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Twitter (TWTR) Audit Plan 10/03/13
Sayra and Ankush Auditing Firm
Index
1.1 Introduction
2.1 About the company
2.2 Key Drivers
2.3 Management Goals
2.4 Economic Factors
2.5 Important News
2.6 Important accounting policies
3.1 Quantitative materiality
3.2 Key qualitative materiality concerns
3.3 Risk of material misstatement
4.1 Conclusion
5.1 References
6.1 Financial Statements
1.1 Introduction
The purpose of this document is to provide a detailed plan of how S&A auditing firm
plans on auditing Twitter Co. Because Twitter has just recently begun being traded publicly, it
will not be possible to obtain historical information of previous audits, to help plan our 2013 audit
engagement. Our responsibility as auditors is to come up with an opinion, using the best
possible audit plan and the financial statements that are provided by Twitter’s management. In
this case, the information we derive our plan from is the S-1 Registration Statement and analyst
forecasts. Because Twitter operates in a fairly new industry, many industrial factors are
unknown.
2.1 About the Company
Twitter is an online social media network that allows users to communicate with others
throughout the world. Through each 140 character post, each user has the opportunity to share
his or her thoughts about any given subject with the world. The company’s vision is to give its
users an easy and free way to connect to the world. Twitter draws in most of its revenue from
advertisements and platform partners.
2.2 Key Drivers
An essential driver for the company is advertising revenue. Because the company
provides services to its users free of charge, the company draws in revenue through advertising
sales. The key to drawing in potential advertising clients is the number of users the company
has. Thus, the greater the amount of users Twitter has, the larger the amount of people that the
advertisement client reach. As of today, the company has around 230 Million users worldwide.
User growth is essential to the company because having a larger number of users will draw in
more advertisement clients.
One important aspect of the industry it that is affected by both advances in the
technology industry and data service industry. Both of these industries allow Twitter, and the
other social media outlets, to remain stable and reliable for its users. Thus, Twitter must remain
reliable in order to maintain and increase its user base. It must also be compatible with the
latest mobile devices and personal computers.
2.3 Management Goals
Since its inception, Twitter has been operating at a loss, and although revenue has
increased greatly over the years, it continues to operate at a loss. Because Twitter has only
recently gone public, management has great incentive to bring the company out of the red.
Management’s main goal is to increase the company’s growth while increasing revenue for it’s
shareholders. One of the main ways management plans on doing this is by investing heavily in
international operations. This is primarily because most of the user growth is expected to be
coming from international users. Management plans on accomplishing this goal by increasing
sales and advertising teams in countries like Argentina, Brazil, Ireland, and Netherlands. It also
plans on promoting Twitter in countries like France and Japan to reach a greater number of
users.
Management also plans on attracting new users by improving current services, as well
as by providing new services. Through investment in talented employees, Twitter management
hopes to increase the number of ideas that flow through the company, as well as create a
strong base for the company to grow from. In the past year, Twitter’s workforce increased by
nearly 900 employees.
2.4 Factors that affect the financials
An impending risk for continual growth is the potential privacy policies that could be
placed on the content of the feed on Twitter and the rest of the social media industry. New
policies on the privacy users could limit growth both in the United States and abroad. Currently,
there are numerous policies regarding the rights of publicity, data protection and other similar
matters that could hinder Twitter’s growth. Another important policy that could hinder potential
growth is one that could limit or increase the amount of information can be collected from users.
Limiting the amount of data collected from users could mean that Twitter would not be able to
offer this service, of collecting data for its advertisers, thus losing revenue. On the other hand,
being forced to collect more data from its users in order to adhere to child privacy rights could
discourage users from using Twitter for fear that too much information is being collected.
Also, the fact that many countries do not allow their people to use social media networks
may limit the company’s growth potential. Without the ability to reach new markets and draw in
more users, Twitter loses the opportunity to draw in more investors and partners. Also, in many
countries, there are already significant social media networks such as Kakao in Japan or
Google in India. Because of the competition, Twitter may not be able to draw in customers who
are already loyal to other social media outlets, or it may not be able to draw in investors who are
already invested in other social media networks.
2.5 Important News
As discussed earlier, Twitter recently released it’s IPO. According to many analyst
forecasts, the company will likely not be profitable until 2015. This is following the trend of it’s
rival Facebook that did not reach the IPO price until nearly a year after it began being publicly
traded. Analysts note that Twitter has a long way to go, in terms of interface, to draw in more
investors. Twitter IPO success is difficult to estimate, while competitor Facebook has had
difficulty reaching its goals in the securities market, rival LinkedIn has been rather successful.
However, due to Facebook results in the market the overall social media industry might suffer.
Although LinkedIn has had a successful trajectory since its IPO, investors might be hesitant in
investing in the social media industry altogether.
2.6 Important accounting policies.
Twitter has decided to have its accounts receivable account be unsecured. Although in
the past only a few accounts reflected large portions of their accounts receivables, which is not
the case now. As of June 30, 2013 no clients have reflected more than 10 percent of accounts
receivable. However, due to the fact that all of the accounts receivables are unsecured, there is
greater potential risk that the amounts will be uncollectable.
Another important policy is the recognition of deferred tax assets. The policies in place
are reflective of GAAP, however the accounting standards allow for a great amount of
judgement on the part of management. Due to the fact that Twitter has continuously operated at
a loss, future use of its assets remains uncertain. It will be essential to understand how
management has accounted for this uncertainty.
3.1 Quantitative Materiality
Our quantitative materiality calculations were done using the AICPA Audit Guide. The
amounts allocated to each accounts are representative of those calculations with some
rounding differences. The total amount of misstatement planned for this engagement is
$3,144,893, the difference between this amount and the amount allocated to materiality is
reflects the reserve we have allowed for this engagement.
ACCOUNT
ALLOCATED MATERIALITY (tolerable error)
KNOWN MISSTATEMENT
LIKELY MISSTATEMENT
TOTAL ESTIMATED MISSTATEMENT
Revenue $ 710,000
Account Receivable $ 440,000
Plant Property and Equipment $ 650,000
Intangible Assets $ 100,000
Good Will $ 500,000
Accounts Payable $ 80,000
Allocated Materiality $ 2,537,000
3.2 Key Qualitative concerns
We believe that there are two key qualitative concerns associated with Twitter’s
financial. One concern is that because the company is operating in losses, the company may
violate debt covenants. Even the smallest misstatement could breach contract, and so it is
important to focus on debt. A great amount of effort will be made to insure the accuracy of debt,
ensure that it is not materially understated, to ensure that minimal misstatements do not violate
debt covenants. Another key concern is that since Twitter is now publicly traded management
has greater incentive to overstate revenue to meet analyst forecasts. Thus, special attention has
to paid to the misstatement of revenue and expenses, to insure that revenues are not
overstated and expenses are not understated to meet analyst forecast. Thus, in all of these
cases, revenues, expenses, and debt the amount of misstatement might not be quantitatively
misstated but can be qualitatively misstated.
3.3 Risk of Material Misstatements
Because Twitter has been operating at a loss since it started, we have determined there
are three main accounts that we would like to focus on. Those accounts are revenues, account
receivables, and accounts payable. The reason why feel like these are important to focus our
effort on is because Twitter’s management has high incentive and opportunity to misstate them.
Since it only operates within the realm of the social network world, its accounts are fairly
straightforward. However, we feel like it is important to focus on these accounts because
management must give investors a reason to invest in the company. For revenues, we believe
that it is important to focus on the existence of the revenues, because they are normally
overstated. In this case due to the fact that Twitter has been operating at a loss and recently
issued its IPO the company has pressure and incentive to perform to meet the analyst
forecasts. For the accounts receivable, we believe that the main risk is that the account is
overstated and we believe we must focus on the existence. Accounts receivable is an important
account because there is incentive to overstate the account because investors want to see that
the company is drawing in money. Finally, we believe that accounts payable is important to
focus on as well. It shows the debt that the company owes, and is a big issue for investors and
lenders. Because the company is already operating at a loss, there is incentive to understate
accounts payable, and present the company in better light. For accounts payable, we assume
that the account is understated and we must also address completion assertion made by
management.
4.1 Conclusion
Overall, we believe that because Twitter’s operations are small in terms of investments
and revenues, there are not many areas of the financial that we need to audit. Of course, there
are certain factors that may cause Twitter to misstate financial information, especially because
of the pressure to reach analyst forecasts and become profitable.
5.1 References
Analyst Reviews
http://www.bloomberg.com/news/2013-11-05/twitter-ipo-more-expensive-than-facebook-without-profits.html
http://www.foxbusiness.com/markets/2013/11/18/twitter-great-but-overvalued-says-analyst/
Management Discussion
Found in S-1
http://www.sec.gov/Archives/edgar/data/1418091/000119312513390321/
d564001ds1.htm#fin564001_2
Other News
http://www.bbc.co.uk/news/technology-24986263
http://www.usatoday.com/story/money/markets/2013/11/11/twitter-lockup-ipo-shares/3498303/
http://www.usatoday.com/story/tech/columnist/2013/11/05/twitter-ipo-new-tech-economy-john-
shinal/3442985/
http://www.reuters.com/article/2013/10/30/net-us-twitter-ipo-idUSBRE99N1AE20131030
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