Case 16-1 The Audit of SSM

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. Established in Philadelphia in 2000 as a small, family-owned business, SSM has expanded to include a wholly owned subsidiary, Steves Shoes LLC. SSMs corporate management is based in Philadelphia, and the manufacturing and distribution plants are located in Houston and Los Angeles.

You have been hired as SSMs 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 SSMs 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 SSMs organizational structure.

Managements Processes and Controls

To understand managements processes and controls over related parties and its relationships and transactions with them, you obtain SSMs 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. SSMs legal department maintains a listing of these disclosures (related-parties listing) and periodically checks the disclosed relationships against SSMs vendor and customer master file. Annually, before SSM files its 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 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 focuses 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 accordance 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:

R_RP_5: The

For transactions that lack a business purpose.

Without taking into account the counterpartys financial capability.

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 transactions in accordance with the applicable financial reporting framework. related-party disclosure does not sufficiently describe related-party

Required

1. In accordance with paragraphs .05.07 of PCAOB AS 2410 (formerly PCAOB AS 18), auditors are required to inquire of the audit committee, management, and others in the company regarding their knowledge of related parties and relationships and transactions with related parties. Use SSMs organizational chart in the appendix below as a resource to identify others in the company who you would consider asking about such knowledge. Explain your rationale for selecting these individuals.

2. Are managements processes and controls over related parties and over related- party relationships and transactions sufficient? Why or why not?

3. Given the need for management to identify, authorize and approve, and account for and disclose its related parties and its relationships and transactions with related parties, what are the types of processes and control activities that management should consider?

4. Given the requirement in paragraph .14 of PCAOB AS 2410 (formerly PCAOB AS 18), what procedures would you perform to test the accuracy and completeness of the related-parties listing and of relationships and transactions with related parties?

5. What would be the implications on the audit if an undisclosed related-party transaction was identified during the completion of audit testing?

Appendix Organizational Charts Entity Organizational Chart

Steve's Shoes LLC

Management Organizational Chart

SSM Board of Directors

SSM Management

SSM Corporate Philadelphia, PA

Steve's Shoes LLC Houston, TX

Steve's Shoes LLC Los Angeles, CA

Dain Blanton Chief Executive Officer

Na Li Sales and Marketing Manager

Sybil Newell Chief Operating Officer

Lars Frolander Chief Financial Officer

Helen Volk Human Resources Manager

Ken Briggs Director of Payroll

Jonathan Edwards Director of Legal Department

Lars Frolander Chief Financial Officer

Tina Parshin Payroll Manager

Mounir Sabet Information Systems Officer

Ashley Callus Financial Controller

Hector Mendez Internal Audit Manager

Suni Park Payroll Clerk

Neil Walker Data Center Mgr

Pia Hansen Programming Mgr

Gete Wami Network Mgr

Sara Harstick Accounting Mgr

Wei Lang Credit Controller

Randhir Singh Reporting Mgr

Multiple Internal Auditors

Juan Perez A/PSupervisor

Multiple Accounting Clerks

Maree Fish Payroll Supervisor

Denis Kapustin A/RSupervisor

Steffi Jones A/PClerk

*Multiple Other A/P Clerks*

Angela Tamas A/RClerk

*Multiple Other A/RClerks*

SSM Operations

Sybil Newell Chief Operating Officer

Andre Willms Production Manager

Penelope Heyns Purchasing Manager

Syed Ali Distribution Manager

Alex Giladay Houston Plant Mgr

Annie Famose Los Angeles Plant Mgr

Linda Thom Houston Purchasing Supervisor

Robert Lane Los Angeles Purchasing Supervisor

See Distribution Dept in Separate Org Chart

Bronwyn Mayer Prod Supervisor

Hughes Obry Prod Supervisor

Multiple Purchasing Clerks

Multiple Purchasing Clerks

Multiple Line Supervisors

Multiple Line Supervisors

SSM Distribution

Syed Ali Distribution Manager

Elien Meijer Houston Ship Mgr

Maurice Green Los Angeles Ship Mgr

Fritz Hoffman Houston Rec. Mgr

Multiple Shipping Clerks

Multiple Shipping Clerks

Multiple Receiving Clerks

Multiple Receiving Clerks