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.

Documents and Records for Audit Procedure 3a Southeast Shoe Distributor, Inc. Vendor Ledgers for Audit Procedure 3a* For the Period From December 1, 2014 to December 31, 2014 Debit Credit Vendor Date Trans. Ref. Type Amount Amount Balance Brown Group, Inc. 12/01/14 Balance Fwd 12,366.94 12/09/14 7357 CDJ 12,366.94 0.00 12/12/14 47314 PJ 1,952.64 1,952.64 12/26/14 49524 PJ 25,883.00 27,835.64 Georgia Natural 12/01/14 Balance Fwd 412.66 Gas Service 12/12/14 7358 CDJ 412.66 0.00 12/26/14 359052-002-08 PJ 448.06 448.06 Metro Cleaning 12/01/14 Balance Fwd 0.00 12/05/14 18777 PJ 350.00 350.00 12/26/14 7415 CDJ 350.00 0.00 Vargo Rack & 12/01/14 Balance Fwd 825.74 Shelving 12/26/14 7417 CDJ 825.74 0.00 12/30/14 2077 - 45 PJ 771.47 771.47 Weyco Group, Inc. 12/01/14 Balance Fwd 9,649.56 12/05/14 24715 PJ 7,111.88 16,761.44 Abstracted from the printout of Vendor Ledgers using exact format of the printout (Note: Trans. Ref. refers to the corresponding check number or vendor invoice number and Type refers to the corresponding Cash Disbursement Journal - CDJ or Purchase Journal - PJ).Documents and Records for Audit Procedure 3a (continued) Voucher Check #: 7453 Approval: JS Invoice Brown Group, Inc. # 47314 8300 Maryland Avenue St. Louis, MO 63105 Date: 01/09/15 Paid Voucher #: 9049 314-854-4000 (phone), 314-854-4274 (fax) Payee: Brown Group, Inc. Account #: 12000 Date: 12/09/14 Terms: Net 30 PO #: 3336 Shipped: United Parcel Service Amount: $ 1,952.64 FOB: Shipping Point Description: Purchase of women's shoes Bill To Ship To Southeast Shoe Distributor, Inc. Southeast Shoe Distributor, Inc. 1102 Memorial Avenue 1102 Memorial Avenue Atlanta, GA 30303 Atlanta, GA 30303 |Phone: (404)555-5555 Item # Description Size Quantity Unit Price Amount 45623 Naturalizer Royal Pumps Bone 6.5 M 36 $ 16.79 5 604.44 45623 Naturalizer Royal Pumps Bone 7.0 M 36 16.79 604.44 23 Naturalizer Royal Pumps Bone 7.5 M 36 16.79 604.44 Total Amount $ 1,813.32 Rate N/A Tax Shipping 139.32 Total Invoice $ 1,952.64 Message Paid Shipped 12/09/2014 Receiving Report Purchase Order Southeast Shoe Distributor, Inc. Date Received: 12/12/14 Bill to 1102 Memorial Avenue Receiving Report #: 2780 Southeast Shoe Distributor, Inc. PO #: 3336 Atlanta, GA 30303 1102 Memorial Avenue Date: 12/05/14 Date Required: 12/15/14 Atlanta, GA 30303 Terms: Net 30 Received from Purchase Order # Shipped: United Parcel Service Brown Group, Inc. 3336 04)555-5555 Buyer: Mary West Freight carrie Received by Vendor Ship To United Parcel Service Sue Ravens Brown Group, Inc. Southeast Shoe Distributor, Inc 8300 Maryland Avenue 102 Memorial Avenue Quantity Item # Size Description St. Louis, MO 63105 Atlanta, GA 30303 36 45623 6.5 M Naturalizer royal pumps bone 30 45623 7.0 M Phone:(314)854-4000 36 45623 7.5 M Item # Description Size Quantity Unit Price Amount 45623 Naturalizer Royal Pumps Bone 6.5 M 36 $ 16.79 $ 604.44 45623 Naturalizer Royal Pumps Bone 7.0 M 36 16.79 604.44 45623 Naturalizer Royal Pumps Bone 7.5 M 36 16.79 604.44 Paid Condition: Excellent Paid Total Amount $ 1,813.32 Ta Total Invoice $ 1,813.32 Message Authorization Name: Bruce Penny Date: 12/05/14 Title: Purchasing Supervisor Signature: Bruce PennyDocuments and Records for Audit Procedure 3a (continued) Voucher Check #: 7476 Approval: JS Date: 01/15/15 Voucher #: 9070 Payee: Georgia Natural Gas Service Account #: 75000 Amount: $ 448.06 Paid Description: Monthly gas bi Service Southeast Shoe Distributor, Inc. Your Account Number Rate - Type of Service Billing Date For 1102 Memorial Avenue 359052-002-08 Commercial 12/23/14 Atlanta, Georgia 30303 GAS Previous Balance 412.66 KT Payment - Thank You 412.66 Remaining Balance 0.00 Current Bill 448.06 Paid Total 448.06 Current bill Past Due After Total Amount Due January 15, 2015 448.06 HOW YOUR CURRENT GAS CHARGES ARE CALCULATED Meter Type of Meter Readings CCF BTU herms Number Service Period Days Reading Current Past Used Factor Used 159756 11/22/14 - 12/23/14 31 Actual 15297 15852 555 1.049 582 Total Therms Energy Charge WNA Facilities Taxable Sales Tax Current Billed Therms X Rate (.73928) Therms X Factor (- .00558 Charge Amount (3.00%) Gas Charge 582 430.26 - 3.25 8.00 435.01 13.05 448.06 SEE THE BACK OF THIS BILL FOR ADDITIONAL INFORMATION GEORGIA NATURAL GAS SERVICES 5605 GLENRIDGE DR NE, ATLANTA, GA 30342 (404) 257-4000Documents and Records for Audit Procedure 3a (continued) Voucher Invoice Invoice #: 2077 - 45 Check #: 7523 Approval:_ Vargo Rack & Shelving Date: 12/30/14 Date: 01/27/15 Paid Voucher #: 9113 6400 Hillandale Drive Lithonia, GA 30058 Payee: Vargo Rack & Shelving Account #: 15000 (404)482-4444 Amount $ 771.47 Customer Order: 3348 Shipped: Vargo Delivery Terms: Net 30 FOB: Destination Description: Purchase of storage shelving Bill To Ship To Southeast Shoe Distributor, Inc. Southeast Shoe Distributor, Inc. al Avenue 1102 Memorial Avenue Atlanta, GA 30303 Atlanta, GA 30303 Phone: (404)555-5555 Item # Description Quantity Unit Price Amount H51118 Penco Erectomatic Shelving, Beige $121.30 $ 727.80 Paid Total Amount $ 727.80 Rate: 6.0% Tax 43.67 Shipping Total Invoice $ 771.47 Receiving Report Purchase Order Southeast Shoe Distributor, Inc. Date Received: 01/02/15 Bill to 1102 Memorial Avenue Receiving Report #: 2817 Southeast Shoe Distributor, Inc. PO #: 3348 Atlanta, GA 30303 1102 Memorial Avenue Date: 12/26/14 Date Required: 12/29/14 Atlanta, GA 30303 Terms: Net 30 Received from Purchase Order # Shipped: Vargo Truck Vargo Rack & Shelving 3348 Phone:(404)555-5555 Buyer: Mary Talley Freight carrier Received by Vendor Ship To Vargo Truck Sue Ravens Vargo Rack & Shelving Southeast Shoe Distributor, Inc. 6400 Hillandale Drive 1102 Memorial Avenue Quantity Item # Size Description Lithonia, GA 30058 Atlanta, GA 30303 H5118 Penco Erectomatic Shelving Phone:(404)482-4444 Item # Description Size Quantity |Unit Price Amount H51118 Beige Penco Erectomatic Shelving 6 $ 121.30 $ 727.80 Paid Condition: Excellent Paid Total Amount $ 727.80 Tax 43.67 Total Invoice $ 771.47 Message Authorization Name: Bruce Penny Date: 12/26/14 Title: Purchasing Supervisor Signature: Bruce PennyDocuments and Records for Audit Procedure 3a (continued) Voucher Invoice Check #: 7573 Paid Approval: JS Weyco Group, Inc. Date: 01/09/15 234 East Reservoir Avenue, P.O. Box 1188 Invoice #: 26171 Date 02/23/15 Voucher #: 9138 Milwaukee, WI 53201 Phone:(312)458-7474, Fax:(312)458-2500 Payee: Weyco Group, Inc. Account #: 12000 PO #: 3349 Shipped: Transit Freight Company FOB: Amount: $ 19,656.00 Terms: Net 45 Shipping Point Description: Purchase of men's shoes Bill To Ship To Southeast Shoe Distributor, Inc. Southeast Shoe Distributor, Inc. 1102 Memorial Avenue 1102 Memorial Avenue Atlanta, GA 30303 Atlanta, GA 30303 Phone:(404)555-5555 Item # Description Size Quantity Unit Price Amount 1617 Stacy Adams Low Top Tie Black 9.0 D 25 $ 31.50 787.50 1617 Stacy Adams Low Top Tie Black 9.5 D 50 31.50 1,575.00 1617 Stacy Adams Low Top Tie Black 10.0 D 50 31.50 1,575.00 1617 Stacy Adams Low Top Tie Black 10.5 D 50 31.50 1,575.00 1617 Stacy Adams Low Top Tie Black 11.0 D 50 31.50 1,575.00 1617 Stacy Adams Low Top Tie Black 11.5 D 25 31.50 787.50 1617 Stacy Adams Low Top Tie Black 12.0 D 25 31.50 787.50 1617 Stacy Adams Low Top Tie Black 13.0 D 25 31.50 787.50 1618 Stacy Adams Low Top Tie Brown 9.0 D 31.50 787.50 8 Stacy Adams Low Top Tie Brown 9.5 D 880 31.50 1,575.00 8 Stacy Adams Low Top Tie Brown 10.0 D 31.50 1,575.00 1618 Stacy Adams Low Top Tie Brown 10.5 D 50 31.50 1,575.00 1618 Stacy Adams Low Top Tie Brown 11.0 D 50 31.50 1,575.00 1618 Stacy Adams Low Top Tie Brown 11.5 D 25 31.50 787.50 1618 Stacy Adams Low Top Tie Brown 12.0 D 1618 Stacy Adams Low Top Tie Brown 13.0 D 25 31.50 787.50 31 50 787.50 Total Amount $ 18,900.00 Paid Rate N/A Tax Shipping 756.00 Total Invoice $ 19,656.00 Message Shipped 01/09/2015 Receiving Report Bill to Purchase Order Southeast Shoe Distributor, Inc. Date Received: 01/12/15 Southeast Shoe Distributor, Inc. PO #: 3349 1102 Memorial Avenue Receiving Report #: 2824 1102 Memorial Avenue Date: 12/26/14 Date Required: 01/30/15 Atlanta, GA 30303 Atlanta, GA 30303 Terms: Net 45 Shipped: Transit Freight Company Received from Purchase Order # Phone:(404)555-5555 Buyer: Doug Scott Weyco Group, Inc. 3349 Freight carrier Received by Vendor Ship To Weyco Group, Inc Southeast Shoe Distributor, Inc. Transit Freight Company Sue Ravens 234 East Reservoir Avenue 1102 Memorial Avenue P.O. Box 1188 Atlanta, GA 30303 Quantity Item # Size Description Milwaukee, WI 53201 25 1618 9.0 D Stacy Adams low top tie brown Phone:(312)458-7474 50 1618 9.5 D 50 1618 10.0 D 50 1618 10.5 D Item # Description Size Quantity Unit Price Amount 50 1617 1618 11.0 D Stacy Adams Low Top Tie Black 9.0 D 25 $ 31.50 $ 787.50 25 1 1.5 D 1617 Stacy Adams Low Top Tie Black 9.5 D 50 31.50 1618 1,575.00 25 1618 12.0 D 1617 Stacy Adams Low Top Tie Black 10.0 0 50 31.50 1,575.00 25 1618 13.0 D 1617 Stacy Adams Low Top Tie Black 10.5 D 50 31.50 1,575.00 25 1617 9.0 D Stacy Adams low top tie black 1617 Stacy Adams Low Top Tie Black 11.0 D 50 31.50 ,575.00 50 1617 9.5 D 1617 Stacy Adams Low Top Tie Black 11.5 D 25 31.50 787.50 1617 10.0 D 1617 Stacy Adams Low Top Tie Black 12.0 D 25 31.50 787.50 50 1617 10.5 D 1617 Stacy Adams Low Top Tie Black 13.0 D 25 31.50 787.50 50 1617 11.OD 1618 Stacy Adams Low Top Tie Brown 9.0 D 31 .50 787.50 25 161 11.5 D 1618 Stacy Adams Low Top Tie Brown 9.5 D 50 31.50 1,575.00 1617 12.0 D Paid 1618 Stacy Adams Low Top Tie Brown 10.0 D 50 31.50 1,575.00 25 1617 13.0 D 1618 Stacy Adams Low Top Tie Brown 10.5 D 31. 50 1,575.00 1618 Stacy Adams Low Top Tie Brown 11.0 D 31.50 1,575.00 1618 Stacy Adams Low Top Tie Brown 11.5 D 31.50 787.50 1618 Stacy Adams Low Top Tie Brown 12.0 D 31.50 787.50 1618 Stacy Adams Low Top Tie Brown 13.0 D 31.50 787.50 Condition: Excellent Total Amount $ 18,900.00 Paid Tax Total Invoice $ 18,900.00 Message Authorization Name: Bruce Penny Date: 12/26/14 Title: Purchasing Supervisor Signature: Bruce PennyDocuments and Records for Audit Procedure 3a (continued) Check #: 7579 Date: 02/27/15 Payee: Metro Cleaning Service Amount: 3 350.00 Description: Monthly cleaning service Voucher Approval: J5 Voucher #: 9170 Account #: 62000 Invoice 600 1om Street NW (404) 999.1313 Metro Cleaning Service Atlanta, Georgia 30318 Invoice no.: 19483 Bill To: Southeast Shoe Distributor, Inc. KT 1102 Memorial Avenue Atlanta, GA 30303 Phone: (404)555-5555 Due Date: 02/27/15 Date Description Amount 01/30/15 January 2015 Cleaning Service $ 350.00 Total Amount Due $ 350.00 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 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 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 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 7,527Reference: 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 ledgers