I need help with writing memorandum. Finding strengths, weaknesses, and changes of audit committee this year

Topics-Planning, Internal Control, and Evidence Situation Company Profile Industry Information Balance Sheet Income Statement Statement of Cash Flows Financial Statement Analysis Audit Procedures Communication Rearch Diet Web Inc. (hereafter Diet Web) was incorporated and began business in March of 20X1, seven years ago. You are working on the 20X8 audit--your CPA firm's fifth audit of DietWeb. Copy Profile Statement y Balance of Cash Statement Audit Situation Information Sheet Statement Flows Procedures Communication Research The company's mission is to provide solutions that help individuals to realize their full potential through better eating hab. its and lifestyles. Much of 20X1 and 20X2 was spent in developing a unique software platform that facilitates the production of individualized meal plans and shopping lists using a specific mathematical algorithm, which considers the user's physical con dition, proclivity to exercise, food preferences, cooking preferences, desire to use prepackaged meals or dine out, among others. Diet Web sold its first online diet program in 20X2 and has continued to market memberships through increasing online adver tising arrangements through the years. The company has continued to develop this program throughout the years and finally became profitable in 20X6. Diet Web is executing a strategy to be a leading online provider of services, information and products related to nutrition, fitness and motivation. In 20X8, the company derived approximately 86% of its total revenues from the sale of approximately 203,000 personalized subscription-based online nutrition plans related to weight management, to dietary regimens such as vegetarianism and to specific medical conditions such as Type 2 diabetes. Given the personal nature of dieting. Diet Web assures customers of complete privacy of the information they provide. To this point Diet Web's management is proud of its success in assuring the privacy of information supplied by its customers this is a constant battle given the variety of intrusion attempts by various Internet hackers. Diet Web nutrition plans are paid in advance by customers and offered in increments of thirteen weeks with the customers having the ability to cancel and receive a refund of the unused portion of the subscription this results in a significant level of "deferred revenue" each period. Although some DietWeb members are billed through use of the postal system, most Diet Web members currently purchase programs and products using credit cards, with renewals billed automatically, until cancellation, One week of a basic Diet Web membership costs less than one-half the cost of a weekly visit to the leading classroom-based diet program. The president, Mr. William Readings, suggests that in addition to its superior cost-effectiveness, the Diet Web online diet program is successful relative to classroom-based programs due to its customization, ease of use, expert support, privacy. constant availability, and breadth of choice. The basic Diet Web membership includes Customized meal plans and workout schedules and related tools such as shopping lists, journals, and weight and exercise tracking. Interactive online support and education including approximately 100 message boards on various topics of interest to members and a library of dozens of multimedia educational segments presented by experts including psychologists, mental health counselors, dietitians, fitness trainers, a spiritual advisor and a physician. 24/7/365 telephone support from a staff of approximately 30 customer service representatives, nutritionists and fitness personnel Throughout its nine-year history, Mr. William Readings has served as chief executive officer. The other three founders of the company are also officers. A fifth individual, Willingsley Williamson, also a founder, served as Chief Financial Officer until mid-20X8 when he left the company due to a difference of opinion with Mr. Readings. The four founders purchased Mr. Williamson's stock and invested an additional approximately $1.2 million in common stock during 20X8 so as to limit the use of long-term debt. The company's board of directors is currently composed of the four individuals who remain active in the company: these four individuals also serve as the company's audit committee; Mr. Readings chairs both the board and the audit committee. Previously, Mr. Readings had also served on the board and the audit committee. With Mr. Williamson's departure, Ms. Jane Jennings, another of the founders, became the company's CFO. Industry Information Statement of Cash Company Profile Balance Situation Income Statement Statem Analysis Procedures Comment Research The nutrition and diet industry in many ways thrives because individuals are becoming more aware of the negative health and financial consequences of being overweight, and consider important both weight loss and healthy weight maintenance. A study by two respected researchers concluded that obesity was linked to higher rates of chronic illness than living in poverty, than smoking, or than drinking. In addition, the American Cancer Society reported that as many as 14% of cancer deaths in men and 20% of cancer deaths in women could be related to being overweight. The financial costs of excess weight are also high. A 20X8 study based on data from a major automobile manufacturer's health care plan showed that an overweight adult has annual health care costs that are 7.3% higher than a person in a healthy weight range, while obese individuals have annual health care costs that are 69% higher than a person of a healthy weight. With health care cost inflation running in the double digits in the United States since 20X4, supporters of the industry believe that the implementation of effective weight management tools will attract more attention from insurers, employers, consumers, and the government. As of January 20X9 five nutrition-or fitness-related bills were being considered in Congress, and several states had enacted or were considering enacting legislation relating to the sale of junk food in public schools. In addition, the US Food and Drug Administration, Department of Health and Human Services, and Federal Trade Commission are contemplating new labeling requirements for packaged food and restaurant food, new educational and motivational programs related to healthy eating and exercise, and increased regulation of advertising claims for food. In response to consumers' growing demand for more healthful eating options, quick-service and full-service restaurants have introduced new offerings including salads, sandwiches, burgers, and other food items designed for the weight-conscious person. At the retail level, sales of natural and organic foods have been growing more rapidly than the overall food and over- the-counter drug market for the last several years. Nutritional supplement sales in the US, for instance, are estimated to have grown 34% between 20X4 and 20X8, while natural and organic foods are estimated to be growing at a rate of approximately 15% annually. Also, the industry has a tendency to change quickly as "dieting fads" regularly are introduced, some remain popular for years, some for only months. Approximately 60% of the US adult population, or 120 million adults, are overweight and, of those, the Calorie Control Council estimates only about 50 million are dieting in a given year. About 15% of these dieters are using a commercial weight loss center, generating revenues of approximately $1.5 billion annually. Diet Web targets dieters who are online, which repre- sents about two-thirds of the total universe at current Internet penetration rates, or 34 million adults, about 5 million of whom are spending approximately $1 billion at weight loss centers. At the same time, the online dieting segment of the market is growing rapidly. The online diet industry in the US generated in excess of $100 million in 20X8, compared to revenues of approximately $75 million in 20X2. The industry includes other online nutrition and diet-oriented Web sites. Another group of competitors to Diet Web are commercial weight loss centers, an industry that has shown marked decline in the last decade. According to Market Analysis Enterprises, the number of commercial weight loss centers in the US declined approximately 50% between 20X2 and 20X8, from over 8,600 to approximately 4,400. Diet Web competes against this segment on the basis of lower price, superior value, convenience, availability, the ability to personalize a meal plan on an ongoing basis, its extensive support capabilities, and the breadth of its meal plan options. Balance Sheet Statement of Cash Industry Campany Profile Situation Financial Statement Analysis Income Statement Audit Procedures Communication Research DieWeb, Inc. BALANCE SHEET December 31, 20X8 and 20X7 in thousands 20x8 MaxZ 3.032 Assets Current assets Cash and cash equivalents Trade receivables Prepaid advertising expenses Prepaid expenses and other current assets Total current assets $1,072 450 59 175 3.751 3.321 $7,072 230 2,361 3.926 56.282 Fixed assets, net Total assets S1070 42 1.973 171 3.256 $ 909 316 1.396 2.633 176 Liabilities and shareholders' equity Current liabilities Accounts payable Current maturities of notes payable Deferred revenue Other current liabilities Total current liabilities Long-term debt, less current maturity Accrued liabilities Deferred tax liability Total liabilities Shareholders' equity Common stock Retained earnings Total shareholders' equity Total liabilities plus shareholders' equity 792 IS 4.097 690 145 3.644 4,854 6,040 (3.065) 2.975 $7,072 56.287 Company Pre Tomate Statement Analysis Audit Procedures CR DieWeb, Inc. INCOME STATEMENT The Year Ended December 31, 2018 and 2017 in thousands) 20x8 $19.166 20XZ $14,814 2,326 725 1.528 653 8.710 22575 Revenue Costs and expenses Cost of revenue Product development Sales and marketing General and administrative Depreciation and amortization Impairment of intangible assets Total costs and expenses Net income before taxes Income tax benefit Net income (los) 13.903 2531 69 15 14.127 (983) 125 5(854) 5812 Statement Industry Audit Balance Sheet Situation Profile Statement Analysis Der Wal, Inc STATEMENT OF CASH FLOWS Year Ended December 31, 20X8 20x2 812 SCR44) (35) 550 000 (47) 650) 55 SO) Cashflows from operations Net income (los) Adjustments to net income Depreciation Increase in receivables Decrease increase in prepaid advertising Decrease in other current assets Increase (Decrease in accounts payable Increase in accrued liabilities Increase (Decrease in deferred revenue Increase in common stock issued Increase in other current liabilities Nel cash provided wied) by operations Cashflows from investing activities Purchase of property and equipment Cashflows f inancing activities New debe Debt payments Net cash provided (wed by financing activities Net increase in cash and cash equivalents Cash and equivalents at beginning of year Cash and equivalents at end of year 161 102 432 1.186 1.59 2.35 (270) (320) 2,016 40 1918) 613 (7218) (105) $1.960 $1,072 $3,032 868 204 1.072 Company Profile Industry Information Balance Sheet Statement of Cash Flows Financial Statement Analysis Statement Audit Procedures Resear (A) (B) (C) (D) OOOO 1. Or the following, which is likely to be one of Diet Web's major risks of doing business on the Internet in the future? A Maintaining privacy of customer information B. Maintaining the ability to pay Federal Communication Commission Internet use fees. C. Inability to provide 24/7/365 support D. Inability to reach customers beyond the United States. (A) (B) (C) (D) OOOO 2. Which of the following is likely to be the most significant business risk for Diet Web? A. Internal control limitations due to the small size of the company, B. Inability of the Internet to provide adequate support for such a business due to its instability C. Entrance of new competitors onto the Internet. D. Misstatements of revenues due to difficulties in determining appropriate year-end cutoffs. Company Profile Industry Informatie Statement Analysis Statement of Cash Flow Balance Sheet Situation Income Statement Risk Audit Procedures Communication Research 1. (A) (B) (C) (D) OOOO The most likely misstatement in the financial statements is A. The increase in cash in 20X8. B. Treatment of impaired intangible assets as an expense in 20X8. C. Treatment of common stock issued as an adjustment to net income. D. An income tax benefit on the income statement as contrasted to income tax expense. 2. (A) (B) (C) (D) oooo Which of the following is the most unexpected change on the balance sheet, if one assumes the revenue increase in 20X8 is correct? A Decrease in prepaid advertising expenses. B. Increase in accounts payable. C. Decrease in deferred revenues D. Increase in common stock Procedures Company Profile Situation Industry Information Balance Sheet Statement of Cash Flows Income Statement Statement Analysis Riks The auditor determines that each of the following objectives will be part of Diet Web's audit. For each audit objective, se lect a substantive procedure that would help to achieve that objective. Each of the procedures may be used once, more than once, or not at all Substantive procedure A Trace opening balances in the summary schedules to the prior year's audit working papers B. Review the provision for deprecation expense and determine that depreciable lives and methods used in the current year are consistent with those used in the prior year. c. Determine that responsibility for maintaining the property and equipment records is segregated from the responsibil ity for custody of property and equipment D. Examine deeds and title insurance certificates E Perform cutoff test to verify that property and equipment additions are recorded in the proper period. F. Determine that property and equipment is adequately insured. G. Physically examine all recorded major property and equipment additions. (A) (B) (C) (D) (E) (F) (G) 1. Diet Web has legal rights to property and equipment acquired during the year. 2. DietWeb recorded property and equipment acquired during the year that did not actually exist at the balance sheet date. Communication Financial Company Industry Balance Income of Cash Statement Audit Situation Profile Information Sheel Statem allows Analysis Procedures Research This is your firm's sixth audit of Diet Web. In a memorandum to the audit team (below) summarize your view of the audit committee's strengths, weaknesses, and any changes that have occurred relating to the audit committee this year. Remember: Your response will be graded for both technical relevance and writing skills. For writing skills you should demon- strate an ability to develop your ideas, organize them, and express them clearly. Do not convey information in the form of a ta ble, bullet point list, or other abbreviated presentation. Topics-Planning, Internal Control, and Evidence Situation Company Profile Industry Information Balance Sheet Income Statement Statement of Cash Flows Financial Statement Analysis Audit Procedures Communication Rearch Diet Web Inc. (hereafter Diet Web) was incorporated and began business in March of 20X1, seven years ago. You are working on the 20X8 audit--your CPA firm's fifth audit of DietWeb. Copy Profile Statement y Balance of Cash Statement Audit Situation Information Sheet Statement Flows Procedures Communication Research The company's mission is to provide solutions that help individuals to realize their full potential through better eating hab. its and lifestyles. Much of 20X1 and 20X2 was spent in developing a unique software platform that facilitates the production of individualized meal plans and shopping lists using a specific mathematical algorithm, which considers the user's physical con dition, proclivity to exercise, food preferences, cooking preferences, desire to use prepackaged meals or dine out, among others. Diet Web sold its first online diet program in 20X2 and has continued to market memberships through increasing online adver tising arrangements through the years. The company has continued to develop this program throughout the years and finally became profitable in 20X6. Diet Web is executing a strategy to be a leading online provider of services, information and products related to nutrition, fitness and motivation. In 20X8, the company derived approximately 86% of its total revenues from the sale of approximately 203,000 personalized subscription-based online nutrition plans related to weight management, to dietary regimens such as vegetarianism and to specific medical conditions such as Type 2 diabetes. Given the personal nature of dieting. Diet Web assures customers of complete privacy of the information they provide. To this point Diet Web's management is proud of its success in assuring the privacy of information supplied by its customers this is a constant battle given the variety of intrusion attempts by various Internet hackers. Diet Web nutrition plans are paid in advance by customers and offered in increments of thirteen weeks with the customers having the ability to cancel and receive a refund of the unused portion of the subscription this results in a significant level of "deferred revenue" each period. Although some DietWeb members are billed through use of the postal system, most Diet Web members currently purchase programs and products using credit cards, with renewals billed automatically, until cancellation, One week of a basic Diet Web membership costs less than one-half the cost of a weekly visit to the leading classroom-based diet program. The president, Mr. William Readings, suggests that in addition to its superior cost-effectiveness, the Diet Web online diet program is successful relative to classroom-based programs due to its customization, ease of use, expert support, privacy. constant availability, and breadth of choice. The basic Diet Web membership includes Customized meal plans and workout schedules and related tools such as shopping lists, journals, and weight and exercise tracking. Interactive online support and education including approximately 100 message boards on various topics of interest to members and a library of dozens of multimedia educational segments presented by experts including psychologists, mental health counselors, dietitians, fitness trainers, a spiritual advisor and a physician. 24/7/365 telephone support from a staff of approximately 30 customer service representatives, nutritionists and fitness personnel Throughout its nine-year history, Mr. William Readings has served as chief executive officer. The other three founders of the company are also officers. A fifth individual, Willingsley Williamson, also a founder, served as Chief Financial Officer until mid-20X8 when he left the company due to a difference of opinion with Mr. Readings. The four founders purchased Mr. Williamson's stock and invested an additional approximately $1.2 million in common stock during 20X8 so as to limit the use of long-term debt. The company's board of directors is currently composed of the four individuals who remain active in the company: these four individuals also serve as the company's audit committee; Mr. Readings chairs both the board and the audit committee. Previously, Mr. Readings had also served on the board and the audit committee. With Mr. Williamson's departure, Ms. Jane Jennings, another of the founders, became the company's CFO. Industry Information Statement of Cash Company Profile Balance Situation Income Statement Statem Analysis Procedures Comment Research The nutrition and diet industry in many ways thrives because individuals are becoming more aware of the negative health and financial consequences of being overweight, and consider important both weight loss and healthy weight maintenance. A study by two respected researchers concluded that obesity was linked to higher rates of chronic illness than living in poverty, than smoking, or than drinking. In addition, the American Cancer Society reported that as many as 14% of cancer deaths in men and 20% of cancer deaths in women could be related to being overweight. The financial costs of excess weight are also high. A 20X8 study based on data from a major automobile manufacturer's health care plan showed that an overweight adult has annual health care costs that are 7.3% higher than a person in a healthy weight range, while obese individuals have annual health care costs that are 69% higher than a person of a healthy weight. With health care cost inflation running in the double digits in the United States since 20X4, supporters of the industry believe that the implementation of effective weight management tools will attract more attention from insurers, employers, consumers, and the government. As of January 20X9 five nutrition-or fitness-related bills were being considered in Congress, and several states had enacted or were considering enacting legislation relating to the sale of junk food in public schools. In addition, the US Food and Drug Administration, Department of Health and Human Services, and Federal Trade Commission are contemplating new labeling requirements for packaged food and restaurant food, new educational and motivational programs related to healthy eating and exercise, and increased regulation of advertising claims for food. In response to consumers' growing demand for more healthful eating options, quick-service and full-service restaurants have introduced new offerings including salads, sandwiches, burgers, and other food items designed for the weight-conscious person. At the retail level, sales of natural and organic foods have been growing more rapidly than the overall food and over- the-counter drug market for the last several years. Nutritional supplement sales in the US, for instance, are estimated to have grown 34% between 20X4 and 20X8, while natural and organic foods are estimated to be growing at a rate of approximately 15% annually. Also, the industry has a tendency to change quickly as "dieting fads" regularly are introduced, some remain popular for years, some for only months. Approximately 60% of the US adult population, or 120 million adults, are overweight and, of those, the Calorie Control Council estimates only about 50 million are dieting in a given year. About 15% of these dieters are using a commercial weight loss center, generating revenues of approximately $1.5 billion annually. Diet Web targets dieters who are online, which repre- sents about two-thirds of the total universe at current Internet penetration rates, or 34 million adults, about 5 million of whom are spending approximately $1 billion at weight loss centers. At the same time, the online dieting segment of the market is growing rapidly. The online diet industry in the US generated in excess of $100 million in 20X8, compared to revenues of approximately $75 million in 20X2. The industry includes other online nutrition and diet-oriented Web sites. Another group of competitors to Diet Web are commercial weight loss centers, an industry that has shown marked decline in the last decade. According to Market Analysis Enterprises, the number of commercial weight loss centers in the US declined approximately 50% between 20X2 and 20X8, from over 8,600 to approximately 4,400. Diet Web competes against this segment on the basis of lower price, superior value, convenience, availability, the ability to personalize a meal plan on an ongoing basis, its extensive support capabilities, and the breadth of its meal plan options. Balance Sheet Statement of Cash Industry Campany Profile Situation Financial Statement Analysis Income Statement Audit Procedures Communication Research DieWeb, Inc. BALANCE SHEET December 31, 20X8 and 20X7 in thousands 20x8 MaxZ 3.032 Assets Current assets Cash and cash equivalents Trade receivables Prepaid advertising expenses Prepaid expenses and other current assets Total current assets $1,072 450 59 175 3.751 3.321 $7,072 230 2,361 3.926 56.282 Fixed assets, net Total assets S1070 42 1.973 171 3.256 $ 909 316 1.396 2.633 176 Liabilities and shareholders' equity Current liabilities Accounts payable Current maturities of notes payable Deferred revenue Other current liabilities Total current liabilities Long-term debt, less current maturity Accrued liabilities Deferred tax liability Total liabilities Shareholders' equity Common stock Retained earnings Total shareholders' equity Total liabilities plus shareholders' equity 792 IS 4.097 690 145 3.644 4,854 6,040 (3.065) 2.975 $7,072 56.287 Company Pre Tomate Statement Analysis Audit Procedures CR DieWeb, Inc. INCOME STATEMENT The Year Ended December 31, 2018 and 2017 in thousands) 20x8 $19.166 20XZ $14,814 2,326 725 1.528 653 8.710 22575 Revenue Costs and expenses Cost of revenue Product development Sales and marketing General and administrative Depreciation and amortization Impairment of intangible assets Total costs and expenses Net income before taxes Income tax benefit Net income (los) 13.903 2531 69 15 14.127 (983) 125 5(854) 5812 Statement Industry Audit Balance Sheet Situation Profile Statement Analysis Der Wal, Inc STATEMENT OF CASH FLOWS Year Ended December 31, 20X8 20x2 812 SCR44) (35) 550 000 (47) 650) 55 SO) Cashflows from operations Net income (los) Adjustments to net income Depreciation Increase in receivables Decrease increase in prepaid advertising Decrease in other current assets Increase (Decrease in accounts payable Increase in accrued liabilities Increase (Decrease in deferred revenue Increase in common stock issued Increase in other current liabilities Nel cash provided wied) by operations Cashflows from investing activities Purchase of property and equipment Cashflows f inancing activities New debe Debt payments Net cash provided (wed by financing activities Net increase in cash and cash equivalents Cash and equivalents at beginning of year Cash and equivalents at end of year 161 102 432 1.186 1.59 2.35 (270) (320) 2,016 40 1918) 613 (7218) (105) $1.960 $1,072 $3,032 868 204 1.072 Company Profile Industry Information Balance Sheet Statement of Cash Flows Financial Statement Analysis Statement Audit Procedures Resear (A) (B) (C) (D) OOOO 1. Or the following, which is likely to be one of Diet Web's major risks of doing business on the Internet in the future? A Maintaining privacy of customer information B. Maintaining the ability to pay Federal Communication Commission Internet use fees. C. Inability to provide 24/7/365 support D. Inability to reach customers beyond the United States. (A) (B) (C) (D) OOOO 2. Which of the following is likely to be the most significant business risk for Diet Web? A. Internal control limitations due to the small size of the company, B. Inability of the Internet to provide adequate support for such a business due to its instability C. Entrance of new competitors onto the Internet. D. Misstatements of revenues due to difficulties in determining appropriate year-end cutoffs. Company Profile Industry Informatie Statement Analysis Statement of Cash Flow Balance Sheet Situation Income Statement Risk Audit Procedures Communication Research 1. (A) (B) (C) (D) OOOO The most likely misstatement in the financial statements is A. The increase in cash in 20X8. B. Treatment of impaired intangible assets as an expense in 20X8. C. Treatment of common stock issued as an adjustment to net income. D. An income tax benefit on the income statement as contrasted to income tax expense. 2. (A) (B) (C) (D) oooo Which of the following is the most unexpected change on the balance sheet, if one assumes the revenue increase in 20X8 is correct? A Decrease in prepaid advertising expenses. B. Increase in accounts payable. C. Decrease in deferred revenues D. Increase in common stock Procedures Company Profile Situation Industry Information Balance Sheet Statement of Cash Flows Income Statement Statement Analysis Riks The auditor determines that each of the following objectives will be part of Diet Web's audit. For each audit objective, se lect a substantive procedure that would help to achieve that objective. Each of the procedures may be used once, more than once, or not at all Substantive procedure A Trace opening balances in the summary schedules to the prior year's audit working papers B. Review the provision for deprecation expense and determine that depreciable lives and methods used in the current year are consistent with those used in the prior year. c. Determine that responsibility for maintaining the property and equipment records is segregated from the responsibil ity for custody of property and equipment D. Examine deeds and title insurance certificates E Perform cutoff test to verify that property and equipment additions are recorded in the proper period. F. Determine that property and equipment is adequately insured. G. Physically examine all recorded major property and equipment additions. (A) (B) (C) (D) (E) (F) (G) 1. Diet Web has legal rights to property and equipment acquired during the year. 2. DietWeb recorded property and equipment acquired during the year that did not actually exist at the balance sheet date. Communication Financial Company Industry Balance Income of Cash Statement Audit Situation Profile Information Sheel Statem allows Analysis Procedures Research This is your firm's sixth audit of Diet Web. In a memorandum to the audit team (below) summarize your view of the audit committee's strengths, weaknesses, and any changes that have occurred relating to the audit committee this year. Remember: Your response will be graded for both technical relevance and writing skills. For writing skills you should demon- strate an ability to develop your ideas, organize them, and express them clearly. Do not convey information in the form of a ta ble, bullet point list, or other abbreviated presentation