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(solution) I need help on this question please I brought a membership for


I need help on this question please I brought a membership for this site so I could get an answer to it but the answer was not helpful. I really need help within the next few days if anyone could help.


Making Connections

 

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 2010. 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 Company?s remaining immaterial revenue was received from fees associated with

 

the sale of virtual goods and services by third-party application developers using SKI?s various

 

platforms.

 

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 multi-year revenue contracts with its

 

customers. In the current year, CC is expected to produce approximately 20% of SKI?s consolidated

 

revenue in the current year.

 

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.

 

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. A new firm was selected

 

and has performed each of the interim reviews in the current year.

 

Kristine Drew, a senior auditor, is the in-charge accountant on the SKI audit. In addition to her

 

supervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue. 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.

 

1 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 on 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 website 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.

 

Corporate Social Network Development and Hosting Revenue

 

As part of its new corporate services program from the acquisition of CC, the Company earns

 

revenues by providing corporate social network development and hosting services. For new 2 customers, a contract will typically require an up-front fee to SKI for the development of the

 

customer?s specific social media network; the contract will also include a separate multi-year

 

hosting agreement. The customized social media networks only operate on the Company?s hosting

 

platform, and customers do not have the option to take possession of the software used to run the

 

networks. Revenues for the up-front fee associated with the development are recognized as the

 

development is completed and the system is available to the customer. Hosting revenues are

 

automatically recognized by the system based on the invoicing cycle outlined within the customer?s

 

contract. According to Mr. Cook, this invoicing cycle is fairly uniform throughout the hosting period;

 

therefore, from a materiality perspective, the Company will disclose that hosting fees are recognized

 

ratably throughout the hosting contract period.

 

In Q4, during an interview with one of the new members of the corporate sales team, Ms. Drew was

 

told that the corporate sales director had established a goal of increasing the length of the average

 

hosting contract. Before SKI acquired CC, most of the multi-year hosting agreements were for threeyear terms. In Q4, the corporate sales director implemented a strategy shift that would increase the

 

contracted hosting period to five years. To accomplish this goal, the sales team was able to offer its

 

customers three months of free service, to be added at the end of any new five-year agreement

 

signed. In addition, the sales director offered an additional commission for converting existing

 

contracts to five-year agreements. To accelerate the implementation of this plan, the sales

 

commission is doubled if the contract modification occurs before the end of the fiscal year.

 

Ms. Drew?s Concern

 

Ms. Drew is concerned about several things she has learned regarding the appropriateness of

 

management?s revenue recognition policies.

 

Required:

 

1. Identify the potential revenue recognition issues related to each of the Company?s sources of

 

revenue.

 

2. On the basis of the information Ms. Drew has learned, what fraud risk factors should she consider

 

discussing with her team at the next fraud brainstorming meeting?

 

3. What potential audit procedures could the team consider to evaluate management?s revenue

 

recognition policies and determine whether those policies are appropriately applied? 3

 


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