Southeast Shoe Distributor, Inc.*

Introduction

Southeast Shoe Distributor (SSD) is a closely owned business that was founded 10 years ago by Stewart Green and Paul Williams. SSD is a distributor that purchases and resells men's, women's, and children's shoes to retail shoe stores located in small to midsize communities. The company's basic strategy is to obtain a broad selection of designer-label and name-brand footwear at low prices for resell to small one-location retail stores. SSD targets stores that have a difficult time obtaining reasonable quantities of designer and name-brand footwear. The company is able to keep the cost of footwear low by (l) selectively purchasing large blocks of production over-runs, over-orders, mid- and late- season deliveries and last season's stock from manufacturers and other retailers at significant discounts, (2) sourcing in-season name-brand and branded designer footwear directly from factories in Brazil, Italy, and Spain, and (3) negotiating favorable prices with manufacturers by ordering footwear during off-peak production periods and taking delivery at one central warehouse.

During the year, the company purchased merchandise from over 50 domestic and international vendors, independent resellers, manufacturers and other retailers that have frequent excess inventory. Designer and name-brand footwear sold by the company include the following: Amalfi, Clarks, Dexter, Fila, Florsheim, Naturalizer, and Rockport. At the present time, SSD has one warehouse located in Atlanta, Georgia. Last year SSD had net sales of $7,311,214. Sales are strongest in the second and fourth calendar-year quarters, with the first calendar-year quarter substantially weaker than the rest.

Background

SSD is required to have an audit of its annual financial statements to fulfill requirements of loan agreements with financial institutions. This audit is to be completed in accordance with the AICPA professional standards for the audit of nonpublic companies. Your audit firm is in the process of completing the audit for the fiscal 2014 financial statements in accordance with these professional standards. The audit senior for this engagement is Jorge Hernandez. The two audit staff assigned to this engagement are Joy Avery and you. The two of you are responsible for performing the tests of balances and analytical tests outlined in the expenditure cycle audit program (referenced in the top right-hand corner as E2).

The general ledger accounts related to purchasing and cash disbursement activities at SSD include the following:

• Inventory Purchases
• Warehousing Expenses
• Purchase Discounts
• Selling Expenses
• Purchase Returns and Allowances
• Prepaid Assets
• Freight In
• Accounts Payable
• Administrative Expenses

Joy Avery has already performed audit procedures 1 and 2 listed on audit schedule E2. Her work is documented on audit schedulesE2, E10, E50, and E51. Additionally, Joy has selected the audit sample for audit procedure 3 as noted on audit schedule E52.

Required

1. Complete audit procedure 3a listed on audit program E2. The supporting documents to be examined for this audit procedure are vouchers, vendor invoices, receiving reports, and purchase orders. Assume you have already tested 35 of the selected sample items, observing no misstatements. The documents and records for the remaining five sample items are provided in "Case #2- Documents and Records for Audit Procedure 3a.pdf" file.SSD's polices only require the generation of receiving reports for purchases of inventory and fixed assets. Additionally, purchase orders are not required to be generated for recurring services such as utilities and cleaning. The results from performing audit procedure 3a should be documented in audit schedule E53. Document completion of audit procedure 3a in the audit program E2.
2. Document your adjusting entries for any observed misstatements that you propose on schedule E11. Then update the accounts payable lead schedule on audit schedule E10. Assume that there was no systematic pattern or intent to commit a fraud based on a review and discussion with client personnel concerning observed misstatements, if any.

Case 10.5: Southeast Shoe Distributor, Inc. Reference: E 11 Prepared by: Date: Reviewed by: Southeast Shoe Distributor Expenditure Cycle - Proposed Adjusting Entries Schedule For the Year Ended December 31, 2014 Account Debit Credit Explanation: Explanation: Explanation: Explanation:Reference: E 50 Prepared by: JA Date: 2/17/15 Reviewed by: Southeast Shoe Distributor Unusual Balances - Expenditure Cycle Accounts Payable For the Year Ended December 31, 2014 Vendor Balance No large, unusual, related-party or debit balances were noted. See conclusion below. Follow-up procedures performed: No large, unusual, related-party or debit accounts payable balances were identified as a result of scanning the year-end vendor ledgers (audit step 2b). Thus, no follow-up procedures are needed.Reference: E 51 Prepared by: JA Date: 2/20/15 Reviewed by: Southeast Shoe Distributor Nonsampling Tests of Balances - Expenditure Cycle Accounts Payable For the Year Ended December 31, 2014 Procedure: The last receiving report issued before December 31, 2014 was 2810. The vouchers, vendor invoices, and purchase orders supporting the last five receiving reports issued before year- end and first five receiving reports issued after year-end were examined and traced to proper inclusion/exclusion in/from the December 31, 2014 vendor ledgers (audit steps 2c and d). Exceptions/Misstatements: No misstatements were noted. Conclusion: The results of audit steps 2c and d support that there were no material cutoff misstatements for purchase transactions occurring just before and after year-end.Reference: E 10 Prepared by: JA Date: 2/17/15 Reviewed by: Southeast Shoe Distributor Accounts Payable - Lead Schedule For the Year Ended December 31, 2014 Audited Unaudited Adjusted Balance Balance Adjustments Balance Account 12/31/13 12/31/14 Debit Credit 12/31/14 Accounts Payable $453,370 $742,704 f, GL Tickmark Legend V - Agreed to prior year audit schedule without exception (audit step 1a). GL - Agreed to 12/31/2014 general ledger without exception (audit step 1b). f - Agreed to the footed balance of the 12/31/2014 accounts payable vendor ledgers without exception (audit step 2a).Reference: E 53 Prepared by: Date: Reviewed by: Southeast Shoe Distributor Nonstatistical Tests of Balance Evaluation - Expenditure Cycle Accounts Payable For the Year Ended December 31, 2014 Recorded Audited Misstatement Misstatements: Amount Amount Amount Total Sample Misstatement Projected Misstatement: Total Sample Misstatement Dollar Value of Sample $184,583.10 11 + Percentage Sample Dollar Misstatement Dollar Value of Population per Journal x $742,704.11 Projected Population Dollar Misstatement = Allowance for Sampling Risk Performance Materiality $40,000.00 Projected Population Dollar Misstatement Recorded Adjustments 11 + 1 Allowance for Sampling Risk Conclusions:Reference: E 2 Prepared by: JA Date 2/28/15 Reviewed by: Southeast Shoe Distributor Expenditure Cycle Audit Program for Year End Analytical Procedures and Tests of Balances For the Year Ended December 31, 2014 Audit Procedures Initial Date Ref 1. Obtain a lead schedule for Accounts Payable and JA 2/14/15 E 10 perform the following: a. Agree prior year balance to prior year audit JA 2/14/15 E 10 schedule. b. Agree current year balance to the general ledger. JA 2/14/15 E 10 2. Obtain a printout of the accounts payable vendor ledgers as of the end of the year and perform the JA 2/17/15 N/A following: a. Foot the year-end vendor ledgers and agree it to JA 2/17/15 E 10 the lead schedule. b. Scan the year-end vendor ledgers for large, unusual, related-party or debit balances and JA 2/17/15 E 50 perform follow-up procedures for each one identified. c. Obtain the last five receiving reports issued before year-end and determine if they were properly JA 2/20/15 E 51 included in the year-end vendor ledgers. d. Obtain the first five receiving reports issued after year-end and determine if they were properly JA 2/28/15 E 51 excluded from the year-end vendor ledgers. 3. Select a sample of checks issued after year-end and JA 2/28/15 E 52 perform the following: a. Examine the voucher package and determine if the related payable was properly included or excluded E 53 from the year-end vendor ledgersReference: E 52 Prepared by: JA Date: 2/28/15 Reviewed by: Southeast Shoe Distributor Nonstatistical Tests of Balances Sampling Plan - Expenditure Cycle For the Year Ended December 31, 2014 Beg. End. Doc. # or Doc. # or Sampling Frame Page # Page # Sample Size Checks issued subsequent to year-end 7,431 7,584 40 Sample Selection Method: The sample of checks issued subsequent to year-end were selected using the haphazard selection method. Sample: Check Number Sample Sample Sample Sample Sample Sample Sample Sample Item Ref Item Ref. Item Ref Item Ref. 1 7,434 16 7,488 31 7,531 2 7,441 17 7,496 32 7,536 3 7,442 18 7,498 33 7,541 4 7,444 19 7,501 34 7,546 7,452 20 7,502 35 7.552 7,453 21 7,503 36 7,553 7,456 22 7,505 37 7,560 7,459 23 7,506 38 7,573 6 00 7,466 24 7,514 39 7,579 10 7,467 25 7,515 40 7,581 11 7,468 26 7,518 12 7,473 27 7,520 13 7,476 28 7,521 14 7,479 29 7,523 15 7,486 30 7,527