the company and may be considered the most important? Which regions are the most important to the organization from geographic standpoint? List the three most important products manufactured by Pharmacorp? Discuss any trends you notice in relation to revenue generation for each of these different categories.

Explain the different types of ratio analysis that could be conducted in substantive analytical procedures using the data from the segment, geographic, and other revenue information. An example would be the R&D expenses as a percentage of revenues. How would these substantive analytics be different from the planning analytics? Discuss the trends and relationships that are relevant, and what are the implications in relation to further substantive testing? Data Analytics and Excel
Reference the Excel file containing financial information from footnote disclosures and substantive
analytical procedures using data analytics.
PharmaCorp will be used as the main analytical procedure tasks you will want to focus on for this
assignment. The other companies, Novartell and AstraZoro, will be used as industry comparisons.
The opportunity exists in this case to perform planning and substantive analytical procedures for
accounts in the revenue cycle. You may assume that the 2015 financial information is unaudited, but the
information from 2014 has been audited. Consider the following trends and characteristics of the
pharmaceutical industry and for PharmaCorp in particular as you work on this case:
Following many years of dominant financial performance by companies in the United States, Europe and
Canada, increased competition is arising from organizations in emerging economies such as Brazil, India,
and China.
Significant uncertainty exists in the industry due to regulation covering health-care and government
reimbursements related to certain procedures and prescribed pharmaceuticals.
Policy makers in the industry and governments increasingly:
Mandate necessary prescripts for patients
Focus on prevention instead of treatment regimes, thereby leading to changes in demand for some
products
Anticipated growth in the industry is expected to be 5% to 7% in 2016 compared with 4% to 5% in the
prior year as stated by leading industry analysts.
Pharmacorp started and executed a significant cost reduction initiative aimed at improving efficiency,
reducing research and development costs, and eliminating corporate overhead in 2014.
PharmaCorp’s credit policies has remained the same over the past several years. Their credit policies are
considered stringent in their industry, and they have been criticized on occasion for these policies in
relation to their competitors.
Two of the companies most popular pharmaceuticals, Sistosis and Vigarvox, are no longer patented as of
the last quarter of 2015 and are now facing competition from generic alternatives.
Required:
Part I: Planning Analytical Procedures
Step 1: Identify Proper Analytical Procedures. The senior auditor suggests you should use these ratios
(on the financial statement level) for planning the analytical procedures as part of the revenue cycle
at the company:
Gross margin: (revenues-cost of sales)/revenues
Turnover of receivables: (revenues/average accounts receivable); use the ending accounts receivable
Receivables as a percentage of current assets: (accounts receivable/total current assets)
Receivables as a percentage of total assets: (accounts receivable/total assets)
Allowance for uncollectible accounts as a percentage of accounts receivable: (allowance/accounts
receivable)
Identify other relationships or trends that are relevant as part of the planning analytics. Discuss your
reasons for your choices.
Step 2: Evaluate the Data Reliability When Developing Expectations. The data you will use to develop
expectations in the revenue cycle has been deemed reliable by the audit staff.
Discuss the likely factors the audit team will consider when making this determination.
Step 3: Develop expectations for accounts in the revenue cycle and for the ratios from Step # 1 that
you deem as relevant. Since this is a planning analytical procedure, the expectations are not set at a
high a high level of precision. Indicate if you expect a ratio to rise, fall, or remain the same, and
explain the level of any anticipated rises or falls, or the range of the ratio. Pharma Corp’s financial
information is in the first tab of the Excel worksheet, while the information for Novartell and
AstraZoro is available in the last two tabs of the file.
Consider both historical trends of Pharmcorp and the industry on the whole.
Step 4 and Step 5: Define and Identify Substantial Unanticipated Variances. Refer to the text for
guidance on materiality.
Apply those guidelines to Step 4 of planning the analytical procedures as part of the revenue cycle for
Pharmacorp. Define the meaning of a significant difference. Discuss your reasons for these choices.
Discuss the qualitative materiality considerations in relation to this case.
Once you have determined the levels of difference you would consider noteworthy, calculate the Step 1
ratios (and any additional trend or ration analysis you deemed necessary), based on Pharmacorp’s
financial statement figures. Identify the ratios where you expect a significant difference.
Step 6 and Step 7: Investigate Substantial Unanticipated Variances and Ensure Appropriate
Documentation.
Discuss the accounts or relationships you feel should be investigated further using substantive audit
procedures. Discuss your reasons for these choices.
Describe the information that should be a part of the auditor’s report or files.
Part II: Substantive Analytical Procedures
You will see three tabs in the Excel file that should be reviewed: the Pharmacorp Segment Information,
Pharmacorp’s Geographic Information, and Pharmacorp’s Other Revenue Information. These tabs
display excerpts from Pharma Corp’s footnote disclosures regarding segment, geographic, and other
revenue information. Examine these disclosures and discuss the operating segments and geographic
regions where the company does business.
Which operating segments generate the most revenue for the company and may be considered the
most important? Which regions are the most important to the organization from geographic
standpoint? List the three most important products manufactured by Pharmacorp? Discuss any trends
you notice in relation to revenue generation for each of these different categories.
Explain the different types of ratio analysis that could be conducted in substantive analytical procedures
using the data from the segment, geographic, and other revenue information. An example would be the
R&D expenses as a percentage of revenues. How would these substantive analytics be different from
the planning analytics? Discuss the trends and relationships that are relevant, and what are the
implications in relation to further substantive testing?
Your written response paper should be 8-10 pages in length. It should be completed in Word and Excel.
The Word portions should follow the APA format, include a title page and reference page. Use five
academic sources other than the textbook, course materials, or other information provided as part of
the course materials.
A
1
2
3
4
5
6
7
8
10-K FILINGS
9
10
11
12
13
14
Accounts receivable, less allowance for doubtful accounts, 2015—$374; 2014—$226
Inventories
Taxes and other current assets
Assets of discontinued operations and other assets held for sale
Total current assets
Long-term investments
PharmaCorp
Consolidated Balance Sheets (USD $)
In Millions, except Share data, unless otherwise specified
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
D
Dec. 31, 2015
ASSETS
Cash and cash equivalents
Short-term investments
Identifiable intangible assets, less accumulated amortization
Taxes and other noncurrent assets
Total assets
LIABILITIES AND EQUITIES
Short-term borrowings, including current portion of long-term debt: 2015—$2,449;
2014—$6
Accounts payable
Dividends payable
Income taxes payable
Accrued compensation and related items
Other current liabilities
Liabilities of discontinued operations
Total current liabilities
Long-term debt
Pension benefit obligations
Postretirement benefit obligations
Noncurrent deferred tax liabilities
Other taxes payable
Other noncurrent liabilities
Total liabilities
Preferred stock, without par value, at stated value; 27 shares authorized; issued:
38 2015—967; 2014—1,112
Common stock, $0.05 par value; 12,000 shares authorized; issued: 2015—8,956;
39 2014—8,902
40 Additional paid-in capital
41 Employee benefit trusts
42 Treasury stock, shares at cost: 2015—1,680; 2014—1,327
43 Retained earnings
44 Accumulated other comprehensive loss
45 Total shareholders’ equity
46 Equity attributable to noncontrolling interests
47 Total equity
48
49 Total liabilities and equity
E
Dec. 31, 2014
(audited)
(unaudited)
15 Property, plant and equipment, less accumulated depreciation
16 Goodwill
17
18
19
20
21
B
$10,489
22,219
12,478
6,963
9,196
70
61,415
14,249
14,361
44,572
46,113
5,088
185,798
$3,282
23,170
13,158
6,510
9,480
5,217
60,917
9,914
15,921
44,669
51,284
5,697
188,002
6,524
4,116
4,164
1,834
910
2,146
13,041
0
28,719
30,936
7,930
3,393
21,593
6,610
4,939
104,120
3,578
1,896
909
2,220
15,066
1,124
28,909
34,826
6,455
3,244
18,861
6,886
6,100
105,381
39
45
448
445
72,608
-1
-40,121
54,240
-5,953
81,260
418
81,678
71,423
-3
-31,801
46,210
-4,129
82,190
431
82,621
185,798
188,002
F
G
50
51
52
53
54
A
B
PharmaCorp
Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
Dec. 31, 2015
D
E
Dec. 31, 2014
F
G
Dec. 31, 2013
$58,886
$65,159
$65,065
57 Cost of sales
11,234
14,176
14,888
58 Selling, informational and administrative expenses
16,516
18,632
18,873
59 Research and development expenses
60 Amortization of intangible assets
7,770
5,275
1,880
4,031
12,080
9,074
5,644
2,830
2,499
12,304
9,583
5,264
3,245
3,841
9,571
2,462
9,618
3,809
8,495
1,153
8,318
55 Revenues
56 Costs and expenses:
61 Restructuring charges and certain acquisition-related costs
62 Other deductions––net
63 Income from continuing operations before provision for taxes on income
64 Provision for taxes on income
65 Income from continuing operations
66 Discontinued operations:
67 Income/(loss) from discontinued operations––net of tax
68 Gain/(loss) on sale of discontinued operations––net of tax
197
250
-19
4,873
1,404
-11
69 Discontinued operations––net of tax
5,080
1,654
-30
70 Net income before allocation to noncontrolling interests
14,598
10,049
8,288
71 Less: Net income attributable to noncontrolling interests
72 Net income attributable to PharmaCorp Inc.
28
40
31
$14,570
$10,009
$8,257
74 Income from continuing operations attributable to PharmaCorp Inc. common shareholders
$1.27
$1.07
$1.03
75 Discontinued operations––net of tax
$0.68
$0.21
$0.00
76 Net income attributable to PharmaCorp Inc. common shareholders
77 Earnings per common share––diluted:
$1.96
$1.28
$1.03
78 Income from continuing operations attributable to PharmaCorp Inc. common shareholders
$1.26
$1.06
$1.03
79 Discontinued operations––net of tax
$0.68
$0.21
$0.00
80
81
82
83
84
$1.94
7,442
7,508
$0.88
$1.27
7,817
7,870
$0.80
$1.02
8,036
8,074
$0.72
73 Earnings per common share––basic:
Net income attributable to PharmaCorp Inc. common shareholders
Weighted-average shares––basic
Weighted-average shares––diluted
Cash dividends paid per common share
85
86
87
88
A
B
PharmaCorp
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
Dec. 31, 2015
D
(unaudited)
89 Operating Activities
90 Net income before allocation to noncontrolling interests
91 Adjustments to reconcile net income before allocation to noncontrolling interests to net cash provided by operating activities:
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
Depreciation and amortization
Share-based compensation expense
Asset write-offs and impairment charges
(Gain)/loss on sale of discontinued operations
Deferred taxes from continuing operations
Deferred taxes from discontinued operations
Benefit plan contributions (in excess of)/less than expense
Other non-cash adjustments, net
Other changes in assets and liabilities, net of acquisitions and divestitures:
Accounts receivable
Inventories
Other assets
Accounts payable
Other liabilities
Other tax accounts, net
Net cash provided by operating activities
Investing Activities
Purchases of property, plant and equipment
Purchases of short-term investments
Proceeds from redemptions and sales of short-term investments
Net proceeds from redemptions and sales of short-term investments with original maturities of 90 days or less
Purchases of long-term investments
Proceeds from redemptions and sales of long-term investments
Acquisitions, net of cash acquired
Proceeds from sale of businesses
Other investing activities
Net cash provided by/(used in) investing activities
Financing Activities
Proceeds from short-term borrowings
Principal payments on short-term borrowings
Net payments on short-term borrowings with original maturities of 90 days or less
Principal payments on long-term debt
Purchases of common stock
Cash dividends paid
Other financing activities
Net cash used in financing activities
Effect of exchange-rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, beginning
Cash and cash equivalents, ending
Cash paid during the period for:
Income taxes
Interest
E
F
G
Dec. 31, 2014
Dec. 31, 2013
(audited)
(audited)
$14,598
$10,049
$8,288
7,711
381
1,199
-7,123
839
1,459
135
-203
8,809
519
1,298
-1,688
207
147
-1,769
-172
8,299
505
3,386
111
2,109
-156
-677
-49
375
-731
93
569
-3,438
1,190
17,054
-66
1,184
801
-367
1,498
-8
20,240
-708
2,917
-718
-401
1,214
-12,666
11,454
-1,327
-24,018
25,302
1,459
-11,145
4,990
-1,050
11,850
93
6,154
-1,660
-18,447
14,176
10,874
-4,620
2,147
-3,282
2,376
279
1,843
-1,513
-11,082
5,699
5,950
-4,128
4,737
-273
0
118
-492
7,985
7
-8,304
-1,413
-8,228
-6,534
488
-15,999
-2
7,207
3,182
10,389
12,910
-3,926
-7,540
-6,896
-9,100
-6,134
169
-20,607
-29
1,447
1,735
3,182
6,500
-9,349
-1,197
-106
-1,000
-6,088
66
-11,174
-31
-243
1,978
1,735
2,430
$1,873
2,938
$2,085
11,775
$2,155
H
1
2
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J
K
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50
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PharmaCorp Operating Segments
We manage our operations through five operating segments —Primary Care; Specialty Care and Oncology; Established Products and
Emerging Markets; Animal Health; and Consumer Healthcare. As of the third quarter of 2012, the Animal Health and Consumer Healthcare
business units are no longer managed as a single operating segment. Each operating segment has responsibility for its commercial
activities and for certain research and development activities related to in-line products and in-process research and development
(IPR&D) projects that generally have achieved proof-of-concept.
On November 30, 2015, we completed the sale of our Nutrition business to Choco and recognized a gain on the sale of this business in
Gain/(loss) on sale of discontinued operations––net of tax in the consolidated statement of income for the year ended December 31, 2015.
The operating results of this business are reported as Income/(loss) from discontinued operations––net of tax in the consolidated
statements of income for all periods presented.
We regularly review our segments and the approach used by management to evaluate performance and allocate resources. Generally,
products are transferred to the Established Products business unit in the beginning of the fiscal year following loss of patent protection or
marketing exclusivity.
A description of each of our five operating segments follows:
• Primary Care operating segment —includes revenues from human prescription pharmaceutical products primarily prescribed by
primary-care physicians, and may include products in the following therapeutic and disease areas: Alzheimer’s disease,
cardiovascular (excluding pulmonary arterial hypertension), erectile dysfunction, genitourinary, major depressive disorder, pain,
respiratory and smoking cessation. All revenues for these products are allocated to the Primary Care business unit, except
those generated in emerging markets and those that are managed by the Established Products business unit.
• Specialty Care and Oncology operating segment —comprises the Specialty Care business unit and the Oncology business unit.
·
Specialty Care—includes revenues from human prescription pharmaceutical products primarily prescribed by physicians
who are specialists, and may include products in the following therapeutic and disease areas: anti-infectives, endocrine
disorders, hemophilia, inflammation, ophthalmology, pulmonary arterial hypertension, specialty neuroscience and
vaccines. All revenues for these products are allocated to the Specialty Care business unit, except those generated in
emerging markets and those that are managed by the Established Products business unit.
·
Oncology—includes revenues from human prescription pharmaceutical products addressing oncology and oncology-related
illnesses. All revenues for these products are allocated to the Oncology business unit, except those generated in
emerging markets and those that are managed by the Established Products business unit.
• Established Products and Emerging Markets operating segment —comprises the Established Products business unit and the
Emerging Markets business unit.
·
Established Products—includes revenues from human prescription pharmaceutical products that have lost patent
protection or marketing exclusivity in certain countries and/or regions. Typically, products are transferred to this business
unit in the beginning of the fiscal year following loss of patent protection or marketing exclusivity. However, in certain
situations, products may be transferred to this business unit at a different point than the beginning of the fiscal year
following loss of patent protection or marketing exclusivity in order to maximize their value. This business unit also
excludes revenues generated in emerging markets.
·
Emerging Markets—includes revenues from all human prescription pharmaceutical products sold in emerging markets,
including Asia (excluding Japan and South Korea), Latin America, the Middle East, Eastern Europe, Africa, Turkey and
Central Europe.
PharmaCorp Geographic Information
Revenues exceeded $500 million in each of 16 countries outside the U.S. in 2015 and 2014, and in each of 17 countries outside the U.S. in 2013. The U.S.
and Japan were the only countries to contribute more than 10% of total revenue in 2015. The U.S. was the only country to contribute more than 10% of
total revenue in 2014 and 2013.
The following table provides revenues by geographic area:
Year Ended December 31,
(MILLIONS OF DOLLARS)
Revenues
2015
2014
2013
$ 23,086
$ 26,933
$ 28,855
Developed Europe
13,375
16,099
16,156
Developed Rest of World
10,554
10,975
9,891
Emerging Markets
11,971
11,252
10,263
$ 58,986
$ 65,259
$ 65,165
United States
Revenues
013. The U.S.
than 10% of
PharmaCorp Other Revenue Information
Significant Customers: We sell our products primarily to customers in the wholesale sector. In 2015, sales to our three largest U.S. wholesaler
customers represented approximately 12%, 9% and 7% of total revenues and, collectively, represented approximately 16% of total accounts
receivable as of December 31, 2015. In 2014, sales to our three largest U.S. wholesaler customers represented approximately 13%, 11% and 9% of
total revenues and, collectively, represented approximately 14% of total accounts receivable as of December 31, 2014. For both years, these sales
and related accounts receivable were concentrated in our three biopharmaceutical operating segments.
Significant Product Revenues The following table provides revenues by product:
Year Ended December 31,
2015
2014
)
2013
51,214
57,747
58,523
Animal Health
4,299
4,184
3,575
Consumer Healthcare
3,212
3,028
2,748
261
300
319
(MILLIONS OF DOLLARS)
Total revenues from biopharmaceutical produ…
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