Former college roommates Annie and Caroline are very familiar with the gig economy because both worked various gigs during their college days. Annie, a dog lover, was a dog walker for Wag and an Uber driver. Caroline, a connoisseur of cuisine, delivered for GrubHub and moonlighted as a Lyft driver. After college, Annie and Caroline went their separate ways but reconnected five years after graduation and met for coffee to catch up. Both were interested in obtaining work that provided more flexibility and they began to reminisce about their college days. Shortly after they reconnected, they came up with the idea to launch their own gig company that would provide services in their community.

Annie and Carolines passion for animals and cuisine led them to focus on dog care and restaurants. They decided to start HungryHound (HH), and contacted their friend Knox, a computer science major, to help develop the online platform and mobile application (app) that would match workers to the needs of the consumers.

Restaurant Services

The restaurant segment of HH focuses on connecting diners with restaurants by supplying a list of restaurants that meet the diners specifications (such as cuisine, restaurant ratings, and proximity to the diner). Restaurants pay a fee to HH, the higher the fee, the more the visibility and prominence of the restaurants name in the app (transaction 1 in the diagram). The fee is $200 per restaurant listing. On the HH app, the diner can view restaurant menus, place an order, and make reservations. The diner can pick up the order (transaction 2) or the diner can use the HH app to set up delivery. Delivery of the food to the diner is completed by the restaurant if the restaurant offers delivery service (transaction 3). If delivery is not provided by the restaurant, HH charges a $3 fee for delivery and provides drivers to pick up the order and deliver it to the diner (transaction 4). HH also receives $1 for all food orders placed via the HH app, which is paid by the restaurant (transactions 2, 3, 4, and 6). The cost of the food and delivery fees are paid via credit card to HH by the diner through the HH app. HH remits the cost of the food order to the restaurant and withholds the cost of delivery and any fees. Depending on who delivered the order, HH remits the full delivery fee to the restaurant or $2 of the delivery fee to the HH driver. Diners may tip the delivery drivers in cash if they choose. To incentivize sales, HH offers a 15% new listing discount to restaurants that start listing on the app (transaction 5). In addition, periodic discounts are offered to app users where HH will discount the food order by 5% (transaction 6). The HH owners are not sure how to classify the discount on the financial statements. The cost of these incentives could be a marketing expense or a reduction of revenue.

Dog Care Services

The dog care segment of HH focuses on connecting dog owners with dog walkers. The HH app can be used by the dog owners to locate a dog walker nearby. HH does background checks for all dog walkers but leaves it up to the dog owner to interview and select a dog walker. Dog walkers pay a fee to be listed on HHs app (transaction 7). Dog owners pay for the dog walking service to HH through the HH app using their credit card and HH remits the dog walking fee to the dog walker (transactions 8 and 9). HH also receives a $4 fee per walk from the dog walker for each dog walking service booked via the HH app. Dog owners may also tip the dog walkers in cash if the owner is satisfied with the service. As with the restaurant services, HH periodically offers a 10% discount to dog owners to entice them to use the app to use the HH dog walking service. In addition to dog walking, HH has identified a manufacturer of high-quality organic dog food and treats, Pawsome Treats. Pawsome sells its dog food and treats exclusively online and HH is one of the biggest promoters of Pawsomes food. Pawsome pays an app fee to HH (transaction 10). Dog owners order Pawsome products using the HH app and all products are delivered to the dog owner through a third-party delivery service, Pamazon, a national and reliable shipping service (transaction 11). HH receives a fee of 1% of the total value of each order placed through the app. HH remits the net cost of the dog food to Pawsome once the delivery is completed. HH has no employees other than Annie, Caroline, and Knox. The only assets are the software system that runs the app created by Knox. It is now three years into the operations of HH and it is growing so quickly that there is a need to expand the technology, hire more programmers, and establish a sales team to help promote the HH app in more markets across the country. In order to expand, Annie and Caroline need a set of financial statements that are in compliance with GAAP because they are interested in either going public or selling HH to a publicly traded company in the next few years. They came to you because you were an accounting major. Up to this point they have used cash-basis accounting and now need to apply accrual accounting and asked for your assistance to construct accrual-based financial statements.

1. HungryHound (HH) is a new client to your audit firm L&J, LLP. Identify at least three attributesof HH that will impact the engagement planning and assessment of client risk. Recall that risk is assessed for the clients internal environment and external environment.
2. Identify whether HH is a public or private company and specify the auditing standards to be used on the audit and the professional organization that promulgates those standards.
   1. If HH completes an initial public offering (IPO), how does the IPO impact HHs status as a public or private company?
   2. If HH completes an IPO, specify the auditing standards to be used on the audit and the professional organization that promulgates those standards.
3. For audit planning regarding revenue recognition, at what level will you assess inherent risk (i.e. high, moderate, low or very low)?
4. Inherent risk is a component of the risk of material misstatement (inherent risk * control risk). Describe the relationship between the risk of material misstatement and detection risk. Describe the impact on audit effort/work when the risk of material misstatement is high.