Southeast Shoe Distribution, Inc.

Case Study

ACCT 4004 Advanced Auditing

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Table of Contents

BRIEF INTRODUCTION……………………………………………………………………………….2
[1]..................................................................................................................................................... 3
[2]......................................................................................................................................................5
[3]......................................................................................................................................................7
[4]....................................................................................................................................................13
[5]....................................................................................................................................................14
[6]....................................................................................................................................................14
[7]....................................................................................................................................................15

Brief Introduction
ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017
Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
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South East Show Distributor (SSD) is a closely owned business that was founded ten years ago
by Stewart Green and Paul Williams. SSD is a distributor that purchases and sells shoes to
smaller retail stores as well as purchase and sell a broad selection of designer label and name
brand merchandise from over 50 domestic and international vendors that are sold in 123 different
retail stores. Its basic strategy is to negotiate and buy these products cheaper during key times in
the season and sell to retail stores that are short on designer and brand name merchandise. SSD
has one warehouse located in Atlanta, Georgia. SSD is required to have an audit of its financial
statements to fulfill requirements of loan agreements with financial institutions. The audit
manager Susan Mansfield reviewed SSD’s control environment, risk assessment process and
monitoring system was assessed to be strong. Susan decided against performing tests of control
for write offs and sales and allowances since they are relatively small. Susan and her is
responsible to identify internal control activities are operating properly and nothing is materially
misstated, as well as identify the tests of control that would successfully gauge the effectiveness
of internal control activities.

[1] References: R31-1

Prepared by: Bibi
Date: Sept-28-2017
ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017
Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
 Page 3 of 15

Reviewed by:

Southeast Shoe Distributor, Inc.

Revenue Cycle – What Could Go Wrong Matrix
For the Year Ended December 31, 2014

Sales Cash Receipts Accounts Disclosure

Receivable
OC A C C O C A C C O C C A
c oc ul c o c u l E R C V c o l c
c m c t a x i o a c m a c
u p u o s i g m l u p s u
r l r f si s h p u r l s r
r e a f fi t ts le a r e i a
e t c c e t t e t f c
What Could Go Wrong n e y a n e i n e i y
c n ti c n o c n c
e e o e e n e e a
s n s s t
s s s i
o
n

Customers cannot pay for sales

purchased on credit

Sales are recorded for nonexistent

customers

Sales are duplicated or omitted

Cash receipts are recorded for wrong

period

Cash receipts were classified for

wrong accounts

Cash receipts summaries not having

appropriate signatures

Recording cash receipts that did not

happen

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
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Cash receipts are not deposited and

not recorded at the proper amounts
received

[2] References: R32-1

Prepared by: Konstantin
Date: Sept-28-2017
Reviewed by:
Southeast Shoe Distributor, Inc.
Revenue Cycle – Control Activities Matrix
For the Year Ended December 31, 2014

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
 Page 5 of 15

Sales Cash Receipts Accounts Disclosure

Receivable
OCACC OCACC O C C A
c o c u l c o c u l E R C V c o l c
x i o a c m a c
i g m l u p s u
s h p u r l s r
Control Activities t t l a r e i a
e s e t e t f c
n t i n e i y
c e o c n c
e n n e e a
e s t
s s i
s o
n

All Sales are approved by the office

manager

Office manager authorizes any sales

before sent back to the sales clerk

Monthly statements are prepared by the

accounting clerk and sent out to
customers

Accounting clerk reconciles sales

invoices and bills which is followed up
X X X
with collection activities

Sales Register, A/R Master file, and G/L

is automatically updated based on
X X
standardized Chart of Accounts

Sales Invoices are automatically

calculated based on a standardized price
file

Two individuals open mail who aren’t

involved in accounting clerk duties

Checks are restrictively endorsed and a

cash receipt summary is prepared and
signed

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
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[3] References: R40-1

Prepared by: Reinalyn Dumo
Date: September 28, 2017
Reviewed by:
Southeast Shoe Distributor, Inc.
Revenue Cycle - Audit Tests Planning Matrix
For the Year Ended December 31, 2014

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
 Page 7 of 15

Sales Cash Receipts Accounts Disclosure

Receivable
OCACC OCACC O C C A
c o c u l c o c u l E R C V c o l c
x i o a c m a c
i g m l u p s u
s h p u r l s r
t t l a r e i a
Test of Controls e s e t e t f c
n t i n e i y
c e o c n c
e n n e e a
e s t
s s i
s o
n

TC1) Inquire and observe the office

manager authorizing sales (CA1)

TC2) Inspect customer order for

authorization by office manager.

TC3) Investigate and observe shipping

personnel checking for authorization

TC4) Review the list of sales invoices

and invoices and bill of landings.

TC5) Conduct and observe the

accounting clerk reconcile the sales
register to supporting documents.

TC6) Reconcile the sales register to the

supporting documents.

TC7) Inquire and observe the accounting

clerk prepare and mail customer
statements.

TC8) Evaluate the correlation files

related to monthly customer statements.

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
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References: R40-2
Prepared by: Reinalyn Dumo
Date: September 28, 2017
Reviewed by:
Southeast Shoe Distributor, Inc.
Revenue Cycle - Audit Tests Planning Matrix
For the Year Ended December 31, 2014

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
 Page 9 of 15

Sales Cash Receipts Accounts Disclosure

Receivable
OCACC OCACC O C C A
c o c u l c o c u l E R C V c o l c
x i o a c m a c
i g m l u p s u
s h p u r l s r
t t l a r e i a
Test of Controls e s e t e t f c
n t i n e i y
c e o c n c
e n n e e a
e s t
s s i
s o
n

TC9) Inspect the standardized chart of

accounts.

TC10) Differentiate accounts codlings

on invoices with the standardized chart
of accounts

TC11) Inquire and observe the sales

clerk use the computer to automatically
prepare sales invoices.

TC12) Analyze the standardized listings

of prices

TC13) Compare prices on invoices to

the appropriate standardized list of
prices

TC14) Compare prices on invoices to

the appropriate standardized list of
prices

TC15) Inquire and examine the

receptionist open mail in the presence of
one other person.

TC16) Inquire and observe the

receptionist when preparing cash
summary with employees

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
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TC17) Match cash receipts summaries

for signatures.

References: R40-3
Prepared by: Reinalyn Dumo
Date: September 28, 2017
Reviewed by:
Southeast Shoe Distributor, Inc.
Revenue Cycle - Audit Tests Planning Matrix
For the Year Ended December 31, 2014

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
 Page 11 of 15

Sales Cash Receipts Accounts Disclosure

Receivable
OC ACC OCAC C O C C A
c o c u l c o c u l E R C V c o l c
x i o a c m a c
i g m l u p s u
s h p u r l s r
t t l a r e i a
Test of Controls e s e t e t f c
n t i n e i y
c e o c n c
e n n e e a
e s t
s s i
s o
n

TC18) Examine the receptionist endorse

customer checks with employee

TC20) Examine the monthly bank

reconciliations

TC21) Inquire and observe the office

manager prepare the bank reconciliation.

TC22) Compare amounts and dates on

cash receipts summaries to validated
deposit slips.

TC23) Perform bank reconciliation.

TC24) Inquire and observe the accounting

clerk prepare adjustment memos.

TC26) Analyze prenumbered adjustment

memos.

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
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[4] Reference: R33

Prepared by: TM
Date: Sept-28-2017
Reviewed by:
Southeast Shoe Distributor, Inc.
Revenue Cycle – Internal Control Deficiencies
For the Year Ended Dec-31-2014

Internal Control Deficiencies Client Personnel

Discussed With

1) The client does not internally verify the proper general ledger account Accounting Clerk
classification for sales and cash receipt transactions.

2) The client does not have internal control to approve selling goods to new Sales Clerk,
customer and to set up a new customer in master file. Office Manager

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
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3) The client ships the goods to customer before credit check Sales Clerk,
Office Manager,
Shipping Clerk

4) The client does not have internal control to check whether invoices are prepared Sales Clerk,
using a date equal to shipping date or specify shipping date on the invoice. Shipping Clerk

5) The client lacks the control to compare customer master file or accounts Office Manager
receivable to general ledger balance

6) The client does not have sufficient controls to account for sales returns and Sales Clerk,
allowances Office Manager

7) The client does not prepare aged accounts receivable trial balance for review and Office Manager
follow up by the management.

8) The client lacks the proper authorization of the write-off of uncollectable Office Manager
accounts by the management.

9) The client does not reconcile the sales and cash receipt to G/L. Office Manager

10) The client does not verify the sales discount taken by customer. Account Clerk
Office Manager
Sales Clerk

[5] If SSD was a public company, the audit work would differ because SSD would be
required by Sarbanes–Oxley Section 404 to have management and the external auditor report on
the legitimacy of the company's internal controls on financial reporting. The auditor would have
to test internal controls related to account balances and related assertions within the financial
statements etc. This is a costly and time consuming, as documenting and testing important
financial controls requires a large effort. However for a private company there is a choice since it
is not required by law to test controls in audit or accounting standards for private companies.
However if a company has well designed and documented controls, the auditors may choose to
test them since it will be more efficient and less costly.

[6] Control Activities that would remediate the deficiency

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn
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1) Adequate chart of accounts should be used. Sales invoices should be posted only to valid
customer accounts. Posting is done automatically to sales account and cash receipt account.
Independent review of posting should be done to G/L.
2) Office Manager should authorize selling goods to new customer and setup new customer
in master file.
3) Office Manager should authorize the credit check on customer. Shipping clerk could
examine customer purchase order for credit approval from manager.
4) Computer system should be programmed in such a way that it checks the reasonableness
of date entered and compares both invoice and shipping date.
5) Office Manager could inspect documentation to verify that comparison of customer
master file or accounts receivable to general ledger account.
6) If there is sales return, it should be properly recorded and update the sales return and
allowance account by sales clerk and follow up verification by Office Manager.
7) Office manager should prepare periodic aged accounts receivable trial balance for review
to reduce the likelihood of uncollectable accounts.
8) Office manager should authorize the write-off of uncollectable account so that it will
prevent the misuse of write-off to conceal the theft of cash.
9) Office manager should reconcile the sale and cash receipt to G/L.
10) Sales discount should be authorized by Office manager and verified by the sales clerk.

[7] SSD has many sales to customers and purchases from vendors and thus dealing with a
very large number of transactions where major errors may occur. Due to the large number of
transactions, it is therefore important that they are thoroughly monitored by having the proper
control activities and efficient standardized processes in place in order to reduce the likelihood of
errors.

ACCT 4004 Advanced Auditing Thursday, Sept 28, 2017

Professor Ramesh Saxena Bibi, Jason, Konstantin, Tenzin, Reinalyn