Review the attachedworking papers and then respond to the following questions in two essays that...

Question

Review the attachedworking papers and then respond to the following questions in two essays that address the specific questions posed.

In the audit plan for the audit of Keystone Computers & Networks, Inc., there is a section on significant accounting and auditing matters. The second matter described involves capitalizing the costs of developing a software program for sale.
1. Research this issue and write a brief memorandum for the working papers describing the issue and summering the appropriate method of accounting for the development costs.
2. Based on your research, describe the major audit issue that you believe will be involved in auditing the software development costs.
A partially completed analytical ratios working paper for Keystone Computers & Networks, Inc., is presented on page 241 of the attached case study.
1. Complete the working paper by computing the financial ratios for 20X5 and provide these in your paper.
2. After completing part a, review the ratios and identify financial statement accounts that should be investigated because the related ratios are not comparable to prior-year ratios, industry averages, or your knowledge of the company. Provide these in your paper.
3. For each account identified in part b, identify and discuss potential reasons for the unexpected account balances and related ratios.

Your essay should total 4-6 pages in length

005_oj4bjo-0t4fjysp.pdf

Robert · Accepted Answer

PART - 1 
1. Accounting for Software Development Cost: 
Firms must expense off all the costs incurred internally in developing software until the 
development achieves the Technological Feasibility of a product. When the development reaches 
to the stage where it is established the software is technologically feasible, the firm must 
capitalize the costs of development. Also additional development costs need to be amortized.  
Technological Feasibility as per FASB could be defined as “Completion of a Detailed Program 
Design / Completion of a working model”. It is subject to significant judgment by managers and 
other related personnel.  
Basically the costs which are being related to the conceptual formulation and design of the 
programs should be expensed as R&D Expenses. The Costs incurred after Technological 
Feasibility should be capitalized. The capitalized cost should then be amortized using different 
methods like Straight Line Method, over periods of expected recovery. 
Interpretation of the meaning of Technological Feasibility has also created the diversity in the 
Industrial Practices.  
Subsequent to the formation of the software, firms do make additional expenditures to add to or 
improve them. If the additional expenditures help to increase the service life or potential of the 
software beyond the original anticipation, it should be capitalized. However the Repair and 
Maintenance expenses that merely maintain the originally expected service should be expensed 
immediately.
2. Auditing Issues: 
The flexibility available to the firms for Software Accounting should cause the auditor to 
proceed cautiously when analyzing the accounting for Software Development. 
Key issues to be taken care are: 
1. Each developing software should be analyzed on the technological feasibility independently by 
the Auditor. Third party opinions could also be taken to form the judgment. 
2.

Review the attachedworking papers and then respond to the following questions in two essays that address the specific questions posed. In the audit plan for the audit of Keystone Computers & Networks,...

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