Part 1: Planning Analytical Procedures. Your assignment is a part of your Portfolio Project which you will complete in Module 8. Information from this assignment will be used in your Portfolio Project.
Reference the Excel file containing financial information from footnote disclosures and substantive analytical procedures using data analytics from your instructor.
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 acquisition and payment 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 regulations covering healthcare and government reimbursements related to certain procedures and prescribed pharmaceuticals.
- Policymakers 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’s credit policies have 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 company’s 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.
Information specific to the Acquisition and Payment Cycle
- Raw materials inventory required in the businesses are purchased from numerous suppliers. No serious shortages or delays of raw materials inventory were encountered in 2015, and none are expected in 2016. PharmaCorp has successfully secured the raw materials inventory necessary to meet its requirements where there have been short-term imbalances between supply and demand, but generally at higher prices than those historically paid.
- A risk that companies in this industry face with respect to the acquisition and payment cycle is that there is a possibility of failing to maintain the integrity of supply chains, possibly resulting in intentional and criminal acts such as product diversion, product theft, and counterfeit raw materials inventory.
- In response to pricing pressure, several major suppliers changed their policy with respect to discounts for early payment of amounts due on credit sales. In response, PharmaCorp changed its policy of paying within two weeks to paying within four weeks since it is no longer monetarily beneficial to do so from a cash management perspective.
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 acquisition and payment cycle at the company:
A. Gross margin: (revenues-cost of sales)/revenues
B. Changes in cost of goods sold on a percentage basis, yearly comparisons
C. Inventory Turnover: (cost of goods sold/ending inventory)
D. Number of days’ sales in inventory: (365/inventory turnover)
E. Accounts payable turnover: (purchases/average accounts payable)
F. Days outstanding in accounts payable: (365/accounts payable turnover)
G. Accounts payable/current liabilities
H. Identify other relationships or trends that are relevant as part of the planning analytics. Discuss your reasons for your choices.
Note: Since you are in the planning stage, discuss the ratios only. Calculations will be required in Step 4 & 5 (Module 4).
Step 2: Evaluate the Data Reliability When Developing Expectations. The data you will use to develop expectations in the acquisition and payment 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 acquisition 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 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.
Your paper should be 3-4-pages in length and include an Excel file with the company financial statements as an additional deliverable. Please follow APA format. Include a title page and reference page. Use four (4) academic sources.