Case 10.4 Southeast Shoe Distributor, Inc. Performance of Tests of Transactions 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 * Recognize common documents and records used to record purchase and cash disbursement transactions = Recognize common control activities used to process purchase and cash disbursement transactions * Recognize potential tests of controls and substantive tests of transactions for auditing purchase and cash disbursement transactions * Perform tests of controls and substantive tests of transactions for purchase and cash disbursement transactions * Evaluate the results of tests of controls and Substantive tests of transactions for purchase and cash disbursement transactions using a nonstatistical approach * Recognize the linkage between control activities, tests of controls and management assertions "Recognize the linkage between substantive tests of transactions and management assertions, INTRODUCTION Southeast Shoe Distributor (SSD) is a closely owned business founded 10 years ago by Stewart Green and Paul Williams. SSD is a distributor that purchases and resells ‘The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawit, Ph.D. of Brigham Young University, as a basis for class discussion. SSD is a fictitious company. All characters and names represented are fictitious; any similarity to existing companies or persons is purely coincidental. ‘Copyright © 2006 by Pearson Education , Inc., Upper Saddle River, NJ 07458 303Beasley / Buckless / Glover / Prawitt ‘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 to 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 INFORMATION ABOUT THE AUDIT SSD is required to have an audit of its annual financial statements 10 fulfill requirements of loan agreements with financial institutions. This audit is to be ‘completed in accordance with the professional standards for the audit of nonpublic companies. Your audit firm is in the process of completing the audit for the Fiscal 2006 audit in accordance with these professional standards. Jorge Hernandez, audit senior, reviewed SSD policies and procedures related to acquisitions and cash disbursements and prepared the enclosed flowcharts (referenced in the top right hand comer as £ 20-1, E 20-2, E 21) and planned control risk matrix (audit schedule E 22). As a result of this process, Jim developed the enclosed audit program (audit schedules E J-1, E 1-2). The audit program was approved by Susan Mansfield, audit manager, and Katherine Smith, audit partner. The two staff auditors assigned to this engagement are Joy Avery and you. Together, you and Joy are responsible for performing the tests of transactions outlined in the expenditure cycle audit program (audit schedules F /-/ and E 1-2). 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 * Warehousing Expenses * Selling Expenses Prepaid Assets * Accounts Payable 304Case 10.4 ~ Southeast Shoe Distributor, Inc.: Performance of Tests of Transactions Joy Avery has already selected the audit samples for purchases and cash disbursements and completed audit procedures 2, 3, 5, 6, and 7. Joy's work is documented on audit schedules E 1-1, E 1-2, E 30, E 32, E 33, E34, E 40, E41, E 42, E43, and E44. REQUIREMENTS 1 Review the flowcharts on audit schedules £ 20-1 and E 20-2 and become familiar with the accounting documents and records used with purchases. Also review Joy Avery’s work documented on audit schedules £ J-1, E 1-2, E 30, E 32, E 33, E 34, E 40, E 41, E 42, E 43, and E 44 in order to understand the work you will perform and how to document your work in the audit schedules. Note that purchase orders are not required to be generated for recurring services such as utilities and cleaning. ‘Complete steps Ia-h from the audit program £ /-/. Assume you have already ‘completed step Ig and h and no deviations were found. Also assume that 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 “Purchase Journal for Audit Procedure 1.” Additionally, note that the audit firm has a policy of using the same audit sample for planned tests of controls and substantive tests of transactions (dual-purpose tests) whenever possible to maximize audit efficiency. ‘Thus, the results of the test-of-controls aspect of audit steps la-h should be documented in audit schedules J-/ and E 31, whereas the substantive test aspect should be documented in audit schedules F /-/ and E 35. Complete step 4a from the audit program £ 1-1. Assume you have already completed this step for 5 of the 60 sample items and no deviations or misstatements were found. The documents and records for the remaining-five sample items are provided behind the “Purchase Journal for Audit Procedure 4.” Document the results of your work in audit schedules E J-J and £35. Document any adjusting entries you propose‘on audit schedule E J! for any observed misstatements. You should assume that there was no systematic pattern or intent to commit a fraud based on a review and discussion with client personnel concerning observed deviations and misstatements. 305Beasley / Buckles Glover / Prawitt Reference: Prepared by: Reviewed by Southeast Shoe Distributor Expenditure Cycle Audit Program for Analytical Procedures and Tests of Transactions ‘Year Ended: December 31, 2006 Ett =A 219/07 [Audit Procedures initial | Select a sample of 40 transactions resorded in the purchase joural throughout the year and perform | Ja | 2/14/07) £30 the following: a, Determine if vendor invoices, purchase orders, and receiving reports were properly included in the voucher packages or the invoices were £31 properly initialed by the executive secretary (Karen Tucci as “KT"). ’. Examine vendor invoices, purchase orders, and 2a receiving reports for authenticity and bas reasonableness. ~. Determine ifthe purchase orders were signed by = the suf (Bruce Penny). spervisor ‘@. Determine if the voucher cover was initialed by Fai the supervisor Janet Sotiiadis as “IS”) ‘¢. Determine if the purchase journal amounts were £31 correct based on the voucher package eu documents. F Determine if the vouchers had correct general E31 ledger account code. E55 = Determine ifthe vouchers were posted to the E31 correct general ledger accounts. £35 Tr. Determine ifthe vouchers were posted fo the EH correct vendor’s accounts payable subsidiary £35 file. Sean the purchase journal for related party, large, or unusual transactions and perform follow-up | JA | 215/07) E32 procedures for each one identified. Examine the weekly exception reports for receiving reports and determine if proper follow-up 2507| £33 procedures were performed. Select le of 40 ivin wrts issued Select a sample of 40 receiving reports issu during the current year and perform the following: | “4 | 24#07 | £34 ‘a. Obtain the related purchase order and vendor invoice and determine if receiving report was £35 properly accounted for in the purchase journal. 306Case 10.4 ~ Southeast Shoe Distributor, Inc.: Performance of Tests of Transactions Reference: _E. Prepared by: Date: ZAY07_ Reviewed by: Southeast Shoe Distributor Expenditure Cycle Audit Program ‘Year Ended: December 31, 2006 Audit Procedures Initial | Date Ref. S_ Scan the cash disbursement joumal for related party, large, or unusual transactions and perform | Ja | 215707| E42 follow-up procedures for each one identified 6. Select a sample of 40 transactions recorded in the cash disbursement journal throughout the year and JA 21407 E40 perform the following: a. Determine if the voucher packages were nyo7| es | properly stamped “paid.” | #2490 ®, Examine cancelled checks for proper Fa endorsement and reasonableness. 4 | 741907| 54 c. Determine if cash disbursement journal amounts Ea agree withthe cancelled checks. A | UN?) Ca d. Determine if disbursements were posted to the Ea correct general ledger accounts. A | MY?! 64 e. Determine if disbursements were posted to the Ea correct vendor accounts payable subsidiary file. | “4 | 7797 | £44 7. Obiain the bank reconciliations completed during Ate yer nd perfoontfllowing Hae | Fe Determine who prepared the bank reconciliations. 4 Via ee b. Review the bank reconciliations for rensonalileniess. A 216/07 Eg c ee ‘the penises for one aA 216/07 ER? 307Beasley / Buckless / Glover / Prawitt Reference: El Prepared by: Date: Reviewed by: Southeast Shoe Distributor Expenditure Cycle - Proposed Adjusting Entry Schedule For the Year Ended December 31, 2006 Account Debit Credit —. Explanation: Explanation: - Explanation: “ Explanation: 308Case 10.4 Southeast Shoe Distributor, Inc: Performance of Tests of Transactions Reference: _E 20-1 Prepared by: JH Date: 9/16/06 Reviewed by: Southeast Shoe Distributor Expenditure Cycle - Purchases Flowchart For the Year Ended December 31, 2006 BuyingiPurchasing Buyer Purchasing Recaves| ¢ Onlamins npn | Merchandise ea Fea ¥ x Prepare Receives Recahing renumbered Report and Matches Purchase Order with Purchase Requision and Purchase Order ‘Purchase Orders Are [Not Generated for + Recuring Services Purchasing Supervisor, ‘Autoraes and Signs Purchase Order NUM. - fled numerically by number ‘A off-page connector B= offpage connector © = off-page connector 309Beasley / Buckless / Glover / Prawitt Reference: _ 20-2 Prepared by: JH. Date: 16/06. Reviewed by: Southeast Shoe Distributor Expenditure Cycle - Purchases Flowchart For the Year Ended December 31, 2006 Recelving Accounting Merchandise @) [2] Invoice (From Vendors) (From Vendors) ‘An Exception Report of Unused Receiving Report Numbers Printed Weekly and Followed Up bythe si ¥ ¥ Inspects and Counts * Purchase Match Doctynenta, Merchandise, Compares Journal feemeusanonen to Purchase Order, and General ae anne Prepares Prenumbered eS Receiving Report and Receiving Report al Vendor ‘Automatically Update Purchase J items Not Requiring @ |_| Receiving Report are Routed othe Executive ‘Secretary to Determine Receipt and Approval ‘Supervisor Reviews the Purchase Journal for Proper Account ‘Classification Using the (Chart of Accounts ‘Récaiving Reports Are ‘Oniy Generated for urchases of Inventory nd Fed Assets Legend: NUM fled numerically by number A = offpage connector B= offpage connector © offpage connector = offpane connectorCase 10.4 ~ Southeast Shoe Distributor, inc.: Performance of Tests of Transactions Reference: E21 Prepared by: JH Date: 16/06 Reviewed by: ‘Southeast Shoe Distributor Expenditure Cycle - Cash Disbursement Flowchart . For the Year Ended December 31, 2006 — ‘Accounting V. P. Finance/Treasurer ™rivwvnre ‘Supervisor Reviews the Cash Disbursement Journal for Proper ‘Account Classification {rom the Chart of ‘Accounts ‘Generates Pronumbered ‘Voucher Covers, Pre- numbered Checks, and (Cash Disbursement Journal. Lis ‘Automatically Updated ‘Supervisor Reviews Reviews Voucher Package Voucher Package for for Reasonableness, Signs Reasonableness and ‘Checks, and Stamps Al ‘Account Classifeation and | >] "Documents "Paid" Initals Voucher Cover “Bank Reconcilatons are NUM: - fled numerically by number D = offpage connector 31Beasley / Buckless / Glover / Prawitt Reference: £22 Prepared by: JH Dae: 7/16/06 Reviewed by Southeast Shoe Distributor Expenditure Cycle - Planned Audit Risk Matrix For the Year Ended December 31, 2006 |~ | Rights /Obligations J Vaimaton i z Initial Inherent Risk — Cash Disbursements Initial Inherent Risk — Accounts Payable Planned Control Risk ~ Purchases Planned Control Risk — Cash Disbursements Planned Detection Risk — Purchases Planned Detection Risk — Cash Disbursements Planned Detection Risk — Accounts Payable Initial Inherent Risk should be assessed as: igh (H) unless the combination of inherent risk factors present justify a lower assessment. ‘Medium (M) if the combination of inherent risk factors present justify this assessment. Low (L) ifthe combination of inherent risk factors present justify tis assessment. Factors justifying a lower inherent risk assessment are: High management integrity, Low motivation to materially misstate for external partes, ‘Repeat engagement, No material prior year misstatements, No related party transactions, Routine transactions, Limited judgment required to correctly record transactions, Low susceptibility to defalcation, Stable business environment. ‘Planned Control Risk should be assessed as ‘Low (L) if control activity(ies) reduces the likelihood of a material misstatement to a negligible level and persuasive tests of controls are planned to be performed. Medium (M) if control activity(ies) reduces the likelihood of a material misstatement to a negligible level and moderately persuasive tests of controls are planned or control activity(ies) reduces the likelihood of @ material misstatement to a moderate level and persuasive tests of controls are planned, High (ED if control actvity(ies) does not reduce the likelihood of a material misstatement to 4 reasonable level or no tests of controls are planned. Planned Detection Risk should be assessed at= Low (L) if persuasive substantive tests are planned to be performed. Medium (M) if moderately persuasive substantive tests are planned to be performed. “High (F) if minimal substantive tests are planned to be performed. ‘disbursements S|S|=]=|S]~ [le] A] Presentation/Disctosure Note: * completeness for 312Case 10.4 — Southeast Shoe Distributor, Inc.: Performance of Tests of Transactions Reference: £30 Prepared by: JA Date: D477 Reviewed by: Southeast Shoe Distributor Nonstatistical Tests of Transactions Sample Plan - Expenditure Cycle Purchases For the Year Ended December 31, 2006 Beg. | Enc Doe. # or | Doc. # or Page # et Page 1 | Page 100 (ine 1) | (Line 1,293) "Sample Selection Method: The sample was selected by using the "=randbetween(1,1293)” Microsoft Excel spreadsheet function. Line numbers drawn twice were discarded and a new line number was selected using the Excel "randbetween function. [Lines recorded in the purchase journal during the \year ‘Sample: Line number starting with line T on page 1 to line 1,293 on page 100 Sample Sample Sample Sample Sample Sample Sample _ Sample Item Ref. Item =—sRef.~—Item_=—sRef. Item Ref. 1 39 16 363 at 953 2 B 7 568 32 969 3 68 18 484 33 4025 4 79 19 514 4 1054 s 7 20 582 35° 4070 6 ot 2 586 5 1159 7 99 2 604 7 4 16t 8 29 2B 606 3B 1,254 9 235 24 652 39-4272 10 237 re 682 40 1,281 it 238 26 eit 12 301 7 903 13 326 2B 907 14 341 29 918 15 356 30 942 313Beasley / Buckless / Glover / Prawitt Reference: E31 Prepared by: Reviewed by: Southeast Shoe Distributor Nonstatistical Tests of Controls Evaluation - Expenditure Cycle Purchases For the Year Ended December 31, 2006 [Sampling Frame: Lines recorded in the purchase journal during the year Sample| Attribute Rew | Sie_| spr | Tor | ASR Voucher contains Vendor Invoce, Purchase a | # ae Order, and Receiving Report (if necessary). Vendor Invoice, Purchase Order, and Recetving | y | 4g 5% ‘Report lok authentic and reasonable, [Purchase Order is signed by Brace Penny or | « 5% Vendor Invoice is initialed by Karen Tuce. Voucher Cover is initialed by Janet Sotiredis. mn | 4 5% Purchase journal amount is corect based on | y | 4g ie voucher package documents, Voucher Cover has corect genera ledger account code. an id = Voucher i posted tothe correct general ledger mw | @| 0 | 5% | 5% Voucher I posted to corect vendor accounts \payable subsidiary fle. a a Conclusions: Taasad ASR _Allonance fr Sampling Risk (TDR-SOR) Rel Risk of Assessing Control Risk Too Lov (L~ Low or M~ Moderate) SDR ‘Sample Deviation Rate “Tolerable Deviation Rte 314Case 10.4 ~ Southeast Shoe Distributor, Inc.: Performance of Tests of Transactions Reference: £32 Prepared by: A Date Reviewed by: Southeast Shoe Distributor Unusual Transactions — Expenditure Cycle Purchases For the Year Ended December 31, 2006 Check or Voucher #, Account ion oF. No large, unusual, or relatedsparty transactions noted. See conclusion below. Follow-up procedures performed: No large, unusual, or related-party purchase transactions were identified from ‘scanning the purchase Journal (audit step 2). Thus, no follow-up procedures are needed. 315Beasley / Buckless / Glover / Prawitt Reference: £33 Prepared by: JA Date: 215/07 Reviewed by: Southeast Shoe Distributor Nonsampling Tests of Transactions ~ Expenditure Cycle Purchases For the Year Ended December 31, 2006 Procedure: The weekly exception reports of unused vouchers and receiving reports were scanned and the follow-up procedures were discussed with Janet Sotiriaais, ‘Accounting Manager (audit step 3). Exceptions/Misstatements: ‘Janet indicated she did not resolve all unmatched receiving reports because ‘she did not have enough time to follow-up on them, Janet indicated that unmatched receiving reports always resulted from vendors not invoicing SSD ona timely basis and that these unmatched receiving reports were ‘eventually captured in the system when the invoice was received from the- vendor, No specific misstatements were noted as a result of this audit procedure. ‘Conclusion: & The results of this procedure do not support a lower control risk assessment related to the completeness assertion for purchases (i.e, there may be ‘unrecorded purchases). Control risk for the completeness of purchases will be increased to the maximum level and addtional substantive audit procedures will be performed. The sample size for audit step 4 will be increased from ts planned size of 40 to 60 receiving reports. Additionally ‘more emphasis will be placed on purchase transactions occurring in the last ‘calendar year querter to ensure that there are no material unrecorded purchases and payables at year-end, 316Case 10.4 — Southeast Shoe Distributor, Inc.: Performance of Tests of Transactions Reference: Ex Prepared by: IA Date: ZAYo7 Reviewed by: Southeast Shoe Distributor Nonstatistical Tests of Transactions Sample Plan - Expenditure Cycle Purchases For the Year Ended December 31, 2006 Beg, | End Does #or | Doc. # or Page # >| ‘Sample Selection Method: The first 40 sample items were selected from the fist three calendar-year quarters by using the "=ranalbetween(2387,2673)" Microsoft Exce/ spreadsheet function. The last 20 sample items were selected from the last calendar year quarter by using the "=randbetween(2674, 2810)" Microsoft Excel spreadsheet function. Receiving report numbers drawn twice were discarded and a new random number was selected using the Excel “randbetween” function. Sample TRacaNing Topo sued Goring the Year ‘Sample: Receiving Report Number ‘Sample Sample Sample Sample Sample Sample Sample Sample Item Ref. item =— Ref, —Item—Ref. stem Ref. 1 2389 16 = 2529 31 2598 5 2695 2 239 17 2533 32 2599 47 2,696 3 2395 18 2539 332610 48 2,702 4 2409 19 2540 342,624 49 2,703 5 2412 200 2548 352638 502,706 6 245 2 2599 36 2635 = $1 2,709 7 2419 22 2563 372636 SD 723 8 2421 23 2568 38 2647 53 2726 9 2424 242570 39 2.666 SA BHT 10-2450 252.579 40 2668 = 552,759 Ml 2463 262584 41 2674 56 2,784 12 2490 27-2587 42 2677 572,778 13 2494 282,588 432679 5B 2,784 14 2522 292593 442685 59 2,787 15 2523 30-2597 452,694 602, 801 317Beasley / Buckless / Glover / Prawitt Southeast Shoe Distributor Reference: £35 Prepared by: Date: Reviewed by: Nonstatistical Substantive Tests Evaluation - Expenditure Cycle Purchases For the Year Ended December 31, 2006 (Misstatements: Recorded Amount ‘Audited Amount Missiatement Amount “Total Sample Misstatement [Projected Misstatement: [Total Sample Misstatement [Dollar Value of Sample $1,061,410.44 Percentage Sample Dollar Misstatement [Dollar Value of Population per Journal Projected Population Dollar Misstatement $5,206, 243.84 [Allowance for Sampling Risk [Tolerable Misstatement ($40,000.00 Projected Population Dollar Misstatement [Recorded Adjustments ‘Allowance for Sampli Tonclusions Risk 318Case 10.4 ~ Southeast Shoe Distributor, Inc.: Performance of Tests of Transactions Reference: £40 Prepared by JA Date: 21407 Reviewed by: Southeast Shoe Distributor Nonstatistical Tests of Transactions Sample Plan — Expenditure Cycle Cash Disbursements For the Year Ended December 31, 2006 End. Doc. # or ‘Sample Selection Method: The sample was selected by using the "=randbetween(1, 1032)” Microsoft Excel Spreadsheet function. Line numbers drawn twice were discarded and a new line number was selected using the Exce! "randbetween” function. ‘Sample: Cash disbursement journal line number ‘Sample Sample Sample Sample Sample Sample Sample Sample Tem Ref. —item=—sRef. stem =—Ref, stem Ref. 1 7 16 446381 2 17 7 4499 ‘32 84S 3 139 18 499 ed (867 4 9 19 S16 3B 5 168 20 536 ss 902 6 197 2 539 36 914 7 232 22 579 7 987 a 21 2 612 ed 992 9 273 24 636 39 997 10 28525 HB 40,000 i 321 26 670 2 45 a7 694 13 374 28 720 14 (396 2 7H Is 403 30 739 319Beasley / Buckless / Glover / Prawitt Reference: E41 Prepared by: JA Date: 219/07 Reviewed by Southeast Shoe Distributor ‘Nonstatistieal Tests of Controls Evaluation — Expenditure Cycle Cash Disbursements For the Year Ended December 31, 2006 [Sampling Frame: Lines recorded in the cash disbursement journal during the year |Sample| Attribute RCL | Size | SDR _| TDR | ASR ro “package documents stamped M 0 0% 5% 5% Canceled check and endorsement look jauthentic and reasonable. iM @ oe ad Ed Cash disbursement journal amount agrees with cancelled check. i {fl a | om.) eel (Disbursement posted to correct general mis, M 40 0% 5% 5% \Disbursement posted to correct vendor accounts payable subsidary file | @ | % | % | Om (Conclusions: | No deviations were noted as a result of performing test of controls 6a-e for cash disbursements, Thus, a reduced control risk assessment is supported | for the existence of purchases and the existence, valuation, and presentation and disclosure of cash disbursements. Allowance for Sampling Risk (TDR-SDR) = isk of Assessing Contol Risk Too Law (L— Low or M~ Moderate) + Sample Deviation Rate = Tolerable Deviation RateCase 10.4 ~Southeast Shoe Distributor, Inc.: Performance of Tests of Transactions Reference: E42 Prepared JA Date: 213/07 Reviewed by: Southeast Shoe Distributor Unusual Transactions ~ Expenditure Cycle Cash Disbursements ' For the Year Ended December 31, 2006 ‘Check or | Account Date Account Description or Payee Voucher #| IDs Amount No large, unusual, or related-party transaction were noted. See conclusion below. Folk ‘No large, unusual, or related-party cash disbursement transactions were identified from scanning the cash disbursement journal (audit step 5). Thus, no follow-up procedures are needed. 321Beasley / Buckless / Glover / Prawitt Reference £4 Prepared by: A Date: 216/07 Reviewed by: Southeast Shoe Distributor Nonsampling Tests of Transactions - Expenditure Cycle Cash Disbursements For the Year Ended December 31, 2006 Procedure: The monthly bank reconciliations were scanned and the bank reconciliation process was discussed with Karen Tucd, Executive Secretary (audit steps 7a and b). Additionally, the April 2006 bank reconciliation was reperformed (audlt step 7). ‘Exceptions/Misstatements: Review of the monthly bank reconeillations and reperformance of the April 2006 bank reconciliation revealed that the bank reconciliation process Is consistent with stated company policy, no exceptions or misstatements were ‘identified. = ‘Conclusion: The results of these tests support a reduced contro! risk assessment for the existence, completeness, and valuation of cash disbursements. 322Case 10.4 — Southeast Shoe Distributor, Inc.: Performance of Tests of Transactions Reference: EM Prepared by: JA Date: Ziyo7 Reviewed by: Southeast Shoe Distributor Non-Statistical Substantive Tests Evaluation - Expenditure Cycle Cash Disbursements For the Year Ended December 31, 2006 Recorded | Audited — | Misstatement Misstatements: ‘Amount_| _Amount__| Amount [No misstatements were identified as a result of performing audit steps 6b-e = = = Total Sample Misstatement $0. Projected Missiatements [Feat Seapie ‘Sample Misstatement $0.00 [Dollar Value of Sample = (316,319. Percentage Sample Dollar Misstatement = ~0.00%| [Dollar Value of Population per Journal = [$8751, Zsa Projected Population Dollar Misstatement = $0. (Allowance for Sampling Risk Fosatie ieee $20,000.09 [Projected Population Dollar Misstatement = $0.00, Recorded Adjustments z 0.00 “Allowance for Sampling Risk = ae 200.04 (Conclusions: ‘No misstatements were noted as a result of performing substantive tests 6b-e for cash disbursements. Thus, a reduction of the substantive tests of balances for the valuation, existence, and completeness assertions of accounts payable és supported. 333Beasley / Buckless / Glover / Prawitt ‘Southeast Shoe Distributor, Inc. Chart of Accounts Account Description Accor tion, Petty Cash T0000 Sales Regular Checking Account 10100 Sales Returns and Allowances Payroll Checking Account 10200 Sales Discounts ‘Accounts Receivable 11000 Other Income [Allowance for Doubtful Accounts 11100 Cost of Goods Sold INotes Receivable 11200 Inventory Adjustments (Other Receivables 11300 Purchase Returns and Allowances linventory 12000 Purchase Discounts [Prepaid Expenses 13000 Advertising Expense (Other Current Assets 14000 Amortization Expense |Fumiture and Fixtures 15000 Auto expense IVehictes 15100 Bad Dept Expense [Leasehold Improvements 15200 Cleaning Expense Buildings 15300 Charitable Contributions ‘Accumulated Depreciation Depreciation Expense Furniture and Fixtures 16000 Dues and Subscriptions |Accumulated Depreciation Employee Benefit Programs Vehicles 16100 _ Expense |Accumulated Depreciation— Freight Expense Leasehold Improvements | Accumulated Depreciation— Buildings jLand |Organizational Costs Other Assets [Accounts Payable ‘Accrued Expenses ‘Salaries and Wages Payable [Federal Payroll Taxes Payable [State Payroll Taxes Payable IFICA Taxes Payable IFUTA Taxes Payable ISUTA Taxes Payable [Property Taxes Payable Income Taxes Payable \Other Taxes Payable 'Notes Payable — Current Portion 'Notes Payable ~ Short Term ‘Other Current Liabilities [Notes Payable— Long Term ‘Common Stock Paid in Capital Retained Eamings jidends 324 16200 Gifts Expense Income Tax Expense 16300 Insurance Expense 17000 Interest Expense 18000 Legal and Professional Expense 19000 Licenses Expense 20000 Maintenance Expense 21000 Meals and Entertainment Expense 21100 Office Expense 21200 Other Taxes 21300 Payroll Tax Expense 21400 Postage Expense 21500 Rent or Lease Expense 21600 Repairs Expense 21700 Salaries Expense 21800 Salaries Bonus Expense 21900 Salaries Commission Expense 22000 Supplies Expense 22100 Telephone Expense 23000 Travel Expense 32000 Gain/Loss on Sale of Assets 32100Case 10.4 ~ Southeast Shoe Distributor, Inc.: Performance of Tests of Transactions Purchase Journal for Audit Procedure 1* For the Period From January 1, 2006 to December 31, 2006 GIL Account ID Debit Credit Account Deseri Invoice #__ Voucher #__Amot Amount fozs16706 74000 404-555-5955 7893 837.27 |(68) Telephone Expense 20000 937.27 ‘Accounts Payable (04/23/06 21790-1778 8063, 376.85 (238) 376.85 ‘Accounts Payable l0s/07/06 69000 11235 8126 113.24 (301) Office Expense 20000 113.24] ‘Accounts Payable 11/08/06 12000 26710 8879 6,677.76 (1054) Inventory 20000 6,677.76} | ‘Accounts Payable 12/23/06 12000 789938 9106 24,575.60 (1281) Inventory 20000 24,575.60 ‘Accounts Payable "?Absiracied from the Purchase Journal using exact format ofthe Purchase Journal. Note thatthe number in parenthesis under the transaction date is not normally included in the Purchase Journal. This number is provided ast represents the line number of the transaction in the Purchase Journal 325Beasley / Buckless / Glover / Prawitt } Southeast Shoe Distributor, Ine. Purchase Journal for Audit Procedure 4* For the Period From January 1, 2006 to December 31, 2006 GIL Account ID Debit Credit D: Account Desc ce #__ Voucher # _Amount__Amot (01721706 12000" ‘341105 7855 31,086.00 20000 31,086.00] ‘Accounts Payable (01/25/06 61000 18-6341 7861 2,034.00 ‘Auto Expense 20000 2,034.00] ‘Accounts Payable 02/19/06 12000 22783 7897 655.44 Inventory 20000 655.44 ‘Accounts Payable lo3/14/06 12000 8992 7930 10,471.68 Inventory 20000 10,471.68] Accounts Payable [04/24/06 12000 15622 8065 25,900.20 Inventory 20000 25,900.20] ‘Accounts Payable los/i3/06 60000 2456-422 8128 421.36 Advertising Expense 20000 421.36] ‘Accounts Payable '06/03/06 15000 47948 8217 3,590.00 Furiture and Fixtures + 20000 3,590.00] ‘Accounts Payable (0811/06 12000 5166-B12 8523, 5,408.00 Inventory 20000 5,408.00] ‘Accounts Payable "Abstract from the Purchase Joural using exact format of the Purchase Journal ooo 326Case 10.4 - Southeast Shoe Distributor, Inc. 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Documents for Audit Procedure 1 (continued) rr one am om = ae om main Ae sot “at ee Patni Invoice ‘atnane ot a ina Senge “roe nae ecw tg a =e aa aa at Tn Ss Se eee ia] a — ‘ans Ss Bat Sisters aor] 329Case 10.4 - Southeast Shoe Distributor, Inc. ‘Documents for Audit Procedure 1 (continued) == Invoice, oe wots | | Tones Anparel Group, Ine worm | | Smee = Sep. sent rasan eran HY TERTEEEETH Ele iat [BE Pay eet te] eS leehe = =| 8) se = a a8) ayo ber sna —- == conn Echos 330Case 10.4 - Southeast Shoe Distributor, Inc. 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