Priceline.com is one of the e-tailers (e-commerce retailer) that have grown over the past few years. Priceline.com operates much like an online wholesale travel agent. It allows consumers to bid for prices on airline travel between two destinations, or lodging at a particular destination. Priceline.com then relays the bid to the airline or hotel provider and promises the consumer an answer in two hours. If the airline agrees to the bid price, Priceline.com takes title to the ticket for a brief instant and then transfers the ticket to the consumer. Priceline.com collects the revenue from the consumer with credit card payment, and then pays the airline company the revenue minus an agreed-upon amount for Priceline’s services.

Required:

a. Internet companies have often been valued on their sales growth because many of them have not yet developed operating profits. Explain how the risk analysis affecting Priceline.com and its revenue recognition practices might affect the audit of the client’s computer system.

b. Should Priceline recognize revenue for the full amount of the booked sale—that is, the amount the consumer agreed to pay for the ticket—or should it recognize revenue only for the commission equivalent holdback? Assume for discussion that Priceline is allowed to retain 10 percent of the ticket price for its services. Explain your answer using revenue recognition criteria.

c. Assume the auditor believes that Priceline should recognize revenue only on the percentage retained; that is, it should recognize revenue similar to the way a travel agency would. Which computerized audit technique would be most useful in addressing this audit objective? Explain how you would use the technique selected to conduct the audit.

d. Assume the auditor is concerned that Priceline was booking fictitious tickets, and was backdating tickets to increase revenue for the previous year. Identify two or more audit techniques that the auditor should use to test for fictitious tickets and premature recognition of revenue.