EBAY Audit Report

Group Project: Audit Plan and Report of EBay Inc.Group 4Bayode OLAMITOKE 104107373Enjie HAN 104007349

Jianwu XIAO 104050178

Jianning LIN 104005831Ke ZHAO 104018778

Ling LU 103999797

Neville KATRAK 104128107

Xiao ZHU 104018813

Yusha YANG 104014909

Catalogue1Pre-engagement Activities

11. Document with reasons why your firm can continue as auditors

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

23. Document your firms risks from accepting your audit client

4. Prepare an engagement letter for your audit client35. Prepare a staff assignment and time budget6Preliminary Audit Planning: Risk Identification71. Document knowledge of the audit clients business, environment risks and management control72. Document your preliminary analytical procedures on managements draft financial statementsPlease check attachment 110103. Document materiality for the audit including both quantitative and qualitative factors influencing your decision

1Planning Timing, Extent and Nature of Audit Procedures and Gathering Audit Evidence

6Concluding and Reporting23References24

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.

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 accepting engagementImplications of the auditor's assessment

How widely distributed are the audited financial statements?Our client eBay is a public company and its financial statements are widely distributed to the public. As a result, the risk from accepting the engagement will be relatively higher.

How strong is the financial condition of the auditee?Referring to the past three financial statements of eBay, their financial status seems to be pretty good. As a result, the risk from accepting the engagement will be relatively lower.

How trustworthy is auditee management?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 complex is the financial reporting required?Because eBay is a multinational online corporation, it has complicated accounting requirements, such as foreign operations, related party or abroad investments. Therefore, the accounting will be very challenging and the risk from accepting the engagement will be relatively higher.

How knowledgeable are the people likely to be using the financial statements?eBay is both a public and a multinational company with a large number of financial report users. Sophisticated investors are always the minority and 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, 2012Mr. John Donahoe, Chief Executive Officer & PresidenteBay 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 ResponsibilitiesAs 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 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 responsibilitiesOur 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.

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 ACCOUNTANTSAcknowledged and agreed on behalf of eBay Inc. by

John Donahoe [date]

5. Prepare a staff assignment and time budget. Staff assignment and time budget

Staff AssignedAudit Time Budget(Hours)

InterimYear-End

Knowledge of the businessWhole team100

Assessment of risk of material misstatement Partner, Manager and Senior 100

Control testingSenior and Junior1500600

Audit planning Partner and Manager150

Related parties investigationManager250500

Audit-auditee conferences Whole team250200

CashJunior500350

Accounts receivableIntermediate750450

Accounts payableIntermediate750500

Other accountsSenior1250850

Representation lettersManager and Senior350

Financial statement reviewPartner and Manager350

Report preparationPartner250

Total56004400

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-bornIranian-Americancomputer programmerPierre 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 internetconsumer-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 Reserveexpected.

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 re-introduce 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 quit the C2C market in China.

Therefore, eBay, despite being a leader of e-commerce in the world, suffers from a comparatively slowly-growing 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. E-commerce, 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 ofcustomer retention.

Furthermore,online shoppingappeals to the environmentally friendly. In March 2009, a research from Heriot-Watt 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 )Position

John Donahoe President and Chief Executive Officer, eBay Inc.

Beth AxelrodSenior Vice President, Human Resources, eBay Inc

Mark CargesChief Technology Officer and Senior Vice President, Global Products, Marketplaces

Michael JacobsonSenior Vice President, Legal Affairs, General Counsel and Secretary, eBay Inc.

Alan MarksSenior Vice President, Corporate Communications, eBay Inc.

Bob SwanSenior Vice President, Finance and Chief Financial Officer, eBay Inc.

Devin WenigPresident, eBay Global Marketplaces

David MarcusPresident, 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 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 ofdigital payments technology that delivers seamless, connected, and convenient experiences at scale.

Board of DirectorsBrief Description

Fred D. AndersonMr. 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.

Marc L. AndreessenMr. Andreessen also serves on the Board of Directors of Hewlett-Packard Company, Facebook, Inc., Stanford Hospital, and several smaller private companies.

Edward W. BarnholtMr. Barnholt served as President and Chief Executive Officer of Agilent Technologies, Inc., a measurement company, from May 1999 until his retirement in March 2005.

Scott D. CookMr. Cook is the founder of Intuit Inc., a maker of business and financial management technology solutions,

John J. DonahoeMr. 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.

William C. Ford, Jr.Mr. Ford has served as Executive Chairman of Ford Motor Company, a global company that manufactures and distributes cars and trucks, since September 2006

Kathleen C. MiticMs. 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 1According 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 Assessment1. Qualitative Factors

Comments

Identify the specific users of the financial statements for this engagement.

Shareholders

Banks

Financial analysts.Stockbroker & dealers.Potential inventors.Governmental institutions.Suppliers and Manufacturers.

Identity what expectationsthe users may have for the financial statements for this engagement.

Shareholders: As the owners of eBay, they are mostly concerned with the financial performance. Revenues, profit and EPS constitute the most important information for them.

Banks: As creditors, banks are mostly concerned with debt paying ability, 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 possiblesituations or misstatementsthat would affect a user nowor at some future point,regardless of the materialitylevel. (e.g. Considerenvironmentalmatters, 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 Factorsa) Planning Data (U.S. Dollars In Millions)This year actual (adjusted)This year anticipatedLast year2nd preceding year

Assets41,488 (1)48,172 (7)37,074 (3)27,320 (5)

Liabilities17,841 (1)25,345 (7)16,209 (3)9,390 (5)

Equity23,647 (1)24,364 (7)20,865 (3)17,930 (5)

Sales/revenue16,047 (2)16,000 - 16,500 (8)14,072 (4)11,652 (6)

Gross profit11,011 (2)11381.47 (9)9,856 (4)8,191 (6)

Expenses7,545 (2)7820.14 (9)6,772 (4)4,281 (6)

Income before tax3,466 (2)3561.33 (9)3,084 (4)3,910 (6)

b) Normalized pre-tax incomeThis year actual

(adjusted)This year anticipatedLast year2nd preceding year

Estimated pre-tax income3,4663561.333,0843,910

Adjustment for nonrecurring items or unadjusted errors brought forward0000

Normalized pre-tax income3,4663561.333,0843,910

Index

PreparedReviewed

Date &initials 3. Materiality Considerationsa) Profit-oriented enterprises

Identify Financial Statement UsersMeasurement BaseFactor AppliedPossible MaterialityComments

Normalized pre-tax income5% (10)174.33

Assets0.5% (10)176.47

Equity1% (10)208.14

Revenue0.5% (10)69.62

Gross profit1% (10)96.86

Overall Materiality Assessment for Financial Statements as a WholeBased 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)Index

PreparedReviewed

Date &initials Notes1) 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 2010.201020112012Growth from 2010 to 2011Growth from 2011 to 2012This year anticipated growthThis year anticipated

Assets22,00327,32037,07424.16%35.70%29.93%48,172

Liabilities6,7029,39016,20940.11%72.62%56.36%25,345

Equity15,30217,93020,86517.17%16.37%16.77%24,364

This year anticipated growth = Average growth of past 2 years = (growth from 2010 to 2011 + growth from 2011 to 2012)/28) 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 by client2012Anticipated growthAnticipated

value

Sales/revenue162501407215.48%16250

Gross profit-985615.48%11381.47

Expenses-677215.48%7820.14

Income before tax-308415.48%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.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 million12) 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 millionPlanning Timing, Extent and Nature of Audit Procedures and Gathering Audit Evidence

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.

AUDIT PROCEDURE PLANNING DOCUMENT

MATERIALITY - $ 174.33 million

F/S Component & Bal. (in thousands)Audit ObjectiveKey ControlCompliance Test & ExtentTimingSubstantive ProcedureSubstantive Procedure Test & ExtentTiming

Cash & Cash Equivalents/Short-Term Investments$4,494,000/$4,531,000ValidityBank reconciliations are performed monthly by someone who does not have cash custody or record-keeping responsibility.Select a sample of recorded cash receipts and vouch to deposit slips and remittance lists.30/9/2013

ConfirmationObtain confirmations regarding bank balances from all banks Ebay has dealt with, using standard bank confirmation forms.15/1/2014

AccuracyRemittance lists are compared with deposits by someone other than the cashier.Select a sample of recorded cash receipts and trace to bank statement.30/9/2013RecalculationRecalculate the arithmetic on bank reconciliations prepared by Ebay.15/1/2014

AuthorizationSenior Management has the authorization for management of cash and short-term investments.Observe the work habits of the person in charge of cash and their interactions with persons who keep the cash records.30/9/2013EnquiryEnquire if any outstanding cheques have been prepared but not mailed at period end, verifying if these are material should be reclassified as accounts payable.15/1/2014

Net Receivables$12,948,000ValidityCustomers' statements are sent to them regularly by the accounts receivable department.Select a sample of customers' accounts and vouch debits to supporting sales invoices.30/9/2013RecalculationObtain an aged trial balance of individual customer accounts. Recalculate the total and trace to the general ledger control account.15/1/2014

AuthorizationCustomer credit is approved before orders are shipped.Select a sample of credit memos and review for proper approval.30/9/2013ConfirmationSend confirmations to all accounts over $50,000. Select a random sample of all remaining accounts for confirmation.15/1/2014

AccountingAccounts receivable subsidiary is regularly reconciled to the control account.Trace sales invoices to accounts receivable posting.30/9/2013ReviewReview the bank confirmations, loan agreements and minutes of the board for indications of pledged, discounted or assigned receivables.15/1/2014

Long-Term Investments$4,971,000ValidityLong-term investments are recorded properly by appropriate personnel in the Finance/Investment department.Select a sample of long-term investments and vouch to investment certificates and other supporting documents.30/9/2013VouchingObtain a schedule of long-term investments, including purchase and disposition information for the period. Reconcile with investment accounts in the general ledger.15/1/2014

AccuracyAppropriate valuation methods are applied as required by IFRS by the concerned department.Select a sample of financial long-term investments and check to see if they were correctly valued based on the market prices as on December 31.30/9/2013ConfirmationConfirm with a trustee or broker the name, number, identification, interest rate, and face amount (if applicable) of securities held as investments.15/1/2014

Proper PeriodInvestments are updated as of date they are purchased or sold.Select a sample of short-term investments recorded after the balance sheet date and vouch to supporting documents for evidence of proper cutoff. 30/9/2013VouchingSelect 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

Property, Plant & Equipment$2,760,000ValidityFixed assets are inspected periodically and physically counted.Vouch additions and disposals of fixed assets to supporting documents. 30/9/2013

InspectionSelect a sample of asset subsidiary records and perform a physical inspection of the fixed assets recorded.15/1/2014

AccuracyThere is a uniform policy for assigning depreciation rates, useful lives and salvage values.Select a sample of fixed assets and check the depreciation applied on them from year to year.30/9/2013

RecalculationSummarize and recalculate detail PPE subsidiary records, including depreciation and reconcile to general ledger control accounts. 15/1/2014

ClassificationThe 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. 30/9/2013

CheckingSelect 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

Goodwill/Intangible Assets$9,267,000/$941,000N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresRecalculationSummarize and recalculate detail intangible asset subsidiary records, and reconcile to general ledger control account(s).15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresInspectionSelect a sample of intangible assets subsidiary records and inspect title or other ownership legal documents.15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresConfirmationObtain written representations from management regarding ownership and completeness.15/1/2014

Accounts Payable/ Short & Current Long-Term Debt$3,215,000/$9,266,000CompletenessRequisitions, 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.Select a sample of receiving reports and vouch to related purchase orders and note missing receiving reports.30/9/2013ConfirmationSend 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

Proper PeriodAssets are updated as of date goods are received or title of ownership is transferred.Select a sample of accounts payable entries recorded after the balance sheet date and vouch to supporting documents for evidence of proper cutoff.30/9/2013RecalculationObtain 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.15/1/2014

ClassificationPurchases 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.Trace debits arising from accounts payable transactions for proper classification.30/9/2013EnquiryEnquire about terms that justify classifying payables as long-term instead of current.15/1/2014

Long-Term Debt$4,117,000N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresTracingObtain a schedule of notes payable and other long-term debt showing beginning balances, new notes, repayments and ending balances. Trace to general ledger accounts.15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresConfirmationConfirm liabilities with creditor: amount, interest rate, due date, collateral and other terms.15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresRecalculationRecalculate interest expense on debts and trace to the interest expense and accrued interest accounts.15/1/2014

Common Stock$2,000N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresVouchingObtain an analysis of owner's 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.15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresConfirmationConfirm outstanding common shares with share registrar agent.15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresTracingRead the directors' minutes for owners' equity authorization. Trace to entries in the accounts. Determine whether related disclosures are adequate.15/1/2014

Retained Earnings$18,854,000N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresVouchingVouch 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.15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresRecalculationRecalculate the current year's net income, dividends paid out to shareholders and other adjustments to check the ending balance of retained earnings.15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresCheckingVouch to the minutes of the Board of Directors to check the amount of dividends provided to shareholders.15/1/2014

Total Revenues$16,047,000ValidityAccess to the sales invoicing process is restricted to appropriate personnel.Select a sample of recorded sales invoices and vouch to supporting shipping documents , note dates and quantities.30/9/2013VouchingSelect a sample of recorded sales invoices and vouch to supporting shipping documents , note dates and quantities. 15/1/2014

AuthorizationAll credit sales are authorized by the credit department prior to shipment.Select a sample of recorded sales invoices and vouch prices to approved price lists and vouch credit approval.30/9/2013ComparisonCompare revenue dollars and physical quantities with prior-year data and industry economic statistics.15/1/2014

AccountingSummary journal entries are approved before posting.Select a sample of recorded sales invoices and trace posting to general ledger and proper customer account.30/9/2013ReviewReview accounting policies for revenue recognition and ensure they comply with the company's financial reporting framework and are properly disclosed.15/1/2014

Cost of Revenues$5,036,000AccuracyQuantity and quality of purchases received is determined at the time of receipt by receiving personnel independent of the purchasing department.Review the appropriateness of standard costs, if used, to price cost of revenues. Review the disposition of variances from standard costs.

30/9/2013ComparisonCompute the gross margin rate and compare with prior years. Follow up with management on unusual fluctuations.15/1/2014

CompletenessPurchase order forms and receiving reports are pre-numbered and the numerical sequence is checked for missing documents.Select a sample of receiving reports and trace posting of amounts to general ledger.30/9/2013TracingSelect 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.15/1/2014

ValiditySupplier invoices are matched against purchase orders and receiving reports before a liability is recorded.Obtain a sample of cost of sales entries in the general ledger and vouch to supporting summaries of finished goods issues.30/9/2013VouchingSelect a sample of recorded cost of sales and vouch to supporting documentation.15/1/2014

R&D Expenses$1,768,000AuthorizationAll R&D expenses are properly authorized by the R&D department before they are recorded.Select a sample of R&D expenses and review for proper approval. 30/9/2013ReviewSelect a sample of R&D expenses and review for proper approval. 15/1/2014

ClassificationThe chart of accounts and accounting manual gives instructions for determining expenses as R&D expenditure.Select a sample of R&D expenses and check if the expenses have been properly classified under operating expenses in the income statement. 30/9/2013CheckingSelect a sample of R&D expenses and check if the expenses have been properly classified under operating expenses in the income statement. 15/1/2014

Proper PeriodR&D expenses are recorded for the period during which they are incurred.Take a sample of R&D expenses and vouch to supporting documents. 30/9/2013VouchingTake a sample of R&D expenses and vouch to supporting documents.15/1/2014

SG&A Expenses$5,554,000CompletenessBlank cheques are pre-numbered and the numerical sequence is checked for missing documents.Select a sample of cash disbursement cheque numbers and scan for missing documents. 30/9/2013ScanningSelect a sample of cash disbursement cheque numbers and scan for missing documents. 15/1/2014

Proper PeriodCheques are dated in the cash disbursements journal with the date of the cheque.Select a sample of recorded expenses from various accounts and vouch them to a) cancelled cheques, and b) supporting documentation. 30/9/2013VouchingSelect a sample of recorded expenses from various accounts and vouch them to a) cancelled cheques, and b) supporting documentation. 15/1/2014

AccountingThe bank reconciliation is reviewed by an accounting official with no conflicting cash receipts, cash disbursements or recordkeeping responsibilities.Select a sample of cash disbursement cheque numbers and trace disbursement debits to general and subsidiary ledger accounts.30/9/2013TracingSelect a sample of cash disbursement cheque numbers and trace disbursement debits to general and subsidiary ledger accounts. 15/1/2014

Income Tax Expense$610,000N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresScanningObtain 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.15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresRecalculationRecalculate 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.15/1/2014

N/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresN/A 100% Substantive ProceduresVouchingEvaluate 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

Concluding and Reporting1. 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.OpinionIn 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... (signed)..

Date.. PUBLIC ACCOUNTANT References

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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

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