Kriss Angles Inc. (KAI) supplies and installs computer networks for small businesses. The services KAI provides include sale of hardware, cabling, software, installation, training, and full support for the networks system for 2 years. KAI's approach to sales is to sell "outcomes," rather than goods or services. For example, on January 1, 2008, KAI entered into a contract with Mind-Freek Ltd. The "outcome" of that contract read: "On or before June 30, 2010, all employees of Mind-Freek Ltd. will be able to communicate with each other electronically, to access all needed corporate data, and to process the information and transactions for which they are responsible in a timely manner." For this outcome, KAI's contract price was $400,000. Of that amount, $50,000 was paid in advance, and $100,000 was paid after all hardware and software had been installed (3 months after signing the contract). The balance is due 2 years after signing the contract, at which time KAI's support changes to a fee-for-service basis. If at the end of the 2 years, Mind-Freek Ltd. signs a statement that the "outcomes" have not been delivered, KAI will refund $280,000 of the fee, keeping only the cost of the hardware.

Mind-Freek Ltd. is a reliable company and collection of the accounts receivable is reasonably assured.

The estimated values to KAI of the various items provided are:

Item	Cost to KAI	Value (if Purchased Separately)
Hardware (including installation)	$120,000	$180,000
Labour to install software and provide initial training	$100,000 for 2,000 hours	$150,000
Labour to provide ongoing support for 2 years	Cannot be estimated in advance. Cost is $30/hour.	Previous similar contracts have cost between $20,000 and $200,000 for the support.

REQUIRED:

1. Assume KAI's management has recorded $200,000 from this contract as revenue for the year ended December 31, 2008. Discuss whether this is the appropriate amount to be recognized as revenue. If not, prepare the appropriate adjusting entry since all misstatements are considered material on this audit engagement. (9 Marks)

2. For the audit issue described above, give two substantive audit procedures for each of the following audit objectives (12 marks):
   1. Occurrence of the transaction
   2. Completeness of the transaction
   3. Measurement of the transaction