Background

Steve's 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. Established in Philadelphia in 2000 as a small, family-owned business, SSM has

expanded to include a wholly owned subsidiary, Steve's 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 hired as SSM's external auditor and have been assigned to test SSM's

related parties and its relationships and transactions with related parties in accordance

with PCAOB AS 2410.

You have spoken with SSM's CEO, Dain Blanton, who believes that the processes and

controls in place at SSM would result in the identification of any related-party

relationship that would require further investigation or possible disclosure in the financial

statements. Further, he has stated that the company does not have any related-party

events or transactions that would need to be disclosed in the current-year annual financial

statements in accordance with ASC 850.

See the appendix below for SSM's organizational structure.

Management's Processes and Controls

To understand management's 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 resources manager performs a

background check. Employees hired for management positions must disclose their

significant ownership interests. SSM's legal department maintains a listing of

these disclosures ("related-parties listing") and periodically checks the disclosed

relationships against SSM's vendor and customer master file. Annually, before

SSM files its Form 10-K, management signs representations 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 discloses any

changes in its significant equity ownership or investments at this time. A review

of the representations is performed by the legal 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

determined that none of the identified and assessed risks of material misstatement aresignificant risks. (Note that there are additional risks of material misstatement that may

be identified regarding related parties and relationships and transactions with related

parties; however, this case study only focuses on the risks outlined below.)

R_RP_1: Related party relationships and/or transactions do not exist or are inaccurate.

R_RP_2: Related party relationships and/or transactions are incomplete.

R_RP_3: Related-party transactions are recorded for transactions that lack a business

purpose.

R_RP_4: The related party disclosure:

includes transactions that may not have occurred or are not accurate;

includes transactions that are not classified appropriately;

does not include transactions that have occurred;

R_RP_5: Related party transactions are disclosed as being at arms-length when they are

not recorded as such.

R_RP_6: The related-party disclosure does not sufficiently describe related-party

transactions in accordance with the applicable financial reporting framework.

Required

1-Are management's processes and controls over related parties and related-party

relationships and transactions sufficient? Why or why not?

2- What would be the implications on the audit if an undisclosed related-party

transaction was identified during the completion of audit testing?