Posted:

SurfAnyTime SurfAnyTime Inc.

SurfAnyTimeSurfAnyTime Inc. (SAT) is an Internet company that runs SurfAnyTime, a large social medianetworking Web site. SAT has experienced steep growth since its launch in 2003, and theCompany went public in 2007. SAT currently has over 450 million active users who visit the siteto connect with others, express themselves, and play games.Last year, substantially all of SAT’s revenue came from advertisers who market their productsand services to SAT’s active users through advertisements placed on the Web site or its variousmobile platforms. The Company’s remaining immaterial revenue was received from feesassociated with the sale of virtual goods and services by third-party application developers usingSAT’s various platforms.In Q1 of the current fiscal year, SAT acquired Corporate Collaborations (CC), an entity thatmanages private and public social media networks for corporations. CC’s customers are primarilynational and global companies whose employees connect over its platform. In addition to hostingprivate social media networks for corporations, CC provides services to develop the networks itmanages. CC’s revenues are earned through the performance of multi-year revenue contractswith its customers. In the current year, CC is expected to produce approximately 20% of SAT’sconsolidated revenue in the current year.SAT’s investors are focused on the growth prospects of the Company’s legacy open social mediaplatform operations and its new corporate revenue unit. The Company’s MD&A disclosuresinclude (1) various user and revenue metrics to help financial statement users assess its traditionaloperations and (2) backlog information to help users assess CC’s operations.AuditBecause of SAT’s continued growth, the audit committee has requested that the Company choosea new audit firm with experience in auditing public technology companies. A new firm wasselected and has performed each of the interim reviews in the current year.Kristine Drew, a senior auditor, is the in-charge accountant on the SAT audit. In addition to hersupervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue.Ms. Drew has read the Company’s disclosed accounting policies and is interviewing the revenuecontroller, Bill Cook, and various sales personnel to develop in- depth process flowdocumentation that will serve as the basis for the team’s risk assessment.Advertising RevenueSAT creates advertising space on its Web site and mobile applications and sells the space toadvertisers either directly or through advertising agencies. According to Mr. Cook, the amountan advertiser pays is dependent on the number of views the ad receives or on the number of userclicks (depending on the type of advertisement defined in the underlying contract) and therevenue 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 SAT through SAT’s2advertising website at standard rates, with the advertisements and terms input directly into theCompany’s ad delivery platform. However, most advertising revenue is generated directlythrough the advertising sales team, which has the ability to help advertisers develop moresophisticated advertising campaigns. Get research paper samples and course-specific study resources under   homework for you course hero writing service – Manage ment has established minimum pricing and volumethresholds for these advertisements; however, the sales staff is given significant latitude insecuring contracts with customers. Extra commissions are paid to sales individuals who signlonger-term contracts that meet minimum revenue targets.Once a contract is signed, the ad development department creates the ad content and obtains thecustomer’s approval. The approved ad and the contract are electronically sent to the adscheduling department, and the advertisement is uploaded into the Company’s ad deliveryplatform. The ad delivery platform is a robust system and is designed to capture all the nuancesassociated with the contract. For example, an advertiser may wish to have its ads displayed onlyto users whose IP addresses are from a specific geographic location, or the contract may bestructured to provide the advertiser with variable pricing or incentives (such as a set of freeadvertisements) once a certain level has been paid for.In summary, the delivery platform captures all the relevant pricing information associated withthe contract to allow for real-time revenue recognition according to the terms of the contract.After the contract is entered into the system, a summary of the contract setup is provided to thesales manager that worked with the customer. The sales manager then reviews the contract setupfor accuracy.The Company’s ad delivery platform automatically tracks the advertising activity each day andreports the activity to its customers, who are then billed weekly for the aggregate ad activity.Corporate Social Network Development and Hosting RevenueAs part of its new corporate services program from the acquisition of CC, the Company earnsrevenues by providing corporate social network development and hosting services. For newcustomers, a contract will typically require an up-front fee to SAT for the development of thecustomer’s specific social media network; the contract will also include a separate multi-yearhosting agreement. The customized social media networks only operate on the Company’shosting platform, and customers do not have the option to take possession of the software usedto run the networks. Revenues for the up-front fee associated with the development arerecognized as the development is completed and the system is available to the customer. Hostingrevenues are automatically recognized by the system based on the invoicing cycle outlined withinthe customer’s contract. According to Mr. Cook, this invoicing cycle is fairly uniform throughoutthe hosting period; therefore, from a materiality perspective, the Company will disclose thathosting fees are recognized ratably throughout the hosting contract period.In Q4, during an interview with one of the new members of the corporate sales team, Ms. Drewwas told that the corporate sales director had established a goal of increasing the length of theaverage hosting contract. Before SAT acquired CC, most of the multi-year hosting agreementswere for three-year terms. In Q4, the corporate sales director implemented a strategy shift thatwould increase the contracted hosting period to five years. To accomplish this goal, the salesteam was able to offer its customers three months of free service, to be added at the end of any3new five-year agreement signed. In addition, the sales director offered an additional commissionfor converting existing contracts to five-year agreements. To accelerate the implementation ofthis plan, the sales commission is doubled if the contract modification occurs before the end ofthe fiscal year.Ms. Drew’s ConcernMs. Drew is concerned about several things she has learned regarding the appropriateness ofmanagement’s revenue recognition policies.Required:1. Identify the potential revenue recognition issues related to each of the Company’s sourcesof revenue.2. On the basis of the information Ms. Drew has learned, what fraud risk factors shouldshe consider discussing with her team at the next fraud brainstorming meeting?3. What potential audit procedures could the team consider to evaluate management’srevenue recognition policies and determine whether those policies are appropriatelyapplied?

Order | Check Discount