Group Project: Audit Plan and Report of EBay Inc.

Group 4
Bayode OLAMITOKE 104107373
Enjie HAN 104007349
Jianwu XIAO 104050178
Jianning LIN 104005831
Ke ZHAO 104018778
Ling LU 103999797
Neville KATRAK 104128107
Xiao ZHU 104018813
Yusha YANG 104014909

Catalogue
Pre-engagement Activities........................................................................................1
1. Document with reasons why your firm can continue as auditors.................................................................1
2. Document why your firm is independent from your audit client..................................................................1
3. Document your firms risks from accepting your audit client......................................................................2
4. Prepare an engagement letter for your audit client.......................................................................................3
5. Prepare a staff assignment and time budget..................................................................................................6
Preliminary Audit Planning: Risk Identification...............................................................7
1. Document knowledge of the audit clients business, environment risks and management control..............7
2. Document your preliminary analytical procedures on managements draft financial statements Please
check attachment 1......................................................................................................................................10
3. Document materiality for the audit including both quantitative and qualitative factors influencing your
decision...........................................................................................................................................................10
Planning Timing, Extent and Nature of Audit Procedures and Gathering Audit Evidence...............16
Concluding and Reporting.....................................................................................23
References.......................................................................................................24

GROUP AUDIT PROJECT

Pre-engagement Activities
1. Document with reasons why your firm can continue as auditors.
Public accounting firms can deny to continue as auditors when the relationship between auditors and clients
goes poor, or the management comes under a poor reputation or questionable integrity. However, the situations
above do not happen to our firm. Continuance decision depends on the following policies:
1. Due to the huge success of e-commerce, our client eBay will have wider and more diverse development plans
in the future. As a result, the management will provide increasingly more transparent information to keep
growing. This, in turn, would reduce audit risk and help us to continue as auditors to eBay.
2. Our audit team is absolutely independent of our client eBay and able to comply with relevant ethical
requirements. For example, no one in our firm has a family member working for or with eBay Inc. or any of its
affiliates. In addition, even though eBay is successful in business, no one in our firm has financial interest in it.
Those are the critical factors that determine if we can continue as an auditor firm to eBay.
3. Having served with eBay for the past few years, we have adequate experience of auditing a multinational
corporation like eBay, and our members are familiar with its accounting policies, judgements and estimates.
Thus, there is a common understanding between the senior management and our auditing team, which would
prove to be really efficient to our audit working.
4. As an auditor firm to eBay, we obtain information from the management to understand their current business
environment and risks. eBay is a technology commerce corporation, as well as a publicly listed company, and
they invest heavily in technology, marketing and promotion, customer support, protection programs and further
development of operations, some of which may entail long-term commitments. Therefore, eBay may be unable
to adjust spending rapidly enough to compensate for any unexpected revenue, which may harm their
profitability. Our audit team who has co-operated with them for several years may effectively handle it.

2. Document why your firm is independent from your audit client.

The objective of an audit is to enable the auditor to express an opinion on the financial statements prepared by
the management of the client firm and to provide advice on accounting procedures. It is important that all
auditors adhere to the highest standards of independence, integrity and objectivity, and be free from conflicts of
interest. Auditors are expected to be independent both in mind and appearance, or in other words, auditors are
expected to be unbiased and impartial.
The evidences that suggest that our audit firm is independent from our audit client eBay are as follows:
a) No one in our audit team has family relationship or a business partnership with eBay or any of its
affiliates.
b) No one in our audit team will do audit work on his or her own without any other intervention. We do not
have close connections with the management of eBay or any of its affiliates, and we do not have any
plan to improve our client's business status either.
1

c) Our team does not have a material, direct or indirect financial interest in the securities of eBay or any of
its affiliates.
d) Our team has not served eBay in a management capacity during the past few years or provided appraisal,
actuarial or valuation services to them.
3. Document your firms risks from accepting your audit client.
Factor affecting the auditors' risk from Implications
assessment
accepting engagement

of

the

auditor's

Our client eBay is a public company and

its financial statements are widely
How widely distributed are the audited
distributed to the public. As a result, the
financial statements?
risk from accepting the engagement will
be relatively higher.
Referring to the past three financial
statements of eBay, their financial status
How strong is the financial condition of the
seems to be pretty good. As a result, the
auditee?
risk from accepting the engagement will
be relatively lower.
Based on our past experience in auditing
eBay, we can assume that there is no
reason to doubt management integrity.
As a result, the risk will be relatively
lower.

How trustworthy is auditee management?

Because eBay is a multinational online

corporation,
it
has
complicated
accounting requirements, such as foreign
How complex is the financial reporting operations, related party or abroad
required?
investments. Therefore, the accounting
will be very challenging and the risk
from accepting the engagement will be
relatively higher.
eBay is both a public and a multinational
company with a large number of
financial report users. Sophisticated
How knowledgeable are the people likely to
investors are always the minority and
be using the financial statements?
most users rely on audited financial
statements. As a result, the risk will be
relatively higher.

4. Prepare an engagement letter for your audit client.

December 15, 2012
Mr. John Donahoe, Chief Executive Officer & President
eBay Inc.
145 Hamilton Ave
San Jose, CA
Dear Mr. Donahoe:
You have requested that we audit the financial statements of eBay Inc., which comprise the balance sheet as at
December 31, 2013, and the income statement, statement of changes in equity, and cash flow statement for the
year then ended, and a summary of significant accounting policies and other explanatory notes. Our audit will
be conducted with the objective of expressing an opinion on the financial statements. Our understanding is that
the intended purposes of the financial statements are to report to the eBay Inc. shareholders and to satisfy the
requirements of eBay Inc.s credit agreement with the California Bank & Trust. We are pleased to confirm our
acceptance and our understanding of this audit engagement by means of this letter.
Our Responsibilities
As auditors, our responsibility is to conduct the audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance whether the financial statements are free from material misstatement. An audit
involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made
by management, as well as evaluating the overall presentation of the financial statements.
Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of
any accounting and internal control system, there is an unavoidable risk that even some material misstatements
may remain undiscovered.
In making our risk assessments, we consider internal control relevant to the entitys preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing a separate opinion on the effectiveness of the entitys
internal control. However, if we identify any of the following matters, they will be communicated to you.
(a) Misstatements, resulting from error, other than trivial errors.
(b) Fraud or any information obtained that indicates that a fraud may exist.
(c) Evidence obtained that indicates that an illegal or possibly illegal act, other than one considered
inconsequential, has occurred.
(d) Significant weaknesses in the design or implementation of internal control to prevent and detect fraud or
error.
(e) Related party transactions identified by our audit team that are not in the normal course of operations and
that involve significant judgments made by management concerning measurement or disclosure.
The matters communicated will be those that we identify during the course of our audit. Audits do not
3

usually identify all matters that may be of interest to management in discharging its responsibilities. The type
and significance of the matter to be communicated will determine the level of management to which the
communication is directed.
One of the underlying principles of the profession is a duty of confidentiality with respect to client affairs.
Accordingly, except for information that is in or enters the public domain, we will not provide any third party
with confidential information concerning the companys affairs without the companys prior consent, unless
required to do so by legal authority, or the rules or professional conduct/code of ethics of the provincial public
accountancy council.
Company responsibilities
Our audit will be conducted on the basis that you, your management team, and the companys Board of
Directors who are charged with governance acknowledge and understand that you are responsible for:
(a) Preparation and fair presentation of the financial statements in accordance with generally accepted auditing
principles. This includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement, whether
due to fraud or error.
(b) Providing us with all information, such as records, documentation and related data, copies of all minutes of
meetings of shareholders, directors, and committees of directors, and other matters that are relevant to the
preparation and fair presentation of the financial statements.
(c) Providing us with any additional information we may request from the company, such as
Information relating to any known or probable instances of noncompliance with legislative or
regulatory requirements, including financial reporting requirements;
Information relating to any illegal or possibly illegal acts, and all facts related thereto;
Information regarding all related parties and related party transactions;
An assessment of the risk that the financial statements may be materially misstated as a result of fraud;
Information relating to fraud or suspected fraud affecting the entity involving management, employees
who have significant roles in internal control, or others, where the fraud could have a non-trivial effect
on the financial statements;
Information relating to any allegations of fraud or suspected fraud affecting the entitys financial
statements communicated by employees, former employees, regulators, or others;
Significant assumptions underlying fair-value measurements and disclosures in the financial
statements, and managements assessment of their reasonableness;
Any plans or intentions that may affect the carrying value or classification of assets or liabilities;
Information relating to the measurement and disclosure of transactions with related parties;
An assessment of all areas of measurement uncertainty known to management that are required to be
disclosed in accordance with Canadian generally accepted accounting principles;
Information relating to claims and possible claims, whether or not they have been discussed with eBay
Inc.s legal counsel; other liabilities and contingent gains or losses, including those associated with
guarantees, whether written or oral, under which eBay Inc. is contingently liable;
Information on whether eBay Inc. has satisfactory title to assets, whether any liens or encumbrances on
assets exist, and whether any assets are pledged as collateral;
Information relating to compliance with aspects of contractual agreements that may affect the financial
statements; and
Information concerning subsequent events.
(d) Providing us with unrestricted access to those within the company from whom we determine it is necessary
to obtain audit evidence.
4

As part of our audit process, we will request from management and, where appropriate, those charged with
governance, written confirmation concerning representations provided to us during the audit on matters that are
Directly related to items that are material, either individually or in the aggregate, to the financial
statements;
Not directly related to items that are material to the financial statements but are significant, either
individually or in the aggregate, to the engagement; and
Relevant to your judgments or estimates that are material, either individually or in the aggregate, to the
financial statements.
Reporting
Unless unanticipated difficulties are encountered, at the conclusion of our audit we will submit to you a report
containing our opinion on the financial statements. We expect to report as shown in the Appendix to this letter:
[Include Standard Audit Report as an Appendix.]
If during the course of our work it appears for any reason that we will not be in a position to render an
unqualified opinion on the financial statements, we will discuss this with you.
Other Matters
We will ask that your personnel, to the extent possible, prepare various schedules and analyses, and make
various invoices and other documents available to the audit team members. This assistance will facilitate our
work and minimize your audit costs. We look forward to full cooperation from your staff during our audit.
We may also submit to you a memorandum containing our comments on the adequacy of existing systems
of internal control, accounting policies and procedures, and other related matters which come to our attention
during the course of the audit.
We ask that our firm name be used only with our consent, and that any information to which we have
attached a communication be issued with that communication unless otherwise agreed to by our firm.
Our charges to the company for the audit services will be made at our regular rates plus our-of-pocket
expenses. The total rate will be $1 million. Bills will be rendered on a regular basis with payment to be made
upon presentation.
The above terms of this engagement will be effective from year to year until amended or terminated in
writing. If you have any questions about the contents of this letter, please raise them with Xiao Zhu, the audit
partner assigned to your audit. If the services outlined are in accordance with your requirements and if the above
terms are acceptable to you, please sign the copy of this letter in the space provided and return it to us. We
appreciate the opportunity to be of service to your company.
Yours sincerely,

Zhu & Lu, LLP, PUBLIC ACCOUNTANTS

Acknowledged and agreed on behalf of eBay Inc. by

John Donahoe

[date]
5

5. Prepare a staff assignment and time budget.

Staff assignment and time budget
Staff Assigned
Knowledge of the business
Assessment of risk of material misstatement
Control testing
Audit planning
Related parties investigation
Audit-auditee conferences
Cash
Accounts receivable
Accounts payable
Other accounts
Representation letters
Financial statement review
Report preparation
Total

Whole team
Partner,
Manager
and Senior
Senior and Junior
Partner and Manager
Manager
Whole team
Junior
Intermediate
Intermediate
Senior
Manager and Senior
Partner and Manager
Partner

Audit Time
Budget(Hours)
Interim YearEnd
100
100
1500
150
250
250
500
750
750
1250

5600

600
500
200
350
450
500
850
350
350
250
4400

Note: Partner: Xiao Zhu, Ling Lu; Manager: Neville Katrak, Enjie Han; Senior: Jianwu Xiao, Jianning Lin;
Intermediate: Olamitoke Bayode, Yusha Yang; Junior: Ke Zhao

Preliminary Audit Planning: Risk Identification

1. Document your knowledge of the audit clients business, environment risks and management control.
Knowledge of eBays business:
eBay Inc., the leader of world e-commerce, is an American multinational company headquartered in San Jose,
California. It runs an online global market and provides flexible delivery and practical solutions that foster
merchant growth (Bazdan, 2011, p. 46). In February 2014, eBay's market capitalization stood at roughly $76.20
billion (MarketWatch, 2014).
eBay Inc. was found in 1995 by French-born Iranian-American computer programmer Pierre Omidyar. At the
beginning, eBay was more of a personal platform for people to bid online and the founder acted as an
intermediary to help finish the transaction. Today, eBay Inc. operates in more than 30 countries and has around
128 million active users globally; furthermore, there are more than 500 million items that are listed on eBay.
eBays major business includes the online marketplaces: the website of eBay, online payment program PayPal
and the eBay enterprise. The website of eBay, the worlds largest internet consumer-to-consumer (C2C)
transaction platform, comprises eight groups of goods and each group has at least 4 different categories. The
main source of revenue for eBay is to collect fees from every trade that occurs through the eBay online
transaction website.
Knowledge of eBays environment risks:
a) National economic condition, policies and competition:
As eBay is a multinational corporation, it needs to deal with different countries economic conditions so that it
can operate its business consistently. However, America and Europe are the places that contribute major income
to eBay. Thus, the condition of their economies is critical for eBays operations. Although its major focus,
America still has a positive growth in its economy, it is not as positive as what the US Federal Reserve expected.
U.S. and Europe have the possibility of an extended period of limited economic growth or possible economic
decline. Additionally, there are unfavorable effects of the constant sovereign debt crisis in Europe, including
advance Euro currency exchange rate volatility. Moreover, this would result in potential negative spillover
effects to the rest of the world. The possibility that one or more countries may quit the Euro zone and reintroduce their own currencies would mess up the business environment, and in worst conditions, the dissolution
of the Euro currency may be possible. (EBays 2012 Annual Report, 2013)
The fiscal policy in U.S. is not so certain. At the same time, Europe may disrupt the credit and financial markets
by limiting the growth of credit finance. These issues also have a probability to result into adverse economic
conditions that may be specific to the Internet, e-commerce and payment industries which would significantly
impact eBays operations.
In an annual report filed with the Securities and Exchange Commission, numerous risks were warned to eBay
which related to its business facets, including its capacity to retain buyers and sellers on its sites and the normal
concern of attracting new users (Corbin, 2008). Other risks included taxation, unfavorable fees and some laws
or regulations to counterfeit merchandise which would result in lower customer retention and other competitors
like Amazon taking advantage of eBays weak performance.
For eBays international operations, for example, China, suffers from the problem of ignoring local demands for
online transactions. Then, while Chinese native C2C trading platform Taobao had great success, eBay had to
7

quit the C2C market in China.

Therefore, eBay, despite being a leader of e-commerce in the world, suffers from a comparatively slowlygrowing economic environment, risks from nations laws and regulations, and its own operational issues.
(b) Industry characteristics:
eBay is one part of the e-commerce industry which rises from the use of World Wide Web since 1979. Ecommerce, also called electronic commerce, is the process of using the Internet or other computer networks to
finish purchase/sale transactions for various products or services. E-commerce has several main typical types of
transactions: business-to-business (B2B), business-to-government (B2G), consumer-to-consumer (C2C),
government-to-business (G2B), government-to-citizen (G2C) and business-to-consumer (B2C) (E-Commerce
Industry, n. d.). E-commerce has a relatively short history compared to traditional trading modes. While
traditional trading modes prefers face-to-face transactions, e-commerce allows every transaction step online.
E-commerce becomes a popular way to shop with the development of electronic devices and internet
technology. Consumers can easily use their smart phone or computers to shop online and pay their bills. Also, it
is convenient for consumers to compare products and prices with a few touches on the screen. This changes the
game for retailers as it raises huge issues of customer retention.
Furthermore, online shopping appeals to the environmentally friendly. In March 2009, a research from HeriotWatt University in the United Kingdom stated that online shopping is 24 times greener than taking the car to
the shops, and seven times greener than taking the bus. In June 2009, the Carnegie Mellon Green Design
Institute in the United States illustrated that shopping online can decrease our environmental impact by as
much as 66%. (E-Commerce Industry, n. d.)
However, e-commerce is difficult to deal with in some cases, for example, with respect to some sophisticated
goods and services that require a large amount of advice or input from the retailer such as pension.
The industry condition reveals that as a relatively recent industry, it has huge potential to development, which
means eBay can still study users demand and promote its business.
Knowledge of eBays management control:
Leadership
(Executive Officers )
John Donahoe
Beth Axelrod
Mark Carges
Michael Jacobson
Alan Marks
Bob Swan
Devin Wenig
David Marcus

Position
President and Chief Executive Officer, eBay Inc.
Senior Vice President, Human Resources, eBay Inc
Chief Technology Officer and Senior Vice President, Global
Products, Marketplaces
Senior Vice President, Legal Affairs, General Counsel and
Secretary, eBay Inc.
Senior Vice President, Corporate Communications, eBay Inc.
Senior Vice President, Finance and Chief Financial Officer,
eBay Inc.
President, eBay Global Marketplaces
President, PayPal

1. John Donahoe joined eBay in March 2005 as President of eBay Marketplaces, responsible for all
elements of eBay's global ecommerce business. In this role, he focused on expanding eBay's core
8

business, which accounts for the majority of the company's revenues.

2. As eBay Inc.'s Senior Vice President, HR, Beth Axelrod is responsible for all aspects of the company's
human resources capabilities designed to drive performance of the business. These include recruiting,
learning and development, compensation, benefits and the continuing evolution of the company's
corporate culture.
3. Mark Carges joined the eBay Inc. leadership team in September 2008, overseeing eBay Inc.'s platform
strategy, as well as having overall responsibility for technology, software development and site
operations for eBay.com.
4. Michael Jacobson joined eBay Inc. in August 1998 and is responsible for overseeing the company's legal
department, risk management program and its policy group. He is responsible for interactions with
content regulators, law enforcement, contracts, SEC compliance and other legal matters.
5. Alan Marks leads communications strategy for all areas of eBay Inc. including business and consumer
media relations, employee communications, executive positioning and issues and reputation
management.
6. Bob Swan is responsible for all aspects of eBay Inc.'s finance functions including controllership,
financial planning and analysis, tax, treasury, audit, mergers and acquisitions, and investor relations.
7. As president of eBay Marketplaces, Devin Wenig leads the eBay classifieds and StubHub businesses
globally. He brings a strong combination of global operating experience, deep leadership skills and
understanding of global technology platforms to eBay.
8. A lifelong entrepreneur and respected product innovator with an impressive record of business success
on two continents, David Marcus joined PayPal in 2011 to continue working on his long-term vision of
digital payments technology that delivers seamless, connected, and convenient experiences at scale.
Board of Directors
Fred D. Anderson

Marc L. Andreessen
Edward W. Barnholt
Scott D. Cook
John J. Donahoe
William C. Ford, Jr.

Brief Description
Mr. Anderson has been a Managing Director of Elevation
Partners, a private equity firm focused on the media and
entertainment industry, since July 2004. Mr. Anderson also
serves on the Board of Directors of Yelp Inc.
Mr. Andreessen also serves on the Board of Directors of
Hewlett-Packard Company, Facebook, Inc., Stanford Hospital,
and several smaller private companies.
Mr. Barnholt served as President and Chief Executive Officer of
Agilent Technologies, Inc., a measurement company, from May
1999 until his retirement in March 2005.
Mr. Cook is the founder of Intuit Inc., a maker of business and
financial management technology solutions,
Mr. Donahoe has served as eBays President and Chief
Executive Officer since March 2008. Mr. Donahoe also serves
on the Board of Directors of Intel Corporation.
Mr. Ford has served as Executive Chairman of Ford Motor
Company, a global company that manufactures and distributes
cars and trucks, since September 2006
9

Kathleen C. Mitic

Ms. Mitic is the Founder and Chief Executive Officer of Three

Koi Labs, a mobile start-up company formed in August 2012.

2. Document your preliminary analytical procedures on managements draft financial statements

(Please refer to Attachment 1
According to the draft financial statements, the net revenue of this company increased from $14.1 billion in
2012 to $16.0 billion in 2013 which reflects eBays successful growth in the last fiscal year. However, the gross
profit margin for 2013 decreased by around 1.4% compared to 2012, primarily because of the increase in cost of
sales. Accrued expenses increased greatly by 46.09% which accounted for a large part of the increase in current
liabilities. Further investigation on expense transactions and tickets should be performed.
In addition, the balance of cash and cash equivalents has declined by 34.08%. Cash receipts, deposit slips,
remittance lists and cash balances should be checked carefully. Both the short-term and long-term investments
increased significantly by 74.87% and 63.30%, respectively. The firm makes larger payments on more
investments which increase the percentage of investments greatly. A detailed check of the client account and
inspection of transfer agents might be needed. There is also a high percentage change in short-term debt by
98.55% which suggests that the company used its cash to pay off its short-term debts. Records of debt need be
further inspected.
Based on the financial ratios shown in the attachment, it seems that eBay has remained fairly stable in its
operations over the last year or experienced a slight decrease in some aspects of the financial ratios. The current
ratio slightly decreased in 2013 (by 0.12) despite the increase in working capital which suggests that the
liquidity of eBay has slightly reduced from the preceding year to the current year. The accounts receivable
turnover indicates a slight decrease (of 0.07) in the efficiency of collecting accounts receivable. The return on
equity and gross margin rations have also decreased by 0.62 and 0.014 respectively. Although these changes in
rations are not necessarily worthy of worry, it is not a good sign for the company. However, the debt-to-equity
remains low compared to the average industry ratio which means eBay has good flexibility.
3. Document materiality for the audit including both quantitative and qualitative factors influencing your
decision.
Auditee:

eBay Inc.

Year end: Dec. 31, 2013

Materiality Assessment
1. Qualitative Factors

Comments
Shareholders
Identify the specific users of the Banks
financial statements for this Financial analysts.
engagement.
Stockbroker & dealers.
Potential inventors.
Governmental institutions.
10

Suppliers and Manufacturers.

Shareholders: As the owners of eBay, they are mostly concerned with the
Identity what expectations
financial performance. Revenues, profit and EPS constitute the most
the users may have for the important information for them.
financial statements for this Banks: As creditors, banks are mostly concerned with debt paying ability,
engagement.
which means assets, liabilities and equity.
Financial Analysts: As professional practitioners, they are interested in
financial ratios, management credibility and also the performance of eBay
over time to determine if it is a good investment or not.
Stockbrokers, Dealers and Potential inventors: They expect to invest in
eBay to make profits, so they are mostly concerned with revenues and
profits.
Governmental institutions: The government is interested for tax purposes
and corporate governance. Therefore, gross profit and income before tax
constitute crucial information to governmental institutions.
Suppliers and Manufacturers: As partners in business, suppliers and
manufacturers care about the companys ability to pay bills and if they can
continue their business cooperation in the future.

Identify any possible

situations or misstatements
that would affect a user now
or at some future point,
regardless of the materiality
level. (e.g. Consider
environmental
matters, policies, statutes,
safety issues, etc.)

Microeconomic environment factors: eBays main markets are Europe

and North America. The effect of European debt crisis or any other
possible microeconomic environment problems may affect eBay severely.
Also, foreign currency exchange rates, inflection and interest policies may
also influence eBay in the future.
Business matters: Because eBay relies on network platforms to do its
business, failure to deal effectively with fraud, bad transactions and
negative customer experiences would increase eBays loss rate and harm
its business.
Safety issues: eBays business is subject to online security risks, including
security breaches. System failures and resulting interruptions in the
availability of its websites, applications, products or services could harm
its business.
Legal matters: eBays Payments business is subject to consumer
protection laws and regulations. And as an MNC, eBays Payments
business is also subject to a number of laws and regulations, including
those governing banking, cross-border and domestic money transmission,
foreign exchange and payment services, that vary in the markets where
they operate.
Policy of related companies: Changes to payment card networks or bank
fees, rules or practices could harm PayPal Payments business, which is an
important part of eBays business.

2. Quantitative Factors
a) Planning Data
This year
This year
actual
anticipated
(adjusted)
11

(U.S. Dollars In Millions)

Last year 2nd
preceding
year

Assets
Liabilities
Equity
Sales/revenue
Gross profit
Expenses
Income before tax

41,488 (1)
17,841 (1)
23,647 (1)
16,047 (2)
11,011 (2)
7,545 (2)
3,466 (2)

48,172 (7)
25,345 (7)
24,364 (7)
16,000 - 16,500 (8)
11381.47 (9)
7820.14 (9)
3561.33 (9)

37,074 (3)
16,209 (3)
20,865 (3)
14,072 (4)
9,856 (4)
6,772 (4)
3,084 (4)

27,320 (5)
9,390 (5)
17,930 (5)
11,652 (6)
8,191 (6)
4,281 (6)
3,910 (6)

b) Normalized pre-tax income

Estimated pre-tax income

Adjustment for nonrecurring
items or unadjusted errors
brought forward
Normalized pre-tax income

This year
actual
(adjusted)
3,466
0

This year
anticipated

Last
year

3561.33
0

3,084
0

2nd
preceding
year
3,910
0

3,466

3561.33

3,084

3,910

Date &
initials

12

Prepared

Reviewed

3. Materiality Considerations
a) Profit-oriented enterprises
Identify Financial Measurement
Statement Users
Base
Normalized pretax income
Assets
Equity
Revenue
Gross profit

Factor
Applied
5% (10)

Possible
Materiality
174.33

0.5% (10)
1% (10)
0.5% (10)
1% (10)

176.47
208.14
69.62
96.86

Comment
s

Overall Materiality Assessment for Financial Statements as a Whole

Based on the anticipated financial statement amounts and on the other factors described above, overall
materiality for this engagement is as follows:
$ 174.33 million (11)

Misstatements below this threshold, if not corrected, will be accumulated on the

Possible Adjustments Sheet unless such misstatements are deemed trivial (below
$174.33 million)
Note: The auditor may designate an amount below which misstatements are deemed
trivial and need not be accumulated because the auditor expects that the accumulation
of such amounts clearly will not have a material effect on the financial statements. In so
doing, the auditor considers the fact that the determination of materiality involves
qualitative as well as quantitative considerations and the misstatements of a relatively
small amount could nevertheless have a material effect on the financial statements. The
summary of uncorrected misstatements included in or attached to the management
representation letter need not include trivial misstatements.

Performance Materiality Assessment

Based on expected misstatements in current period financial statements of $174.33 million, and on other factors
noted above, performance materiality for planning the audit is as follows:
$ 139.47 million (12)

Date &
initials

13

Prepared

Reviewed

Notes
1) EBAY_2013_Unaudited Balance sheet
2) EBAY_2013_Unaudited Income Statement
3) EBAY_2012_Audited Balance sheet
4) EBAY_2012_Audited Income Statement
5) EBAY_2011_Audited Balance sheet
6) EBAY_2011_Audited Income Statement
7) Estimated based on Annual Reports of 2012, 2011, and 2010.

2010

2011

2012

Assets
Liabilities
Equity

22,003
6,702
15,302

27,320
9,390
17,930

37,074
16,209
20,865

Growth
from
2010 to
2011
24.16%
40.11%
17.17%

Growth
from
2011 to
2012
35.70%
72.62%
16.37%

This year
anticipated
growth

This year
anticipate
d

29.93%
56.36%
16.77%

48,172
25,345
24,364

This year anticipated growth = Average growth of past 2 years = (growth from 2010 to 2011 + growth from
2011 to 2012)/2
8) Data from client. Anticipated Sales/revenue.
(http://investor.ebayinc.com/releasedetail.cfm?ReleaseID=733959 Business Outlook)
9) Estimated based on (4) & (8)
We obtained the anticipated Sales/revenue from our client and we think this estimation is reliable.
Therefore, we assume that the growth rate of gross profit, expenses and income before tax will be same as
the growth rate of sales/revenue.

Anticipated
2012
by client

Anticipated Anticipated
growth
value

Sales/revenue 16250

14072 15.48%

16250

Gross profit

9856

15.48%

11381.47

Expenses
Income
before tax

6772

15.48%

7820.14

3084

15.48%

3561.33

Client estimated that Sales/revenue will be 16000-16500. 16250 is the midpoint of client estimation.
10) Based on currently available information, we use our professional judgment.
We think the internal control system of eBay is relatively complete and effective.
The profits of E-bay are stably increasing, and there is no sharply change in past 3 years.
The business condition of eBay is normal and there is obviously no risk of discontinuing operations.

14

Based on those opinions above, we think the business risks and control risks of eBay are relatively low. To be
conservative, we take 5% as Factor Applied in Normalized pre-tax income materiality judgment.
For the same reasons, we take 0.5%, 1%, 0.5%, and 1% as Factor Applied of Assets, Equity, Revenue, and
Gross Profit respectively.
11) Calculation of the Overall Materiality:
Overall Materiality = Average Normalized pre-tax income of past 3 years * 5% = (3,466 + 3,084 + 3,910) / 3
* 5% = $174.33 million
12) Calculation of the Performance Materiality:
To leave room for error and reduce the probability that the total misstatement exceeds materiality, we need
to determine a smaller number as Performance Materiality level.
Performance Materiality = 80% * Overall Materiality = $139.47 million

Planning Timing, Extent and Nature of Audit Procedures and Gathering Audit Evidence
15

1. Complete the audit planning document for the assets, liabilities, shareholder various equity, revenues
and expenses of your audit client on the form given by the course instructor. You should prepare audit
procedures for three audit objectives for each asset, liability, equity component, revenue and expense
included in the audit clients financial statements.

16

AUDIT PROCEDURE PLANNING DOCUMENT

MATERIALITY - $ 174.33 million
F/S Component & Bal.
(in thousands)

Audit
Objective

Key Control

Compliance Test & Extent

Timing

Substantive
Procedure

Substantive Procedure Test &

Extent

Timing

Cash & Cash

Equivalents/Short-Term
Investments
$4,494,000/$4,531,000

Validity

Bank reconciliations are

performed monthly by
someone who does not
have cash custody or
record-keeping
responsibility.
Remittance lists are
compared with deposits by
someone other than the
cashier.
Senior Management has
the authorization for
management of cash and
short-term investments.

Select a sample of
recorded cash receipts and
vouch to deposit slips and
remittance lists.

30/9/20
13

Confirmation

Obtain confirmations
regarding bank balances from
all banks Ebay has dealt with,
using standard bank
confirmation forms.

15/1/2014

Select a sample of
recorded cash receipts and
trace to bank statement.

30/9/2013

Recalculation

Recalculate the arithmetic on

bank reconciliations prepared
by Ebay.

15/1/2014

Observe the work habits of

the person in charge of
cash and their interactions
with persons who keep the
cash records.

30/9/2013

Enquiry

Enquire if any outstanding

cheques have been prepared
but not mailed at period end,
verifying if these are material
should be reclassified as
accounts payable.
Obtain an aged trial balance of
individual customer accounts.
Recalculate the total and trace
to the general ledger control
account.
Send confirmations to all
accounts over $50,000. Select
a random sample of all
remaining accounts for
confirmation.
Review the bank
confirmations, loan
agreements and minutes of the
board for indications of
pledged, discounted or
assigned receivables.
Obtain a schedule of longterm investments, including
purchase and disposition
information for the period.
Reconcile with investment
accounts in the general ledger.
Confirm with a trustee or

15/1/2014

Accuracy

Authorization

Net Receivables
$12,948,000

Long-Term Investments
$4,971,000

Validity

Customers' statements are

sent to them regularly by
the accounts receivable
department.

Select a sample of
customers' accounts and
vouch debits to supporting
sales invoices.

30/9/2013

Recalculation

Authorization

Customer credit is
approved before orders are
shipped.

Select a sample of credit

memos and review for
proper approval.

30/9/2013

Confirmation

Accounting

Accounts receivable
subsidiary is regularly
reconciled to the control
account.

Trace sales invoices to

accounts receivable
posting.

30/9/2013

Review

Validity

Long-term investments are

recorded properly by
appropriate personnel in
the Finance/Investment
department.

Select a sample of longterm investments and

vouch to investment
certificates and other
supporting documents.

30/9/2013

Vouching

Accuracy

Appropriate valuation

Select a sample of

30/9/2013

Confirmation

15/1/2014

15/1/2014

15/1/2014

15/1/2014

15/1/2014

methods are applied as

required by IFRS by the
concerned department.

Property, Plant &

Equipment
$2,760,000

Goodwill/Intangible
Assets
$9,267,000/$941,000

Proper Period

Investments are updated as

of date they are purchased
or sold.

Validity

Fixed assets are inspected

periodically and physically
counted.

financial long-term
investments and check to
see if they were correctly
valued based on the market
prices as on December 31.
Select a sample of shortterm investments recorded
after the balance sheet date
and vouch to supporting
documents for evidence of
proper cutoff.
Vouch additions and
disposals of fixed assets to
supporting documents.

Accuracy

There is a uniform policy

for assigning depreciation
rates, useful lives and
salvage values.

Classification

30/9/2013

Vouching

30/9/20
13

Inspection

Select a sample of fixed

assets and check the
depreciation applied on
them from year to year.

30/9/20
13

Recalculation

The accounting manual

contains policies for
capitalization of assets and
for expensing repairs and
maintenance.

Select a sample of fixed

assets and check to see if
the costs of shipment,
installation, testing and the
like have been properly
capitalized, and if repairs,
maintenance and similar
expenses have been
expensed.

30/9/20
13

Checking

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

Recalculation

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A 100%
Substantiv
e
Procedure
s
N/A 100%
Substantiv
e
Procedure
s
N/A 100%
Substantiv
e
Procedure
s

Inspection

Confirmation

broker the name, number,

identification, interest rate,
and face amount (if
applicable) of securities held
as investments.
Select a sample of short-term
investments recorded after the
balance sheet date and vouch
to supporting documents for
evidence of proper cutoff.

15/1/2014

Select a sample of asset

subsidiary records and
perform a physical inspection
of the fixed assets recorded.
Summarize and recalculate
detail PPE subsidiary records,
including depreciation and
reconcile to general ledger
control accounts.
Select a sample of fixed assets
and check to see if the costs of
shipment, installation, testing
and the like have been
properly capitalized, and if
repairs, maintenance and
similar expenses have been
expensed.

15/1/2014

Summarize and recalculate

detail intangible asset
subsidiary records, and
reconcile to general ledger
control account(s).
Select a sample of intangible
assets subsidiary records and
inspect title or other
ownership legal documents.

15/1/2014

Obtain written representations

from management regarding
ownership and completeness.

15/1/2014

15/1/2014

15/1/2014

15/1/2014

Accounts Payable/
Short & Current LongTerm Debt
$3,215,000/$9,266,000

Completeness

Proper Period

Long-Term Debt
$4,117,000

Common Stock

Requisitions, purchase
orders and receiving
reports are pre-numbered
and numerical sequence is
checked. Overall
comparisons of purchases
are made periodically by
statistical or product-line
analysis.
Assets are updated as of
date goods are received or
title of ownership is
transferred.

Select a sample of
receiving reports and
vouch to related purchase
orders and note missing
receiving reports.

30/9/2013

Confirmation

Send letters of confirmation to

major suppliers, especially
those with small or zero
balances and those with whom
the company has done
significant business.

15/1/2014

Select a sample of
accounts payable entries
recorded after the balance
sheet date and vouch to
supporting documents for
evidence of proper cutoff.
Trace debits arising from
accounts payable
transactions for proper
classification.

30/9/2013

Recalculation

15/1/2014

30/9/2013

Enquiry

Obtain a trial balance of

recorded accounts payable as
of year-end. Recalculate its
total and trace the total to the
general ledger A/P control
account.
Enquire about terms that
justify classifying payables as
long-term instead of current.

Obtain a schedule of notes

payable and other long-term
debt showing beginning
balances, new notes,
repayments and ending
balances. Trace to general
ledger accounts.
Confirm liabilities with
creditor: amount, interest rate,
due date, collateral and other
terms.

15/1/2014

Recalculation

Recalculate interest expense

on debts and trace to the
interest expense and accrued
interest accounts.

15/1/2014

Vouching

Obtain an analysis of owner's

15/1/2014

Classification

Purchases from
subsidiaries and affiliates
are classified as
intercompany purchases
and payables. Purchase
returns and allowances are
properly classified.
Purchases for repairs and
maintenance are
segregated from purchases
of fixed assets.

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A 100%
Substantiv
e
Procedure
s

Tracing

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

Confirmation

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A

N/A 100% Substantive

N/A 100% Substantive

N/A 100%
Substantiv
e
Procedure
s
N/A 100%
Substantiv
e
Procedure
s
N/A 100%

100%

15/1/2014

15/1/2014

$2,000

Retained Earnings
$18,854,000

Total Revenues
$16,047,000

Substantive
Procedures

Procedures

Procedures

Substantiv
e
Procedure
s

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

Confirmation

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A 100%
Substantiv
e
Procedure
s
N/A 100%
Substantiv
e
Procedure
s

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A 100%
Substantiv
e
Procedure
s

Vouching

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A 100%
Substantiv
e
Procedure
s

Recalculation

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

Checking

Validity

Access to the sales

invoicing process is
restricted to appropriate
personnel.

Authorization

All credit sales are

authorized by the credit
department prior to

Select a sample of
recorded sales invoices and
vouch to supporting
shipping documents , note
dates and quantities.
Select a sample of
recorded sales invoices and
vouch prices to approved

N/A 100%
Substantiv
e
Procedure
s
30/9/2013

30/9/2013

Comparison

Tracing

Vouching

equity transactions. Trace

additions and reductions to the
general ledger. Vouch
additions to directors' minutes
and cash receipts. Vouch
reductions to directors'
minutes and other supporting
documents.
Confirm outstanding common
shares with share registrar
agent.

15/1/2014

Read the directors' minutes for

owners' equity authorization.
Trace to entries in the
accounts. Determine whether
related disclosures are
adequate.
Vouch to the net income in last
year's income statement and
check to see if it matches to
the opening balance of
retained earnings for the
current year.
Recalculate the current year's
net income, dividends paid out
to shareholders and other
adjustments to check the
ending balance of retained
earnings.
Vouch to the minutes of the
Board of Directors to check
the amount of dividends
provided to shareholders.

15/1/2014

Select a sample of recorded

sales invoices and vouch to
supporting shipping
documents , note dates and
quantities.
Compare revenue dollars and
physical quantities with prioryear data and industry

15/1/2014

15/1/2014

15/1/2014

15/1/2014

15/1/2014

shipment.

Cost of Revenues
$5,036,000

R&D Expenses
$1,768,000

Accounting

Summary journal entries

are approved before
posting.

Accuracy

Quantity and quality of

purchases received is
determined at the time of
receipt by receiving
personnel independent of
the purchasing department.

Completeness

Validity

Authorization

Classification

Proper Period

SG&A Expenses
$5,554,000

Completeness

price lists and vouch credit

approval.
Select a sample of
recorded sales invoices and
trace posting to general
ledger and proper customer
account.

economic statistics.
30/9/2013

Review

Review the
appropriateness of
standard costs, if used, to
price cost of revenues.
Review the disposition of
variances from standard
costs.

30/9/2013

Comparison

Purchase order forms and

receiving reports are prenumbered and the
numerical sequence is
checked for missing
documents.

Select a sample of
receiving reports and trace
posting of amounts to
general ledger.

30/9/2013

Tracing

Supplier invoices are

matched against purchase
orders and receiving
reports before a liability is
recorded.
All R&D expenses are
properly authorized by the
R&D department before
they are recorded.
The chart of accounts and
accounting manual gives
instructions for
determining expenses as
R&D expenditure.

Obtain a sample of cost of

sales entries in the general
ledger and vouch to
supporting summaries of
finished goods issues.
Select a sample of R&D
expenses and review for
proper approval.

30/9/2013

Vouching

30/9/2013

Select a sample of R&D

expenses and check if the
expenses have been
properly classified under
operating expenses in the
income statement.
Take a sample of R&D
expenses and vouch to
supporting documents.
Select a sample of cash
disbursement cheque

R&D expenses are

recorded for the period
during which they are
incurred.
Blank cheques are prenumbered and the

Review accounting policies

for revenue recognition and
ensure they comply with the
company's financial reporting
framework and are properly
disclosed.
Compute the gross margin rate
and compare with prior years.
Follow up with management
on unusual fluctuations.

15/1/2014

Select a sample of basic

transaction documents (such
as sales invoices, production
reports) and determine
whether the related cost of
sales was figured and recorded
properly.
Select a sample of recorded
cost of sales and vouch to
supporting documentation.

15/1/2014

Review

Select a sample of R&D

expenses and review for
proper approval.

15/1/2014

30/9/2013

Checking

15/1/2014

30/9/2013

Vouching

Select a sample of R&D

expenses and check if the
expenses have been properly
classified under operating
expenses in the income
statement.
Take a sample of R&D
expenses and vouch to
supporting documents.

30/9/2013

Scanning

Select a sample of cash

disbursement cheque numbers

15/1/2014

15/1/2014

15/1/2014

15/1/2014

Proper Period

Income Tax Expense

$610,000

numerical sequence is
checked for missing
documents.
Cheques are dated in the
cash disbursements journal
with the date of the
cheque.

numbers and scan for

missing documents.

and scan for missing

documents.

Select a sample of
recorded expenses from
various accounts and
vouch them to a) cancelled
cheques, and b) supporting
documentation.
Select a sample of cash
disbursement cheque
numbers and trace
disbursement debits to
general and subsidiary
ledger accounts.

30/9/2013

Vouching

Select a sample of recorded

expenses from various
accounts and vouch them to a)
cancelled cheques, and b)
supporting documentation.

15/1/2014

30/9/2013

Tracing

Select a sample of cash

disbursement cheque numbers
and trace disbursement debits
to general and subsidiary
ledger accounts.

15/1/2014

Obtain or prepare an analysis

of income-tax related accounts
and related tax information.
Scan the accounts and
compare opening balances to
prior years' work papers.
Recalculate the current year's
provision for income taxes by
preparing a draft of the tax
return or a tax calculation
workpaper. Reconcile income
before taxes as per F/S to
taxable income as per the tax
return.
Evaluate the adequacy of the
amount of income taxes
payable in the balance sheet
by vouching current year tax
payments to paid checks and
document any items tested.

15/1/2014

Accounting

The bank reconciliation is

reviewed by an accounting
official with no conflicting
cash receipts, cash
disbursements or
recordkeeping
responsibilities.

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A 100%
Substantiv
e
Procedure
s

Scanning

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A 100%
Substantiv
e
Procedure
s

Recalculation

N/A 100%
Substantive
Procedures

N/A 100% Substantive

Procedures

N/A 100% Substantive

Procedures

N/A 100%
Substantiv
e
Procedure
s

Vouching

15/1/2014

15/1/2014

Concluding and Reporting

1. Prepare a draft Auditors Report for your client assuming an unqualified audit opinion occurs.
To the Board of Directors and Stockholders of eBay Inc.:
We have audited the accompanying financial statements of eBay Inc., which comprise the balance sheet as at
December 31, 2013, and the income statement, statement of changes in equity, and cash flow statement for the
year then ended, and a summary of significant accounting policies and other explanatory notes.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance
with International Financial Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due
to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our
audit in accordance with International Financial Reporting Standards. Those standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amount and disclosures in the
financial statements. The procedures selected depend on the auditors judgment, including the assessment the
risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made
by management, as well as evaluating the overall presentation of financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of eBay Inc.
as of December 31, 2013, and its financial performance and its cash flows for the year then ended in accordance
with International Financial Reporting Standards.

City...
Date..

(signed)..
PUBLIC ACCOUNTANT

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Economy (Nase Gospodarstvo), 57(3/4), 44-50.
Corbin, K. (2008). eBay Warns of Revenue Risks. Retrieved from http://www.internetnews.com/ecnews/article.php/3731751/eBay+Warns+of+Revenue+Risks.htm
EBays 2012 Annual Report (2013). Retrieved from
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EBays Management Control (n. d.). Retrieved from http://investor.ebayinc.com
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http://www.ebayinc.com/who_we_are/one_company
XIAOJUAN OU, C., & DAVISON, R. M. (2009). Why eBay Lost to TaoBao in China: The Global
Advantage. Communications Of The ACM, 52(1), 145-148.
Zwass, V. (1996). Electronic Commerce: Structures and Issues. International Journal of Electronic Commerce ,
Vol. 1, No. 1, pp. 3-23. Article Stable URL: http://www.jstor.org/stable/27750797