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AP3.8 (LO 5) Moderate Audit strategy All Tunes Satellite Radio (ATS) provides a subscription service to satellite Radio channels. Customers can pay for a subscription on a monthly basis, or pay for a year in advance and receive a 15% discount. Approximately 53% of customers pay in advance. When ATS receives payment in advance, a deferred revenue account (Unearned Revenue) is credited. At the end of each month as the satellite radio service is provided to customers, ATS makes an adjusting entry to recognize subscription revenue. The audit team is planning a reliance on controls strategy to obtain evidence of revenue recognition for ATS. The team will be testing internal controls over the recognition of subscription revenue during interim. Required a. Explain the type of audit strategy planned by the audit team for gathering evidence about revenue recognition b. Suppose during the interim testing of internal controls the team discovers a significant number of instances in which subscription revenue received in advance is recognized immediately in revenue Analyze how the audit strategy will be impacted. Cloud 9 - Continuing Case W&S Partners has just won the January 31, 2023, audit for Cloud 9. The audit team assigned to this client is: Partner, Jo Wadley Audit manager, Sharon Gallagher Audit senior, Josh Thomas IT audit manager, Mark Batten Experienced staff, Suzie Pickering First-year staff, lan Harper W&S Partners use the following percentages as starting points for the various benchmarks: Benchmark Threshold (%) Income before tax 5.0 Total revenue 0.5 Gross profit 2.0 Total assets 0.5 Equity 10 These starting points can be increased or decreased by taking into account qualitative client factors, which could be: The nature of the client's business and industry (for example, rapidly changing, either through growth or downsizing, or an unstable environment). Whether the client is a public company (or subsidiary of) subject to regulations. The knowledge of or high risk of fraud. Typically, income before tax is used; however, it cannot be used if reporting a loss for the year or if profitability is not consistent When calculating PM based on interim figures, it may be nee- essary to annualize the results. This allows the auditors to plan the audit properly based on an approximate projected year-end balance. Then, at year-end, the figure is adjusted, if necessary, to reflect the actual results. As a part of the risk assessment phase for the new audit, the audit team needs to gain an understanding of Cloud 9's structure and its business environment, determine materiality, and assess the risk of material misstatement. This will assist the team in de- veloping an audit strategy and designing the nature, extent, and timing of audit procedures. One task during the planning phase is to consider the con- cept of materiality as it applies to the client. Auditors will de- sign procedures to identify and correct errors or irregularities that would have a material effect on the financial statements and affect the decision-making of the users of the financial statements. Materiality is used in determining audit procedures and sample selections, and evaluating differences from client records to audit results. Materiality is the maximum amount of misstatement, individually or in aggregate, that can be accepted in the financial statements. In selecting the benchmark to be used to calculate materiality, the auditors should consider the key drivers of the business. They should ask, "What are the end users (that is, stockholders, banks, etc.) of the accounts going to be looking at?" For example, will stockholders be interested in profit figures that can be used to pay dividends and increase share price? W&S Partners' audit methodology dictates that one plan- ning materiality (PM) amount is to be used for the financial statements as a whole. The benchmark selected for determin- ing materiality is the one determined to be the key driver of the business. Required Answer the following questions based on the information pre- sented for Cloud 9 in the appendix to this text and in the current chapter and previous chapters. a. Using the October 31, 2022. trial balance in the appendix to this text), calculate planning materiality and include the justification for the benchmark that you have used for your calculation. b. Discuss how the planning materiality would be used to deter- mine performance materiality c. If the planning materiality amount is subsequently increased or decreased later in the audit, how would that impact the audit? AP3.8 (LO 5) Moderate Audit strategy All Tunes Satellite Radio (ATS) provides a subscription service to satellite Radio channels. Customers can pay for a subscription on a monthly basis, or pay for a year in advance and receive a 15% discount. Approximately 53% of customers pay in advance. When ATS receives payment in advance, a deferred revenue account (Unearned Revenue) is credited. At the end of each month as the satellite radio service is provided to customers, ATS makes an adjusting entry to recognize subscription revenue. The audit team is planning a reliance on controls strategy to obtain evidence of revenue recognition for ATS. The team will be testing internal controls over the recognition of subscription revenue during interim. Required a. Explain the type of audit strategy planned by the audit team for gathering evidence about revenue recognition b. Suppose during the interim testing of internal controls the team discovers a significant number of instances in which subscription revenue received in advance is recognized immediately in revenue Analyze how the audit strategy will be impacted. Cloud 9 - Continuing Case W&S Partners has just won the January 31, 2023, audit for Cloud 9. The audit team assigned to this client is: Partner, Jo Wadley Audit manager, Sharon Gallagher Audit senior, Josh Thomas IT audit manager, Mark Batten Experienced staff, Suzie Pickering First-year staff, lan Harper W&S Partners use the following percentages as starting points for the various benchmarks: Benchmark Threshold (%) Income before tax 5.0 Total revenue 0.5 Gross profit 2.0 Total assets 0.5 Equity 10 These starting points can be increased or decreased by taking into account qualitative client factors, which could be: The nature of the client's business and industry (for example, rapidly changing, either through growth or downsizing, or an unstable environment). Whether the client is a public company (or subsidiary of) subject to regulations. The knowledge of or high risk of fraud. Typically, income before tax is used; however, it cannot be used if reporting a loss for the year or if profitability is not consistent When calculating PM based on interim figures, it may be nee- essary to annualize the results. This allows the auditors to plan the audit properly based on an approximate projected year-end balance. Then, at year-end, the figure is adjusted, if necessary, to reflect the actual results. As a part of the risk assessment phase for the new audit, the audit team needs to gain an understanding of Cloud 9's structure and its business environment, determine materiality, and assess the risk of material misstatement. This will assist the team in de- veloping an audit strategy and designing the nature, extent, and timing of audit procedures. One task during the planning phase is to consider the con- cept of materiality as it applies to the client. Auditors will de- sign procedures to identify and correct errors or irregularities that would have a material effect on the financial statements and affect the decision-making of the users of the financial statements. Materiality is used in determining audit procedures and sample selections, and evaluating differences from client records to audit results. Materiality is the maximum amount of misstatement, individually or in aggregate, that can be accepted in the financial statements. In selecting the benchmark to be used to calculate materiality, the auditors should consider the key drivers of the business. They should ask, "What are the end users (that is, stockholders, banks, etc.) of the accounts going to be looking at?" For example, will stockholders be interested in profit figures that can be used to pay dividends and increase share price? W&S Partners' audit methodology dictates that one plan- ning materiality (PM) amount is to be used for the financial statements as a whole. The benchmark selected for determin- ing materiality is the one determined to be the key driver of the business. Required Answer the following questions based on the information pre- sented for Cloud 9 in the appendix to this text and in the current chapter and previous chapters. a. Using the October 31, 2022. trial balance in the appendix to this text), calculate planning materiality and include the justification for the benchmark that you have used for your calculation. b. Discuss how the planning materiality would be used to deter- mine performance materiality c. If the planning materiality amount is subsequently increased or decreased later in the audit, how would that impact the audit