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 sells men's, women's, and children's shoes to retail shoe stores located in smallto mid-size communities. The company's basic strategy is to obtain a broad selection of designer-label and name-brand merchandise at low prices and resell the merchandise to small, one-location, retail stores that have difficulty obtaining reasonable quantities of designer and name-brand merchandise. The company is able to keep the cost of merchandise 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 merchandise directly from factories in Brazil, Italy, and Spain, and (3) negotiating favorable prices with manufacturers by ordering merchandise 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 frequently have excess inventory. Designer and name-brand footwear sold by the company during the year 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 123 retail shoe store customers and had net sales of \(\$ 7,311,214\). Sales are strongest in the second and fourth calendaryear 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. SSD has the following general ledger accounts related to sales and cash collection activities

- Sales

- Sales Discounts

- Sales Returns and Allowances

- Uncollectible Accounts Expense

- Accounts Receivable

- Allowance for Uncollectible Accounts Bill Zander, staff auditor, reviewed SSD's information system and control activities related to sales and cash receipts and prepared the enclosed flowcharts (referenced in the top right hand corner as \(R 30-1, R 30-2, R 30-3\), and \(R 30-4\) ). The number and size of sales returns and uncollectible accounts is relatively small. Thus Susan Mansfield, audit partner, decided not to have Bill document the company's policies and procedures related to sales returns and allowances and uncollectible accounts.

As the audit senior, you have been assigned responsibility for identifying substantive tests of transactions to detect material misstatements related to revenue cycle accounts. You have conducted some preliminary discussions with client personnel and noted the following

- Sales returns and allowances transactions are recorded in the sales register

- Sales discounts are recorded in the cash receipts journal

- The estimation and write-off of uncollectible accounts are recorded in the general journal and require preparation of a prenumbered adjustment memo

- Misstatements to sales, cash receipts, and accounts receivable are recorded in the general journal and require preparation of a prenumbered adjustment memo

REQUIREMENTS
Complete audit steps 1-3 in the Revenue Cycle Planning Audit Program Identification of Substantive Tests (audit schedule R 1-2) and document your work in audit schedules \(R\) 1-2, R 41-1, R 41-2, R 42-1, R 42-2, R 43-1, and R 43-2. Audit steps \(3 \mathrm{a}, 3 \mathrm{~b}\), and \(3 \mathrm{c}\) can be completed separately. Your instructor will indicate which steps you are to complete.