ABC Stores is a large discount catalogue department store chain. The company has recently expanded from 8 to 60 stores by borrowing from several large financial institutions and from a public offering of common stock. A recent investigation has disclosed that ABC materially overstated net income. This was accomplished by understating account payable a recording fictitious supplier credits that further reduced accounts payable. An SEC investigation was critical of the evidence gathered by ABC's audit firm, John & Peter, in testing account payable and the supplier credits. The following is a description of some of the fictitious supplier credits and unrecorded amounts in account payable, as well as the audit procedure.

1. Apple Credits - ABC created 28 fictitious credit memos totalling RM257,000 from Apple Distributors, the main supplier of health and beauty aids to ABC. ABC's controller initially told the auditor that the credits were for returned goods, then said they were a volume discount, and finally stated they were a payment so that ABC would continue to use Apple as a supplier. One of the John & Peter staff auditors concluded that a RM257,000 payment to retain ABC's business was too large to make economic sense. The credit memo indicated that the credits were for damaged merchandise, volume rebates and advertising allowances. The audit firm requested a confirmation of the credits. In response, John Tom, the president of ABC Stores, placed a call to Brown Marry, the presidents of Apple, and handed the phone to the staff auditor. In fact, the call had been placed to an officer, posing as Marry, orally confirmed the credits. ABC refused to John & Peter to obtain written confirmation supporting the credits. Although the staff auditor doubted the validity of the credits, the audit partner, Mark Jack, accepted the credits based on the credit, telephone confirmation of the credits and oral representations of ABC officers.

Identify deficiencies in the sufficiency and appropriateness of the evidence gathered in the audit of account payable of ABC Stores. (Discussion is very exhaustive, interesting to read, very strong supporting evidences and relevant inherent risks.)