Southeast Shoe Distributor (SSD) is a closely-owned business that was 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 for 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 inseason 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. The audit senior for this engagement is Jorge Hernandez. The two audit staff assigned to this engagement are Joy Avery and you. The two of you are responsible for performing the tests of balances and analytical tests outlined in the expenditure cycle audit program (referenced in the top right-hand corner as \(E\) 2). SSD has the following general ledger accounts related to purchasing and cash disbursement activities

- Inventory Purchases

- Purchase Discounts

- Purchase Returns and Allowances

- Freight Expenses

- Administrative Expenses

- Warehousing Expenses

- Selling Expenses

- Prepaid Expenses

- Accounts Payable Joy Avery has already performed audit procedures 1 and 2 listed on audit schedule \(E 2\). Her work is documented on audit schedules \(E 2, E 10, E 50\), and \(E 51\). Additionally, Joy has selected the audit sample for audit procedure 3 as noted on audit schedule \(E 52\).

REQUIREMENTS

You are assigned responsibility for completing audit procedure 3a listed on audit program E 2. The supporting documents to be examined for this audit procedure are vouchers, vendor invoices, receiving reports, and purchase orders. Assume that you have already tested 35 of the selected sample items, observing no misstatements. The documents and record for the remaining five sample items are provided behind the audit schedules. SSD's polices only require the generation of receiving reports for purchases of inventory and fixed assets. Additionally, purchase orders are not required to be generated for recurring services such as utilities and cleaning. The results from performing audit procedure 3 a should be documented on audit schedule E 53. Adjusting entries for any observed misstatements should be proposed on schedule E 11. Finally, assume that there was no systematic pattern or intent to commit a fraud based on a review and discussion with client personnel concerning observed misstatements.