Making Connections. Business & Marketing Assignment.

Using the Making Connections Case in the Case Module, address the following:
-Identify any and all fraud "red flags"
-Suggest audit procedures for each of the above identified fraud conditions. In other words for each identified potential fraud condition, what should the auditor do.
-Identify RELEVANT authoritative auditing guidance and how this guidance is related to the case.

Copyright 2013 Deloitte Development LLCAll Rights Reserved.Case 14-6Making ConnectionsSocial Konnections Inc. (SKI or the “Company”) is a global Internet company thatruns Social Konnections, a large social media networking Web site. SKI has experiencedsteep growth since its launch in 2005, and the Company went public in 2010. SKIcurrently has over 500 million active users who visit the site to connect with others,express themselves, and play games.Last year, substantially all of SKI’s revenue came from advertisers who market theirproducts and services to SKI’s active users through advertisements placed on the Website or its various mobile platforms. The Company’s remaining immaterial revenue wasreceived from fees associated with the sale of virtual goods and services by third-partyapplication developers using SKI’s various platforms.In Q1 of the current fiscal year, SKI acquired Corporate Collaborations (CC), an entitythat manages private and public social media networks for corporations. CC’s customersare primarily national and global companies whose employees connect over its platform.In addition to hosting private social media networks for corporations, CC providesservices to develop the networks it manages. CC’s revenues are earned through theperformance of multiyear revenue contracts with its customers. In the current year, CC isexpected to produce approximately 20 percent of SKI’s consolidated revenue.SKI’s investors are focused on the growth prospects of the Company’s legacy open socialmedia platform operations and its new corporate revenue unit. The Company’s MD&Adisclosures include (1) various user and revenue metrics to help financial statement usersassess its traditional operations and (2) backlog information to help users assess CC’soperations.AuditBecause of SKI’s continued growth, the audit committee has requested that the Companychoose a new audit firm with experience in auditing public technology companies. A newfirm was selected and has performed each of the interim reviews in the current year.Kristine Drew, a senior auditor, is the in-charge accountant on the SKI audit. In additionto her supervisory and administrative responsibilities, Ms. Drew is responsible forauditing revenue. Ms. Drew has read the Company’s disclosed accounting policies and isinterviewing the revenue controller, Bill Cook, and various sales personnel to develop indepth process flow documentation that will serve as the basis for the team’s riskassessment.Advertising RevenueSKI creates advertising space on its Web site and mobile applications and sells the spaceto advertisers either directly or through advertising agencies. According to Mr. Cook, theamount an advertiser pays is dependent on the number of views the ad receives or on the Case 14-6c: Making Connections Page 2Copyright 2013 Deloitte Development LLCAll Rights Reserved.number of user clicks (depending on the type of advertisement defined in the underlyingcontract) and the revenue is recorded in the period in which the views or clicks are made.Ms. Drew has learned that simple advertising can be purchased directly from SKI throughSKI’s advertising Web site at standard rates, with the advertisements and terms inputdirectly into the Company’s ad delivery platform. However, most advertising revenue isgenerated directly through the advertising sales team, which has the ability to helpadvertisers develop more sophisticated advertising campaigns. Management hasestablished minimum pricing and volume thresholds for these advertisements; however,the sales staff is given significant latitude in securing contracts with customers. Extracommissions are paid to sales individuals who sign longer-term contracts that meetminimum revenue targets.Once a contract is signed, the ad development department creates the ad content andobtains the customer’s approval. The approved ad and the contract are electronically sentto the ad scheduling department, and the advertisement is uploaded into the Company’sad delivery platform. The ad delivery platform is a robust system and is designed tocapture all the nuances associated with the contract. For example, an advertiser may wishto have its ads displayed only to users whose IP addresses are from a specific geographiclocation, or the contract may be structured to provide the advertiser with variable pricingor incentives (such as a set of free advertisements) once a certain level has been paid for.In summary, the delivery platform captures all the relevant pricing information associatedwith the contract to allow for real-time revenue recognition according to the terms of thecontract. After the contract is entered into the system, a summary of the contract setup isprovided to the sales manager that worked with the customer. The sales manager thenreviews the contract setup for accuracy.The Company’s ad delivery platform automatically tracks the advertising activity eachday and reports the activity to its customers, who are then billed weekly for the aggregatead activity.Corporate Social Network Development and Hosting RevenueAs part of its new corporate services program from the acquisition of CC, the Companyearns revenues by providing corporate social network development and hosting services.For new customers, a contract will typically require an up-front fee to SKI for thedevelopment of the customer’s specific social media network; the contract will alsoinclude a separate multiyear hosting agreement. The customized social media networksonly operate on the Company’s hosting platform, and customers do not have the option totake possession of the software used to run the networks. Revenues for the up-front feeassociated with the development are recognized as the development is completed and thesystem is available to the customer. Hosting revenues are automatically recognized by thesystem based on the invoicing cycle outlined within the customer’s contract. Accordingto Mr. Cook, this invoicing cycle is fairly uniform throughout the hosting period;therefore, from a materiality perspective, the Company will disclose that hosting fees arerecognized ratably throughout the hosting contract period. Case 14-6c: Making Connections Page 3Copyright 2013 Deloitte Development LLCAll Rights Reserved.In Q4, during an interview with one of the new members of the corporate sales team,Ms. Drew was told that the corporate sales director had established a goal of increasingthe length of the average hosting contract. Before SKI acquired CC, most of the multiyearhosting agreements were for three-year terms. In Q4, the corporate sales directorimplemented a strategy shift that would increase the contracted hosting period to fiveyears. To accomplish this goal, the sales team was able to offer its customers threemonths of free service, to be added at the end of any new five-year agreement signed. Inaddition, the sales director offered an additional commission for converting existingcontracts to five-year agreements. To accelerate the implementation of this plan, the salescommission is doubled if the contract modification occurs before the end of the fiscalyear.Ms. Drew’s ConcernMs. Drew is concerned about several things she has learned regarding the appropriatenessof management’s revenue recognition policies.Required:1. Identify the potential revenue recognition issues related to each of the Company’ssources of revenue.2. On the basis of the information Ms. Drew has learned, what fraud risk factorsshould she consider discussing with her team at the next fraud brainstormingmeeting?3. What potential audit procedures could the team consider to evaluatemanagement’s revenue recognition policies and determine whether those policiesare appropriately applied?