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Advanced Auditing

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Yourl040Return. com Evoluoting eBusiness Revenue Recognition, lnformstion Privocy, ond Eledronic Evidence lssues -‘u ‘-:; s. Brasr,nv’FnaNrA. Bucruess . srsvsx M. Gr,ovnn. Doucr,as F. pnawrrr [. EARNING OBJECTIVES . *-::: :ompleting and discussing this case you should be able to [5] Recognize issues surrounding the privacy of customer information [6] Describe audit implications when transaction evidence is solely electronic [7] Recognize threats to eBusiness strategies, which rely solely on the delivery of services “via the Internet J:ntify business risks for Internet-only business :rldels Le;ommend internal control improvements for “r eBusiness-based company Understand selected eBusiness related revenue :ecognition issues .

:l i! – -centify :et-only companies exchange banner ad services accounting issues that arise when Inter_ INTRODUCTION -]i:er being in business for only two years, yourl040Return. com has_quickly become a leading ::’-rr-ider of online income tax preparation and-filing services for mdividuaf taxpayers. steven -.. ago founded the company business idea cine to him f”, individual tax ^ft”i ^ ::eDaration software.

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As he stared at all the software,packages -hiil;h;;pt”g on the rh”frr”, a”t a local computer ,:pply store, the following thought kept racing thro,rgh his riind, “yith all of the tax law changes from year to year, why should I shell out $50 Jor a CD that will be obsolete next yeir, not to mentiin the $iO I haue to pay to-fite my taxes electronic,ally over the Internet? I’d rather pqt company a small irrirarrin,p .. a fee to use c o ntinu ally up d at e d t a x p r ep ar ati o n s oJtw;r;. , l’-ot long after his shopping experience, chicago, an entrepreneur at heart, decided to create such a :ornpany’ Less than one year later, Your1040Return.. o-‘b”grn operations in time for the next tax s aas on. OVERVIEW OF YO URT O4ORETURN. C OM OPERATIONS our1O40Retum’com is an entirely Internet-based tax preparation website for preparing and filing federal . nd state individual income tax returns. Most of its revenues come from indlviduals seeking to :’n-oid preparation of a paper-based tax return and who are willing to “rentli ;. ;;;, to a popular tax ::eparation software P,… lg” through YourlO40Return. com. othJr revenues come from individuals -“‘-anting to electronically file an alrJady prepared paper-based return. —-‘casewasPreparedbyMarkS’Beasley,Ph’D andFrankA. Buckless,Ph. D. ofNorthCarolinastateuniversityandStevenM. Glover,ph. D. and names represented are fictitious; any similarity to existing companies or persons is purelr. coincidental. J::glasF Prawitt’Ph’D ofBrighamYounguniversity,asabasisforclassdiscussion. rburrO-roReturn. comisafictitiouscompany. ::-j (opyright @ 2012 by Peorson [ducolion, lnc. , Upper Soddle River, NJ 0245g

Allcharacters l3 Seclion 2: Underslonding the (lienl’s Business ond Assessing Risk For a minimal fee, Yourl040Return. com pror-ides an interface for individuals to electronically file their returns with the appropriate federal and state regulatory bodies. Typical users come from middle class households wanting to simpiify yearly tax return preparation tasks. These users are generally searching for an accurate, easy, and economical alternative to other professional tax services. Individuals can access these services through Yourl04OReturn. com’s website.

To log on, customers must first register for a user name and password. Once the customer indicates that he or she wants to register, the website asks the customer to provide information including full name, mailing address, Social Security number, birth date, phone number, email address, and a major credit card number. This registers the individual on YourlO4OReturn. com’s website and initiates the credit card approval process. Once the credit card number is validated, customers select from one of three service packages: Silver, Gold, or Platinum.

The Silver package provides basic tax services, including electronic access to tax forms, schedules, and publications. Customers can enter tax return information directly onto the forms and schedules, and Yourl040Return. com will file the completed materials electronically, eliminating the need for mailing paper copies to tax agencies. The Silver package also provides a service that allows customers to apply electronically for a return extension. The Silver package, however, does not give subscribers access to the tax preparation software package.

In addition to the benefits of the Silver package, the Gold package grants customers online access to a commercially developed and continually maintained tax preparation software package. The package helps customers easily prepare tax returns ranging from the simple 1040-EZ to a complex return, such as one filed by a self-employed businessperson with nationwide real estate investments and actively traded securities. Both the Gold and the Silver packages provide access to services for one tax season only. Premium services are offered through the Platinum package, which allows customers to sign up for Yourl040Return. om membership ranging between two to five years. Through this multipleyear package service, customers receive year-round access to the tax preparation software provided to Gold customers, which allows them to continually track changes to their tax basis in securities and periodically evaluate tax implications of possible transactions. Furthermore, Platinum customers receive personalized attention and real-time tax support from qualified income tax specialists, who work on a contract basis, via an online instant messenger program. Yourl040Return. om experiences high seasonal demand for its services from early February to the filing deadline ofApril 15. Because Yourl040Return. com allows customers to apply for filing extensions online, the company also experiences strong demand for its services just before extension deadlines. If the IRS finds a problem with a return submitted through the company’s Web service, YourlO4OReturn. com does not correct the problem, but informs the customer of the problem so that the individual can correct the error and refile the return free of charge. The estimated frequency and cost ofexpected refilings are factored into the price ofthe service packages.

YourlO4OReturn. com does not handle tax refund or tax liability payments. If a customer is eligible for a refund, the IRS remits the payment directly to the taxpayer. If a customer is required to pay income taxes, the IRS simply charges the appropriate amount to the customer’s credit card number that is electronically submitted with the income tax return or the customer can provide bank draft information to electronically transfer funds from the customer’s bank account to the iRS. YourlO4OReturn. com assumes no liability for inappropriately filed returns or the tax positions of its customers.

All liability resides with the customer u’ho prepared the return. Yourl040Return. com recognizes revenue differently’ for each product. The revenue for the first year of Platinum service is recognized immediatell after the customer selects this option. The company assumes customers will use the package for an entire vear rvithout cancellation even though Yourl040Return. com has a fairly simple cancellation policr-. All revenues from subsequent years of Platinumservicearerecognizedinlikemanner. FortheGoldpackage,aportionoftherevenueis l4 (ose 2. 1 : Yourl 040Return. com ecognized when the customer accesses the tax preparation software package via the Internet for the first time. The company recognizes the remaining i”rr”no” when the custoirer submits the return to the IRS. The company does not recognir” t. rr”r,r” for the Silver package until the customer submits a return to the IRS. In addition to fees generated for its individual tax preparation services, yourlO40Return. com engages-in ad swapping with a number of major Internet companies. For example, Amazon. com swapped a significant amount of advertising with Yourl04oRetuin. com fromJanuary to April of this year. Amazon. om placed a banner ad on its website reminding visitors to visil Yourlg46Return. com for all of their tax needs. In exchange for this ad, YourlO40Re-turn. com placed a similar ad directing its visitors to shop online at Amazon. com. SECURING CUSTOMER INFORMATION Protecting unauthorized access to customer information is a high priority at yourlO4oReturn. com. The company houses its web server and microcomputers, whiJh run criiical applications, in a keycoded room accessible only to the programmet und Chi. ago, the CEO. The’web server is also pro-tected by a proxy server firewall to prevent outside ha&ers from attacking the database.

In addition to these security measures, all customers are required to create alphaiumeric passwords that are at least six characters in length, to prevent unauthirized access to cristomer accounts. YourlO4OReturn. com does not maintain a “bricks and mortar” storefront or interact face-toface with customers. The company engages in all transactions electronically and stores all purchase orders, sales invoices, advertising contracts in electronic form. The company backs’ up data -and daily, but the backup data are not readily available at all times.

After six monttis of ,oft storige on the company’s server network, tackup files are removed from the network to free up the hfilted storage capacity. The files are downloaded to DVDs for storage and future retrieval. ^A significant upgrade of YourlO4OReturn. com’s limited information system-is in the planning stages. help ensure , _T! ” comPany has hired several tax experts who monitor tax. od” . h”. r”g”, “”nd the underlying- tax preparation software is accurate. In addition, Yourl040Refurn. com engages a national CPA firm to review the accuracy of the tax preparation software.

The company contracts with a software desigrr firm-that develops the ac-tual tax ireparation online tools. Two of Chicagot nephews – Nathan Randall and Matthew Gilbert orr”ti. ” the operations of the information technology platforms that host the tax preparation software and Yourl040Return. comt internal applications, including the companyt financial accounting system software. Both of them have some prior experience in IT operations; however, each has less than 5 years of relevant work experience following their com_pletion of undergraduate degrees in computer science. Emily parkin serves as the companyt CFO, responsible for YourlO4OReturn. o*’r^ and financial reporting “.. orrnting activities. She joined Yourl040Return. com after three years of audit experlence with on” ofih” nifi Four international accounting firms. Given the growth in the number of individuals using YourlO40Return. com’s services, g_evera] marketing executives have recently begun to offer Chicag”o large sums of money to purchase Yourl040Return. comt customer lists. Althotgh-Chicago has yeito foimally draft an offi. i”j privacy statement for his comPan, he feels responsible for the privacy of his customers’ informatiori and is unsure if he should sell the lists.

The cash offers have been temptingr however, given that the money would allow him to, move ahead with planned information syste-m ,rpgr”d”i In the meantime, Chicago arranged a line of credit with a local bank to fund the upgrad”rl a. part of that financing transaction, the bank has required an audit of Yourl04OReturn. coi’s annual financial statements. l5 Seclion 2: Underslonding lhe (lienl’s Business ond Assessing Risk REOU I RED [1] You are an audit senior with Gooch & Brown CPA, LLR a local accounting firm specializing in audits of information systems and financial statements. Yourl040Return. om engaged your firm to perform its financial statement audit. You have been asked by the partner to perform the following tasks: lal tbI Describe to Steven Chicago why it is important for your firm to have an understanding of Yourl040Return. com’s business model. Identify YourlO40Return. com’s major business risks and describe how those risks may increase the likelihood of material misstatements in YourlO40Return. comt financial statements. do to improve its internal control. [c] Indicate what YourlO40Return. com should tdl Explain what audit implications arise if you decide that the controls over electronic records at YourlO4OReturn. om are inadequate to ensure that records have not been altered. leI Authoritative literature provides guidelines for proper revenue recognition policies for transactions such as those discussed in the case. Analyze YourlO4OReturn. com’s revenue recognition policies for the three package services. Provide appropriate citations to authoritative literature. tfI Explain how you can obtain evidence that ad swapping actually occurred between the YourlO4OReturn. com and Amazon. com. Describe accounting issues that arise when Internet-based companies swap ad services and identify relevant authoritative literature. sI Address a memo to Steven Chicago detailing the appropriate contents for a customer privacy policy. (You may want to visit other company websites, such as wwwcpamoneywatch. com, toseeanexampleofaprivacypolicy). WhyisitimportantforYourl04OReturn. comtohave an explicit privacy policy? How might the lack of a policy affect Yourl040Return. comt financial statements in the future? 121 Auditing standards provide guidance for auditors when evaluating electronic evidence. What are the implications for an auditor when a client’s accounting system produces and stores transaction evidence only electronically? 3l Yourl040Return. com’s main business strategy involves the delivery of services via the Internet. What are some threats to the viability of YourlO4OReturn. com’s business strategy? 141 When customers register for the Platinum package, they have online access to tax professionals who are paid on a contract basis. If you were in Steven Chicago’s shoes, how would you compensate those professionals for their services? What controls could YourlO4OReturn. com implement to ensure that the company does not oyerpay for those professional services? 16

Cite this Advanced Auditing

Advanced Auditing. (2016, Sep 27). Retrieved from https://graduateway.com/advanced-auditing/

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