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?