Substantive analytical procedures for revenue

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.