Acct 5908 Topic 5 Case PDF

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Southeast Shoe Distributor Limited Case Preparation for the workshop In the workshops, we will be considering a number of issues relating to the planning of the audit for Southeast Shoe Distributor Limited. While the assessment of inherent risk has already been made, you should read the reasons provided for the assessment and reflect upon why the particular assessment was made. Flowcharts for the revenue cycle have been provided and the assessment of control risk for each assertion will be discussed in the workshop. You should review the flowcharts prior to the workshop with a view to understanding the control activities. Following an assessment of control risk, a judgment will be made on the appropriate level of detection risk. You should specifically consider the following questions and submit your preparation notes via Turnitin;  What is the difference between a predominantly controls approach versus a predominantly substantive approach to an audit. In what circumstance is each approach appropriate?  Bill Zander has noted a higher volume of sales transactions in the last quarter of the year as a reason for assessing inherent risk for the assertions of completeness and cutoff for sales as high. Why would higher volumes of sales transactions worry Bill Zander?  In the flowcharts that are presented as documentation of the auditor’s understanding of the revenue cycle, several documents are referred to. Provide a one sentence description of the following documents;  Customer order  Sales invoice  Bill of lading  Customer statement  Cheque (check)  Deposit slip Remember that, in order to be eligible for the 1 mark for workshop preparation for this topic, you must submit your preparation notes before the commencement of your workshop via the Turnitin link. Submissions made after the start of the workshop will be considered late and receive a mark of zero. ___________________________________

Southeast Shoe Distributor Limited Acknowledgement This case is adapted from the Southeast Shoe Distributor Inc. case published in: Beasely, M.S., Buckless, F.A., Glover, S.M., and Prawitt, D.F. 2015. Auditing Cases: An Integrative Learning Approach. Upper Saddle River, NJ.: Pearson. ______________________________________________________ Southeast Shoe Distributor Limited is a closely owned business that was founded ten years ago by Stewart Green and Paul Williams. Southeast Shoe Distributor is a distributor that purchases and sells men’s, women’s, and children’s shoes to retail shoe stores located in small to midsize towns and cities in southeast Australia. The company’s basic strategy is to obtain a broad selection of designer label and name brand merchandise at low prices and resell the merchandise to small one-location retail stores that have difficulty obtaining reasonable quantities of designer and name brand merchandise. The company is able to keep the cost of merchandise low by; (1) selectively purchasing large blocks of production overruns and last season’s stock from manufacturers and other retailers at significant discounts, (2) sourcing in-season name brand and braded designer merchandise directly from factories in Brazil, Italy and Spain, and (3) negotiating favourable prices with manufacturers by ordering merchandise during off-peak production periods. During the year, the company purchased merchandise from over 50 domestic and international vendors, independent resellers, manufacturers and other retailers that frequently had excess inventory. At the present time, Southeast Shoe Distributor has one warehouse located in Goulbourn, New South Wales. Last year Southeast Shoe distributor had 123 retail store customers and had net sales of $7,311,214. Sales are strongest in the June and December quarters with the march quarter considerably weaker than the rest of the year. Your audit firm is currently planning for the 30 June 2018 audit. Southeast Shoe Distributors has the following general ledger accounts related to sales and cash collections activities: Sales Sales Discounts Sales Returns and Allowances

Bad Debts Expense Debtors Provision for Doubtful Debts

The audit manager, Susan Mansfield, has reviewed Southeast Shoe Distributor’s control environment, risk assessment process and monitoring system and has assessed them to be strong. Additionally, Susan has determined that performance materiality should be $40,000 for the revenue cycle and that acceptable audit risk is low. Bill Zandar, the audit senior, has assessed inherent risk related to sales, cash receipts, and debtors, and prepared an audit risk matrix that is presented on the following page. He has also reviewed Southeast Shoe Distributor’s information system and control activities related to sales and cash receipts and prepared the flowcharts that appear on the following pages You have been assigned to a team responsible for designing an audit plan for the revenue cycle that will achieve the desired acceptable audit risk at the lowest possible cost. You are currently preparing for the meeting. You should first review the relevant flowcharts and make an assessment of control risk, then complete the risk matrix on the following page. Thereafter, determine the appropriate level of detection risk. Make a note of any other information that would be relevant, and why it would be relevant. 1 

Southeast Shoe Distributor Limited Revenue Cycle – Planning Audit Risk Matrix Year ended 30 June 2018

Acceptable Audit Risk L L L L L L L L L L L Inherent Risk – Sales H H H H L L H H H H L L Inherent Risk – Cash Receipts H L L H L Inherent Risk – Debtors Control Risk – Sales Control Risk – Cash Receipts Control Risk – Debtors Detection risk – Sales Detection Risk – Cash Receipts Detection Risk – Debtors Inherent Risk High (H) unless the combination of inherent risk (and business risk) factors justify a lower assessment. Low (L) if the combination of inherent risk (and business risk) factors justify this assessment

Presentation

Classification

Accuracy, Valuation and Allocation

Completeness

Rights and Obligations

Existence

Presentation

Balances

Classification

Cut-off

Accuracy

Completeness

Occurrence

Transactions

L

L

Factors justifying a lower inherent risk assessment are: High management integrity, Low motivation to materially misstate for external parties, Repeat engagement with no material prior year misstatements, No related party transactions, Routine transactions, Limited judgment required to correctly record transactions, Stable business environment, Good business model. Control Risk Less than High (L) if controls are expected to reduce the likelihood of material misstatement to a negligible level. High (H) if controls are not expected reduce the likelihood of material misstatement to a reasonable level (or testing of controls is not planned. Detection Risk Low (L) if persuasive substantive tests are planned to be performed. Moderate (M) is moderately persuasive substantive tests are planned to be performed. High (H) if minimal substantive tests are planned to be performed.

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Southeast Shoe Distributor Limited Revenue Cycle – Inherent Risk Year ended 30 June 2018

Additional comments on inherent risk assessment. The inherent risk assessment for the occurrence of sales transactions is set at a high level even though no misstatements were discovered in previous years because of the external incentives for management and employees to inflate sales. The inherent risk assessment for completeness of sales transactions is set at a high level even though no misstatements were discovered in previous years because of higher volume of sales transactions in the last quarter of the year. The inherent risk for assessment for the accuracy of sales transactions is set at a high level even though no misstatements were discovered in previous years because of the large number of products and price points offered. The inherent risk assessment for the cut-off of sales transactions and cash receipt transactions is set at a high level even though no misstatements were discovered in previous years because of the higher volume of sales transactions in the last quarter of the year. The inherent risk assessment of the classification of sales transactions is set at a low level because no misstatements were discovered in prior years and few non-trade sales occur during any year. The inherent risk assessment for the occurrence, completeness and accuracy of cash receipt transactions is set at a high level even though no misstatements were discovered in previous years because of the susceptibility of cash to theft. The inherent risk assessment for the classification of cash receipt transactions is set at a low level because of the lack of external incentives and discovered misstatements in previous years. The inherent risk assessment for the classification of cash receipt transactions is set at a low level because of the lack of external incentives and discovered misstatements in previous years. The inherent risk assessment for the completeness and rights and obligations of accounts receivable is set at low because of the lack of external incentives and discovered misstatements in previous years. The inherent risk assessment for the existence of accounts receivable is set at a high level even though no misstatements were discovered in prior years because of the management and employee external incentives to inflate accounts receivable. The inherent risk assessment for the valuation assertion of accounts receivable is set at a high level though no misstatement were observed in prior years because of the subjectivity of estimating uncollectible accounts and the weak economy. The inherent risk assessment for the occurrence, completeness, classification and accuracy of disclosures related to cash receipt transactions, sales transactions and accounts receivable is set at low level because of the lack of external incentives and discovered misstatements in previous years.

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Southeast Shoe Distributor Limited Revenue Cycle – Sales Flowchart Year ended 30 June 2018

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Southeast Shoe Distributor Limited Revenue Cycle – Sales Flowchart Year ended 30 June 2018

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Southeast Shoe Distributor Limited Revenue Cycle – Cash Receipts Flowchart Year ended 30 June 2018

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Southeast Shoe Distributor Limited Revenue Cycle – Cash Receipts Flowchart Year ended 30 June 2018

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