Audit planning and implementation

Planning the Audit

Audit of the financial statements of Keystone Computers & Networks, Inc. (KCN) for the year ended December 31, 20X5. Also, the company's debt agreement with Western Financial Services requires the company to furnish the lender a report by our firm on KCN's compliance with various restrictive debt covenants.

Audit KCN for the year ended December 31, 20X5.

Issue letter on KCN's compliance with its various restrictive debt covenants.

Report of Independent Auditors

The Stockholders and the Board of Directors

Keystone Computers & Networks, Inc.

We have audited the accompanying balance sheets of Keystone Computers & Networks, Inc. As of December 31, 20X5 and 20X4, and the related statements of income, changes in equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the Unites States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Keystone Computers & Networks, Inc. As of December 31, 20X5 and 20X4, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

Charles Adam

Partner

Western Financial Services

Address]

Gentlemen:

Basis of report

Our work was conducted in accordance with the framework for reporting in connection with loan covenants set out in guidance issued by the Consultative Committee of Accountancy Bodies. We have read the attached Statement prepared by the Board of Directors. Our work was based on obtaining an understanding and reasonable assurance of compliance of Keystone Computers & Network, Inc. (the Company) to the Loan Agreement with Western Financial Services (the Lender). For the purpose of providing you with this letter, other than as set out herein, we have carried out the audit and review of the Company's financial information

Report

Based solely on the procedures set out in the engagement letter dated October 9, 20X5 (see Attachment 1) we confirm that the Company is in compliance with all of its restrictive debt covenants with the Lender.

Our report as set out herein is confidential to the addressees of this letter and should not be made available to any other party without our written consent.

Yours faithfully

Charles Adam

Partner cc Chairman of the Board of Directors, Keystone Computers & Networks, Inc.

Memo

To FILES

From Warren Love

Karren West

Date November 14, 20X5

Subject Keystone Computers & Networks, Inc.

Revenue recognition - Accounting for the sale of extended warranty contracts

ISSUE:

When to recognize revenue from sale of extended warranty contracts?

At what amount should revenue from sale of extended warranty contracts be recognized?

RESOLUTION:

FASB and IASB had a joint revenue recognition project wherein they developed a conceptual model for the 'asset and liability approach' to defining and recognizing revenues.

This approach focuses on identifying and measuring increases in assets and decreases in liabilities both at fair value, arising from contracts. Key decisions used as basis for this approach are enumerated below: