CASE 10.1 SOUTHEAST SHOE DISTRIBUTOR, INC.

KEY FACTS

 Southeast Shoe Distributor, Inc. (SSD) is a closely owned company founded ten years ago.

 SSD purchases and sells designer label and name brand men, women, and children shoes to 123 retail stores located in
small to medium size communities.

 SSD has one warehouse located in Atlanta, Georgia.

 Net sales last year were $7,311,214 and sales generally are the strongest in the second and fourth calendar year
quarters.

 SSD is required to have an audit of its financial statements to fulfill requirements of its loan agreements.

 The audit manager, Susan Mansfield, reviewed SSD’s control environment, risk assessment policies, and assessed
them as strong.

 A staff auditor, Bill Zander, reviewed SSD’s information system and control activities and documented his
understanding in the flowcharts provided.

 The audit manager, Susan Mansfield, has decided not to document nor perform tests of controls related to SSD’s sales
returns and allowances and write-offs of customer accounts as they are not material.

 Documents and records used with respect to sales transactions are Customer Order, Sales Invoice, Bill of Lading,
Monthly Customer Statement, Standardized Price File, Standardized Chart of Accounts, Sales Register, Accounts
Receivable Master File, and General Ledger.

 Documents and records used with respect to cash receipt transactions are Customer Check, Sales Invoice (Remittance
Advice), Deposit Slip, Cash Receipt Summary, Bank Statement, Standardized Chart of Accounts, Cash Receipts Journal,
Accounts Receivable Master File, and General Ledger.

SOLUTIONS:

Note: Due to the subjective nature of some of the judgments alternative solutions could be considered equally
acceptable.

1. Identify "what could go wrong" with SSD's sales and cash receipts activities by completing step 5 of the audit
program R 1-1. Document your work in audit schedules R 1-1, R 31-1, R 31-2, and R 31-3 (Note: number what
could go wrong similar to the examples provided).

A solution to the assignment is provided using schedules similar to the schedules provided to students
on the pages that follow.

2. Identify SSD’s control activities by completing step 6 of the audit program R 1-1. Document your work in audit
schedules R 1-1, R 32-1, R 32-2, and R 32-3 (Note: you should assume that only the control activities identified
in the flowcharts exist and number your activities similar to the activity provided).

A solution to the assignment is provided using schedules similar to the schedules provided to students
on the pages that follow.
3. Identify potential tests of controls by completing step 7 of the audit program R 1-1. Document your work in
audit schedules R 1-1, R 40-1, R 40-2, and R 40-3 (Note: number your tests similar to the example provided).

A solution to the assignment is provided using schedules similar to the schedules provided to students
on the pages that follow. Note that the solution lists potential tests of controls that could be performed.
It is very unlikely that an auditor would decide to perform all these tests. Additionally, the solution does
not indicate whether the test should be performed on the entire population or a sample of the
population.

4. Complete step 8 of the audit program R 1-1 by identifying any internal control deficiencies SSD may have and
document your work in audit schedule R 1-1 and R 32.

A solution to the assignment is provided using schedules similar to the schedules provided to students
on the pages that follow.

5. How would your work differ if SSD was a public company? What other factors would you need to consider?

An audit for a non-public entity is required to be completed in accordance with auditing standards
issued by the Auditing Standards Board (ASB) of the AICPA. These standards mandate that controls be
investigated for the purpose of preparing the nature, duration and timing of substantive tests. Public
agencies are expected to perform audits in compliance with the Public Company Accounting Oversight
Board's auditing standards (PCAOB). In addition to providing the entity's financial statements with
assurance, the auditor is also expected to provide the entity's internal controls with assurance. In order
to provide assurance of the internal controls of the company, the auditor must carry out control checks
relating to all major account balances, transaction and disclosure classes and related claims in the
financial statements.

7. Describe the importance of SSD’s control activities given its large number of customers and vendors.
Given the large number of customers and suppliers associated with its business, SSD will have a high
volume of sales, cash receipts, purchasing, and cash disbursement transactions. Without standardized
procedures that involve suitable monitoring activities that are continuously implemented, the risk of
errors occurring with these transaction processes will be very high.
R 40-1