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Note: This case will enable you to practice conducting planning and substantive analytical procedures for accounts in the acquisition and payment cycle. When analyzing the

Note: This case will enable you to practice conducting planning and substantive analytical procedures for accounts in the acquisition and payment cycle. When analyzing the financial data, you may assume that the 2015 information is unaudited, while prior-year data is audited. The data are from fictional companies.
As you complete this case, consider the following features of and trends in the pharmaceutical industry and for GSK Corp. specifically:
After a long period of industry dominance by companies in the United States, the United Kingdom, and Europe, these companies are facing increasing competition from companies domiciled in emerging economies, such as Brazil, India, and China.
There exists significant uncertainty in the market because of recent regulation covering health care and government payouts for certain procedures and related pharmaceuticals.
Health care policymakers and the government are increasingly mandating what physicians can prescribe to patients.
Health care policymakers and the government are increasingly focusing on prevention regimens rather than treatment regimens, thereby leading to shifts in the demand for various pharmaceuticals.
The global pharmaceutical market is anticipated to grow by 5 to 7% in 2016 compared with a 4 to 5% growth rate in 2015, according to a leading industry analyst publication.
Beginning in 2014, GSK Corp initiated and executed a significant company-wide cost reduction initiative aimed at improving manufacturing efficiency, cutting back on research and development expenses, and eliminating unnecessary corporate overhead.
GSK Corp.s policies for extending credit to customers have remained stable over the last three years. GSK Corp.s credit-granting policies are considered stringent within the industry, and analysts have sometimes criticized the company for this, contending that such policies have hindered the companys revenue growth relative to industry peers.
Two of GSK Corp.s popular pharmaceuticals, Celebrix and Vyxos, came off patent during the fourth quarter of FYE 2015. These pharmaceuticals now face competition in the generic drug portion of the overall industry market.
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. GSK Corp. 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, GSK Corp. 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
a. Your audit senior has suggested that the following ratios (on an overall financial statement level) will be used for planning analytical procedures in the acquisition and payment cycle at GSK Corp.:
Inventory Ratios
Gross margin analysis (revenues cost of sales)/revenues
Changes in cost of goods sold on a percentage basis, yearly comparisons
Inventory turnover (cost of goods sold/ending inventory)
Number of days sales in inventory (365/inventory turnover)
Accounts Payable Ratios
Accounts payable turnover (purchases/average accounts payable)
Days outstanding in accounts payable (365/accounts payable turnover)
Accounts payable/current liabilities
As part of the first step, identify any other relevant relationships or trend analyses that would be useful to consider as part of planning analytics. Explain your reasoning.
b. The audit team has determined that the data you will be using to develop expectations in the acquisition and payment cycle are reliable. Indicate the factors that the audit team likely considered in making that determination.
C. Refer to the guidance in Chapter 7 on performance materiality, tolerable misstatement, and clearly trivial amounts. Apply those materiality guidelines to the planning analytical procedures in the acquisition and payment cycle for GSK Corp. to define what is meant by a significant difference. Explain your reasoning. Also comment on qualitative materiality considerations in this context. Now that you have determined what amount of difference would be consid

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