YABE LLP

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(No Transcript)
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Agenda

• Business Environment
• Industry Characteristics
• Preliminary Analytical Review
• Compliance with SAS 99
• Preliminary Materiality Assessment
• Preliminary Risk Assessment
• Significant Audit Risk Areas
• QA

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Business Environment
Analytical Review
Company Info
Materiality
Risks
Audit Strategy
Fraud
QA

• Online trading platform
• International presence through local sites,
  acquisitions, and investments

4
Industry Characteristics
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Factors of success
• Positive customer feedback and word-of-mouth
• Ability to carry out acquisitions smoothly and
  overcome integration problems
• Provides convenience

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Industry Characteristics
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Unusual accounting practices of industry
• Stock-based compensation
• Revenue recognition
• Advertising fees
• Listing and feature fees

6
Comparative Size Analysis of Competitors
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks
Source Yahoo! Finance
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Financial Results
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Profitability and sustainability
• Consistent cash flow, revenues, and net income
• Steady profit margin
• Outstanding current ratios
• Cash Flow Revenues Net Income
• 6m 03 vs. 12m 02 83.08 81.19
• 6m 03 vs. 6m 02 192.42
• 6m 2003 2002 2001
  2000
• Profit Margin 19.89 20.60
  12.10 11.20
• eBay Amazon.com Yahoo!
  Industry
• Current Ratio 3.76 1.63
  2.12 1.46

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Types of Fraud
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Intentionally misstate financial statements
• Misappropriation of assets
• Customer and price lists
• Key SAS 99 Provision
• Increased emphasis of professional skepticism
• Incentives
• Opportunities
• Attitude

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Fraud Risk Assessment
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Pressure to meet financial goals
• Stock-based compensation
• International operations expected initial loss
• Cookie Jar reserves
• Tax evasion

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Fraud Risk Assessment
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• IT integration and reliance
• Misappropriation
• Revenue process
• Earning shifting
• Large cash account
• Petty theft

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Materiality Assessment
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• AICPA Guide calculation ?
• approximately 2 million (total revenues)
• Volatile industry, 1 cent change in
• diluted EPS is material to investors
• 1 cent number of shares (292,820,000) ?
• 3 million
• SAB 99

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Preliminary Risk Assessment
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Highly competitive Internet environment
• Technology changes
• Susceptible to
• Consumers confidence in online purchasing
• Spending in general
• International operations (26 of net revenues)
• Accounting for revenues and taxes

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Preliminary Risk Assessment
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• IT system used to account for revenues
• Potential breach of system by hackers
• Fraud
• Valuation of intangibles
• Recording amortization
• Potential earnings management
• Top management owns a high percentage of
  outstanding shares

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Revenue Recognition
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Nature
• Highly automated by information technology (IT)
• Estimable accounts ? affect EPS
• Allowance for transaction loss
• Allowance for doubtful accounts
• Incentive for management to manipulate expense
• Test funds receivable because of the lag time in
  payment and receipt

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Revenue Recognition
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Extent
• Understand the claim process
• Communicate with management to obtain
• documentation on the estimation methodology
• Management anticipated unexpected events may
• affect this estimation significantly
• Timing
• Year-end

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Goodwill Intangibles
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Nature
• 30 of assets for 2003
• Due to acquisitions such as CaRad, EachNet
• Extent
• Inquiries of management
• Reperformance of valuation calculations
• Timing
• Year-end test and interim

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Deferred Tax Asset (DTA)
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Nature
• FAS 96
• Created by eBays undeductible oversea operation
  losses
• Uncertainty of oversea operations
• Extent
• Employ tax specialist assess valuation
• Audit procedures
• Analytical reviews
• Inquiries to management about future
  profitability of oversea
• operations
• Timing
• Interim and year-end.

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Stock Compensation
Analytical Review
Analytical Review
Analytical Review
Company Info
Materiality
Audit Strategy
Fraud
QA
Risks

• Nature
• High stock valuation
• High amounts of stock option for management
• Using fair market value recording (FAS 148)
• Extent
• Analytical procedures
• Recalculation
• Equity specialist
• Confirmation
• Timing
• Year-end

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Questions?

• QA
• Company Info
• Analytical Review
• Fraud
• Materiality
• Risk Assessment
• Audit Strategy