Financial Audit Plan Paper

We have read and discussed the “DCNC Intro and APM.doc”. When reviewing the audit plan of DCNC, we came across problems with the significant risks section and the section on significant accounting and auditing matters. In particular, the second matter described involves capitalizing the costs of developing a software program for sale stuck out in our minds. Our concerns and proposed solutions are addressed below.

Significant Risks

DCNC noted the following significant risks: 1) engagement in a strategy to sell to customers with higher credit risk and 2) officers of the company to receive significant bonuses based on quarterly results.

Solution for risk 1: In order to properly manage the risk of the customer selling strategy, auditors should

They also need to increase unpredictability of audit procedures and sampling. Furthermore, they must verify the cutoff of sales and transactions.

Capitalization Costs

In concern with the capitalization cost, the main issue at hand is whether our software development qualifies for capitalization. According to FASB ASC 985-20-25-1, all costs incurred to establish the technological feasibility of a computer software product to be sold, leased, or otherwise marketed are research and development costs . Those costs shall be charged to expense when incurred as required by Subtopic 730-10.

The major audit issue will be determining when the technology (and/or intangible assets derived from technology development) becomes technologically feasible and when to allow costs to be capitalized. The feasibility is determined through a series of tests and assessments deemed appropriate by DCNC. Once determined, the feasibility of this technology will be expensed in the same periods as the research and development costs occur. One of the most important criteria is determining and measuring the expenditures that are related to the intangible asset during development. Other factors include the completion of the technology and when the intangible asset is eligible to be used. Following the appropriate standards will allow for audit issues such as this to be minimized, but determining the technological feasibility is often challenging for