Southeast Shoe Distributor (SSD) is a closely-owned business founded 10 years ago by Stewart Green and Paul Williams. SSD is a distributor that purchases and resells men's, women's, and children's shoes to retail shoe stores located in small to midsize communities. The company's basic strategy is to obtain a broad selection of designer-label and name-brand footwear at low prices to resell to small, one-location, retail stores. SSD targets stores that have a difficult time obtaining reasonable quantities of designer and name-brand footwear. The company is able to keep the cost of footwear low by (1) selectively purchasing large blocks of production overruns, overorders, mid- and late-season deliveries, and last season's stock from manufacturers and other retailers at significant discounts, (2) sourcing in-season name-brand and branded designer footwear directly from factories in Brazil, Italy, and Spain, and (3) negotiating favorable prices with manufacturers by ordering footwear during off-peak production periods and taking delivery at one central warehouse.

During the year, the company purchased merchandise from over 50 domestic and international vendors, independent resellers, manufacturers, and other retailers that have frequent excess inventory. Designer and name-brand footwear sold by the company include the following: Amalfi, Clarks, Dexter, Fila, Florsheim, Naturalizer, and Rockport. At the current time, SSD has one warehouse located in Atlanta, Georgia. Last year, SSD had net sales of \(\$ 7,311,214\). Sales are strongest in the second and fourth calendar-year quarters, with the first calendar-year quarter substantially weaker than the rest.

BACKGROUND INFORMATION ABOUT THE AUDIT
SSD is required to have an audit of its annual financial statements to fulfill requirements of loan agreements with financial institutions. Jorge Hernandez, audit senior, reviewed SSD policies and procedures related to acquisitions and cash disbursements and prepared the enclosed flowcharts (referenced in the top right hand corner as E 20-1, E 20-2, E 21) and planned control risk matrix (audit schedule \(E\) 22). As a result of this process, Jorge developed the enclosed audit program (audit schedules E 1-1, E 1-2). The audit program was approved by Susan Mansfield, audit manager, and Katherine Smith, audit partner. The two staff auditors assigned to this engagement are Joy Avery and you. Together, you and Joy are responsible for performing the tests of transactions outlined in the expenditure cycle audit program (audit schedules E 1-1 and E 1-2). SSD has the following general ledger accounts related to purchasing and cash disbursement activities - Inventory Purchases - Purchase Discounts - Purchase Returns and Allowances - Freight Expense - Administrative Expenses - Warehousing Expenses - Selling Expenses - Prepaid Expenses - Accounts Payable Joy Avery has already selected the audit samples for purchases and cash disbursements and completed audit procedures \(2,3,5,6\), and 7. Joy's work is documented on audit schedules \(E\) 1-1, E 1-2, E 30, E 32, E 33, E 34, E 40, E 41, E \(42, E 43\), and \(E 44\).

REQUIREMENTS
You have been assigned responsibility for completing audit steps 1a-h and 4a listed on audit program E 1-1. You will want to review the flowcharts on audit schedules \(E\) 20-1 and E 20-2 to become familiar with the accounting documents and records used with purchases. Assume that you have already completed audit steps \(1 \mathrm{f}, \mathrm{g}\), and \(\mathrm{h}\) for all 40 sample items and no deviations or misstatements were found. Also assume you have tested 35 of the sample items selected for audit steps 1a-e and 55 of the sample items selected for audit step \(4 \mathrm{a}\). No deviations or misstatements were observed for these sample items. The accounting documents and records related to the remaining five sample items for audit steps 1a-e and 4 a are provided behind the audit schedules. Note that receiving reports are only generated for purchases of inventory and fixed assets and that purchase orders are not generated for recurring services, such as utilities and cleaning. The audit firm has a policy of using the same audit sample for planned tests of controls and substantive tests of transactions (dual-purpose tests) whenever possible to maximize audit efficiency. Thus, the results of the test-ofcontrols aspect of audit steps 1a-h and 4a should be documented on audit schedule \(E\) 31, whereas the substantive test aspect should be documented on audit schedule \(E 35\). Adjusting entries should be proposed on schedule E 11 for any observed misstatements. You should assume that there was no systematic pattern or intent to commit a fraud based on a review and discussion with client personnel concerning observed deviations and misstatements. Finally, you may want to review the audit schedules already completed by Joy Avery to have an idea of how each is to be completed.