Background Steves Shoe Makers Inc. ( SSM ), a company that is publicly traded on the New York Stock Exchange , manufactures and distributes high- performance athletic footwear and apparel . E stablished in Philadelphia in 2000 as a smal l, family -owned business , SSM has expanded to include a wholly owned subsidiary, Steves Shoes LLC. SSM s corporate management is based in Philadelphia , and the manufacturing and distribution plants are located in Houston and Los Angeles. You have been hi red as SSM s external auditor and have been assigned to test SSMs related parties and its relationships and transactions with related parties in accordance with PCAOB AS 2410 (formerly PCAOB AS 18 ). You have spoken with SSM s CEO, Dain Blanton, who belie ves that the processes and controls in place at SSM would result in the identif ication of any related -part y relationship that would require further investigation or possible disclosure in the financial statements . Further, he has stated that the c ompany does not have any related -party events or transactions that would need t o be disclosed in the current -year annual financial statements in accordance with ASC 850. See the appendix below for SSM s organizational structure . Managements Processes and Control s To understand managements processes and controls over related parties and its relationships and transactions with them , you obtain SSM s relevant process flow narrative from management , which states the following : Before hiring a new employee, the human r esources manager performs a background check. E mployee s hired for ma nagement positions must disclose their significant ownership interest s. SSM s l egal department maintains a listing of these disclosures (related -parties listing) and periodically check s the discl osed relationships against SSM s vendor and customer master file. Annually , before SSM files its 10- K, management sign s representation s indicating that to the best of its knowledge , SSM did not enter into any related -party transactions that were not disclosed in the financial statements . Management also disclose s any changes in its significant equity ownership or investments at this time . A review of the representations is performed by the l egal department , the related -parties listing is updated for any new related parties identified , and the records are maintained in a locked room. Risks of Material Misstatement As a result of the risk -assessment procedures performed, you have determined that the risks of material misstatement listed below apply to the audit of SSM . You have also Case 16- 1c: The Audit of SSM : Application of PCAOB AS 2410 (formerly PCAOB AS 18) Page 2 Copyright 2016 Deloitte Development LLC All Rights Reserved. determined that none of the identified and assessed risks of material misstatement are significant risks. (Note that there are additional risks of material misstatement regarding related parties and relationships and transactions with related parties ; however , this case study only focus es on the risks outlined below.) R_RP_1: Related parties and transactions with related parties may not be appropriately identified . R_RP_2: Related -party transactions are not recorded in ac cordance with applicable accounting standards . R_RP_3: Related -party transactions are recorded: For transactions that did not occur or are pending . At incorrect amounts . In the incorrect period. R_RP_4: Related -party transactions are recorded: For tr ansactions that lack a business purpose . Without taking into account the counterpartys financial capability . R_RP_5: The related -party disclosure includes transactions that:

The related-party disclosure includes transactions that:

May not have occurred.

Lack a business purpose

Are not recorded on terms equivalent to those prevailing in an arms-length transaction and are not disclosed as such.

R_RP_6:The related-party disclosure does not sufficiently describe related-partytransactions in accordance with the applicable financial reporting framework

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