TUGAS PENGANTAR PRAKTIK PENGAUDITAN

PERTEMUAN III

PLANNING 6-9

KELAS L
Nama Anggota Kelompok L:
1. Rohmad Budi Santoso 041711333110
2. Mariska Nur Anggraeni 041811333041
3. Aisyah Sabryna Pramusita 041811333110
4. Ersa Tri Maharani 041811333157
5. Rinaldo Satria Yudha 041811333228

UNIVERSITAS AIRLANGGA
FAKULTAS EKONOMI DAN BISNIS
TAHUN 2020/2021
Document Title: GA-4

To: Darlene Wardlaw

From: Jennifer Babcock
Subject: Apollo Shoes Analytical Review Memo

After conducting an analytical review of the financial information presented by Apollo

Shoes, Inc. the following changes and potential misstatements have been identified:

● Net Sales decreased by 4.8%, but Gross Profit decreased only by 0.117%

● Selling, General, and Administrative Expenses decreased, however this appears to be due
to the reduced amount of Research and Development that took place during 2014 in response
to poor economic conditions.

● Interest Expense increased by 196.20%, which is likely due to the $43.862.755,92 increase
in debt from the previous year.

● Miscellaneous Income also increased from $0 in 2013 to $2,166,000 in 2014. There is no

detail indicating the source of this income.

● Net Accounts Receivable increased by 213.91% from 2013 to 2014. This is concerning.
especially when taking into consideration thet net sales decreased by 4.21% and that the
allowance for doubtful accounts decreased by 1.89%.

● Inventory increased by 259,75% from 2013 to 2014. This is Concerning, especially when
considering the company’s admission in the June 30, 2014 Board of Directors meeting that
sales were not meeting expectations.

● Prepaid insurance increased 360.67% and could be misstated if Apollo Shoes did not make
the necessary amortization journal entry.

Throughout the analytic review, it was apparent that Apollo Shoes has several accounts with
either concerning or suspicious activity. Further investigation may either prove their
legitimacy of these accounts or lead to the determination that fraudulent accounting is
occurring.
 Document Title: AG-4-1

Last Year's Current Year Increase (Decrease) During Current

W/P 2014
Acct Acct Title 31 Dec 2013 31 Dec 2014 Year
Ref
(Audited) (Unaudited) Amount Percentage (Audited)
ASSETS
10100 Cash on Hand $1.987,28 $2.275,23 $287,95 14,490%
Regular Checking
10200 Account $198.116,52 $557.125,92 $359.009,40 181,211%
Payroll Checking
10300 Account $0,00 $0,00 $0,00 0,000%
10400 Savings Account $3.044.958,13 $3.645.599,15 $600.641,02 19,726%
11000 Accounts Receivable $16.410.902,71 $51.515.259,98 $35.104.357,27 213,909%
11400 Other Receivables $1.250.000,00 $1.250.000,00 0,000%
Allowance for Doubtful
11500 Accounts -$1.262.820 -$1.239.009,75 $23.810,13 -1,885%
12000 Inventory - Spotlight $18.825.205,24 $67.724.527,50 $48.899.322,26 259,755%
Reserve for Inventory
12300 Obsolescence -$3.012.000,00 -$846.000,00 $2.166.000,00 -71,912%
14100 Prepaid Insurance $743.314,38 $3.424.213,78 $2.680.899,40 360,668%
14200 Prepaid Rent $200.000,00 $0,00 -$200.000,00 -100,000%
14300 Office Supplies $7.406,82 $8.540,00 $1.133,18 15,299%
Notes Receivable-
14400 Current $0,00 $0,00 $0,00 0,000%
14700 Other Current Assets $0,00 $0,00 $0,00 0,000%
TOTAL CURRENT
ASSETS $35.157.071,20 $126.042.531,81 $90.885.460,61 $8,91
15000 Land $117.000,00 $117.000,00 $0,00 0,000%
Buildings and Land
15100 Improvements $623.905,92 $674.313,92 $50.408,00 8,079%
Machinery, Equipment,
15200 Office Furniture $433.217,10 $2.929.097,13 $2.495.880,03 576,127%
17000 Accum. Depreciation -$164.000,00 -$610.000,00 -$446.000,00 271,951%
19000 Investments $572.691,08 $1.998.780,39 $1.426.089,31 249,015%
19900 Other Noncurrent Assets $53.840,59 $53.840,59 $0,00 0,000%
TOTAL NONCURRENT
ASSETS $1.636.654,69 $5.163.032,03 $3.526.377,34 $11,05
TOTAL ASSETS $36.793.725,89 $131.205.563,84 $94.411.837,95

LIABILITIES AND EQUITIES

20000 Accounts Payable $4.633.118,09 $1.922.095,91 -$2.711.022,18 -58,514%
23100 Sales Tax Payable $0,00 $0,00 $0,00 0,000%
23200 Wages Payable $29.470,32 $0,00 -$29.470,32 -100,000%
FICA Employee
23300 Withholding $1.318,69 $8.439,65 $7.120,96 540,003%
23350 Medicare Withholding $583,99 $11.414,99 $10.831,00 1854,655%
Federal Payroll Taxes
23400 Payable $6.033,01 $118.086,12 $112.053,11 1857,333%
23500 FUTA Tax Payable $0,00 $0,00 $0,00 0,000%
State Payroll Taxes
23600 Payable $2.815,47 $55.106,86 $52.291,39 1857,288%
23700 SUTA Tax Payable $0,00 $0,00 $0,00 0,000%
FICA Employer
23800 Withholding $1.318,69 $8.439,65 $7.120,96 540,003%
 Medicare Employer
23900 Withholding $583,99 $11.414,99 $10.831,00 1854,655%
24100 Line of Credit $10.000.000,00 $44.403.000,00 $34.403.000,00 344,030%
Current Portion Long-
24200 Term Debt $0,00 $0,00 $0,00 0,000%
24700 Other Current Liabilities $0,00 $0,00 $0,00 0,000%
TOTAL CURRENT
LIABILITIES $14.675.242,25 $46.537.998,17 $31.862.755,92 $86,89
Notes Payable-
27000 Noncurrent $0,00 $12.000.000,00 $12.000.000,00
TOTAL NONCURRENT
LIABILITIES $0,00 $12.000.000,00 $12.000.000,00 $0,00
TOTAL LIABILITIES $14.675.242,25 $58.537.998,17 $43.862.755,92 298,889%
39003 Common Stock $8.105.000,00 $8.105.000,00 $0,00 0,000%
39004 Paid-in Capital $7.423.000,00 $7.423.000,00 $0,00 0,000%
39005 Retained Earnings $2.219.120,65 $6.590.483,64 $4.371.362,99 196,986%
Net-Income $4.371.362,99 $49.122.992,72
TOTAL EQUITIES $22.118.483,64 $71.241.476,36 $49.122.992,72 222,090%
TOTAL LIABILITIES AND EQUITIES $36.793.725,89 $129.779.474,53 $92.985.748,64

Increase (Decrease) During Curren

Last Year's Current Year
W/P 2014 t Year
Acct Acct Title 31 Dec 2013 31 Dec 2014
Ref (Audite
(Audited) (Unaudited)
Amount Percentage d)
REVENUE
40000 Sales - Spotlight $246.172.918,44 $242.713.452,88 -$3.459.465,56 -1,405%
41000 Sales Returns $4.497.583,20 $11.100.220,89 $6.602.637,69 146,804%
42000 Warranty Expense $1.100.281,48 $1.158.128,47 $57.846,99 5,257%
45000 Income from Investments $0,00 $1.426.089,31 $1.426.089,31 0,000%
NET SALES $240.575.053,76 $229.029.014,21 -$11.546.039,55 -4,799%
Cost of Goods Sold
50010 Cost of Goods Sold $141.569.221,61 $130.196.645,26 -$11.372.576,35 -8,033%
57500 Freight $4.302.951,46 $4.240.263,09 -$62.688,37 -1,457%
GROSS PROFIT $94.702.880,69 $94.592.105,86 -$110.774,83 -0,117%
OPERATING EXPENSE
60000 Advertising Expense $897.140,01 $1.036.854,01 $139.714,00 15,573%
61000 Auto Expenses $208.974,39 $210.502,80 $1.528,41 0,731%
Research and
62000 Development $31.212.334,17 $528.870,44 -$30.683.463,73 -98,306%
64000 Depreciation Expense $133.000,00 $446.000,00 $313.000,00 235,338%
64500 Warehouse Salaries $4.633.383,82 $4.720.715,56 $87.331,74 1,885%
65000 Property Tax Expense $80.495,32 $99.332,45 $18.837,13 23,402%
Legal and Professional
66000 Expense $3.605.133,96 $4.913.224,45 $1.308.090,49 36,284%
67000 Bad Debt Expense $1.622.425,99 $0,00 -$1.622.425,99 -100,000%
68000 Insurance Expense $853.942,65 $36.106,92 -$817.835,73 -95,772%
70000 Maintenance Expense $61.136,04 $35.502,87 -$25.633,17 -41,928%
70100 Utilities $135.642,99 $137.332,18 $1.689,19 1,245%
70110 Phone $76.373,78 $52.599,02 -$23.774,76 -31,129%
70120 Postal $128.033,21 $77.803,61 -$50.229,60 -39,232%
TOTAL OPERATING
EXPENSE $43.648.016,33 $12.294.844,31 -$31.353.172,02 -71,832%
 OPERATING PROFIT $51.054.864,36 $82.297.261,55 $31.242.397,19 61,194%
OTHER INCOME (EXPENSE)
Income from 13188146,0
45000
Investments $0,00 $131.881,46 $131.881,46 00%
46000 Interest Income $204.302,81 $131.881,46 -$72.421,35 -35,448%
47000 Miscellaneous Income $2.166.000,00 $2.166.000,00 0,000%
Miscellaneous Office
71000 Expense $17.023,27 $24.891,82 $7.868,55 46,222%
72000 Payroll Tax Exp $1.550.989,06 $1.577.811,85 $26.822,79 1,729%
Pension/Profit-Sharing
73000 Plan Ex $3.000.000,00 $3.300.000,00 $300.000,00 10,000%
74000 Rent or Lease Expense $2.603.485,87 $1.206.574,00 -$1.396.911,87 -53,655%
Administrative Wages
77500 Expense $16.875.305,98 $16.197.225,43 -$678.080,55 -4,018%
78000 Interest Expense $875.000,00 $2.591.736,50 $1.716.736,50 196,198%
TOTAL OTHER INCOME
(EXPENSE) -$24.717.501,37 -$22.600.358,14 $2.117.143,23 -8,565%
INCOME BEFORE
INCOME TAX $26.337.362,99 $59.696.903,41 $33.359.540,42 126,662%
INCOME TAX EXPENSE
Income Tax Expense -
78500 Federal $2.365.000,00 $8.900.000,00 $6.535.000,00 276,321%
Income Tax Expense -
78510 State $429.000,00 $3.100.000,00 $2.671.000,00 622,611%
NET INCOME $23.543.362,99 $47.696.903,41 $24.153.540,42 102,592%
OTHER COMPREHENSIVE INCOME
(LOSS)
80000 Loss on Legal Settlement $19.172.000 -$19.172.000,00 -100,000%
NET COMPREHENSIVE
INCOME $4.371.362,99 $47.696.903,41 $43.325.540,42 991,122%

Last Year's Current Year Increase (Decrease) During Current

W/P 2014
Acct Acct Title 31 Dec 2013 31 Dec 2014 Year
Ref
(Audited) (Unaudited) Amount Precentage (Audited)
Cash Flows from Operating
Activities
Net Income $4.371.000,00 $49.122.992,72 $44.751.992,72 1023,839%
Adjustments to Reconcile
Net Income to Net Cash
Provided
Depreciation and
Amortization $133.000,00 $446.000,00 $313.000,00 235,338%
Changes in Operating
Assets and Liabilities
Decrease (Increase) in
Current Assets
- -
Accounts Receivable $12.410.000,00 -$35.104.357,27 $22.694.357,27 182,872%
-
Inventory -$1.990.000,00 -$48.899.322,26 $46.909.322,26 2357,252%
Prepaid Expense -$599.000,00 -$2.680.000,00 -$2.081.000,00 347,412%
Increase (Decrease) in
Current Liabilities
 Accounts Payable and
Accrued Expense $1.119.000,00 -$2.711.022,18 -$3.830.022,18 -342,272%
- -
Total Adjustments $13.747.000,00 -$88.948.701,71 $75.201.701,71 547,041%
Net Cash (used for) -
Operating Activities -$9.376.000,00 -$39.825.708,99 $30.449.708,99 324,762%
Cash Flows from Investing
Activities
Capital Expenditure -$834.000,00 -$3.971.000,00 -$3.137.000,00 376,139%
Purchase of Other Assets -$54.000,00 $54.000,00 -100,000%
Net Cash (used for)
Investing Activities -$888.000,00 -$3.971.000,00 -$3.083.000,00 347,185%
Cash Flows from Financing
Activities
Preceeds from the
Issuance of Debt $10.000.000,00 $34.403.000,00 $24.403.000,00 244,030%
Proceeds from the
Issuance of Common Stock
Net Cash Provided by
Financing Activities $10.000.000,00 $34.403.000,00 $24.403.000,00 244,030%
Net Increase (Decrease)
in Cash -$264.000,00 -$9.393.708,99 -$9.129.708,99 3458,223%
Cash at Beginning of Year $3.509.000,00 $3.245.000,00 -$264.000,00 -7,524%
Cash at End of Year $3.245.000,00 -$4.542.000,00 -$7.787.000,00 -239,969%
Document Title: GA-4-2

2013 2014
LIQUIDITY RATIO
Acid Test 46,684% 40,873%
Interest Coverage Ratio 3009,984% 2303,355%
Working Capital Ratio 239,567% 270,838%
FINANCING RATIO
Debt to Equity 66,348% 82,168%
Debt to Assets 39,885% 44,615%
Solvency Ratio 161,335% 82,242%
ACTIVITY RATIO
Assets Turnover 669,062% 184,987%
Inventory Turnover 1307,677% 358,383%
Fixed Assets Turnover 15041,225% 4700,987%
Acc Receivable Turnover 1500,057% 471,149%
Avg Collection Period 2399,909% 7640,901%
PERFORMANCE RATIO
EPS 98,097% 198,737%
BVPS 92,160% 296,839%
ROA 63,987% 36,353%
Gross Profit Margin 38,470% 38,973%
Net Profit Margin 9,564% 19,652%
ROE 106,442% 66,951%
Document Title: GA-5

Date: January 15, 2015

To: Darlene Wardlaw
From: Jennifer Babcock
Subject: Apollo Shoes Materiality Memo

After having analyzed the data found in the financial statement of Apollo Shoes Inc., I found
a number of areas that may contain possible material misstatement.

1. Independent auditors’ concept of materiality

The concept of materiality states that an auditor's attention should be focused primarily
on matters that are important to the financial statement users. The goal of an independent
auditor is to obtain the reasonable assurance about whether or not the financial
statements as a whole are free of material misstatement. This assurances is in
consideration of the fact that the outside user's may be negatively impacted if decisions
are made based off of any material misstatements that may exist in a company's financial
information. As materiality is often a matter of professional judgment the auditor must
make materiality decisions based on the specifics of each audit engagement.
Additionally, when auditing the financial statements, the auditor's judgment regarding
matters that are considered to be material to users of financial statements is based on the
consideration of the needs of user group as a whole.
2. Common measures of materiality
The most common way of viewing materiality is by the dollar amount that would
influence the decision making of financial users. Materiality is commonly assessed as a
percentage of a key financial statement component. Choosing an appropriate benchmark,
such as total revenue, total net assets, or profits before tax, is key as these measurements
can relate directly back to the financial statement. By utilizing calculations such as
percentages, ratios, and the methods used to round to zero as these figures could detect
abnormalities or materiality issues. The typical rule of thumb is that anything less than
5% is generally not considered to be material, while anything over 10% is generally
considered to be material. However, the relative size of the misstatement, the nature of
the item or issue, the engagement circumstances, and the possible cumulative effects all
must be considered when determining materiality.
3. Estimate of Apollo Shoes' minimum material misstatement
Based on the lack of being able to communicate with Apollo's prior auditors and some of
the concerning information that has been provided in some of the documentation that we
have currently received from Apollo, such as the Board of Directors meeting minutes, I
would like to use some calculations that are on the lower end of the spectrum in order to
ensure that fraud and material misstatements are not occurring. To begin with, I will start
with 5% of Apollo's net profit. According to the trial balance information that we
received, Apollo's Net Income for 2014 appears to be $50,549,082.03. If we use 5% of
this amount, our minimum material misstatement amount will be $2,527,454.10.
Document Title: GA-6

Date: January 16, 2015

To: Darlene Wardlaw
From: Jennifer Babcock
Subject: Considerations of Potential Fraud Memo

This memo is meant to address the possibilities of fraud within Apollo Shoes Inc. After
careful review of the Board of Directors meeting minutes and the analytic procedures that
have been performed so far, there are a number of things that may be considered “red flags”
for the company. The generally accepted auditing standard, SAS 99 "Consideration of Fraud
in a Financial Statement Audit," discusses the relevancy of finding and correcting possibly
fraudulent statements and the need to provide reasonable assurance that the financial
statements are free of material misstatements.

The following red flags in regards to the Apollo engagement have been identified:

 In the October 17, 2014 Audit Committee meeting minutes, Eric Unum, Apollo's VP
of Finance, stated that the company's former auditor, Smith & Smith, CPAs,
unexpectedly withdrew from the engagement due to "mutually incongruent goals."
Mr. Unum declined any further discussion of the matter due to possible litigation. The
fact that the previous auditors withdrew combined with the Apollo's request that the
prior auditors not be contacted is highly suspicious.
 One potential issue is that Larry Lancaster is Chairman of the Board, and is also
Apollo's President & CEO, causing a potential conflict of interest. The fact that Mr.
Unum is both a member of the board and Apollo's VP of Finance further complicates
this conflict of interest.
 In both the January 6, 2014 and the June 30, 2014 Board of Director meeting minutes,
Mr. Lancaster, responds with "or heads will roll!". This suggests that Mr. Lancaster
may have an aggressive management style that may encourage or force employees to
take inappropriate risks or make poor business decisions in an attempt to meet
company goals.
 In the June 30, 2014 Board of Director meeting minutes, the board members
unanimously approved a $1,250,000 personal loan that was supposed to be for Mr.
Lancaster's secretary. This loan was approved on the contingency that personal loan
options be made available to all members of the board if requested. There are multiple
issues going on here. First, Mr. Lancaster requested that the check for the loan be
made out him personally and that he would supposedly cash it and give it to his
secretary. It seems unlikely that a check for such a large amount would need to be
cash and even more unreasonable that the check wouldn't be made out to the secretary
directly. Secondly, Mr. Unum suggests that the loan be coded as an "Other
Receivable" rather than "Employee Advance" as would be appropriate. Lastly, the
board members are treating this situation and the company as if it is a personal bank
rather than a legitimate company in the business of making a profit. This suggests a
complete disregard for the company's shareholders.
  In the June 30, 2014 Board of Director meeting minutes, Mr. Unum requests that the
Board approve a $44,403,000 draw from the company's line of credit. Other than for
the purchase of the new software system costing $1.2 million, there is no specific
mentioning as to why the large draw is needed. They only state that the funds are
needed to pay for the computer system and "other expenses." This is highly
concerning, especially since the 2013 draw of $10,000,000 was not paid off but
merely rolled into a short-term $12,000,000 loan through a local bank, per the January
6, 2014 minutes.
 It is also concerning that the board approves executive 10% raises, executive bonuses,
and $90,000 stipends per board member even though the company's sales dropped by
4.21% and the current economy suggests the likelihood of continuing decreased sales.

Apollo's audit risk appears to be high due to some of the suspicious activities occurring
within the company and the seemingly high potential for fraud. It is difficult to tell at this
point how pervasive the potential fraud might be, but if it is occurring, top management
would be most likely to be involved. If collusion is taking place within the company, it would
be even more difficult to detect the possible fraud that may be occurring.

In order to ensure our best chances of being able to detect any existing fraudulent schemes,
we should insure that the client does not know which areas will be audited at which times or
how, and the personnel used to assist with document review should be limited in order to
prevent internal employees who are engaging in fraudulent behavior from being able to alter
existing documentation or the audit "findings."
Document Title: GA Series

Date : January 16, 2015

To : Arnold Anderson
From : Jennifer Babcock
Subject : Apollo Shoes Computer Processing of Transactions Memo

Apollo’s Mid –Year Conversion to Computer System

After having reviewed the documentation that was provided by Karina Ramirez in relation to
Apollo’s decision to implement a computer processing system for the accounting of
transactions, the following is of concern:

 Since the conversion took place mid-year, it may make the collection of data more
difficult unless the company was effectively able to enter the full year’s worth of
transactions and detail into the new accounting software. If not, the audit process will
be made more difficult by having a portion of the accounting transactions and
associated documentation existing in a manual form and the other half existing in a
computerized form.
 Since this is the company’s first year using the new accounting software, due
diligence must be used in order to ensure that the software is working as expected and
that staff members understand how to appropriately use the system.

AOW’s Use of the PC as an Audit Tool

Our own firm can benefit from the use for computers and software in several ways, even
though we do not have any audit-specific programs at this time.

Word Processing

Most of the documents that will need to be created by us throughout an audit, such as the
engagement letter, audit memos, the audit report, and a variety of other documents can be
created with the use of a word processing software. We could use a word processing software
to create various official documents that could be saved to client files on a server. This
process would all us to go back and review documents specific to a given client much
quicker, and possibly from a remote location, without having to pull a physical file.

Electronic Spreadsheets

Electronic spreadsheets can be utilized to calculate common-size and comparative financial

data to be used for analytical review, along with the computation of ratios. The working trial
balance could also be put into a spreadsheets, allowing us an easier time of putting in
adjusting journal entries. The columnar set-up of an electronic spreadsheets allows us to use
this type of software to efficiently create and save working papers and other support
documentation necessary to the audit. Spreadsheets would also allow us to quickly calculate
totals and a variety of other mathematical functions in order to save time, ensure accuracy,
and quickly make changes to data.

Spreadsheets can also be of great use internally for purposes such as putting together a
budgets, which would them be compared with actual activity data for analysis.

Computer Auditing

A computer audit specialist could use a one of the laptops as a terminal to perform data base
inquiries and enter test data. We would need to coordinate such applications with the Apollo
personnel, as we would be entering their system through a communications software. This
would allow us the ability to remotely review some of the client’s data without having to be
onsite.

Statistical Software

We could also greatly benefit from purchasing some statistical software that could be used to
generate random numbers and make statistical calculations. Some packages can perform
regressions as well as calculate variances and standard deviations. Software can also be used
to quickly test for a number of issues, such as missing or duplicate numbers (purchase orders,
invoices, bills of lading, checks, etc) and to look for certain dollar amounts, such as those that
fall just below a given threshold. Having a good audit software package could not only
improve the effectiveness of our audit review, but would also help us to save time by
allowing the computer to do some of the work for us.