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 (1) selectively purchasing large blocks of production overruns, overorders, 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 2008 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 E 2)

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

■ Inventory Purchases

■ Purchase Discounts

■ Purchase Returns and Allowances

■ Freight In

■ Administrative Expenses Joy Avery has already performed audit procedures 1 and 2 listed on audit schedule E 2. Her work is documented on audit schedules E 2, E 10, E SO, and ESI. Additionally, Joy has selected the audit sample for audit procedure 3 as noted on audit schedule E 52.

REQUIRED [1] Complete audit procedure 3a listed on audit program E 2. 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 behind the audit schedules. 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 E 53. Document completion of audit procedure 3a in the audit program E 2.
[2] Document your adjusting entries for any observed misstatements that you propose on schedule Ell. Then update the accounts payable lead schedule on audit schedule E 10. 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.
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Southeast Shoe Distributor Expenditure Cycle Audit Program for Year End Analytical Procedures and Tests of Balances For the Year Ended December 31, 2008 Audit Procedures Initial Date Ref. 1. Obtain a lead schedule for Accounts Payable and JA 2/14/09 E 10 perform the following: a. Agree prior year balance to prior year audit schedule. JA 2/14/09 E 10 b. Agree current year balance to the general ledger. JA 2/14/09 E 10 2. Obtain a printout of the accounts payable vendor ledgers as of the end of the year and perform the following: a. Foot the year-end vendor ledgers and agree the lead schedule. JA 2/17/09 N/A it to JA 2/17/09 E 10 b. Scan the year-end vendor ledgers for large, unusual, related-party or debit balances and perform follow-up procedures for each one JA 2/17/09 E 50 identified. c. Obtain the last five receiving reports issued before year-end and determine if they were properly JA 2/18/09 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 excluded from the year-end vendor ledgers. JA 2/28/09 E51 3. Select a sample of checks issued after year-end and perform the following: JA 2/28/09 E52 a. Examine the voucher package and determine if the related payable was properly included or excluded from the year-end vendor ledgers. E53