Keystone Computer Case

3148 words 13 pages
Appendix 6C Problems
6C/1. The audit plan for Keystone Computers & Networks, Inc. Section | Purpose | Content | Objectives of the Engagement | To describe the services that are to be rendered to the client | The objectives are (1) audit of KCN’s financial statements for the year ended 12/31/05, and (2) issuance of a letter on compliance with covenants of the client’s letter of credit agreement. | Business and Industry Conditions | To describe the nature of KCN’s business and industry. | KCN sells and services microcomputers, networking hardware and software to business customers. KCN is exposed to external shocks and competitive forces in its industry. To effectively compete and succeed, KCN must have
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6C/3. a) Significant accounting and auditing matters: Capitalizing cost of developing software programs for sale. 1. FASB Statements 2 and 86 and FASB Interpretation No. 6 address capitalizing cost of developing software programs and accounting treatment. FASB 2 addresses the nature of the activity for which the software is being developed in determining whether software cost should be included or excluded from research and development. 2. FASB 6 indicates extent of acquisition, development or improvement of a process by a company for use in its selling or administrative activities – includes cost for computer software. They are not cost for research and development. 3. FASB 86 states that all costs incurred to establish the technological feasibility of a computer software product to be sold is research and development cost. Furthermore, technological feasibility of a product is established when the business has completed all planning, designing, coding, and testing activities necessary to meet its technological performance requirements.

KNC situation concerning the above – Based on FASB’s statements, KNC costs incurred subsequent to establishing technological feasibility are to be capitalized until the product is released to customers. Maintenance and support should be charged to expense and revenue must be recognized.

b) The major audit issue will be to determine whether the client has properly classified costs between


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