Hal Case Analysis

Year-End Audit Engagement Planning Memo

Risk is high because: what type of risk? What did I teach you in class Agnes?

• Bonus for VP is based on increase in % of sales revenues from 2006. This means that John has bias towards agressive accounting policies in order to receive bonus. Did you identify any examples? If so, please support here.

• Procedure: To address this risk - we need to determine if revenue recoginition is done correctly. For example, by examining BBI contracts. This is not valid.

• John has given verbal agreements with customers on special 10% discount and special payment terms of 90 days. This means that there is uncertainty for accuracy in sales and collectibilty issue since there is no written agreement to determine who is right.

• Procedure: We must determine the number of customers that have side agreements and vouch to sales orders to determine whether 10% discount was taken for accuracy purpose. This is not valid either. We need to work on your format Agnes. We have tons of work to do!

Materiality

• Materiality should be set to a lower level because Ivan would be concern about whether John deserves the bonus, new accounting system outsourced to DIU and lack of controls in DIU. Can you please quantify the materiality here?

Accounting Issues

Revenue Recognition

Issue: HAL is recognizing the non-refundable fee at May 31, 2007. Ok the issue here is a bill and hold issue with the rev rec for the BBI contract. This is not the correct issue.

Alt 1: HAL can recogize the fee since BBI has already purchase more than $15M worth of goods (HAL delivered $17.5M to BBI by May 31, 2007. Therefore, under the contract, the remaining goods are covered by the $10M non-refundable fee. Since it is non-refundable and goods are guarantteed to be delivered to HAL, early recognition of $7.5M is acceptable. This is not the issue Agnes.

Alt 2: Although the fee is non-refundable, HAL cannot recognize the fee since the fee is...