AUDITING LABORATORY

Section 10 Case 10.1

“Shouthest Shoe Distributor Inc”

Arranged by:

Syafira Azzahra 165020307141011

INTERNATIONAL UNDERGRADUATE PROGRAM IN ACCOUNTING
FACULTY OF ECONOMICS AND BUSINESS
BRAWIJAYA UNIVERSITY
MALANG
2019
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 currently planning for the Fiscal 2014 audit
in accordance with these professional standards. SSD has the following general ledger
accounts related to sales and cash collection activities:

In accordance with the professional standards, Susan Mansfield, audit manager,

reviewed SSD’s control environment, risk assessment process, and monitoring system
and has assessed them as strong. Bill Zander, staff auditor, reviewed SSD’s
information system and control activities related to sales and cash receipts and
prepared the enclosed flowcharts (referenced in the top right hand corner as R 30-1, R
30-2, R 30-3, and R 30-4). The number and size of sales returns and allowances and
write-offs of specific customer accounts is relatively small. Thus Susan has decided
there is no need to document SSD’s policies nor perform tests of controls for these
two business activities. As the audit senior, you have been assigned responsibility for
(1) identifying internal control activities that assure that transactions, accounts and
disclosures related to sales and cash collection activities are not materially misstated
and (2) identifying tests of controls that would test the design and operating
effectiveness of internal control activities identified for sales and cash collection
activities.

REQUIRED
1. Identify "what could go wrong" with SSD's sales and cash receipts activities by
completing step 5 of the audit program R 1-1. Document your work in audit
schedules R 1-1, R 31-1, R 31-2, and R 31-3 (Note: number what could go wrong
similar to the examples provided).
2. Identify SSD’s control activities by completing step 6 of the audit program R 1-1.
Document your work in audit schedules R 1-1, R 32-1, R 32-2, and R 32-3 (Note:
you should assume that only the control activities identified in the flowcharts
exist and number your control activities similar to the activity provided).
3. Identify potential tests of controls by completing step 7 of the audit program R 1-
1. Document your work in audit schedules R 1-1, R 40-1, R 40-2, and R 40-3
(Note: number your tests similar to the example provided).
4. Complete step 8 of the audit program R 1-1 by identifying any internal control
deficiencies SSD may have and document your work in audit schedule R 1-1 and
R 33.
5. How would your work differ if SSD was a public company? What other factors
would you need to consider?

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6. For each internal control deficiency you listed in audit schedule R 33
(requirement 4), identify at least one control activity that would remediate the
deficiency.
7. Describe the importance of SSD’s control activities given its large number of
customers and vendors.

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ANSWER

1. The answers for this question are on the schedules provided in the next page.

2. The answers for this question are on the schedules provided in the next page.

3. The answers for this question are on the schedules provided in the next page.

4. The answers for this question are on the schedules provided in the next page.

5. An audit for a non-public entity is required to be completed in accordence

with the auditing standards issued by the Auditing Standards Board (ASB) for
the AICPA. These standards require examination of controls for the purpose of
planning the nature, extent, and timing of the substantive testing. On the other
hand, public entities are required to have audits conducted in accordance with
the auditing standards of the Public Company Accounting Oversight Board
(PCAOB). In addition to providing assurance on the entity’s financial
statements, an auditor is also required to provide assurance on the entity’s
internal controls. In order to provide assurance on an entity’s internal controls,
the auditor must perform tests of controls which is related to all significant
account balances, classes of transactions and disclosures, and related
assertions in the entity’s financial statements.

By law, public companies’ annual financial statements are audited each year
by independent auditors — accountants who examine the data for conformity
with U.S. Generally Accepted Accounting Principles (GAAP). The auditors
con-duct a systematic examination of a company’s accounting books,
transaction records and other relevant documents to consider whether the
financial statements are fairly presented and free from material misstatements.
The auditor prepares a written report containing an opinion on the financial
statements. That opinion is filed with the SEC and is available to investors and
other interested parties.

The independent audit’s overriding goal is to provide investors, capital market

participants and policymakers with “reasonable assurance,” beyond
management’s own assertions, that the financial statements can be relied upon
for investment decisions and other purposes.In addition to auditing financial
statements, auditors often also assess the effectiveness of a company’s internal
controls over financial reporting. Internal controls are procedures designed by
the company’s management to address the risk of material errors and
misstatements in financial statements. Auditor attestation that the controls are
effective can boost investor confidence. Investors’ interests also are served
when an auditor identifies control weaknesses and management addresses the
shortcomings.

6. Answer :

Control Deficiency Remediating Control Activity

1. The client does not internally verify the Independent review of posting to the
proper general ledger account general ledger.

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 classification for the sales and cash
receipt transactions.
2. The client does not internally verify the
amounts recorded on the sales invoices.
3. The client does not reconcile the sales
and cash receipts journal to the general
ledger.
4. The client does not internally verify
sales discounts taken by the customers.
Clerical testing of the amounts on the sales
invoices.
Independent reconciliation of the sales and
cash receipts journal to the general ledger.
Verification of sales discounts before
recording.

7. Southeast Shoe Distributor (SSD) would have a high volume of sales, cash
receipts, purchasing, and cash disbursement transactions, given the large
number of customers and vendors involved with their business. The likelihood
of errors occurring with these transaction processes would be very high
without standardized processes that include appropriate control activities that
are consistently applied.