Southeast Shoe Distributor, Inc.

Performance of tests of
Balances for the expenditure cycle...
Southeast Shoe Distributor, Inc. Performance of tests of Balances for the expenditure cycle...

Southeast Shoe Distributor, Inc. Performance of tests of Balances for the expenditure cycle
(Acquisitions and cash d
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performance-of-tests-of-balances-for-the-expenditure-cycle
Southeast Shoe Distributor, Inc. Performance of tests of Balances for the expenditure cycle...

Southeast Shoe Distributor, Inc. Performance of tests of Balances for the expenditure cycle
(Acquisitions and cash disbursements) Mark S. Beasley · Frank A. Buckless· Steven M. Glover ·
Douglas F. Prawitt LEARNING OBJECTIVES After completing and discussing this case you
should be able to [1] Recognize common documents and records used in the expenditure cycle
[2] Recognize common tests of balances for accounts payable [3] Perform tests of balances for
accounts payable [4] Evaluate the results of tests of balances for accounts payable using a non
statistical approach [5] Recognize the linkage of substantive tests of balances to management
assertions 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 (1)
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
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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 E 2). The general ledger accounts related
to purchasing and cash disbursement activities at SSD include the following:

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 50, and E 51. Additionally, Joy has
selected the audit sample for audit procedure 3 as noted on audit schedule E 52.

[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
at the following website www.pearsonhighered.com/beasley. 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 E 11. 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

Southeast Shoe Distributor, Inc. Performance of tests of Balances for the expenditure cycle...

Southeast Shoe Distributor, Inc. Performance of tests of Balances for the expenditure cycle
(Acquisitions and cash disbursements) Mark S. Beasley · Frank A. Buckless· Steven M. Glover ·
Douglas F. Prawitt LEARNING OBJECTIVES After completing and discussing this case you
should be able to [1] Recognize common documents and records used in the expenditure cycle
[2] Recognize common tests of balances for accounts payable [3] Perform tests of balances for
accounts payable [4] Evaluate the results of tests of balances for accounts payable using a non
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statistical approach [5] Recognize the linkage of substantive tests of balances to management
assertions 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 (1)
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 E 2). The general ledger accounts related
to purchasing and cash disbursement activities at SSD include the following:

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 50, and E 51. Additionally, Joy has
selected the audit sample for audit procedure 3 as noted on audit schedule E 52.

[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
at the following website www.pearsonhighered.com/beasley. 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 E 11. 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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