Chapter 40 Auditing High Technology Companies.docx

1、Chapter 40 Auditing High Technology Companies窗体底部40Auditing High Technology Companies40.1 OVERVIEW OF THE INDUSTRY 40.2 RISK FACTORS, AUDIT REACTION, AND AUDITING PROCEDURES (a) Revenue Recognition,(b) Field-Service Operations,(c) Computer Software Sales,(d) Bioscience and Technology,(e) Foreign Ope

2、rations,(f) Maintenance and Service Agreements,(g) Inventory,(i) Obsolescence,(ii) Field-Service Inventory,(iii) Direct Materials Valuation,(iv) Consigned Inventory,(h) Overhead Accounting,(i) Warranty Accruals,(j) Research and Development Costs,(i) Software Development Costs,(ii) Contracted Researc

3、h and Development,(iii) Acquired Technology,(k) Intercompany Transactions and Taxes, 40.1 OVERVIEW OF THE INDUSTRYCompanies that incorporate new technologies in their products have experienced rapid growth and provided dramatic new product offerings to the world markets. Additionally, the increased

4、use of the Internet and intranets for both electronic commerce and information-sharing purposes has had a significant impact on the economy, as Internet-based start-up companies have proliferated and traditional technology companies have allocated significant resources to e-business strategies. As a

5、 result, high technology companies are becoming one of the largest industries in the U.S. and world economies. Segments of the high technology industry include computers, electronics, semiconductors, e-business, software, communications, instrumentation, robotics, biotechnology, medical devices, and

6、 other applied sciences. These businesses and the products they offer are diverse, but they share the following common characteristics that result in their inclusion in the high technology category: Intensive research and development, which generally cause operating losses prior to product introduct

7、ion A need to identify funding to sustain the company prior to product introduction, and thereafter for marketing and sales efforts and working capital Products that derive value from technology as opposed to the production process Significant competitive advantage and rapid growth of companies that

8、 are first or second to market Sudden emergence of rapid-growth niche markets Rapid growth in total market and individual company size Extensive use of resellers and third-party channels as a means of increasing distribution volume and minimizing selling and administrative costs Rapid entry into int

9、ernational markets High gross margins that shrink rapidly as competing products are introduced Extensive warranty and customer support commitments that result in high customer service costs Rapid product obsolescence caused by the introduction of competing products utilizing more advanced technologi

10、es Frequent instances of products that fail to meet customer expectations or have short life cycles, resulting in rapid downturns for individual companies or entire niche markets Significant operations utilizing the Internet/electronic commerce business model In addition to providing the defining ch

11、aracteristics of high technology companies, these attributes are often the cause of the most significant audit issues in the industry. Such issues include premature revenue recognition; improper capitalization of research and development costs; unexpected inventory write-offs; and failure to appropr

12、iately account for sales discounts, return provisions, and vendor commitments. Furthermore, the rapid growth experienced by many high technology companies frequently results in companies outgrowing their accounting systems and controls. These factors and the frequency of business failures in the hig

13、h technology industry make it necessary for the auditor to exercise increased diligence in assessing risk-including the risk that the company will be unable to obtain sufficient funding to continue as a going concern-and determining the audit strategy and in performing substantive tests. This chapte

14、r discusses unique aspects of the high technology environment and the related audit implications. 40.2 RISK FACTORS, AUDIT REACTION, AND AUDITING PROCEDURESRevenue recognition is a key audit risk area in the high technology industry, largely because of the Securities and Exchange Commissions (SEC) f

15、ocus on it. Specifically, the SEC has requested that the Financial Accounting Standards Board (FASB) consider adding several Internet/dot-com issues to the agenda of the Emerging Issues Task Force (EITF). In addition, in December 1999 the SEC staff issued Staff Accounting Bulletin (SAB) No. 101, Rev

16、enue Recognition in Financial Statements, which in essence extended the four criteria for revenue recognition under Statement of Position (SOP) 97-2, Software Revenue Recognition (discussed in the main volume), to all companies. The SAB calls for stricter interpretations of certain characteristics o

17、f sales transactions, such as installation, customer acceptance, and upfront fees, areas that have a particular impact on high technology companies. The common characteristics of high technology companies cited previously can increase dramatically the inherent risks to which such companies are vulne

18、rable, as well as control risk. Audit areas commonly affected by these increased risks include revenue recognition, inventory, field-service operations, warranty accruals, and research and development costs. The remainder of this chapter discusses how the auditor should identify and address such ris

19、ks. (a) Revenue Recognition Technology developed by a vendor often can be applied to a large number of different types of product at minimal incremental cost. Therefore, it is not uncommon for sales and management personnel to structure large numbers of transactions so that each is unique in some ma

20、nner. Especially close to the end of an accounting period, vendors commonly offer large sales discounts and other concessions, such as product warranties, rights of return or exchange, acceptance clauses, or free services. These unique contractual arrangements make the determination of revenue recog

21、nition more difficult than in many other industries. Several high technology companies have experienced business failures as a result of inadequate controls, including monitoring controls. In some of those instances, employees took advantage of the companys ineffective internal control to record rev

22、enue that should have been deferred according to the provisions of the related sales contracts. Such provisions may grant rights of return, exchange, or acceptance; extended payment terms; and the right to receive additional products or services in the future; or may specify other vendor obligations

23、. In assessing the companys internal control, the auditor should determine that management has established and maintains sufficient controls to identify and properly account for such unique sales arrangements. This commonly necessitates a review of all material nonstandard sales contracts by appropr

24、iate personnel. Controls also are needed to ensure that accounting personnel are notified of commitments made by sales personnel that are not included in sales contracts. The auditor should read significant sales contracts and examine the relevant facts and circumstances surrounding individual trans

25、actions in order to determine whether revenue has been recognized appropriately. Frequently, a company will not have detailed customer documentation setting forth the terms of a particular sale. In these circumstances, the auditor should give serious consideration to contacting customers directly th

26、rough detailed confirmations that include the specific terms of sale as represented by the company. The auditor should not consider revenue recognition in isolation from the collectibility of the related accounts receivable. In many cases, the ability of the vendor to collect receivables is the ulti

27、mate determinant of when revenue should be recognized. Significant receivable balances that remain uncollected long after the balance sheet date or days sales outstanding that are unusually high may call into question the appropriateness of the entitys revenue recognition policies. (b) Field-Service

28、 OperationsMany high technology manufacturers have field-service operations that support equipment that has been delivered and installed. Revenues from field-service operations may be based on contracts or individual service calls, depending on the underlying service or maintenance agreement with th

29、e customer. The auditor should be alert to service and maintenance costs that should not be billed to customers because the customer is entitled to the services under warranty agreements. Field-service operations tend to be geographically dispersed and characterized by a large volume of low-dollar-v

30、alue transactions. The geographical dispersion often requires large amounts of test equipment and parts inventory at many locations. Controlling these operations requires effective procedures and management systems, which may not be fully developed. Internal audit participation in this area is often

31、 critical in attaining adequate audit coverage. (c) Computer Software SalesAICPA Statement of Position (SOP) 97-2, Software Revenue Recognition, addresses software revenue recognition principles. SOP 97-2 superseded SOP 91-1, which was applied by analogy to revenue recognition for high technology pr

32、oducts other than software. It is expected that SOP 97-2 also will be applied to nonsoftware sales. In general, SOP 97-2 requires that revenue not be recognized until the product is delivered; however, the SOP also states that revenue may not be recognized even when delivery has occurred, unless all of the following conditions have been met: Evidence of an agreement has been obtained Collectibility of the related receivable is probable The vendor