Question

1.Netflix’s company introduction about main business, company structure 2.Netflix’s audit planning, such as setting up of materiality level, assessment of inherent risk, control risk and detection risk

Answer 1

1.Netflix’s company introduction about main business, company structure:

Business

Netflix, Inc. is the world’s leading internet entertainment service with over 139 million paid memberships in over 190 countries enjoying TV series, documentaries and feature films across a wide variety of genres and languages. Members can watch as much as they want, anytime, anywhere, on any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Additionally, over two million members in the United States subscribe to the legacy DVD-by-mail service.

They are a pioneer in the internet delivery of TV series and movies, launching our streaming service in 2007. Since this launch, they have developed an ecosystem for internet-connected screens and have added increasing amounts of content that enable consumers to enjoy TV series and movies directly on their internet-connected screens. As a result of these efforts, they have experienced growing consumer acceptance of, and interest in, the delivery of TV series and movies directly over the internet.

Company structure

The Company has three reportable segments: Domestic streaming, International streaming and Domestic DVD. The Domestic streaming segment derives revenues from monthly membership fees for services related to streaming content to members in the United States. The International streaming segment derives revenues from monthly membership fees for services related to streaming content to members outside of the United States. The Domestic DVD segment derives revenues from monthly membership fees for services consisting solely of DVD-by-mail.

Netflix’s audit planning, such as setting up of materiality level, assessment of inherent risk, control risk and detection risk:

Broad Audit Plan

Audit Objectives for Content

Existence – do all recorded acquisitions exist?

Completeness – are all content the acquisitions & liabilities recorded?

Accuracy – are the acquisitions and liabilities recorded at the correct amount?

Classification – are all content related expenses capitalized?

Internal Controls

Some of Netflix internal controls require separation of duties of negotiating contracts and approving invoices for the contracts. Netflix is a web based company so it is important to have internal controls in place to securely transmit customer payment and billing information over the internet as well as internal controls that restrict access of unauthorized employees to customer credit card information.

Audit risk and materiality

The audit risk model format is Audit Risk= Inherent Risk*Control Risk* Detection Risk.

Inherent risk is the possibility that material errors could enter the accounting system.

Control risk is the probability that Netflix's internal control will fail to recognize material misstatements should the current content library inventory be valued incorrectly.

The detection risk is probability that the audit team's procedures will fail to detect material misstatements about the Netflix current content library.