Reference no: EM132866598

Question - Donald Trump (former president of the USA) was recently banned from using Twitter. The main reason for this was his violation of Twitter's user code of conduct / policies. Subsequent to the 2020 year end, Trump sued Twitter for $1 billion. Twitter management thought that the lawsuit was frivolous and would never materialize so didn't disclose anything related to the lawsuit in the 2020 F/S. Twitter's lawyers agreed that the lawsuit would not be successful and that the $1B was seemingly random. There were no other issues with the F.S. for the 2020 year end. Materiality was $39M based on NIBT.

a. If you wanted to verify the exclusion of the Trump lawsuit from the F.S, what audit evidence would you gather? Why?

b. How would the presence of a code of user conduct and the company's adherence to that policy impact your risk assessment for the audit? Choose one impact and be specific and use the audit risk model to support your response.

c. One of Twitter's critical audit matters (called KAMs in Canada) was revenue recognition. Specifically, the identification of performance obligations and whether or not Twitter was actually the agent in those obligations (and not the principal). In auditing these performance obligations, what assertion would have been most risky? Why did you choose this assertion?

d. The Twitter auditor also used tests of controls to collect evidence for Twitter's revenue. Would this increase or decrease PDR? Explain your choice.

e. What auditor's report would you issue in this scenario? Fully justify your response.

f. In 2020, Twitter had other unusual lawsuits (aside from the Trump lawsuit) that were valid and the company recorded Dr. Legal Expense and Cr. Accrued liability for $500M in 2020. Would these transactions have impacted 2020 materiality? Why or why not?