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