Part I: Planning Analytical Procedures 1. 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: a. Gross margin: (revenues-cost of sales)/revenues b. Turnover of receivables: (revenues/average accounts receivable); use the ending accounts receivable c. Receivables as a percentage of current assets: (accounts receivable/total current assets) d. Receivables as a percentage of total assets: (accounts receivable/total assets) e. Allowance for uncollectible accounts as a percentage of accounts receivable: (allowance/accounts receivable) f. Identify other relationships or trends that are relevant as part of the planning analytics. Discuss your reasons for your choices. 2. 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. a. Discuss the likely factors the audit team will consider when making this determination 3. 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. a. Consider both historical trends of Pharmcorp and the industry on the whole. 4. Step 4 and Step 5: Define and Identify Substantial Unanticipated Variances. Refer to the text for guidance on materiality. a. 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. b. 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. 5. Step 6 and Step 7: Investigate Substantial Unanticipated Variances and Ensure Appropriate Documentation. a. Discuss the accounts or relationships you feel should be investigated further using substantive audit procedures. Discuss your reasons for these choices. b. Describe the information that should be a part of the auditor's report or files. F124 X - 1000 6,524 Short-term borrowings, including current portion of long-term debt: 2015-$2,449; 22 2014-$6 23 Accounts payable 24 Dividends payable 25 income taxes payable 26 Accrued compensation and related items 27 other current liabilities 28 uabilities of discontinued operations 29 Total current abilities 30 Long-term debt 31 Pension benefit obligations 32 Postretirement benefit obligations 33 Noncurrent deferred tax liabilities 34 other taxes payable 35 other noncurrent liabilities 36 Total liabilities Page 1 28,719 30,936 7,930 3,393 21,593 6,610 4,939 104,120 4,116 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 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 3 54,240 -5,953 81,260 418 81,678 -31,801 46,210 4,129 82.190 82,621 49 Total liabilities and equity 185,798 188,002 talabilities and equity PharmaCorp Consolidated Statements of Income (USDS) In Millis, est Pet Share data, unless otherwise specified Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 $38,836 565,159 $63,065 11234 16,516 7.770 14,176 18,672 14,888 18,873 9,583 5,264 5,614 3.24 3,841 Revenues costs and expenses Cost of sales Selling informational and administrative expenses Research and development expenses Amortization of intarpble assets Restructuring charges and certain acquisition related costs other deductions--net come from continuing operations before provision for takes on income Provision for taxes on income Income from continuing operations Discontinued operations incon/loss from discontinued operations of tax Gairloss on sale of discontinued operations niet of tax 9 Discontinued operations net of tax Net Income before allocation to noncontrolling interests 1 less Net Income attributable to rencontrolling interests 2 Net Income attributable to Pharmacorp Inc. 73 tarings per common share basic 74 Income from continuing operations attributable to Pharmacorp Inc. common sharel 75 Discontinued operations--net of tax 76 Net Income attributable to Pharmacorp Inc. common shareholders 77 Larnings per common share-diluted: 78 income from continuing operations attributable to PharmaCorp Inc. common sharel 79 Discontinued operations of tax BD Net Income attributable to PharmaCorp Inc. common shareholders B1 Weighted average shares basic 82 Weighted average shares diluted 83 Cash dividends paid per common share Page 2 $14,370 $127 $0.2 $1.96 $1.00 5127 2.1 $1.94 7,40 7305 50.83 $8.50 Dec 31, 2013 Dec 31, 2014 (audited) $10,049 (audited) 58,288 3.299 519 1,199 1,298 -1.888 3,336 111 2,109 -156 -1,769 -172 LE 1.198 PharmaCorp Consolidated Statements of Cash Flows (USD S) In Millions, unless otherwise specified Dec. 31, 2015 89 Operating Activities (usaudited) 90 Net Income before allocation to noncontrolling interests $14.598 91 Adjustments to reconcile net income before allocation to rocontrolling interests to net cash provided by operating activities: 92 Depreciation and amortization 7,711 93 Share-based compensation expense 94 Asset write-offs and impairment charges 95 (Gain loss on sale of discontinued operations 96 Deferred taxes from continuing operations 97 Deferred taxes from discontinued operations 98 Benefit plan contributions in excess of less than expense 99 Other non-cash adjustments, net 100 Jother changes in assets and liabilities, net of acquisitions and divestitures: 101 Accounts receivable 102 nentories 105 other assets 104 Accounts payable 105 Other liabilities 105 other tax accounts, net 107 Net cash provided by operating activities 1.08 investing Activities 109 Purchases of property, plant and equipment 110 Purchases of short-term investments 111 Proceeds from redemptions and sales of short-term investments 112 Net proceeds from redemptions and sales of short-term investments with original 113 Purchases of long-term investments 11.145 114 Proceeds from redemptions and sales of long-term investments 115 Acquisitions, net of cash acquired 116 Proceeds from sale of businesses 11,850 117 other investing activities 118 Net cash provided by used in investing activities 119 Financing Activities 120 Proceeds from short-term borrowings 121 Principal payments on short-term borrowings 122 Net payments on short term borrowings with original maturities of 90 days or less 123 Principal payments on long-term debt 124 Purchases of common stock 125 Cash dividends paid 126 other financing activities 127 Net cash used in financing activities -13.99 128 Effect of exchange rate changes on cash and cash equivalents 20.340 - Page 3 -1,313 -11,082 -1.660 -18.467 14,176 10,574 3.695 5.950 4.125 2,147 4,737 -273 2370 1,543 -92 12,910 6,500 -7,540 -1,197 6.196 -9,100 4.334 -708 2,917 1.184 801 -367 1,498 -718 401 1,214 -3438 1,190 20,240 -12.666 11,454 Page -1.650 -18.47 14,176 10,874 4.630 2,147 -1,513 11. 02 5.699 5,930 -4,128 -3,26 100 other changes in assets and of acquisitions and divestitures: 101 Accounts receivable 102 inventories 103 other assets 104 Accounts payable 105 other liabilities 106 other tax accounts.net 107 Net cash provided by operating activities 108 Investing Activities 109 Purchases of property, plant and equipment 110 Purchases of short-term investments 111 Proceeds from redemptions and sales of short-term investments 112 Net proceeds from redemptions and sales of short-term investments with original 113 Purchases of long-term investments 114 Proceeds from redemptions and sales of long term investments 215 Acquisitions, net of cash acquired 116 Proceeds from sale of businesses 117 Other investing activities 118 Net cash provided by/fused in) Investing activities 119 Financing Activities 120 Proceeds from short term borrowings 121 Principal payments on short-term borrowings 122 Net payments on short-term borrowing with original maturities of 90 days or less 123 Principal payments on long-term debt 124 Purchases of common stock 125 cash dividends paid 126 other financing activities 127 Net cash used in financing activities 128 Effect of exchange rate changes on cash and cash equivalents 129 Net increase/ decrease in cash and cash equivalents 130 Cash and cash equivalents, beginning 131 cash and cash equivalents, ending 132 cash paid during the period for: 133 Income taxes 134 Interest 279 1,843 7,985 -304 -1,413 -8.228 -6.534 488 -15,999 12.910 -3.926 -7.540 -6,896 -9,100 -6,134 6,500 -9,349 -1.197 -106 -1.000! -6,058 169 20.607 -11,174 -31 -343 7.207 3,182 10,389 1.447 1,735 3.182 1,975 1,735 2,430 SI 873 2,918 $2.08 11,715 las J Part I: Planning Analytical Procedures 1. 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: a. Gross margin: (revenues-cost of sales)/revenues b. Turnover of receivables: (revenues/average accounts receivable); use the ending accounts receivable c. Receivables as a percentage of current assets: (accounts receivable/total current assets) d. Receivables as a percentage of total assets: (accounts receivable/total assets) e. Allowance for uncollectible accounts as a percentage of accounts receivable: (allowance/accounts receivable) f. Identify other relationships or trends that are relevant as part of the planning analytics. Discuss your reasons for your choices. 2. 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. a. Discuss the likely factors the audit team will consider when making this determination 3. 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. a. Consider both historical trends of Pharmcorp and the industry on the whole. 4. Step 4 and Step 5: Define and Identify Substantial Unanticipated Variances. Refer to the text for guidance on materiality. a. 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. b. 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. 5. Step 6 and Step 7: Investigate Substantial Unanticipated Variances and Ensure Appropriate Documentation. a. Discuss the accounts or relationships you feel should be investigated further using substantive audit procedures. Discuss your reasons for these choices. b. Describe the information that should be a part of the auditor's report or files. F124 X - 1000 6,524 Short-term borrowings, including current portion of long-term debt: 2015-$2,449; 22 2014-$6 23 Accounts payable 24 Dividends payable 25 income taxes payable 26 Accrued compensation and related items 27 other current liabilities 28 uabilities of discontinued operations 29 Total current abilities 30 Long-term debt 31 Pension benefit obligations 32 Postretirement benefit obligations 33 Noncurrent deferred tax liabilities 34 other taxes payable 35 other noncurrent liabilities 36 Total liabilities Page 1 28,719 30,936 7,930 3,393 21,593 6,610 4,939 104,120 4,116 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 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 3 54,240 -5,953 81,260 418 81,678 -31,801 46,210 4,129 82.190 82,621 49 Total liabilities and equity 185,798 188,002 talabilities and equity PharmaCorp Consolidated Statements of Income (USDS) In Millis, est Pet Share data, unless otherwise specified Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 $38,836 565,159 $63,065 11234 16,516 7.770 14,176 18,672 14,888 18,873 9,583 5,264 5,614 3.24 3,841 Revenues costs and expenses Cost of sales Selling informational and administrative expenses Research and development expenses Amortization of intarpble assets Restructuring charges and certain acquisition related costs other deductions--net come from continuing operations before provision for takes on income Provision for taxes on income Income from continuing operations Discontinued operations incon/loss from discontinued operations of tax Gairloss on sale of discontinued operations niet of tax 9 Discontinued operations net of tax Net Income before allocation to noncontrolling interests 1 less Net Income attributable to rencontrolling interests 2 Net Income attributable to Pharmacorp Inc. 73 tarings per common share basic 74 Income from continuing operations attributable to Pharmacorp Inc. common sharel 75 Discontinued operations--net of tax 76 Net Income attributable to Pharmacorp Inc. common shareholders 77 Larnings per common share-diluted: 78 income from continuing operations attributable to PharmaCorp Inc. common sharel 79 Discontinued operations of tax BD Net Income attributable to PharmaCorp Inc. common shareholders B1 Weighted average shares basic 82 Weighted average shares diluted 83 Cash dividends paid per common share Page 2 $14,370 $127 $0.2 $1.96 $1.00 5127 2.1 $1.94 7,40 7305 50.83 $8.50 Dec 31, 2013 Dec 31, 2014 (audited) $10,049 (audited) 58,288 3.299 519 1,199 1,298 -1.888 3,336 111 2,109 -156 -1,769 -172 LE 1.198 PharmaCorp Consolidated Statements of Cash Flows (USD S) In Millions, unless otherwise specified Dec. 31, 2015 89 Operating Activities (usaudited) 90 Net Income before allocation to noncontrolling interests $14.598 91 Adjustments to reconcile net income before allocation to rocontrolling interests to net cash provided by operating activities: 92 Depreciation and amortization 7,711 93 Share-based compensation expense 94 Asset write-offs and impairment charges 95 (Gain loss on sale of discontinued operations 96 Deferred taxes from continuing operations 97 Deferred taxes from discontinued operations 98 Benefit plan contributions in excess of less than expense 99 Other non-cash adjustments, net 100 Jother changes in assets and liabilities, net of acquisitions and divestitures: 101 Accounts receivable 102 nentories 105 other assets 104 Accounts payable 105 Other liabilities 105 other tax accounts, net 107 Net cash provided by operating activities 1.08 investing Activities 109 Purchases of property, plant and equipment 110 Purchases of short-term investments 111 Proceeds from redemptions and sales of short-term investments 112 Net proceeds from redemptions and sales of short-term investments with original 113 Purchases of long-term investments 11.145 114 Proceeds from redemptions and sales of long-term investments 115 Acquisitions, net of cash acquired 116 Proceeds from sale of businesses 11,850 117 other investing activities 118 Net cash provided by used in investing activities 119 Financing Activities 120 Proceeds from short-term borrowings 121 Principal payments on short-term borrowings 122 Net payments on short term borrowings with original maturities of 90 days or less 123 Principal payments on long-term debt 124 Purchases of common stock 125 Cash dividends paid 126 other financing activities 127 Net cash used in financing activities -13.99 128 Effect of exchange rate changes on cash and cash equivalents 20.340 - Page 3 -1,313 -11,082 -1.660 -18.467 14,176 10,574 3.695 5.950 4.125 2,147 4,737 -273 2370 1,543 -92 12,910 6,500 -7,540 -1,197 6.196 -9,100 4.334 -708 2,917 1.184 801 -367 1,498 -718 401 1,214 -3438 1,190 20,240 -12.666 11,454 Page -1.650 -18.47 14,176 10,874 4.630 2,147 -1,513 11. 02 5.699 5,930 -4,128 -3,26 100 other changes in assets and of acquisitions and divestitures: 101 Accounts receivable 102 inventories 103 other assets 104 Accounts payable 105 other liabilities 106 other tax accounts.net 107 Net cash provided by operating activities 108 Investing Activities 109 Purchases of property, plant and equipment 110 Purchases of short-term investments 111 Proceeds from redemptions and sales of short-term investments 112 Net proceeds from redemptions and sales of short-term investments with original 113 Purchases of long-term investments 114 Proceeds from redemptions and sales of long term investments 215 Acquisitions, net of cash acquired 116 Proceeds from sale of businesses 117 Other investing activities 118 Net cash provided by/fused in) Investing activities 119 Financing Activities 120 Proceeds from short term borrowings 121 Principal payments on short-term borrowings 122 Net payments on short-term borrowing with original maturities of 90 days or less 123 Principal payments on long-term debt 124 Purchases of common stock 125 cash dividends paid 126 other financing activities 127 Net cash used in financing activities 128 Effect of exchange rate changes on cash and cash equivalents 129 Net increase/ decrease in cash and cash equivalents 130 Cash and cash equivalents, beginning 131 cash and cash equivalents, ending 132 cash paid during the period for: 133 Income taxes 134 Interest 279 1,843 7,985 -304 -1,413 -8.228 -6.534 488 -15,999 12.910 -3.926 -7.540 -6,896 -9,100 -6,134 6,500 -9,349 -1.197 -106 -1.000! -6,058 169 20.607 -11,174 -31 -343 7.207 3,182 10,389 1.447 1,735 3.182 1,975 1,735 2,430 SI 873 2,918 $2.08 11,715 las J