Specifically only need help with f-h.

1. Refer to the Excel “Dixie” data posted on eLearning: (18)
   1. Develop an estimated regression equation with the Revenue serving as the dependent variable and Paper Ads and TV Ads serving as explanatory variables. Write out this estimated equation (use the estimate values!) to explain Revenue.
   2. Show the residual plots where residuals are plotted against each explanatory variable separately. Comment on whether you can proceed with statistical inference based on what you see in the plots. (Hint: Don’t go looking for trouble!)
   3. Provide an interpretation for the three coefficient estimates that you calculated in part “a”. (don’t forget the intercept).
   4. What would your regression model predict the revenue amount to be in a market with 0 TV Ads and 0 Paper Ads? Is this a meaningful prediction? Answer, in a sentence, why or why not.
   5. Provide a 90% confidence interval for your estimate of the Paper Ads Coefficient. Interpret exactly what this 90% confidence interval means.
   6. What statistic and p-value would you use to test the specific null hypothesis that:

Ho: b _{Paper Ads} = b _{TV Ads} = 0

      Do you reject or fail to reject this null hypothesis?

1. g. If I asked you to consider a “backward selection” approach which only included predictors to the model that were significant at a 99% level, then would your answer to part “a” change? If so, what would it change to?
2. h. What percentage of the variation in Revenue can be explained by the model you developed on part “a”? How much more variation does this model explain than a model which uses only TV Ads to help predict Revenue?

Organizations use budgets to reach their financial goals. A planning budget is a detailed financial plan that shows future income and expenses. For example, all of us sometimes create household budgets that plan projected income and expenses for food, clothing, housing, etc. At the end of the budgeting period, we compare what we earned and our expenses to the planning budget to make sure we followed the plan. For example, if we buy a boat and didn’t budget for that boat, what might happen? Organizations use budgets in a similar way.

We also create flexible budgets to help guide actual operations. For example, an organization’s actual expenses will rarely equal its budgeted expenses as estimated. Activities, such as sales, are rarely the same as budgeted. Many actual expenses and revenues will naturally differ from what was budgeted. A flexible budget is an estimate of what revenues and costs should have been, given the actual level of activity for the period. A flexible budget might help us to justify buying that boat!

Variance analysis evaluates and improves performance. A varianceis the difference between the actual amount and the amount budgeted in a certain time period. In other words, the amounts are different. Revenue variance is the difference between actual revenue and budgeted revenue. If the actual revenue is higher than budgeted revenue, the variance is labeled favorable. If actual revenue is less than budgeted, the variance is labeled unfavorable. Spending variances also occur. If the actual spending exceeds budgeted spending, the variance is unfavorable. If the actual spending is less than budgeted spending, the variance is favorable. As you can see, earning more than budgeted is good, but we should try to avoid spending more than what we budget. Think about the boat!

• Describe the budgeting process at your place of work. If you do not work or if this information is not available, you may describe the budgeting process you use in your personal life.
• Explain how using a flexible budget and variance analysis can help make the process you described above more effective.

B. MONOPOLY

A corporation buys up all the individual one-person businesses and operates them as one corporation. The individuals work for the corporation as employees. There is now one corporation (Washington Physical Therapy Company) providing this service to everyone in the metropolitan area.   Technology and the actual services do not change.

For the Corporation:

Fixed cost per day: $4,000 (this is 100 times $40)

Variable cost per day for the Company (travel, supplies, etc.) based on existing operations of all 100 employees:

$40 for the first 500 sessions in a day

                        $45 for the 600^th   to 699^th session in a day

                        $50 for the 700^th to 799^th session in a day

                        $60 for the 800^th to 899^th session in a day.

                        $70 for the 900 to 999^th session in a day.

1. Complete the cost schedule for the Company

2. On the Monopoly Graph at the end of this assignment, Graph the Marginal Cost (which is like a supply curve) and the Average Total Cost for the Company.

3. Graph the Demand Curve (Demand has not changed).

4. Determine the Total Revenue and the Marginal Revenue based on the Demand Schedule:

4. Graph the Marginal Revenue (at the quantity midpoint). E.g. graph $70 at a quantity of 150

5. Determine the profit maximizing level of output

6. What price will the company charge?

7. What will be the profit per unit (one physical therapy session) and the total company profit per day?

8. How does the price and quantity compare with the price and quantity before the industry became a monopoly?

9. Can we expect these profits to persist over time? Why or why not?

10. What are the implications for society?

3.

value:
10.00 points

Required information

1. A publisher faces the following demand schedule for the next novel from one of its popular authors:

The author is paid $2 million to write the book,

Price 100 90 80 70 60 50 40 30 20 10 0

QD(1000s) 0 100 200 300 400 500 600 700 800 900 1000

and the marginal cost of publishing the book is a constant $10 per book.

a. Compute the total revenue, total cost, and profit at each quantity. What quantity would a profit-maximizing publisher choose? What price would it charge?

The total revenue at each level of production is given by the demand schedule above, using T R = P Q. The total cost is the constant fixed costs of $2 million plus the variable cost of ($10)Q. For convenience, the units of revenue, cost, and profit are given in millions. In the table below, we combine these equations with the calculation of marginal revenue. It turns out that the profit-maximizing level of output is 500,000 units, corresponding to a price of $50.

b. Compute marginal revenue. (Recall that MR = ∆T R/∆Q). How does marginal revenue compare to the price? Explain.

QD(1000s) 0 100 200 300 400 500 600 700 800 900 1000

TR ($ millions) 0 9 16 21 24 25 24 21 16 9 0

TC ($ millions) 2 3 4 5 6 7 8 9 10 11 12

Profit ($ millions) -2 6 12 16 18 18 16 12 6 -2 -12

Marginal Revenue ($) 90 70 50 30 10 -10 -30 -50 -70 -90

Marginal Cost ($) 10 10 10 10 10 10 10 10 10 10

c. Graph the marginal-revenue, marginal-cost, and demand curves. At what quantity do the marginal-revenue and marginal-cost curves cross? what does this signify?

The relevant information is given in the table above. In the table, we can see that marginal cost and marginal revenue are equal at Q = 50. That is MR(50) = MC(50) = 10. Not coincidentally, this is also the profit-maximizing level of output that we found earlier.

d. In your graph, shade in the deadweight loss. Explain in words what this means.

The social surplus maximizing level of output would set the price equal to marginal cost. In that case, P = 10 and then turning to the demand schedule this corresponds to output of Q(10) = 900, 000. The deadweight loss is the surplus that is lost because we do not makes the units from 500,000 to 900,000. In this case, the deadweight loss if represented with a triangle with base 900, 000− 500, 000 = 400, 000 and the height of 50 − 10 = 40. The area of this triangle is 0.5(400000)(40) = 2 million

e. If the author were paid $3 million instead of $2 million to write the book, how would this affect the publisher’s decision regarding what price to charge? Explain.

Recall that there are two questions for the firm — how much to produce, and how whether to stay in business. The first question — how much to produce — is based on comparing marginal costs and benefits (e.g. should I go from 3 to 4? From 4 to 5, and etc.). By definition, marginal costs are variable costs i.e. they are related to how much output is chosen. The increase in the fee to the author is a type of fixed cost. In the current exercise, the fee paid to the author has no affect on the market demand schedule or on the production costs of the book. Thus, there is no affect of the author’s fee on any of the MARGINAL factors in our exercise. The publisher’s profit will go down, but otherwise there is no effect on what choices it will want to make.

1) Write a C++ program.You will code a movie search/filter console GUI with various operations.
The objectives you have to accomplish are listed below;

* Create a Movie Class with private id(int),name(string),point(float),year(int) variables
* Generate Getter for all variables and Setter for only point variable.
* Read the "movie.txt" file and store each movie in Movie array.
* Write necessary functionalities for the GUI options given in below;

Welcome to the Movie Market. Please select an option.
a - Get movie details by ID
b - List movies between the years entered
c - Change the point of a movie
d- Get movie details starting with the entered letter
e - Exit

* Write a "printMovie" function to print movie details
* Use "autoIncrement" logic to set ID values for Movie

Bonus:
Add a "voting system" functionality for movies.
* A movie can be voted up to 10 times with integer values between 1 and 10
* The "point" value of the movie should be equal to the average of votes.
* Be careful when you calculate the average
(If a movie is voted for the first time, the average is (original point value + new vote value) / 2 )

-MOVİES-
9.2;The Shawshank Redemption (1994)
9.1;The Godfather (1972)
9.0;The Godfather: Part II (1974)
8.9;Il buono, il brutto, il cattivo. (1966)
8.9;Pulp Fiction (1994)
8.9;Inception (2010)
8.9;Schindler's List (1993)
8.9;12 Angry Men (1957)
8.8;One Flew Over the Cuckoo's Nest (1975)
8.8;The Dark Knight (2008)
8.8;Star Wars: Episode V - The Empire Strikes Back (1980)
8.8;The Lord of the Rings: The Return of the King (2003)
8.8;Shichinin no samurai (1954)
8.7;Star Wars (1977)
8.7;Goodfellas (1990)
8.7;Casablanca (1942)
8.7;Fight Club (1999)
8.7;Cidade de Deus (2002)
8.7;The Lord of the Rings: The Fellowship of the Ring (2001)
8.7;Rear Window (1954)
8.7;C'era una volta il West (1968)
8.7;Raiders of the Lost Ark (1981)
8.7;Toy Story 3 (2010)
8.7;Psycho (1960)
8.7;The Usual Suspects (1995)
8.7;The Matrix (1999)
8.6;The Silence of the Lambs (1991)
8.6;Se7en (1995)
8.6;Memento (2000)
8.6;It's a Wonderful Life (1946)
8.6;The Lord of the Rings: The Two Towers (2002)
8.6;Sunset Blvd. (1950)
8.6;Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb (1964)
8.6;Forrest Gump (1994)
8.6;Léon (1994)
8.6;Citizen Kane (1941)
8.6;Apocalypse Now (1979)
8.6;North by Northwest (1959)
8.6;American Beauty (1999)
8.5;American History X (1998)
8.5;Taxi Driver (1976)
8.5;Terminator 2: Judgment Day (1991)
8.5;Saving Private Ryan (1998)
8.5;Vertigo (1958)
8.5;Le fabuleux destin d'Amélie Poulain (2001)
8.5;Alien (1979)
8.5;WALL·E (2008)
8.5;Lawrence of Arabia (1962)
8.5;The Shining (1980)
8.5;Sen to Chihiro no kamikakushi (2001)
8.5;Paths of Glory (1957)
8.5;A Clockwork Orange (1971)
8.5;Double Indemnity (1944)
8.5;To Kill a Mockingbird (1962)
8.5;The Pianist (2002)
8.4;Das Leben der Anderen (2006)
8.4;The Departed (2006)
8.4;M (1931)
8.4;City Lights (1931)
8.4;Aliens (1986)
8.4;Eternal Sunshine of the Spotless Mind (2004)
8.4;Requiem for a Dream (2000)
8.4;Das Boot (1981)
8.4;The Third Man (1949)
8.4;L.A. Confidential (1997)
8.4;Reservoir Dogs (1992)
8.4;Chinatown (1974)
8.4;The Treasure of the Sierra Madre (1948)
8.4;Modern Times (1936)
8.4;Monty Python and the Holy Grail (1975)
8.4;La vita è bella (1997)
8.4;Back to the Future (1985)
8.4;The Prestige (2006)
8.4;El laberinto del fauno (2006)
8.4;Raging Bull (1980)
8.3;Nuovo Cinema Paradiso (1988)
8.3;Singin' in the Rain (1952)
8.3;Some Like It Hot (1959)
8.3;The Bridge on the River Kwai (1957)
8.3;Rashômon (1950)
8.3;All About Eve (1950)
8.3;Amadeus (1984)
8.3;Once Upon a Time in America (1984)
8.3;The Green Mile (1999)
8.3;Full Metal Jacket (1987)
8.3;Inglourious Basterds (2009)
8.3;2001: A Space Odyssey (1968)
8.3;The Great Dictator (1940)
8.3;Braveheart (1995)
8.3;Ladri di biciclette (1948)
8.3;The Apartment (1960)
8.3;Up (2009)
8.3;Der Untergang (2004)
8.3;Gran Torino (2008)
8.3;Metropolis (1927)
8.3;The Sting (1973)
8.3;Gladiator (2000)
8.3;The Maltese Falcon (1941)
8.3;Unforgiven (1992)
8.3;Sin City (2005)
8.3;The Elephant Man (1980)
8.3;Mr. Smith Goes to Washington (1939)
8.3;Oldeuboi (2003)
8.3;On the Waterfront (1954)
8.3;Indiana Jones and the Last Crusade (1989)
8.3;Star Wars: Episode VI - Return of the Jedi (1983)
8.3;Rebecca (1940)
8.3;The Great Escape (1963)
8.3;Die Hard (1988)
8.3;Batman Begins (2005)
8.3;Mononoke-hime (1997)
8.2;Jaws (1975)
8.2;Hotel Rwanda (2004)
8.2;Slumdog Millionaire (2008)
8.2;Det sjunde inseglet (1957)
8.2;Blade Runner (1982)
8.2;Fargo (1996)
8.2;No Country for Old Men (2007)
8.2;Heat (1995)
8.2;The General (1926)
8.2;The Wizard of Oz (1939)
8.2;Touch of Evil (1958)
8.2;Per qualche dollaro in più (1965)
8.2;Ran (1985)
8.2;Yôjinbô (1961)
8.2;District 9 (2009)
8.2;The Sixth Sense (1999)
8.2;Snatch. (2000)
8.2;Donnie Darko (2001)
8.2;Annie Hall (1977)
8.2;Witness for the Prosecution (1957)
8.2;Smultronstället (1957)
8.2;The Deer Hunter (1978)
8.2;Avatar (2009)
8.2;The Social Network (2010)
8.2;Cool Hand Luke (1967)
8.2;Strangers on a Train (1951)
8.2;High Noon (1952)
8.2;The Big Lebowski (1998)
8.2;Hotaru no haka (1988)
8.2;Kill Bill: Vol. 1 (2003)
8.2;It Happened One Night (1934)
8.2;Platoon (1986)
8.2;The Lion King (1994)
8.2;Into the Wild (2007)
8.2;There Will Be Blood (2007)
8.1;Notorious (1946)
8.1;Million Dollar Baby (2004)
8.1;Toy Story (1995)
8.1;Butch Cassidy and the Sundance Kid (1969)
8.1;Gone with the Wind (1939)
8.1;Sunrise: A Song of Two Humans (1927)
8.1;The Wrestler (2008)
8.1;The Manchurian Candidate (1962)
8.1;Trainspotting (1996)
8.1;Ben-Hur (1959)
8.1;Scarface (1983)
8.1;The Grapes of Wrath (1940)
8.1;The Graduate (1967)
8.1;The Big Sleep (1946)
8.1;Groundhog Day (1993)
8.1;Life of Brian (1979)
8.1;The Gold Rush (1925)
8.1;The Bourne Ultimatum (2007)
8.1;Amores perros (2000)
8.1;Finding Nemo (2003)
8.1;The Terminator (1984)
8.1;Stand by Me (1986)
8.1;How to Train Your Dragon (2010)
8.1;The Best Years of Our Lives (1946)
8.1;Lock, Stock and Two Smoking Barrels (1998)
8.1;The Thing (1982)
8.1;The Kid (1921)
8.1;V for Vendetta (2006)
8.1;Casino (1995)
8.1;Twelve Monkeys (1995)
8.1;Dog Day Afternoon (1975)
8.1;Ratatouille (2007)
8.1;El secreto de sus ojos (2009)
8.1;Gandhi (1982)
8.1;Star Trek (2009)
8.1;Ikiru (1952)
8.1;Le salaire de la peur (1953)
8.1;Les diaboliques (1955)
8.1;8½ (1963)
8.1;The Princess Bride (1987)
8.1;The Night of the Hunter (1955)
8.0;Judgment at Nuremberg (1961)
8.0;The Incredibles (2004)
8.0;Tonari no Totoro (1988)
8.0;The Hustler (1961)
8.0;Good Will Hunting (1997)
8.0;The Killing (1956)
8.0;In Bruges (2008)
8.0;The Wild Bunch (1969)
8.0;Network (1976)
8.0;Le scaphandre et le papillon (2007)
8.0;A Streetcar Named Desire (1951)
8.0;Les quatre cents coups (1959)
8.0;La strada (1954)
8.0;The Exorcist (1973)
8.0;Children of Men (2006)
8.0;Stalag 17 (1953)
8.0;Persona (1966)
8.0;Who's Afraid of Virginia Woolf? (1966)
8.0;Ed Wood (1994)
8.0;Dial M for Murder (1954)
8.0;La battaglia di Algeri (1966)
8.0;Låt den rätte komma in (2008)
8.0;All Quiet on the Western Front (1930)
8.0;Big Fish (2003)
8.0;Magnolia (1999)
8.0;Rocky (1976)
8.0;La passion de Jeanne d'Arc (1928)
8.0;Kind Hearts and Coronets (1949)
8.0;Fanny och Alexander (1982)
8.0;Mystic River (2003)
8.0;Manhattan (1979)
8.0;Barry Lyndon (1975)
8.0;Kill Bill: Vol. 2 (2004)
8.0;Mary and Max (2009)
8.0;Patton (1970)
8.0;Rosemary's Baby (1968)
8.0;Duck Soup (1933)
8.0;Festen (1998)
8.0;Kick-Ass (2010)
8.0;Fa yeung nin wa (2000)
8.0;Letters from Iwo Jima (2006)
8.0;Roman Holiday (1953)
8.0;Pirates of the Caribbean: The Curse of the Black Pearl (2003)
8.0;Mou gaan dou (2002)
8.0;The Truman Show (1998)
8.0;Crash (2004/I)
8.0;Hauru no ugoku shiro (2004)
8.0;His Girl Friday (1940)
8.0;Arsenic and Old Lace (1944)
8.0;Harvey (1950)
8.0;Le notti di Cabiria (1957)
8.0;Trois couleurs: Rouge (1994)
8.0;The Philadelphia Story (1940)
8.0;A Christmas Story (1983)
8.0;Sleuth (1972)
8.0;King Kong (1933)
8.0;Bom yeoreum gaeul gyeoul geurigo bom (2003)
8.0;Rope (1948)
8.0;Monsters, Inc. (2001)
8.0;Tenkû no shiro Rapyuta (1986)
8.0;Yeopgijeogin geunyeo (2001)
8.0;Mulholland Dr. (2001)
8.0;The Man Who Shot Liberty Valance (1962)

Risk Assessment- Exercise #2 Social Konnections Inc. (SKI or the “Company”) is a global Internet company that runs Social Konnections, a large social media networking Web site. SKI has experienced steep growth since its launch in 2005, and the Company went public in 2007. SKI currently has over 500 million active users who visit the site to connect with others, express themselves, and play games. Last year, substantially all of SKI’s revenue came from advertisers who market their products and services to SKI’s active users through advertisements placed on the Web site or its various mobile platforms. The founder of the company serves as the CEO and is also on the chairman of the board of directors. The CFO is also one of the co-founders of the company. Both have been serving in these roles since 2005. In Q1 of the current fiscal year, SKI acquired Corporate Collaborations (CC), an entity that manages private and public social media networks for corporations. CC’s customers are primarily national and global companies whose employees connect over its platform. In addition to hosting private social media networks for corporations, CC provides services to develop the networks it manages. CC’s revenues are earned through the performance of multiyear revenue contracts with its customers. In the current year, CC is expected to produce approximately 20 percent of SKI’s consolidated revenue. SKI’s investors are focused on the growth prospects of the Company’s legacy open social media platform operations and its new corporate revenue unit. The Company’s MD&A disclosures include (1) various user and revenue metrics to help financial statement users assess its traditional operations and (2) backlog information to help users assess CC’s operations. Advertising Revenue SKI creates advertising space on its Web site and mobile applications and sells the space to advertisers either directly, or through advertising agencies. According to Mr. Cook, the amount an advertiser pays is dependent on the number of views the ad receives or the number of user clicks (depending on the type of advertisement defined in the underlying contract) and the revenue is recorded in the period in which the views or clicks are made. Ms. Drew has learned that simple advertising can be purchased directly from SKI through SKI’s advertising Web site at standard rates, with the advertisements and terms input directly into the Company’s ad delivery platform. However, most advertising revenue is generated directly through the advertising sales team, which has the ability to help advertisers develop more sophisticated advertising campaigns. Management has established minimum pricing and volume thresholds for these advertisements; however, the sales staff is given significant latitude in securing contracts with customers. Extra commissions are paid to sales individuals who sign longer-term contracts that meet minimum revenue targets. Once a contract is signed, the ad development department creates the ad content and obtains the customer’s approval. The approved ad and the contract are electronically sent to the ad scheduling department, and the advertisement is uploaded into the Company’s ad delivery platform. The ad delivery platform is a robust system and is designed to capture all the nuances associated with the contract. For example, an advertiser may wish to have its ads displayed only to users whose IP addresses are from a specific geographic location, or the contract may be structured to provide the advertiser with variable pricing or incentives (such as a set of free advertisements) once a certain level has been paid for. In summary, the delivery platform captures all the relevant pricing information associated with the contract to allow for real-time revenue recognition according to the terms of the contract. After the contract is entered into the system, a summary of the contract setup is provided to the sales manager that worked with the customer. The sales manager then reviews the contract setup for accuracy. The Company’s ad delivery platform automatically tracks the advertising activity each day and reports the activity to its customers, who are then billed weekly for the aggregate ad activity. Ms. Drew’s Concern Ms. Drew is concerned about several things she has learned regarding the appropriateness of management’s revenue recognition policies. Financial Statements Balance Sheet: Account Prior year (1 year ago)** Two years ago Assets* $100m $80m Liabilities $40m $30m Equity $60m $50m Revenue $30m $18 Expenses $22m $19 Net Income $8m ($1m) loss *Assets consist primarily of cash, land/building, patents, goodwill, and other assets. ** As you plan your audit this is the latest financial information available. Controls The Company’s has various controls in place. The CFO performs a checklist on a monthly basis to review the performance of the company. The CFO reports to the CEO every quarter. The CEO reports to the chairman of the board of directors once a year before the financial statements are prepared and released to the public. The company has over 10 thousand employees around the world, of which 4 thousand work at the headquarters. All employees receive the company’s code of ethics that was prepared in 2005 when the company was founded. The CEO was in recent trouble when he posted controversial messages on the social platform that offended people of a certain group. The company has One hundred different controls across the company and across the world related to operations of the company and revenue. The company uses 10 different IT systems as the company is growing quickly it has had to adopt and adds new systems whenever they are needed. The leaders of one of the main divisions recently left to go work for Facebook, and has not been replaced for the last 4 months. Controls have changed a lot since last year because the company is so dynamic and the environment is so fast paced. Employees are always trying to keep up with the new systems and new controls. Audit Because of SKI’s continued growth, the audit committee has requested that the Company choose a new audit firm with experience in auditing public technology companies. Kristine Drew, a senior auditor, is the in-charge accountant on the proposal and planning of the SKI audit. In addition to her supervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue and determining the risk assessment for the audit. Ms. Drew has read the Company’s disclosed accounting policies and is interviewing the revenue controller, Bill Cook, and various sales personnel to develop in-depth process flow documentation that will serve as the basis for the team’s risk assessment. Required: 1. What would you set Audit risk, Control Risk, Inherent Risk, and Detection risk? (Very low, low, medium, or high) 2. Are there are significant or fraud risks that you have identified? (If any why are they fraud or significant risks?) 3. What other information do you need to plan your audit approach? Where would you get this information from? For each piece of information indicate where you might receive it from and how? (ex: who else is on the board of directors- obtained through inquiry.) 4. What benchmark would you use to calculate materiality? Why? (ex: revenue, EBITDA, Equity, Assets, etc) 5. Using the benchmark and guidance in the book calculate “overall materiality” for your audit? (ex: 8% of Equity ($60m)= $2.4m). 6. For Revenue what assertions are the most important for you to test? 7. For Revenue what are your concerns with each of those assertions based on the information above? 8. What are the things about testing revenue that you are concerned about (specifically what parts of the company’s process if any concern you)? (Example: An employee could steal money from the bank account, or revenue could be modified in the accounting software by an employee.) (Focus on the actual real process for the company described above to make this determination.) 9. For your audit approach would you choose to test controls or primarily perform substantive procedures? If so what would be your mix of control testing to substantive testing? (ex: 50% controls, and 50% substantive) 10. Would you accept this audit? If not why not?

Risk Assessment- Exercise #1

Social Konnections Inc. (SKI or the “Company”) is a global Internet company that runs Social Konnections, a large social media networking Web site. SKI has experienced steep growth since its launch in 2005, and the Company went public in 2007. SKI currently has over 500 million active users who visit the site to connect with others, express themselves, and play games.

Last year, substantially all of SKI’s revenue came from advertisers who market their products and services to SKI’s active users through advertisements placed on the Web site or its various mobile platforms.

The founder of the company serves as the CEO and is also on the chairman of the board of directors. The CFO is also one of the co-founders of the company. Both have been serving in these roles since 2005.

In Q1 of the current fiscal year, SKI acquired Corporate Collaborations (CC), an entity that manages private and public social media networks for corporations. CC’s customers are primarily national and global companies whose employees connect over its platform. In addition to hosting private social media networks for corporations, CC provides services to develop the networks it manages. CC’s revenues are earned through the performance of multiyear revenue contracts with its customers. In the current year, CC is expected to produce approximately 20 percent of SKI’s consolidated revenue.

SKI’s investors are focused on the growth prospects of the Company’s legacy open social media platform operations and its new corporate revenue unit. The Company’s MD&A disclosures include (1) various user and revenue metrics to help financial statement users assess its traditional operations and (2) backlog information to help users assess CC’s operations.

Advertising Revenue

SKI creates advertising space on its Web site and mobile applications and sells the space to advertisers either directly, or through advertising agencies. According to Mr. Cook, the

amount an advertiser pays is dependent on the number of views the ad receives or the number of user clicks (depending on the type of advertisement defined in the underlying contract) and the revenue is recorded in the period in which the views or clicks are made.

Ms. Drew has learned that simple advertising can be purchased directly from SKI through SKI’s advertising Web site at standard rates, with the advertisements and terms input directly into the Company’s ad delivery platform. However, most advertising revenue is generated directly through the advertising sales team, which has the ability to help advertisers develop more sophisticated advertising campaigns. Management has established minimum pricing and volume thresholds for these advertisements; however, the sales staff is given significant latitude in securing contracts with customers. Extra commissions are paid to sales individuals who sign longer-term contracts that meet minimum revenue targets.

Once a contract is signed, the ad development department creates the ad content and obtains the customer’s approval. The approved ad and the contract are electronically sent to the ad scheduling department, and the advertisement is uploaded into the Company’s ad delivery platform. The ad delivery platform is a robust system and is designed to capture all the nuances associated with the contract. For example, an advertiser may wish to have its ads displayed only to users whose IP addresses are from a specific geographic location, or the contract may be structured to provide the advertiser with variable pricing or incentives (such as a set of free advertisements) once a certain level has been paid for. In summary, the delivery platform captures all the relevant pricing information associated with the contract to allow for real-time revenue recognition according to the terms of the contract. After the contract is entered into the system, a summary of the contract setup is provided to the sales manager that worked with the customer. The sales manager then reviews the contract setup for accuracy.

The Company’s ad delivery platform automatically tracks the advertising activity each day and reports the activity to its customers, who are then billed weekly for the aggregate ad activity.

Ms. Drew’s Concern

Ms. Drew is concerned about several things she has learned regarding the appropriateness of management’s revenue recognition policies.

Financial Statements

Balance Sheet:

*Assets consist primarily of cash, land/building, patents, goodwill, and other assets.

** As you plan your audit this is the latest financial information available.

Controls

The Company’s has various controls in place. The CFO performs a checklist on a monthly basis to review the performance of the company. The CFO reports to the CEO every quarter. The CEO reports to the chairman of the board of directors once a year before the financial statements are prepared and released to the public.

The company has over 10 thousand employees around the world, of which 4 thousand work at the headquarters. All employees receive the company’s code of ethics that was prepared in 2005 when the company was founded. The CEO was in recent trouble when he posted controversial messages on the social platform that offended people of a certain group. The company has One hundred different controls across the company and across the world related to operations of the company and revenue.

The company uses 10 different IT systems as the company is growing quickly it has had to adopt and adds new systems whenever they are needed.

The leaders of one of the main divisions recently left to go work for Facebook, and has not been replaced for the last 4 months.

Controls have changed a lot since last year because the company is so dynamic and the environment is so fast paced. Employees are always trying to keep up with the new systems and new controls.

Audit

Because of SKI’s continued growth, the audit committee has requested that the Company choose a new audit firm with experience in auditing public technology companies.

Kristine Drew, a senior auditor, is the in-charge accountant on the proposal and planning of the SKI audit. In addition to her supervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue and determining the risk assessment for the audit.

Ms. Drew has read the Company’s disclosed accounting policies and is interviewing the revenue controller, Bill Cook, and various sales personnel to develop in-depth process flow documentation that will serve as the basis for the team’s risk assessment.

Required:

1. What would you set Audit risk, Control Risk, Inherent Risk, and Detection risk? (Very low, low, medium, or high)
2. Are there are significant or fraud risks that you have identified? (If any why are they fraud or significant risks?)
3. What other information do you need to plan your audit approach? Where would you get this information from? For each piece of information indicate where you might receive it from and how? (ex: who else is on the board of directors- obtained through inquiry.)
4. What benchmark would you use to calculate materiality? Why? (ex: revenue, EBITDA, Equity, Assets, etc)
5. Using the benchmark and guidance in the book calculate “overall materiality” for your audit? (ex: 8% of Equity ($60m)= $2.4m).
6. For Revenue what assertions are the most important for you to test?
7. For Revenue what are your concerns with each of those assertions based on the information above?
8. What are the things about testing revenue that you are concerned about (specifically what parts of the company’s process if any concern you)? (Example: An employee could steal money from the bank account, or revenue could be modified in the accounting software by an employee.) (Focus on the actual real process for the company described above to make this determination.)
9. For your audit approach would you choose to test controls or primarily perform substantive procedures? If so what would be your mix of control testing to substantive testing? (ex: 50% controls, and 50% substantive)
10. Would you accept this audit? If not why not?

Risk Assessment- Exercise #1

Social Konnections Inc. (SKI or the “Company”) is a global Internet company that runs Social Konnections, a large social media networking Web site. SKI has experienced steep growth since its launch in 2005, and the Company went public in 2007. SKI currently has over 500 million active users who visit the site to connect with others, express themselves, and play games.

Last year, substantially all of SKI’s revenue came from advertisers who market their products and services to SKI’s active users through advertisements placed on the Web site or its various mobile platforms.

The founder of the company serves as the CEO and is also on the chairman of the board of directors. The CFO is also one of the co-founders of the company. Both have been serving in these roles since 2005.

In Q1 of the current fiscal year, SKI acquired Corporate Collaborations (CC), an entity that manages private and public social media networks for corporations. CC’s customers are primarily national and global companies whose employees connect over its platform. In addition to hosting private social media networks for corporations, CC provides services to develop the networks it manages. CC’s revenues are earned through the performance of multiyear revenue contracts with its customers. In the current year, CC is expected to produce approximately 20 percent of SKI’s consolidated revenue.

SKI’s investors are focused on the growth prospects of the Company’s legacy open social media platform operations and its new corporate revenue unit. The Company’s MD&A disclosures include (1) various user and revenue metrics to help financial statement users assess its traditional operations and (2) backlog information to help users assess CC’s operations.

Advertising Revenue

SKI creates advertising space on its Web site and mobile applications and sells the space to advertisers either directly, or through advertising agencies. According to Mr. Cook, the

amount an advertiser pays is dependent on the number of views the ad receives or the number of user clicks (depending on the type of advertisement defined in the underlying contract) and the revenue is recorded in the period in which the views or clicks are made.

Ms. Drew has learned that simple advertising can be purchased directly from SKI through SKI’s advertising Web site at standard rates, with the advertisements and terms input directly into the Company’s ad delivery platform. However, most advertising revenue is generated directly through the advertising sales team, which has the ability to help advertisers develop more sophisticated advertising campaigns. Management has established minimum pricing and volume thresholds for these advertisements; however, the sales staff is given significant latitude in securing contracts with customers. Extra commissions are paid to sales individuals who sign longer-term contracts that meet minimum revenue targets.

Once a contract is signed, the ad development department creates the ad content and obtains the customer’s approval. The approved ad and the contract are electronically sent to the ad scheduling department, and the advertisement is uploaded into the Company’s ad delivery platform. The ad delivery platform is a robust system and is designed to capture all the nuances associated with the contract. For example, an advertiser may wish to have its ads displayed only to users whose IP addresses are from a specific geographic location, or the contract may be structured to provide the advertiser with variable pricing or incentives (such as a set of free advertisements) once a certain level has been paid for. In summary, the delivery platform captures all the relevant pricing information associated with the contract to allow for real-time revenue recognition according to the terms of the contract. After the contract is entered into the system, a summary of the contract setup is provided to the sales manager that worked with the customer. The sales manager then reviews the contract setup for accuracy.

The Company’s ad delivery platform automatically tracks the advertising activity each day and reports the activity to its customers, who are then billed weekly for the aggregate ad activity.

Ms. Drew’s Concern

Ms. Drew is concerned about several things she has learned regarding the appropriateness of management’s revenue recognition policies.

Financial Statements

Balance Sheet:

*Assets consist primarily of cash, land/building, patents, goodwill, and other assets.

** As you plan your audit this is the latest financial information available.

Controls

The Company’s has various controls in place. The CFO performs a checklist on a monthly basis to review the performance of the company. The CFO reports to the CEO every quarter. The CEO reports to the chairman of the board of directors once a year before the financial statements are prepared and released to the public.

The company has over 10 thousand employees around the world, of which 4 thousand work at the headquarters. All employees receive the company’s code of ethics that was prepared in 2005 when the company was founded. The CEO was in recent trouble when he posted controversial messages on the social platform that offended people of a certain group. The company has One hundred different controls across the company and across the world related to operations of the company and revenue.

The company uses 10 different IT systems as the company is growing quickly it has had to adopt and adds new systems whenever they are needed.

The leaders of one of the main divisions recently left to go work for Facebook, and has not been replaced for the last 4 months.

Controls have changed a lot since last year because the company is so dynamic and the environment is so fast paced. Employees are always trying to keep up with the new systems and new controls.

Audit

Because of SKI’s continued growth, the audit committee has requested that the Company choose a new audit firm with experience in auditing public technology companies.

Kristine Drew, a senior auditor, is the in-charge accountant on the proposal and planning of the SKI audit. In addition to her supervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue and determining the risk assessment for the audit.

Ms. Drew has read the Company’s disclosed accounting policies and is interviewing the revenue controller, Bill Cook, and various sales personnel to develop in-depth process flow documentation that will serve as the basis for the team’s risk assessment.

Required:

1. What would you set Audit risk, Control Risk, Inherent Risk, and Detection risk? (Very low, low, medium, or high)
2. Are there are significant or fraud risks that you have identified? (If any why are they fraud or significant risks?)
3. What other information do you need to plan your audit approach? Where would you get this information from? For each piece of information indicate where you might receive it from and how? (ex: who else is on the board of directors- obtained through inquiry.)
4. What benchmark would you use to calculate materiality? Why? (ex: revenue, EBITDA, Equity, Assets, etc)
5. Using the benchmark and guidance in the book calculate “overall materiality” for your audit? (ex: 8% of Equity ($60m)= $2.4m).
6. For Revenue what assertions are the most important for you to test?
7. For Revenue what are your concerns with each of those assertions based on the information above?
8. What are the things about testing revenue that you are concerned about (specifically what parts of the company’s process if any concern you)? (Example: An employee could steal money from the bank account, or revenue could be modified in the accounting software by an employee.) (Focus on the actual real process for the company described above to make this determination.)
9. For your audit approach would you choose to test controls or primarily perform substantive procedures? If so what would be your mix of control testing to substantive testing? (ex: 50% controls, and 50% substantive)
10. Would you accept this audit? If not why not?

Risk Assessment- Exercise #1

Social Konnections Inc. (SKI or the “Company”) is a global Internet company that runs Social Konnections, a large social media networking Web site. SKI has experienced steep growth since its launch in 2005, and the Company went public in 2007. SKI currently has over 500 million active users who visit the site to connect with others, express themselves, and play games.

Last year, substantially all of SKI’s revenue came from advertisers who market their products and services to SKI’s active users through advertisements placed on the Web site or its various mobile platforms.

The founder of the company serves as the CEO and is also on the chairman of the board of directors. The CFO is also one of the co-founders of the company. Both have been serving in these roles since 2005.

In Q1 of the current fiscal year, SKI acquired Corporate Collaborations (CC), an entity that manages private and public social media networks for corporations. CC’s customers are primarily national and global companies whose employees connect over its platform. In addition to hosting private social media networks for corporations, CC provides services to develop the networks it manages. CC’s revenues are earned through the performance of multiyear revenue contracts with its customers. In the current year, CC is expected to produce approximately 20 percent of SKI’s consolidated revenue.

SKI’s investors are focused on the growth prospects of the Company’s legacy open social media platform operations and its new corporate revenue unit. The Company’s MD&A disclosures include (1) various user and revenue metrics to help financial statement users assess its traditional operations and (2) backlog information to help users assess CC’s operations.

Advertising Revenue

SKI creates advertising space on its Web site and mobile applications and sells the space to advertisers either directly, or through advertising agencies. According to Mr. Cook, the

amount an advertiser pays is dependent on the number of views the ad receives or the number of user clicks (depending on the type of advertisement defined in the underlying contract) and the revenue is recorded in the period in which the views or clicks are made.

Ms. Drew has learned that simple advertising can be purchased directly from SKI through SKI’s advertising Web site at standard rates, with the advertisements and terms input directly into the Company’s ad delivery platform. However, most advertising revenue is generated directly through the advertising sales team, which has the ability to help advertisers develop more sophisticated advertising campaigns. Management has established minimum pricing and volume thresholds for these advertisements; however, the sales staff is given significant latitude in securing contracts with customers. Extra commissions are paid to sales individuals who sign longer-term contracts that meet minimum revenue targets.

Once a contract is signed, the ad development department creates the ad content and obtains the customer’s approval. The approved ad and the contract are electronically sent to the ad scheduling department, and the advertisement is uploaded into the Company’s ad delivery platform. The ad delivery platform is a robust system and is designed to capture all the nuances associated with the contract. For example, an advertiser may wish to have its ads displayed only to users whose IP addresses are from a specific geographic location, or the contract may be structured to provide the advertiser with variable pricing or incentives (such as a set of free advertisements) once a certain level has been paid for. In summary, the delivery platform captures all the relevant pricing information associated with the contract to allow for real-time revenue recognition according to the terms of the contract. After the contract is entered into the system, a summary of the contract setup is provided to the sales manager that worked with the customer. The sales manager then reviews the contract setup for accuracy.

The Company’s ad delivery platform automatically tracks the advertising activity each day and reports the activity to its customers, who are then billed weekly for the aggregate ad activity.

Ms. Drew’s Concern

Ms. Drew is concerned about several things she has learned regarding the appropriateness of management’s revenue recognition policies.

Financial Statements

Balance Sheet:

*Assets consist primarily of cash, land/building, patents, goodwill, and other assets.

** As you plan your audit this is the latest financial information available.

Controls

The Company’s has various controls in place. The CFO performs a checklist on a monthly basis to review the performance of the company. The CFO reports to the CEO every quarter. The CEO reports to the chairman of the board of directors once a year before the financial statements are prepared and released to the public.

The company has over 10 thousand employees around the world, of which 4 thousand work at the headquarters. All employees receive the company’s code of ethics that was prepared in 2005 when the company was founded. The CEO was in recent trouble when he posted controversial messages on the social platform that offended people of a certain group. The company has One hundred different controls across the company and across the world related to operations of the company and revenue.

The company uses 10 different IT systems as the company is growing quickly it has had to adopt and adds new systems whenever they are needed.

The leaders of one of the main divisions recently left to go work for Facebook, and has not been replaced for the last 4 months.

Controls have changed a lot since last year because the company is so dynamic and the environment is so fast paced. Employees are always trying to keep up with the new systems and new controls.

Audit

Because of SKI’s continued growth, the audit committee has requested that the Company choose a new audit firm with experience in auditing public technology companies.

Kristine Drew, a senior auditor, is the in-charge accountant on the proposal and planning of the SKI audit. In addition to her supervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue and determining the risk assessment for the audit.

Ms. Drew has read the Company’s disclosed accounting policies and is interviewing the revenue controller, Bill Cook, and various sales personnel to develop in-depth process flow documentation that will serve as the basis for the team’s risk assessment.

Required:

1. What would you set Audit risk, Control Risk, Inherent Risk, and Detection risk? (Very low, low, medium, or high)
2. Are there are significant or fraud risks that you have identified? (If any why are they fraud or significant risks?)
3. What other information do you need to plan your audit approach? Where would you get this information from? For each piece of information indicate where you might receive it from and how? (ex: who else is on the board of directors- obtained through inquiry.)
4. What benchmark would you use to calculate materiality? Why? (ex: revenue, EBITDA, Equity, Assets, etc)
5. Using the benchmark and guidance in the book calculate “overall materiality” for your audit? (ex: 8% of Equity ($60m)= $2.4m).
6. For Revenue what assertions are the most important for you to test?
7. For Revenue what are your concerns with each of those assertions based on the information above?
8. What are the things about testing revenue that you are concerned about (specifically what parts of the company’s process if any concern you)? (Example: An employee could steal money from the bank account, or revenue could be modified in the accounting software by an employee.) (Focus on the actual real process for the company described above to make this determination.)
9. For your audit approach would you choose to test controls or primarily perform substantive procedures? If so what would be your mix of control testing to substantive testing? (ex: 50% controls, and 50% substantive)
10. Would you accept this audit? If not why not?