After being in business for only two years, Your1040Return.com has quickly become a leading provider of online income tax preparation and filing services for individual taxpayers. Steven Chicago founded the company after a business idea came to him while shopping for individual tax preparation software. As he stared at all the software packages on the shelves at a local computer supply store, the following thought kept racing through his mind:
“With all of the tax law changes from year to year, why should I shell out $50 for a CD that will be obsolete next year, not to mention the $20 I have to pay to file my taxes electronically over the Internet? I’d rather pay a company a small membership fee to use continually updated tax preparation software.”
Not long after his shopping experience, Chicago, an entrepreneur at heart, decided to create such a company. Less than one year later, Your1040Return.com began operations in time for the next tax season.

REQUIRED
[1] You are an audit senior with Gooch & Brown CPA, LLP, a local accounting firm specializing in audits of information systems and financial statements. Your1040Return.com engaged your firm to perform its financial statement audit. You have been asked by the partner to perform the following tasks:
[a] Why does Your1040.com need to have its financial statements audited? How might understanding the reasons for the audit of the financial statements inform the auditor about potential audit risk?
[b] Describe to Steven Chicago why it is important for your firm to have an understanding of Your1040Return.com’s business model.
[c] Identify Your1040Return.com’s major business risks and describe how those risks may increase the likelihood of material misstatements in Your1040Return.com’s financial statements.
[d] Indicate what Your1040Return.com should do to improve its internal control.
[e] Explain what audit implications arise if you decide that the controls over electronic records at Your1040Return.com are inadequate to ensure that records have not been altered.
[f] Steven Chicago has indicated that he is exploring upgrades to the company's IT systems. Your audit partner would like you to explore whether cloud computing is an option that your firm might recommend for consideration by Steven, Perform research to explain what cloud computing is and why it might offer benefits to Your1040.com.
[g] Authoritative literature provides guidelines for proper revenue recognition policies for transactions such as those discussed in the case. Analyze Your1040Return.com’s revenue recognition policies for the three package services. Provide appropriate citations to authoritative literature.
[h] Explain how you can obtain evidence that ad swapping actually occurred between the Your1040Return. com and Amazon.com. Describe accounting issues that arise when Internet-based companies swap ad services and identify relevant authoritative literature.
[1] 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 www.amazon.com, to see an example of a privacy policy). Why is it important for Your1040Return.com to have an explicit privacy policy? How might the lack of a policy affect Your1040Return.com’s financial statements in the future?
[2] Your1040Return.com’s main business strategy involves the delivery of services via the Internet. What are some threats to the viability of Your1040Return.com’s business strategy?
[3] 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 Your1040Return.com implement to ensure that the company does not overpay for those professional services?
[4] 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?