AUDITING CASE

Required to suggest what has to be done in this case, identify issues, analyze using auditing acceptable standards and recommend using auditing concepts and accounting concepts

Wind Energy Systems Income Statement (unaudited) For the eleven months ended November 30, 2011 Sales $550,000 Cost of goods sold 20,000 Net Income before tax $530,000EXHIBIT 2 NOTES FROM MEETING WITH MEGAN NICHOLS: 1. Research and Development Costs The research and developments costs on the balance sheet include the following: > $500,000 in consultant costs for a feasibility study on the merits of wind energy; > $300,000 for production of the wind turbine prototype that was used in deciding whether they had a viable product; > $45,075 in marketing survey costs; and > $300,000 in set-up and training costs for the prototype. Megan indicated that she will start amortizing these costs over a ten-year period once they have sold their 100th unit. 2. Start-up Costs Once it was decided that the product was viable, Megan discontinued calling anything "devel- opment costs" and started calling these costs "start-up costs." Again, these were included on the balance sheet. The plan is to record all operating costs, including depreciation expense, on the balance sheet until WES installs their 100" turbine. At this point, Megan feels that the company will be fully operational and they will start expensing these costs going forward. Megan also indicated that she will start amortizing these costs over a ten-year period once they have sold their 100 unit.\fEXHIBIT 1 Wind Energy Systems Balance Sheet November 30, 2011 (unaudited) Assets Liabilities & Shareholder's Equity Cash $ 10,455 Current Liabilities $ 550,780 Accounts Receivable (net) 550,000 Long-term Liabilities 2,570,000 Inventories 245,000 Shareholders' Equity 1,140,000 Development Costs 1,145,075 $4,260,780 Start-up Costs 1,198,500 Land 513,350 Plant and Equipment (net) 598,400 $4,260, 780You have just arrived back at the office and have prepared some notes from the meeting (Exhibit 2). Later you meet with the engagement partner to talk about the meeting and agree on key issues. The partner has asked you to draft a letter to Sean Bradley and Megan Nichols outlin- ing your firm's position with respect to the financial accounting issues discussed at the meeting. In addition, the partner has asked for a preliminary audit planning memo based on what you have learned so far.3. Revenue The wind turbines are sold for $50,000 per unit and earn a 60% gross margin. To date, one customer installation is complete and 10 orders are to be installed in early January 2012. Customers have 90 days from the date of installation to return the turbine if they are not satisfied. Payment is due within 30 days of installation. Megan records revenue once the order is received from the customer