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Background You are an audit manager for the public accounting rm, Audit Firm LLP. You have been assigned to your rm's new audit client, Friend2Friend, Inc. (F 2F)1. Audit Firm LLP has been engaged to perform an integrated audit for F2F for the year-ended December 31, 2020. F2F is a public company that provides a platform for users to connect and share information with friends across the globe. Its market capitalization is approximately $12.6 billion. F2F started its business six years ago and has grown its user base exponentially since its rst year in operations and also went public two years ago. F2F has developed its own proprietary software to deliver its platform to its users. F2F allows for users to create friendship \"circles\" or groups that can connect and share personal updates, photographs, and other information. Users can create various \"circles\" within their contact listing and share information with their individual \"circles of friends\" or contacts for a more personalized experience. Currently, F2F operates in the Services-Computer Programming, Data Processing, Etc., or Standard Industry Classication (SIC) 7370 of the Securities and Exchange Commission (SEC). Its competitors primarily are those companies included in SIC 7370 industry classication. The industry is heavily reliant on innovation, technology, and acquiring users. Technology disruptions and loss of users could negatively impact the business of those in the industry. The primary 1 Friend2Friend is a ctious company. The financial information and any related background of Friend2Friend, Inc. were developed for illustrative purposes only. revenue source for F2F, as well as other in the industry, is advertising revenues. Ads are displayed on the content pages of the users and contribute to a large portion of the revenue earned for those in the industry. Exhibit I provides the companies listed in the SIC 7370 and provides their market capitalization, revenues and assets for 2019 and 2020. Exhibit la- SIC 7370 Industry Data for Fiscal-Year End 2019 (in thousands) Industry Market Cap ($) Revenue ($) Assets ($) Facebook Inc $ 504,828,920 $ 70,697,000 $ 133,376,000 Alphabet Inc. 410,095,157 161,857,000 275,909,000 IHS Markit Ltd. 28,915,247 4,414,600 16,087,200 TWITTER, INC. 25,076,320 3,459,329 tA 12,703,389 Snap Inc 19, 101,501 1,715,534 4,011,924 Trade Desk, Inc. 10,813,174 661,058 tA 1,728,761 Factset Research System Inc. 10,361,241 1,435,351 1,560,130 Sabre Cor 6,230,910 3,974,988 5,689,957 Match Group Holdings II, LLC 5,897,622 2,051,258 2,423,712 A A AtA A tA 10 Trip Advisor, Inc. 3,830,673 1,560,000 1,984,000 11 SVMK Inc. 2,479,688 307,421 804,259 12 Pluralsight, Inc. 1,730,458 A A A 316,910 1,031,953 13 Switch, Inc. 1,291,529 462,310 1,773,743 14 Eventbrite, Inc. 1,202,774 326,801 808,015 AtA 15 HEALTHSTREAM INC 875,511 254,112 489.544 Source: SEC Edgar Database via Audit Analytics 2Exhibit 1b- SIC 7370 Industry Data for Fiscal-Year End 2020 (in thousands) Industry Market Cap ($) Revenue ($) Assets ($) Facebook Inc $ 665,370,558 $ 85,965,000 159,316,000 Alphabet Inc. 528,459,694 182,527,000 $ 319,616,000 Snap Inc A TA TA E 63,254,077 2,506,626 5,024,238 TWITTER, INC. 43,235,205 3,716,349 13,379,090 IHS Markit Ltd. 36,868,084 4,287,800 16,135,200 AtA PINTEREST, INC. 34,886,373 1,692,658 2,609,459 Trade Desk, Inc. 34,410,308 836,033 A 2,753,645 Factset Research System Inc. 13,451,595 1,494,111 2,083,388 Rackspace Technology, Inc. 3,953,797 2,707,100 6,377,800 FA FA A tA 10 Cardlytics, Inc. 3,884,015 186,892 422,537 11 Sabre Corp 3,734,255 1,334,100 6,077,722 12 SVMK Inc. 3,607,956 375,610 A 877,817 13 TripAdvisor, Inc. 3,377,881 604,000 1,969,000 14 MAGNITE, INC 3,373,324 221,628 938,960 15 Pluralsight, Inc. 2,549,203 391,865 1,151,133 16 Switch, Inc. 1,921,586 511,547 tA 2,114,456 17 Health Catalyst, Inc. 1,851,658 188,845 577,740 18 Eventbrite, Inc. 1,252,969 106,006 795,685 A A 19 MODEL N, INC. 1, 193,238 A 161,056 320,290 20 CEVA INC 922,494 100,326 306,952 21 EverQuote, Inc. 760,568 346,935 129,050 A HEALTHSTREAM INC 695,648 244,826 500,313 Source: SEC Edgar Database via Audit Analytics You and your team are in the final stages of the audit, which includes reporting on the overall financial statements of F2F. During the current year, F2F completed a significant business acquisition of Emoji Chat, which resulted in approximately $400 million of goodwill and intangibles. The total consideration paid for Emoji Chat was $785 million and was financed with convertible debt and equity. Emoji Chat is another social media application that users can use to communicate with their personal circle of friends. See Exhibit 2 for a summary of the balance sheet and income statement information of F2F. 3Exhibit 2- Summary Financial Information of F2F (in thousands) 12/31/2020 12/31/2019 Total Assets $1,977,250 $1,009,201 Total Liabilities $1,010,197 $287,000 Total Equity $967 $722,201 Total Revenue $1,251,978 $400,890 Total Expenses $820,505 $260,130 Net Income $140,760 Furthermore, during the year, F2F was also named as the defendant for to several legal matters. In 2020, F2F was name as the defendant in a class action suit, which alleged a Violation of consumer protection laws as data was compromised during a thirdparty cyber-attack 0n F2F. During the cyber-attack, the thirdparty attempted to steal user prole information and other data from user accounts. The class action suit is for an unspecied amount and is in the preliminary stages. Several other legal cases are pending and relate to an employee claim of termination without cause and a patent infringement claim. F2F is still investigating these claims with the assistance of their external legal counsel. In Exhibit 3, the critical accounting policies of F2F are listed. Exhibit 3- Summary of Critical Accounting Policies and Estimates Critical Account Policy Description Revenue Recognition The advertising revenue is generated from the display of advertisements on F2F through contractual agreements that are either based on the number of advertisement impressions (or images) delivered or contractual agreements based on a fixed fee basis over a period of time. Revenue related to agreements based on the number of images delivered is recognized when the advertisement is displayed. Revenue related to fixed fee arrangements is recognized ratably over the service period, typically 30 to 90 days. Impressions are considered delivered when visible to the user . Loss Contingencies F2F is involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. Certain matters may be speculative for amounts that are unable to be determined. A liability is recorded when a loss is probable and the amount can be reasonably determined, which requires significant judgment. Estimates are reviewed on an on-going basis to reflect the impact of any negotiations, settlements, rulings, legal advice, or other actions that may impact the provisions made. Income Taxes- Uncertain F2F recognizes tax benefit for uncertain tax positions only if it is more Tax Positions likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. In addition, F2F records a reserve for any uncertain tax positions (including interest and potentials) even though the final outcome may differ than our estimate. Business Combinations F2F allocates the fair value of the purchase consideration to the tangible assets acquired, the liabilities assumed, and to the intangible assets acquired. Th acquired assets and assumed liabilities are estimated at their fair value on the date of acquisition. The excess of the fair value of the purchase consideration and the identified assets/liabilities is recorded as goodwill. Management makes significant estimates to determine the fair value of the identified assets/liabilities. In estimating the fair value of identified intangible assets, an estimate of the future cash flows from acquired users, technology, and trade name, useful lives, and discount rates is made and based on assumptions that management deems reasonable. These assumptions are estimates and actual results may differ. Within the measurement period (not to exceed one year), adjustments may be made to the estimates made by management with an offset to goodwill. If an adjustment is required subsequent to the measurement period, then the adjustment will be reflected in earnings. 5Valuation of Goodwill and Goodwill is assessed for impairment annually or more frequently if Acquired Intangibles events or circumstances arise that would more likely than not reduce the fair value of the reporting unit below its carrying value. Acquired intangibles are assessed for impairment when events or circumstances that indicate the carrying value of the assets are not recoverable. The undiscounted cash ows that the asset is expected to generate are compared to the can'ying value of the asset to determine recoverability. If the asset is not recoverable, it is reduced to its fair value. As part of the audit, you have engaged valuation specialist to assist with the valuation of the assets in the signicant business combination of Emoji Chat. Your rm's valuation specialist evaluated F2F management's valuation of the fair value of the acquired tangible and intangibles assets and liabilities assumed for the business combination with Emoji Chat. You also engaged your firm's Information Technology specialists to assist with the interface and technology that is used by F2F' s users and to display impressions, or images, used for generating advertising revenue. Case Requirements: 1. Familiarize yourself with the PCAOB' 3 requirements for Critical Audit Matters (CAM) in the audit report as required by Auditing Standard 3101, The Auditor 's Report on an Audit ofFinancial Statements When the Auditor Expresses an Unqualified Opinion (\"AS 3101\"). a. Briey describe the requirements of AS 3101 and the nature of items that audit should consider for disclosure as a CAM. 2. Identify the areas of the audit that may meet the requirements for disclosure as a CAM based on AS 3101 based on the current background of the audit client. Use the background in the case and the nancial information to assist with determining those areas that may meet the requirements of the AS 3101. 3. Analyze the CAMs that have previously been disclosed as a CAM by competitors in the industry (SIC: 7370 Services-Computer Programming, Data Processing, Etc. ). a. To analyze CAMs in the industry, you can search the wwwsecgov for lO-K lings of the competitors. See Exhibit 1 for a list of competitors to consider in the industry to the SEC website for each competitor's lO-K ling (You do not need to analyze each competitor listed). You may consider additional companies that could be competitors of your client. b. You should consider trends in the nature of the CAM disclosures for a subset of the industry as (i.e. those competitors of similar size using a measure of either market capitalization, revenues, and assets or the largest members of the industry). 4. Provide a summary analysis of the industry and the number and nature of CAM disclosures made by competitors. Consider the industry overall and how the trends and disclosure for the industry may or may not apply to your client. 5. Using your judgement, identify the CAMS that you think should be disclosed. Prepare the CAMS to be disclosed in the audit report. 6. You will summarize your results to present to the partner on the account. You can use PowerPoint to summarize your responses. Be sure your descriptions, tables, and judgments are clear and concise. You are required to submit your own work. Please do not copy or duplicate a classmate's judgments or results