As you complete these questions, consider the following features of and trends in the pharmaceutical industry and for PhamaCorp 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 economics, 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 policy makers and the government are increasingly focusing on prevention regimes rather than treatment regimes, thereby leading no 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, PharmaCorp 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.
- PhamaCorp's policies for extending credit to customers have remained stable over the last three years. PhamaCorps's credit-granting policies are considered stringent (chinh xac) within the industry, and analyses have sometimes criticized (phe binh) the company for this, contending that such policies have hindered (can tro) the company's revenue growth relative to industry peers.
- Two of PharmaCorp's popular pharmaceuticals, Selebrax and Vyvox, 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.
Step 1: Identify Suitable Analytical Procedures. Your audit senior has suggested that the following ratios (on an overall financial statement level) will be used for planning analytical procedures in the revenue cycle at PharmaCorp:
Gross margin: (revenues-cost of sales/revenues
Turnover of receivables: (revenues/average accounts receivable); for ease of computation simply use ending accounts receivable.
Receivables as a percentage of current assets and as a percentage of total assets: (accounts receivable/total current assets) and (accounts receivable/total assets)
Allowance for uncollectible accounts as a percentage of accounts receivable: (allowance/accounts receivable)
As part of Step 1, identify any other relevant relationships or trend analyses that would be useful to consider as part of planning analytics. Explain your reasoning.
Step 2: Evaluate Reliability of Data Used to Develop Expectations. The audit team has determined that the data you will be using to develop expectations in the revenue cycle are reliable. Indicate the factors that the audit team likely considered in making that determination.