The Runners Shop (TRS) was a family-owned business founded 17 years ago by Robert and Andrea Johnson. In July of 2003, TRS found itself experiencing a severe cash shortage that forced it to file for bankruptcy protection. Prior to shutting down its operations, TRS was engaged in the retail sale of athletic footwear and related products for runners. TRS's 2002 audited financial statements reported net sales of \(\$ 2,217,292\) and a net loss of \(\$ 50,980\). Consistent with prior years, sales were strongest in the second and fourth calendar-year quarters, with the first calendar-year quarter substantially weaker than the rest.

The company's basic strategy was to provide superior customer service over competing sporting goods and mass merchandiser retail stores. The company attempted to provide superior service by hiring college-age runners as sales staff and then training them on shoes and strategies that would correct common running ailments. This strategy helped TRS develop a very loyal customer base for its first store located in Charlottesville, Virginia. Sales at the Charlottesville store were so strong that Robert and Andrea decided to expand into three other markets: Richmond, Virginia; College Park, Maryland; and Cary, North Carolina.

Unfortunately, the expansion effort did not go as well as Robert and Andrea had anticipated. They expected that the first three years of operations for the new locations would be difficult, but after that point they hoped to experience significant improvement in operations. The expected performance improvement did not materialize and after four years of operations the expansion stores were still running at a loss. In July 2003, Robert and Andrea, with almost all of their personal assets exhausted, realized they could no longer hang on and filed for bankruptcy protection.

BANKCRUPTCY PROMPTS CREDITORS TO SUE TRS
The plaintiffs in the lawsuit were First Commercial Bank and National Bank and Trust. First Commercial Bank provided a short-term line of credit that allowed TRS to borrow up to \(\$ 100,000\) to cover cash disbursements for merchandise purchases prior to peak sales periods. This loan agreement did require TRS to pay off its outstanding balance the last business day each July. National Bank and Trust provided an installment loan to TRS when it expanded from one to four locations. This loan agreement required TRS to remit monthly interest and principal payments. Both lenders required TRS to have its annual financial statements audited as a condition of the loan agreements.
Unfortunately, as a result of the bankruptcy both lending institutions lost the outstanding principal balances owed them by TRS. The two lending institutions jointly filed a lawsuit against the firm that audited TRS's financial statements, Green and Brown, LLP. The lawsuit alleges that the audit firm did not perform the audit in accordance with generally accepted auditing standards and as a result the two banks were mislead and were unable to recover their outstanding loan balances.
The law firms representing the defendant (Green and Brown, LLP) and the plaintiffs (First Commercial Bank and National Bank and Trust) are now conducting discovery procedures. The objectives of the discovery process are to ensure that all evidence is equally available to all parties and to facilitate settlement of the case.

INFORMATION ABOUT THE AUDIT
Green and Brown, LLP, had audited the financial statements of TRS for the last 10 years. The audit report issued for the 2002 and 2001 financial statements was as follows:
Independent Auditor's Report
To Robert and Andrea Johnson, President and Treasurer of The Runners Shop We have audited the accompanying balance sheets of The Runners Shop as of December 31, 2002 and 2001, and the related statements of income, retained earnings, 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 statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 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 The Runners Shop as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Green and Brown, LLP Charlottesville, VA March 5, 2003 The audit staff for the 2002 audit of TRS's financial statements consisted of four individuals: Pete Letterman, audit partner; Carol Maddox, audit manager; Mary Lewis, audit senior, and Joe Manaker, staff auditor. All of these individuals also worked on the previous year's audit of TRS. Enclosed is the audit program and audit documentation related to TRS's Notes Payable. Joe performed the audit work in this area and Mary reviewed his work.

REQUIREMENTS
You are working for the litigation support firm hired to identify deficiencies with the audit work performed by Green and Brown, LLP. Your assignment is to identify deficiencies with the audit work performed by the audit firm related to TRS's Notes Payable. The purpose of reviewing this section of the audit documentation is to demonstrate a pattern of careless behavior on the part of the auditors to build a case of auditor negligence.
The documentation of the audit firm's work related to TRS's Notes Payable is enclosed. Green and Brown, LLP's guidelines for the preparation of audit documentation have also been provided for your information. Deficiencies you identify should be listed on the enclosed schedules.