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 the company. Less than one year later, Your1040Return.com began operations in time for the next tax season.

OVERVIEW OF YOUR1040RETURN.COM OPERATIONS

Your1040Return.com is an entirely Internet-based tax preparation website for preparing and filing federal and state individual income tax returns. Most of its revenues come from individuals seeking to avoid the preparation of a paper-based return and who are willing to "rent" access to a popular tax preparation software package through Your1040Return.com. Other revenues come from individuals wanting to electronically file an already prepared paper-based return.

For a minimal fee, Your1040Return.com provides an interface for individuals to electronically file their returns with the appropriate federal and state regulatory bodies. Typically, users come from middle clmiddle-classass households wanting to simplify yearly tax return preparation tasks. These users are generally searching for an accurate, easy, and economical alternative to another professional tax service.

Individuals can access these services through Your1040Return.com's web site. 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 Web site 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 Your1040Return.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, and schedules, and Your1040Return.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 business person with nationwide real estate investments and actively traded securities.Both the Gold and 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 Your 1040Return.com membership ranging between two to five years.Through this multiple year package service, customers receive year-round access to the tax preparation software provide to Gold customers, which allows them to continually track changes to their tax basis in securities and periodically evaluate tax implications of passible transactions. Furthermore, Platinum customers receive personalized attention and real-time tac support from qualified income tax specialists, who work on a contract basis, via an online instant messenger program.

Your 1040Return.com experiences high seasonal demand for its services from early February to the filing deadline of April 15. Because Your 1040Return.com allows customers to apply for filing extensions online, the company experiences strong demand for its services just before extensions deadlines.

If the IRS finds a problem with a return submitted through the company's Web service, Your 1040Return.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 of expected refiling are factored into the price of the service packages.

Your 1040Return.comdoes not handle tax refund or tax liability payments. If a customer is eligible for a refund, the IRS remit 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 tax return. Your 1040Return.com assumes no liability or inappropriately filed returns or the tax positions of its customers. All liability resides with the customer who prepared the return.

Your 1040Return.com recognizes revenue differently for each product. The revenue for the first year of Platinum service is recognized immediately after the customer selects this option. The company assumes customers will use the package for an entire year without cancellation even though Your 1040Return.com has a fairly simple cancellation policy. For the Gold Package, a portion of the revenue is recognized when the customer accesses the the tax preparation software package via the Internet for the first time. The company recognizes the remaining revenue when the customer submits the return to the IRS. The company does not recognize revenue for the Silver package until the customer submits a return to the IRS.

In addition to fees generated for its individual tac preparation services, Your 1040Return.com engages in ad swapping with a number of major Internet companies.For example, Amazon .com swapped a significant amount of advertising with Your 1040Return.com from January to April of this year. Amazon .com placed a banner ad on its web site reminding visitors to visit Your 1040Return.com for all tax needs. In exchange for this ad, Your 1040Return.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 Your 1040Return.com. The company houses its web server and microcomputers, which run critical applications, in a key-coded room accessible only to the programmer and Chicago, the CEO. The web server is also protected by a proxy server firewall to prevent outside hackers from hacking the database. In addition to these security measures, all customers are required to create alphanumeric passwords that are at least six characters in length, to prevent unauthorized access to customer accounts.

Your 1040Return.com does not maintain a "brick and mortar" storefront or interact face-to-face with customers. The company engages in all transactions electronically and stores all purchase orders, dales invoices, and advertising contract in electronic form. The company backs up data daily, but the backup data are not readily available at all times. After six months of soft storage on the company's server network, backup files are removed from the network to free up limited storage capacity. The files are downloaded to DVDs for storage and future retrieval. A significant upgrade of Your 1040Return.com's limited information system is in the planning stages.

Two of Chicago's nephews - Nathan Randall and Matthew Gilbert - oversee the maintenance of the company's information system. Both employees will graduate with degrees in Information Systems at the end of the semester from a local university and will begin to work full time for the company after graduation. The accounting system is maintained by Chicago's niece, Emily Parkin, who is a Master's student for the preparation of all internal financial statements.

Given the growth in the number of individuals using Your 1040Return.com's services, several marketing executives have recently begun to offer Chicago large sum of money to purchase Your 1040Return.com customer lists, Although Chicago has yet to formally draft an official privacy statement for his company, he feels responsible for the privacy of his customers' information and is unsure if he should sell the lists. The cash offers have been tempting, however, given that the money would allow him to move ahead with planned information system upgrades. In the meantime, Chicago arranged a line of credit with a local bank to fund upgrades. As part of that financing transactions, the bank has required an audit of Your 1040Return.com's annual financial statements.

REQUIRED:

1. You are an auditor with Gooch & Brown CPA LLP, a local accounting firm specializing in audits of information systems and financial statement. Your 1040Return.com engaged your firm to perform its financial statement audit.You have been asked by the partner to perform the following task:
   1. Describe to Steven Chicago why it is important for your firm to have an understanding of Your1040Return.com's business model.
   2. 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.
   3. Indicate what Your1040Return.com should do to improve its internal control.
   4. Explain what audit implications arise if you decide that the controls over electronic at Your1040Return.com are inadequate to ensure that records have not been altered.
2. Auditing Standards Section 314, Understanding the Entity and its Environment and Assessing the risks of Material Misstatements, provides guidance for auditors when evaluating electronic evidence. What are the implications for an auditor when a client's accounting system produces and stores transactions evidence only electronically?
3. Your1040Return.com's main business strategy involves the delivery of services via the Internet. What are some of the threats to the viability of Your1040Return.com's business strategy?
4. 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 Chiago'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?