You are on page 1of 30

Audit II Apollo Case Final Project

1. 1. Unit 5 Assignment Jennifer, I know you spent many hours on this assignment. Your
hard work paid off. This is by far the best assignment I have had submitted and I've been
teaching this course using this case for several years. You did a fantastic job! You exceed
expectations on properly indexing your workpapers, cross referencing and footing. You
should be very proud. I have made comments on the file itself. Please let me know if
youhave any questions. Julie
2. 2. Document Title: GA-1 Anderson, Olds, and Watershed Certified Public Accountants
Apollo Shoes Inc 100 Shoe Plaza Shoetown, ME 00001 October 21, 2014 Dear Mr.
Lancaster: This letter will confirm our understanding of the arrangement for our audit of
the financial statements of Apollo Shoes Inc. for the year ending December 31, 2014. We
will audit the Company's balance sheet at December 31, 2014, and the related statements
of income, comprehensive income, stockholders' equity, and cash flows for the year then
ended, for the purpose of expressing an opinion on them. We will also audit whether
Apollo Shoes Inc. maintained effective internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO criteria). Apollo Shoes Inc.'s management is responsible for these
financial statements and for maintaining effective internal control over financial
reporting. Management is also responsible for making financial records and related
information available for audit and for identifying and ensuring that the company
complies with the laws and regulations that apply to its activities. Lastly, management is
responsible for adjusting the financial statements to correct material misstatements and
for affirming to us in the representation letter that the effects of any uncorrected
misstatements aggregated by us during the current engagement and pertaining to the
latest period presented are immaterial, both individually and in the aggregate, to the
financial statements taken as a whole. Our responsibility is to express an opinion on these
financial statements and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audits. If, for any reason, we are unable to complete
the audit or are unable to form or have not formed an opinion, we may decline to express
an opinion or decline to issue a report as a result of the engagement. We will conduct our
audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audit of the financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered
3. 3. necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinion. A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the significant transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that
significant transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the effectiveness
to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate. As part of our engagement for the year ending December 31, 2014, we
will prepare the federal tax and state franchise tax returns for Apollo Shoes Inc. Our fees
will be billed as work progresses and are based on the amount of time required plus travel
and other out-of-pocket expenses. Invoices are payable upon presentation. We will notify
you immediately of any circumstances we encounter that could significantly affect our
initial estimate of $750,000. If this letter correctly expresses your understanding, please
sign the enclosed copy where indicated and return it to us. Sincerely, Anderson, Olds, and
Watershed, CPAs ______________________________ [Engagement Partner's
Signature] Accepted and agreed to: ______________________________ [Client
Representative's Signature] Apollo Shoes Inc. ______________________________
[Title] ______________________________ [Date]
4. 4. Document Title: GA-2 Date: October 21, 2014 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Audit Staffing Memo Arnold Anderson is fulfilling the
role of Audit Engagement Partner. Darlene Wardlaw is fulfilling the role of Engagement
Manager. Maria Olds is fulfilling the role of Tax Partner. Audit Staff is limited to
Jennifer Babcock (in-charge) and Bradley Crumpler (intern). After carefully reviewing
the prior year's Form 10-K, the minutes of the board of directors, and some of the other
documents received for Apollo Shoes Inc., I believe that the audit team would benefit
from enlisting individuals with the following specialized expertise: a. Tax Specialist. A
tax specialist will be needed as Apollo Shoes executives have also asked us to prepare
their 2014 Federal Tax and State Franchise Tax Returns. b. Plant, Property & Equipment
(PP&E) Specialist. A PP&E specialist could be helpful in the audit engagement as Apollo
Shoes recently decided to bring product manufacturing in-house and to this end paid $1.3
million for equipment. The PP&E specialist will be needed in order to assess the
reasonableness of the amount paid for these assets. c. Information Technology (IT)
Specialist. Apollo Shoes implemented a computer accounting system mid-way through
2014. The IT Specialist could help us to assess the true value of the new computer system
and the corresponding expenses relating to the installation of the system and potential
training costs. These specialists should cover our needs in regards to the Apollo Shoes
Inc. audit. I will let you know if I come across any other areas during the audit that might
require an additional specialist to be added to the team.
5. 5. Document Title: GA-4 Date: January 6, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Analytical Review Memo After conducting an analytical
review of the financial information presented by Apollo Shoes, Inc. the following
changes and potential misstatements have been identified:  Net Sales decreased by
4.21%, but Gross Profit increased by 1.27%. In the June 30, 2014 Board of Directors
meeting, Mr. Unum stated that sales were down due to decreased customer willingness to
pay $300 for a pair of shoes. In response, the company decided to increase prices by 10%
in order match the increase in production costs. Because the company experienced a
period of declining sales. One possible explanation for the increase in gross profit could
be the recording of fake sales.  Selling, General, and Administrative Expenses decreased
by 46.05%, however this appears to be due to the reduced amount of Research and
Development that took place during 2014 in response to poor economic conditions. 
Interest Expense increased by 196.02%, which is likely due to the $46,403,000 increase
in debt from the previous year.  Miscellaneous Income also increased from $0 in 2013 to
$2,166,000 in 2014. There is no detail indicating the source of this income.  Net
Accounts Receivable increased by 231.9% from 2013 to 2014. This is concerning,
especially when taking into consideration that net sales decreased by 4.21% and that the
allowance for doubtful accounts decreased by 1.89%.  Other Receivables increased from
$0 in 2013 to $1,250,000 in 2014 due to a personal loan the was supposedly given to Mr.
Lancaster’s personal secretary This load should have been recorded as an employee
advance, but was not due to the desire to "not worry” their shareholders with such details.
The board approved the personal loan, but only on the contingency that the loan option be
made available to the other members of the board.  Inventory increased by 322.93%
from 2013 to 2014. This is concerning, especially when considering the company's
admission in the June 30, 2014 Board of Directors meeting that sales were not meeting
expectations.  Prepaid insurance increased 360.67% and could be misstated if Apollo
Shoes did not make the necessary amortization journal entry.  Between 2013 and 2014,
Employee and Employer Medicare Withholdings increased 1855%, Employee and
Employer FICA Withholdings increased 540%, and Federal and State Payroll Taxes
increased 1857%. Throughout the analytic review, it was apparent that Apollo Shoes has
several accounts with either concerning or suspicious activity. Further investigation may
either prove their legitimacy of these accounts or lead to the determination that fraudulent
accounting is occurring.
6. 6. Document Title: GA-5 Date: January 15, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Materiality Memo After having analyzed the data found
in the financial statement of Apollo Shoes Inc., I found a number of areas that may
contain possible material misstatement. 1. Independent auditors’ concept of materiality
The concept of materiality states that an auditor's attention should be focused primarily
on matters that are important to the financial statement users. The goal of an independent
auditor is to obtain the reasonable assurance about whether or not the financial statements
as a whole are free of material misstatement. This assurances is in consideration of the
fact that the outside user's may be negatively impacted if decisions are made based off of
any material misstatements that may exist in a company's financial information. As
materiality is often a matter of professional judgment the auditor must make materiality
decisions based on the specifics of each audit engagement. Additionally, when auditing
the financial statements, the auditor's judgment regarding matters that are considered to
be material to users of financial statements is based on the consideration of the needs of
user group as a whole. 2. Common measures of materiality The most common way of
viewing materiality is by the dollar amount that would influence the decision making of
financial users. Materiality is commonly assessed as a percentage of a key financial
statement component. Choosing an appropriate benchmark, such as total revenue, total
net assets, or profits before tax, is key as these measurements can relate directly back to
the financial statement. By utilizing calculations such as percentages, ratios, and the
methods used to round to zero as these figures could detect abnormalities or materiality
issues. The typical rule of thumb is that anything less than 5% is generally not considered
to be material, while anything over 10% is generally considered to be material. However,
the relative size of the misstatement, the nature of the item or issue, the engagement
circumstances, and the possible cumulative effects all must be considered when
determining materiality. 3. Estimate of Apollo Shoes' minimum material misstatement
Based on the lack of being able to communicate with Apollo's prior auditors and some of
the concerning information that has been provided in some of the documentation that we
have currently received from Apollo, such as the Board of Directors meeting minutes, I
would like to use some calculations that are on the lower end of the spectrum in order to
ensure that fraud and material misstatements are not occurring. To begin with, I will start
with 5% of Apollo's net profit. According to the trial balance information that we
received, Apollo's Net Income for 2014 appears to be $50,549,082.03. If we use 5% of
this amount, our minimum material misstatement amount will be $2,527,454.10.
7. 7. Document Title: GA-6 Date: January 16, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Considerations of Potential Fraud Memo This memo is meant to
address the possibilities of fraud within Apollo Shoes Inc. After careful review of the
Board of Directors meeting minutes and the analytic procedures that have been
performed so far, there are a number of things that may be considered “red flags” for the
company. The generally accepted auditing standard, SAS 99 "Consideration of Fraud in a
Financial Statement Audit," discusses the relevancy of finding and correcting possibly
fraudulent statements and the need to provide reasonable assurance that the financial
statements are free of material misstatements. The following red flags in regards to the
Apollo engagement have been identified:  In the October 17, 2014 Audit Committee
meeting minutes, Eric Unum, Apollo's VP of Finance, stated that the company's former
auditor, Smith & Smith, CPAs, unexpectedly withdrew from the engagement due to
"mutually incongruent goals." Mr. Unum declined any further discussion of the matter
due to possible litigation. The fact that the previous auditors withdrew combined with the
Apollo's request that the prior auditors not be contacted is highly suspicious.  One
potential issue is that Larry Lancaster is Chairman of the Board, and is also Apollo's
President & CEO, causing a potential conflict of interest. The fact that Mr. Unum is both
a member of the board and Apollo's VP of Finance further complicates this conflict of
interest.  In both the January 6, 2014 and the June 30, 2014 Board of Director meeting
minutes, Mr. Lancaster, responds with "or heads will roll!". This suggests that Mr.
Lancaster may have an aggressive management style that may encourage or force
employees to take inappropriate risks or make poor business decisions in an attempt to
meet company goals.  In the June 30, 2014 Board of Director meeting minutes, the
board members unanimously approved a $1,250,000 personal loan that was supposed to
be for Mr. Lancaster's secretary. This loan was approved on the contingency that personal
loan options be made available to all members of the board if requested. There are
multiple issues going on here. First, Mr. Lancaster requested that the check for the loan
be made out him personally and that he would supposedly cash it and give it to his
secretary. It seems unlikely that a check for such a large amount would need to be cash
and even more unreasonable that the check wouldn't be made out to the secretary directly.
Secondly, Mr. Unum suggests that the loan be coded as an "Other Receivable" rather than
"Employee Advance" as would be appropriate. Lastly, the board members are treating
this situation and the company as if it is a personal bank rather than a legitimate company
in the business of making a profit. This suggests a complete disregard for the company's
shareholders.  In the June 30, 2014 Board of Director meeting minutes, Mr. Unum
requests that the Board approve a $44,403,000 draw from the company's line of credit.
Other than for the
8. 8. purchase of the new software system costing $1.2 million, there is no specific
mentioning as to why the large draw is needed. They only state that the funds are needed
to pay for the computer system and "other expenses." This is highly concerning,
especially since the 2013 draw of $10,000,000 was not paid off but merely rolled into a
short-term $12,000,000 loan through a local bank, per the January 6, 2014 minutes.  It is
also concerning that the board approves executive 10% raises, executive bonuses, and
$90,000 stipends per board member even though the company's sales dropped by 4.21%
and the current economy suggests the likelihood of continuing decreased sales. Apollo's
audit risk appears to be high due to some of the suspicious activities occurring within the
company and the seemingly high potential for fraud. It is difficult to tell at this point how
pervasive the potential fraud might be, but if it is occurring, top management would be
most likely to be involved. If collusion is taking place within the company, it would be
even more difficult to detect the possible fraud that may be occurring. In order to ensure
our best chances of being able to detect any existing fraudulent schemes, we should
insure that the client does not know which areas will be audited at which times or how,
and the personnel used to assist with document review should be limited in order to
prevent internal employees who are engaging in fraudulent behavior from being able to
alter existing documentation or the audit "findings."
9. 9. Document Title: GA-6-1 MEETING HELD JANUARY 6, 2014 Larry Lancaster,
chairman of the board, presided over the first meeting of the year, beginning at 3 P.M.
The meeting was conducted in the boardroom of Apollo’s new global headquarters. All
members were present: Larry Lancaster Josephine Mandeville** Fritz Brenner** Ivan
Gorr* Theodore Horstmann** Harry Baker* Eric Unum * Outside director ** Outside
director and member ofthe audit committee. The minutes of the December 16, 2013
meeting were reviewed and approved. Reporting on the annual meeting of shareholders,
Mr. Lancaster welcomed the new or reelected board members: Josephine C. Mandeville,
Professor of Accountancy and Typing at the Graduate School of Business and Clerical
Skills; Ivan W. Gorr, President and CEO of Far More Drugs; Harry R. Baker, Executive
Vice President and Treasurer of the Iguana Growers of America Inc., Theodore
Horstmann, Minister of Commerce of Anglonesia; and Fritz Brenner, President of The
Widget Corporation Mr. Unum presented the forecast for the year, attached. Sales are
expected to increase 10 percent, with costs of goods sold and general expenses bearing
about the same relationships as experienced last year. Mr. Lancaster stated, “Well, they
better increase by that much, or heads will roll!” Mr. Lancaster’s plan to move production
to within the company was discussed. Over Mr. Horstmann’s vehement disagreement, the
board authorized purchase of equipment totaling $1.3 million to facilitate internal
production of Apollo products by a vote of 6-1. Mr. Unum reported that the Company’s
short-term line of credit was refinanced as of February 2, 2014 and rolled into a note
payable with the Twenty-First National Bank of Maine, due January 1, 2015. Mr.
Brenner moved a declaration of dividends for the year ended the previous December 31.
The motion died for lack of a second. Mr. Unum moved, and Mr. Lancaster seconded,
officers’ salary increases of 10 percent for 2014 as well as stipends for outside Board
Members of $90,000 each. The board approved these salaries and stipends by a 6- 1 vote:
President and CEO, Larry Lancaster $2,750,000 Exec Sr. VP and CFO, Joe Bootwell
1,320,000 VP Marketing, Fred Durkin 1,100,000 VP Finance, Eric Unum 649,000 VP
Legal Affairs, Sue Fultz 1,650,000 VP Operations, Daisy Gardner 451,000 Internal Audit
Director, Karina Ramirez 235,000 Treasurer, Mary Costain 222,000 Controller, Samuel
Carboy 214,000 Mr. Lancaster encouraged everyone to watch the 2014 Superbowl to
watch for Apollo’s 15- second commercial. He noted that the cost of the commercial time
rose approximately 10% from last year. The cost of production and airing the ad is now
approaching $1,000,000. Meeting ended 5:30 P.M. /s/ Jeff Chesnut, Secretary
10. 10. Document Title: GA-6-2 MEETING HELD JUNE 30, 2014 Larry Lancaster,
chairman of the board, presided over the second meeting of the year, beginning at 3 P.M.
All members were present: Larry Lancaster Josephine Mandeville** Fritz Brenner**
Ivan Gorr* Theodore Horstmann** Harry Baker* Eric Unum * Outside director **
Outside director and member of the audit committee. The minutes of the January 6
meeting were reviewed and approved. Mr. Lancaster reported on damage caused by a
“Nor’easter” storm that hit Shoetown in April. Damages amounted to approximately
$50,000, just under the insurance deductible. Mr. Unum reported that sales revenues are
not meeting expectations, primarily because of parents’ growing disenchantment with
spoiling their children; parents were no longer willing to buy $300 premium shoes for
their kids as they did in previous years. Mr. Gorr concurred and mentioned something
about “not sparing the rod.” In order to compensate for decreased sales, the Company has
raised prices by about 10% with respect to product costs. Mr. Lancaster lamented that the
quality of Apollo products was too high—the shoes were just not wearing out fast
enough. Mr. Lancaster also stated that because of the strength of current product lines and
as a cost- cutting measure, he decided to stop research and development efforts on the
Phoneshoe, thereby eliminating Research and Development expense for the current year.
The development lab will be modified in 2015 to house a personal gym for corporate
executives. Scientists working in the lab have been reassigned to maintenance duties
elsewhere in the company. The Company has also saved postage and telephone expense
through increased use of e-mail. In other business, the board authorized the write-off of
one account receivable for $23,810.13 for an account that had been outstanding for over a
year. Mr. Lancaster noted that he did not anticipate any other write-offs during the year,
or that “heads would roll!” Mr. Unum moved that Apollo advance $1,250,000 to Mr.
Lancaster’s personal secretary as a personal loan to cover personal legal expenses related
to her previous employer. Mr. Unum further suggested that the promissory note plus
accrued interest of 1% per year be due on June 30, 2051. Mr. Lancaster suggested that it
be recorded in “other receivables,” rather than “employee advances” so as to not trouble
shareholders with needless details. After general agreement among the board that similar
options be made available to other board members in the future on an as needed basis, the
advance was approved unanimously. Mr. Lancaster asked Mr. Unum to have the check
drawn to him immediately at the conclusion of the board meeting; he would cash it and
give it to his secretary. The board unanimously supported Ernst Hathaway’s promotion
from Director of MIS to VP-Information Systems. He reported on the plans for the
purchase and installation of a new information system. The board authorized up to $1.2
million for the purchase of the new computer system. Ms. Mandeville offered to consult
on the purchase and installation. To fund the purchase and pay other expenses, Mr. Unum
requested that the board authorize a draw of $44,403,000 on the Company’s line of credit
on July 1. This proposal was unanimously approved. Meeting ended 7:30 P.M. /s/ Jeff
Chesnut, Secretary AudComMins—063002.doc
11. 11. Document Title: GA-6-3 MEETING HELD JANUARY 6, 2015 Larry Lancaster,
chairman of the board, presided over the regular meeting, beginning at 2 P.M. All
members were present: Larry Lancaster Josephine Mandeville** Fritz Brenner** Ivan
Gorr* Theodore Horstmann** Harry Baker* EricUnum * Outside director ** Outside
director and member of the audit committee. The minutes of the June 30 meeting were
reviewed and approved. The selection by the audit committee of Anderson, Olds &
Watershed as auditors was ratified. The $750,000 fee was approved for the 2014 audit.
Ms. Mandeville moved, and Mr. Gorr seconded, a proposal to declare retroactively a cash
dividend of $860,000 payable March 1 to stockholders of record on December 31.
Approved by a vote of 5–2. Ms. Fultz, VP-Legal affairs, stated that on January 5, 2015
(yesterday), a class action suit alleging gross negligence and violation of warranty of
merchantability was brought against Apollo for $12,000,000. The action stems from the
use of one of the Company's products in an aquatic environment, which may have caused
severe electrical shock to the wearer(s). She is working closely with Apollo’s legal
counsel, Perley Stebbins, to vigorously defend Apollo’s good name. Ms.Fultz stated that
the company’s current insurance does not cover these types of actions. Mr. Baker
inquired as to the status of the machinery purchased in early 2014. Mr. Lancaster replied
that the machinery would be set up “soon.” Mr. Lancaster moved and Mr. Unum
seconded the approval of officers’ bonuses for the year just ended December 31.
Approved by a 4–3 vote. President, Larry Lancaster $200,000 VP Marketing, Fred
Durkin 50,000 VP Finance, Eric Unum 50,000 VP Information Systems, Ernst Hathaway
50,000 VP Legal Affairs, Sue Fultz 50,000 VP Operations, Daisy Gardner 50,000 The
Board approved the Company’s contribution to the Employee Benefits program. Mr.
Unum stated that the contribution was increased by $300,000 for 2014, up 10% over the
past several years to appease growing employee dissatisfaction. Given the company’s
plans to automate the distribution process, Mr. Unum stated that employee benefits will
decrease significantly in future years. Mr. Unum noted also that the company decided not
to air a Superbowl ad this year. Meeting ended 8:30 P.M. /s/ Jeff Chesnut, Secretary
12. 12. Document Title: GA-7 Date: January 16, 2015 To: Arnold Anderson From: Jennifer
Babcock Subject: Apollo Shoes Computer Processing of Transactions Memo Apollo's
Mid-Year Conversion to Computer System After having reviewed the documentation that
was provided by Karina Ramirez in relation to Apollo's decision to implement a
computer processing system for the accounting of transactions, the following is of
concern:  Since the conversion took place mid-year, it may make the collection of data
more difficult unless the company was effectively able to enter the full year's worth of
transactions and detail into the new accounting software. If not, the audit process will be
made more difficult by having a portion of the accounting transactions and associated
documentation existing in a manual form and the other half existing in a computerized
form.  Since this is the company's first year using the new accounting software, due
diligence must be used in order to ensure that the software is working as expected and
that staff members understand how to appropriately use the system. AOW's Use of the
PC as an Audit Tool Our own firm can benefit from the use for computers and software
in several ways, even though we do not have any audit-specific programs at this time.
Word Processing Most of the documents that will need to be created by us throughout an
audit, such as the engagement letter, audit memos, the audit report, and a variety of other
documents can be created with the use of a word processing software. We could use a
word processing software to create various official documents that could be saved to
client files on a server. This process would all us to go back and review documents
specific to a given client much quicker, and possibly from a remote location, without
having to pull a physical file. Electronic Spreadsheets Electronic spreadsheets can be
utilized to calculate common-size and comparative financial data to be used for analytical
review, along with the computation of ratios. The working trial balance could also be put
into a spreadsheet, allowing us an easier time of putting in adjusting journal entries. The
columnar set-up of an electronic spreadsheets allows us to use this type of software to
efficiently create and save working papers and other support documentation necessary to
the audit. Spreadsheets would also allow us to quickly calculate totals and a variety of
other mathematical functions in order to save time, ensure accuracy, and quickly make
changes to data.
13. 13. Spreadsheets can also be of great use internally for purposes such as putting together
a budgets, which would them be compared with actual activity data for analysis.
Computer Auditing A computer audit specialist could use a one of the laptops as a
terminal to perform data base inquiries and enter test data. We would need to coordinate
such applications with the Apollo personnel, as we would be entering their system
through a communications software. This would allow us the ability to remotely review
some of the client's data without having to be onsite. Statistical Software We could also
greatly benefit from purchasing some statistical software that could be used to generate
random numbers and make statistical calculations. Some packages can perform
regressions as well as calculate variances and standard deviations. Software can also be
used to quickly test for a number of issues, such as missing or duplicate numbers
(purchase orders, invoices, bills of lading, checks, etc.) and to look for certain dollar
amounts, such as those that fall just below a given threshold. Having a good audit
software package could not only improve the effectiveness of our audit review, but would
also help us to save time by allowing the computer to do some of the work for us.
14. 14. Document Title: ICQ Internal Control Questionnaire—Sales Transaction Processing
Assertions and Questions Yes, No, N/A Comments Occurrence assertion: 1. Is thecredit
department independent of the sales department? Yes The credit manager is in
thetreasury's office, not the sales department 2. Are sales of the following types
controlled by thesame procedures described below? Sales to employees, COD sales,
disposals of property, cash sales, and scrap sales. N/A Not enough information provided
in order to determine whether or not these types of sales are all controlled by thesame set
of procedures 3. Is access to sales invoice blanks restricted? Yes Blank sales invoices are
kept in a locked closet 4. Are pre-numbered bills of lading or other shipping documents
prepared or completed in the shippingdepartment? Yes Pre-numbered 2-copy bills of
lading are completed in shipping department and one is sent with a copy of the invoice to
the A/R department Completeness assertion: 5. Are sales invoice blanks pre-numbered?
Yes Billing clerks create 4-copy invoices on prenumbered sales invoice forms 6. Is
thesequence checked for missing invoices? Yes When sales invoices are recorded,
numerical sequence is check by A/R clerk - missing invoices must be found and
explained 7. Is theshipping document numerical sequence checked for missing bills of
lading numbers? N/A No enough information in the in the report to be able to determine
if this control is being performed Accuracy assertion: 8. Are all credit sales approved by
thecredit department prior to shipment? Yes Credit managers approves all sales orders
before they can be sent to the billing department and then on to the shippingdepartment 9.
Are sales prices and terms based on approved standards? Yes Unit prices are verified
from an approved pricelist 10. Are returned sales credits and other credits supported by
documentation as to receipt, condition, and quantity, and approved by a responsible
officer? N/A Not enough information available to verify 11. Are shipped quantities
compared to invoice quantities? Yes Invoice copies 3 & 4 are used by theshipping
employees to verify quantities 12. Are sales invoices checked for error in quantities,
prices, extensions and footing, and freight allowances, and checked with customers’
orders? Yes Accounts receivable clerk performs this function 13. Is there an overall
check on arithmetic accuracy of period sales data by a statisticalor product-line analysis?
Yes The Marketing Vice President is in charge of this function 14. Are periodic sales data
reported directly to general ledger accounting independent of accounts receivable
accounting? No Information comes from the accounts receivable department
Classificationobjective: 15. Does theaccounting manual contain instructions for
classifying sales? Yes Marketing Vice President / Marketing Department Cutoff
objective: 16. Does theaccounting manual contain instructions to date sales invoices on
the shipment date? Yes General Ledger Supervisor / General Ledger Control Account
<<RevenueICQ.doc>>
15. 15. Document Title: ICC-1-1 Apollo Revenue Cycle Flowchart
16. 16. Document Title: C-1 Date: January 17, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Revenue Cycle Problems Memo This memo is intended
to summarize the qualitative features and deviations discovered during the revenue cycle
test of controls performed by Bradley. Apollo's control procedures were tested to (1)
obtain control evidence about the validity, authorization, accuracy, and proper period
recording of recorded sales, and to (2) obtain control evidence regarding the accuracy and
classification of sales postings to individual customer accounts receivable. Objective: To
perform enough in-depth auditing to provide assurance against errors and fraud in the
sales and accounts receivable accounts. The internal controls were tested for effectiveness
using samples of transactions in accordance with audit standards. Results: The revenue
cycle test of controls for year end 2014 resulted in 51 deviations out of 180 sample
transactions. Fifteen samples were chosen from each calendar month, however, 41 of the
51 deviations occurred during the 2nd half of the year. This is highly suspicious as
typically deviations should be relatively uniform throughout the year. Of the 51
deviations, 12 were due to incorrect pricing, three had incorrect quantities, and two had
arithmetic errors. In all cases, these errors results in overcharges, which seemly highly
unlikely unless intentional. These overcharges resulted in 16 credit memos having been
issued in order to correct the amounts and quantities billed. As was that case with the
percentage of deviations themselves, a vast majority of the credit memos processed
occurred during the third quarter, with none having been processed in the first half of the
year. Alarmingly, 31 of the 180 transactions sampled had no credit approval notations, 10
of which are still outstanding at the date of this audit. The outstanding invoices without
credit approval for just those that were sampled in this audit total $38,714,200. All of
these unpaid orders with missing credit approvals were placed between the months of
August and December. The few transactions that were found to be missing bills of lading
have all been paid in full and on time, but will need to be verified to make sure that these
sales were recorded. Of further concern are the invoices that appear to be fictitious in
nature, with two in particular that caught my attention. The first is Invoice 39578 that was
billed to Company B. This order received no credit approval and is still outstanding. This
is the only occurrence among the deviations of Company B having been billed, but the
company name itself is suspicious and seems unlikely to be legitimate. The second
invoice of concern is Invoice 41976, which was billed to Mall-Warts on December 28,
2014 in the amount of $5,765,082, the exact same amount that was billed to Sassy Shoes
on Invoice 40686 dated October 28, 2014. Both invoices are currently outstanding and
neither received credit approval. However, unlike the Sassy Shoes invoice, we were
unable to locate a purchase order in association with the Mall-Warts invoice. Where one
or both of these invoices is fictitious will have to confirmed.
17. 17. Response: Due to the unreliability of Apollo's sales and accounts receivable controls,
the audit team has been forced to do more extensive testing. Positive and/or negative
confirmations are needed to verify most of Apollo's customer accounts, except for those
with currently zero balances. Positive confirmations were sent to customers with account
balance that were greater than $1,000,000 and negative confirmations were sent to
customers with account balances of $1,000,000 or less. Customers have also been asked
to verify their total sales for the year. Recommendations: These findings indicate that
either control procedures are not uniform throughout the year, or deliberately fraudulent
activity is taking place. Additionally, December deviations are potential cause of
misstatements in the financial statements. Management is advised to implement and
follow control procedures throughout the year and to ensure that sales are not being
inflated, especially at year-end. The lack of appropriate credit approval has resulted in
collection issues. Enforcing appropriate credit approval requirements will improve the
collection time of accounts receivable, resulting in a reduction of financial problems, as
were seen in the fourth quarter of 2014. Missing bills of lading, substantial arithmetic
errors with delay in correction, and deviations resulting in the need for credit memos due
to overcharges are red flags for potentially fraudulent transactions. The missing bills of
lading suggests the possibility of improperly recorded sales, and the lack of mixture
between over and under charges and the lag time between errors and corrections are
indicative of misstatement and possible fraud. Apollo's internal control should be
catching these types of issues. Improvements will need to be made in order to ensure that
such misstatements and errors do not continue to go unnoticed for so long.
18. 18. STANDARD FORM TO CONFIRM ACCOUNT BALANCE INFORMATION
WITH FINANCIAL INSTITUTIONS Document Title: B-3 Apollo Shoes, Inc
CUSTOMER NAME FINANCIAL INSTITUTION'S NAME AND ADDRESS Twenty
First National Bank Post Office Box 1 Shoetown, ME 00002 We have provided to our
accountants the follow ing information as of the close of business on 12/31/2014,
regarding our deposit and loan balances. Please confirmthe accuracy of the information,
noting any exceptions to the information provided. If the balances have been left blank,
please complete this formby furnishing the balance in the appropriate space below .*
Although we do not request nor expect you to conduct a comprehensive, detailed search
of your records, if during the process of completing this confirmation additional
information about other deposit and loan accounts we may have w ith you comes to your
attention, please include such information below . Please use the enclosed envelope to
return the form directly to our accountants. 1. At the close of business on the date listed
above, our records indicated the follow ing deposit balance(s): ACCOUNT NAME
ACCOUNT NO. INTEREST RATE BALANCE* General Cash Account Payroll
Account Savings Account 604-17-526-5 604-29-016-3 604-03-739-8 n/a n/a 3.2%
3,309,192.03 0 3,645,599.152. We w ere directly liable to the financialinstitution for
loans at the close of business on the date listed above as follow s: ACCOUNT NO./
DESCRIPTION BALANCE* DATE DUE INTEREST RATE DATE THROUGH
WHICH INTEREST IS PAID DESCRIPTION OF COLLATERAL Note#106316 Line
of Credit, Acct#7500438 12,000,000 44,403,000 1/1/2015 2015 (revolving) 8.15% 9.16%
11/30/2014 11/30/2014 Inventory Inventory E.P Unum 1/9/2015 (Customer's Authorized
Signature (Date) The informationpresentedaboveby the customer is in agreementwith
ourrecords. Although we have not conducted a comprehensive, detailedsearch of
ourrecords,no otherdepositor loan accountshavecome to our attention except as noted
below . I.M.Rich 1/13/2015 (Financial Institution Authorized Signature) (Date)
EXCEPTIONS AND OR COMMENTS No exceptions noted. Please return this
formdirectly to our accountants: Andersen, Olds, and Watershed, LLP 32nd Financial
Avenue Shoetown, ME 00002 * Ordinarily, balances are intentionally left blank if they
are not available at the time this formis prepared.
19. 19. Approved 1990 by American Bankers Association, American Institute of Certified
Public Accounts, and BankAdministration Institute. Additional forms available from:
AICPA - Order Department, P.O. Box 1003 NY, NY 10108-1003
20. 20. Document Title: C-2-1 Date: January 28, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Audit of Accounts Receivable Memo In regards to our
audit of Accounts Receivable, we decided to use both positive and negative
confirmations to verify customer balances as we determined that we could not rely on
Apollo's controls over these accounts. Positive confirmations merely ask the customer to
respond to us stating whether or not their account balance listed is correct. We used this
type of confirmation for all customers who had account balances that were greater than
$1,000,000. Negative confirmations ask the customer to respond only if there is an issue
with the account balance listed. We used this type of confirmation for all customers who
had account balances that were $1,000,000 or less. We also asked customers to confirm
their total sales for the year as there were relatively few transactions for each customer to
look at. This process resulted in 6 positive confirmations and 25 negative confirmations
having been sent out. If we do not receive responses from any of the positive
confirmation customers, we will follow up with a second positive confirmation request. If
this second attempt results in no reply from the customer(s) as well, we will take steps to
contract the customers through other means, such as by telephone. We may also research
these customers to make sure that billing and contact information is complete and
accurate. Of the confirmations that were sent out, we received all six positive
confirmations back, along with one negative confirmation. The findings of each are listed
below:  Neutralizer - Customer's records showed that $1,388.75 more was owed to
Apollo than what was indicated on the positive confirmation. Neutralizer had made out a
check to Apollo on 12/28/14 in the amount of $3,053,144.23 for the 10 pallets of shoes
that were received.  Mall-Warts - Customer stated that they had entered into an
involuntary bankruptcy on 11/03/14, which Apollo was made aware of at that time.
Against Mall-Warts' wishes, Apollo sent a large shipment of shoes to Mall-Wart in late
December (including over 1600 pairs of size 23 shoes). While Mall-Warts believes that
the balance listed on the positive confirmation is correct, they did not place an order for
the most recent shipment and cannot currently afford to ship the goods back to Apollo. 
Run for Your Life Shoes - Customer stated that they had made one purchase from Apollo
during 2014, but that they had paid the entire balance on 01/08/15.  Tread - Customer
stated that they had returned five pairs of defective shoes and had been told that their
account had been credited for the return, which was supposed to be in the amount of
$1,388.75, the current balance listed. Otherwise, total purchases for the year agreed with
the customer's records.
21. 21.  Paul Bunion Footwear - Customer did not note any problems in regards to the
positive confirmation that they had received.  Sassy Shoes - Customer stated that they
did own the balance listed on the positive confirmation that was received, but that they
had been having some financial difficulties during the year causing payment to be
slowed. They also claimed that payment had been sent on 01/10/15.  International
Soccer Federation - Customer confirmed that the balance listed on their positive
confirmation was correct, but due to issues with the product, did not intent to purchase
any more merchandise from Apollo. After examining these results, it appears as though
there are a couple of issues. The first is that it appears Neutralizer was (probably)
accidentally credited the $1,388.75 that should have been credited to Tread's customer
account. Correcting this error would clear up both of these accounts. Our audit process
has confirmed that a payment was received from Run for Your Life Shoes that paid off
their balance and a payment was also received from Sassy Shoes, however records
indicate that they still have an outstanding balance of $634,000.00. Of larger concern in
the fact that Apollo shipped an order to Mall-Warts in the amount of $5,765,082 on
December 28, 2014 after having already been informed of Mall-Warts' involuntary
bankruptcy. As we have been unable to locate a purchase order in relation to this order,
combined with the fact that Mall-Warts states that this is not an order that they place,
raises extreme suspicion. Even more suspicious is the fact that Apollo shipped over 1600
pairs of the size 23 shoes that they had been having difficulty getting rid of due to the odd
size. This large inventory of size 23 shoes in 2013 resulted in Apollo having to add the
balance of this portion of inventory into their Reserve for Inventory Obsolescence
account. Making a large shipment of these odd sized shoes to Mall-Warts resulted in
Apollo reducing this reserve account from $3,012,000 to a balance of just $846,000. This
decision on Apollo's part had a double impact on the financials by allowing the company
to record a full-price sale for this particular inventory and allowed them to greatly
reduced their Obsolescence account, increasing the total value of the inventory account. It
appears that this was an authorized shipment that never should have been recorded as a
sale and the transaction should be voided and the merchandise recovered from Mall-
Warts.
22. 22. Document Title: C-2-2 Apollo Shoes, Inc. Shoetown, ME Neutralizer 1359 Central
Boulevard Derma,MS 39530 Attn: Accounts Payable Dept. Our auditors, Anderson,
Olds, and Watershed,are making their regular audit of our financial statements. Part of
this audit includes direct verification of customer balances. PLEASE EXAMINE THE
DATA BELOW CAREFULLY AND EITHER CONFIRM ITS ACCURACY OR
REPORT ANY DIFFERENCES DIRECTLY TO OUR AUDITORS USING THE
ENCLOSED REPLY ENVELOPE. This is not a request for payment. Please do not send
your remittance to our auditors. Your prompt attention to this request will be appreciated.
Samuel Carboy ______________________ Samuel Carboy, Controller The balance due
Apollo Shoes as of December 31, 2014, is $3,051,755.48 Purchases from Apollo Shoes
during the year 2014 totaled $3,051,755.48 This balance is correct except as noted below:
Our recordsindicatethatwe owe $1388.75 morethanindicatedabove. We wrote acheck
toApolloon12/28 for $3,053,144.23for 10 palletsofshoes. Date: 1/20/2015 By:
__RudyRobinson______________________ Title: _AccountsPayable ______________
23. 23. Document Title: C-2-3 Apollo Shoes, Inc. Shoetown, ME Mall-Warts 146 Boardwalk
Drive Atlantic City, NJ 08401 Attn: Accounts Payable Dept. Our auditors, Anderson,
Olds, and Watershed,are making their regular audit of our financial statements. Part of
this audit includes direct verification of customer balances. PLEASE EXAMINE THE
DATA BELOW CAREFULLY AND EITHER CONFIRM ITS ACCURACY OR
REPORT ANY DIFFERENCES DIRECTLY TO OUR AUDITORS USINGTHE
ENCLOSED REPLY ENVELOPE. This is not a request for payment. Please do not send
your remittance to our auditors. Your prompt attention to this request will be appreciated.
Samuel Carboy ______________________ Samuel Carboy, Controller The balance due
Apollo Shoes as of December 31, 2014, is $20,549,225.88 Purchases from Apollo Shoes
during the year 2014 totaled $122,826,158.60 These amounts are correct except as noted
below: The amounts appear right, but we entered intoinvoluntary bankruptcy on
November 3. We told Apollo about this back at that time. We don’t know why they
shipped us somany pairs inlate December (including over 1600 pairs of size 23’s that we
can’t evengive away!)! We didn’t order them andwe can’t afford tosend them back! Date:
1/14/2015 By: __Action Jackson____________
24. 24. Title: _Liquidation Coordinator______ Document Title: C-2-4 Apollo Shoes, Inc.
Shoetown, ME Run for Your Life Shoes Attn: Accounts Payable Dept. 5110 Speedway
Drive Los Angeles, CA 90035 Our auditors, Anderson, Olds, and Watershed,are making
their regular audit of our financial statements. Part of this audit includes direct
verification of customer balances. PLEASE EXAMINE THE DATA BELOW
CAREFULLY AND EITHER CONFIRM ITS ACCURACY OR REPORT ANY
DIFFERENCES DIRECTLY TO OUR AUDITORS USINGTHE ENCLOSED REPLY
ENVELOPE. This is not a request for payment. Please do not send your remittance to our
auditors. Your prompt attention to this request will be appreciated. Samuel Carboy
______________________ Samuel Carboy, Controller The balance due Apollo Shoes as
of December 31, 2014, is $2,165,500.55 Purchases from Apollo Shoes during the year
2014 totaled $2,165,500.55 This balance is correct except as noted below: Yes,we made
one purchasefromApolloduringthe year,butwe paid the entireamounton1/8/2015. Date:
1/14/2015 By: __JustinThompson_____________________ Title: _AccountsPayable
Coordinator___________
25. 25. Document Title: C-2-5 Apollo Shoes, Inc. Shoetown, ME Tread Attn: Accounts
Payable Dept. Highway 67 French Lick, IN 47432 Our auditors, Anderson, Olds, and
Watershed,are making their regular audit of our financial statements. Part of this audit
includes direct verification of customer balances. PLEASE EXAMINE THE DATA
BELOW CAREFULLY AND COMPARE THEM TO YOUR RECORDS OF YOUR
ACCOUNT WITH US. IF THE INFORMATION IS NOT IN AGREEMENT WITH
YOUR RECORDS,PLEASE STATE ANY DIFFERENCES BELOW AND RETURN
DIRECTLY TO OUR AUDITORS IN THE RETURN ENVELOPE PROVIDED. IF
THE INFORMATIONIS CORRECT,NO REPLYIS NECESSARY. This is not a request
for payment. Please do not send your remittance to our auditors. Your prompt attention to
this request will be appreciated. Samuel Carboy ______________________ Samuel
Carboy, Controller The balance due Apollo Shoes as of December 31, 2014, is $1,388.75
Purchases from Apollo Shoes during the year 2014 totaled $3,091,017.74 This balance is
correct except as noted below: We were told inNovember that our account had already
beencreditedfor the amount listed above for a return of 5 pairs ofdefective shoes. Total
purchases agree with our records though. Date:__1/14/2015 By: __ShoelessJoe
Johanson____ Title: _President,TreadShoes
26. 26. Document Title: C-2-6 Apollo Shoes, Inc. Shoetown, ME Paul Bunion Footwear
Attn: Accounts Payable Dept. Lone Mountain Trail P.O. Box 10558 Big Sky, MT 59717
Our auditors, Anderson, Olds, and Watershed,are making their regular audit of our
financial statements. Part of this audit includes direct verification of customer balances.
PLEASE EXAMINE THE DATA BELOW CAREFULLY AND EITHER CONFIRM
ITS ACCURACY OR REPORT ANY DIFFERENCES DIRECTLY TO OUR
AUDITORS USINGTHE ENCLOSED REPLY ENVELOPE. This is not a request for
payment. Please do not send your remittance to our auditors. Your prompt attention to
this request will be appreciated. Samuel Carboy ______________________ Samuel
Carboy, Controller The balance due Apollo Shoes as of December 31, 2014, is
$11,558,847.58 Purchases from Apollo Shoes during the year 2014 totaled
$29,270,632.63 This balance is correct except as noted below: Noproblemsnoted. Date:
1/21/2015 By: __KevinBunion_______________________ Title: _VP-Finance,PBS
______________
27. 27. Document Title: C-2-7 Apollo Shoes, Inc. Shoetown, ME Sassy Shoes Attn:
Accounts Payable Dept. 440 W. 53rd Street New York, NY 10018 Our auditors,
Anderson, Olds, and Watershed,are making their regular audit of our financial
statements. Part of this audit includes direct verification of customer balances. PLEASE
EXAMINE THE DATA BELOW CAREFULLY AND EITHER CONFIRM ITS
ACCURACY OR REPORT ANY DIFFERENCES DIRECTLY TO OUR AUDITORS
USINGTHE ENCLOSED REPLY ENVELOPE. This is not a request for payment.
Please do not send your remittance to our auditors. Your prompt attention to this request
will be appreciated. Samuel Carboy ______________________ Samuel Carboy,
Controller The balance due Apollo Shoes as of December 31, 2014, is $6,400,081.85
Purchases from Apollo Shoes during the year 2014 totaled $15,178,041.85 This balance
is correct except as noted below: Yes, we owed it. This is the third letter that we’ve
receivedfrom you people!!! Our sales are just running a little slowly this year, but we
paidon the tenth, so quit hassling us! Date:__1/22/2015_______________ By:
__SassySpinelli______________ Title: _Founder, Sassy Shoes_________
28. 28. Document Title: C-2-8 Apollo Shoes, Inc. Shoetown, ME International Soccer
Federation Attn: Accounts Payable Dept. Birmingham Road Stratford-upon-Avon
Warwickshire CV34 6LT England Our auditors, Anderson, Olds, and Watershed,are
making their regular audit of our financial statements. Part of this audit includes direct
verification of customer balances. PLEASE EXAMINE THE DATA BELOW
CAREFULLY AND EITHER CONFIRM ITS ACCURACY OR REPORT ANY
DIFFERENCES DIRECTLY TO OUR AUDITORS USINGTHE ENCLOSED REPLY
ENVELOPE. This is not a request for payment. Please do not send your remittance to our
auditors. Your prompt attention to this request will be appreciated. Samuel Carboy
______________________ Samuel Carboy, Controller The balance due Apollo Shoes as
of December 31, 2014, is $1,222,359.56 Purchases from Apollo Shoes during the year
2014 totaled $3,228,779.92 This balance is correct except as noted below: The amounts
are correct asstated. Idon’t thinkwe are going tobuy any more though. The sirens keep
going off prematurely and it’scausingour fans toriot. Date: 1/21/2015 By:
__FootsMcKinney____________________ Title: _EquipmentManager,ISF
_____________
29. 29. Document Title: C-3 Date: January 28, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Allowance for Doubtful Accounts Memo This memo is
intended to address the reasonableness of the Allowance for Doubtful Accounts for
Apollo Shoes Inc. Typically the reasonableness of this account is not assessed by the
external auditors, however, in this case we have reason to doubt the appropriateness of
the value placed on this account for the year ended December 31, 2014. Bad debt and
Allowance for Doubtful Accounts are typically determined based on a percentage of
either sales or total receivables. This percentage should stay relatively consistent from
year to year unless has changed products, credit policies, or its customer base. Since none
of these kinds of changes took place for Apollo, 2014 estimates should be relatively close
to what was used in 2013, unless there are other outside factors that would influences
these accounts. If we determine the Allowance for Doubtful Accounts based on a
percentage of Total Receivables and Bad Debt Expense as a percentage of Total Sales,
the percentages and ratios for 2013 were as follows: Allowance for Doubtful Accounts =
$1,262,819.88 / $16,410,902.71 = 7.70% Bad Debt Expense = $1,622,425.99 /
$246,172,918.44 = 0.66% A/R Turnover = $246,172,918.44 / $15,148,082.83 = 16.25
times Days' Sales in A/R = $15,148,082.83 / ($246,172,918.44 / 360) = 22.15 days For
2014, Apollo's percentages and ratios were as follows: Allowance for Doubtful Accounts
= $1,239,009.75 / $51,515,259.98 = 2.41% Bad Debt Expense = This account had a zero
balance at the end of 2014 A/R Turnover = $242,713,452.88 / $50,276,250.23 = 4.83
times Days' Sales in A/R = $50,276,250.23 / ($242,713,452.88 / 360) = 74.57 days These
results are indicative of a serious accounts receivable collections issue for Apollo Shoes.
If the Allowance for Doubtful Accounts percentage had remained similar to what was
used in 2013, the estimated used for 2014 would have been around $3,966,675
($51,515,259.98 x 7.7%). This amount is over three times greater than what was actually
used by Apollo. Additionally, Bad Debt Expense for 2014 could be calculated by using
2013's percentage to get $1,601,909 ($242,713,452.88 x 0.66%). Apollo's accounts
receivable turnover ratio in 2013 was three times faster than in 2014, and the days' sales
in accounts receivable ratio shows that customers were taking three times as long to pay
in 2014 as they were in 2013. This may be partially due to Apollo's lack of enforcing
credit checks on all sales, but could also be due to the economic slowdown that seems to
be occurring.
30. 30. In addition, Apollo's largest customer, Mall-Warts, has entered into involuntary
bankruptcy, resulting in a large outstanding balance that likely won't be paid. Mall-Warts'
outstanding balance consists of $14,784,144.03 that is over 90 days old and the
$5,765,081.85 illegitimate shipment that Apollo sent to Mall-Warts on December 28,
2014, totaling $20,549,225.88 in all. In order for Apollo to be accurately reflecting their
Allowance for Doubtful Accounts, the account needs to be adjusted to the base value of
$3,966,675 that was calculated using the same percentage rate of accounts receivable that
was used in 2013, plus the $20,549,225.88 balance for Mall-Warts that is currently
outstanding. This would result in the 2014 Allowance for Doubtful Accounts total being
$24,515,900.88. My recommendation is that Apollo Shoes should make an adjustment to
their 2014 Allowance for Doubtful Accounts to reflect these assumptions. If this is done,
the Allowance for Doubtful Accounts can be reduced to $18,750,819.03. In addition, I
would like to look a little deeper in the Company B customer as they have an outstanding
balance of $63,258.65 that is over 90 days old. While this balance might be small in
comparison to some of the other accounts, I would like to ensure that this customer is a
legitimate company. There has been other sales recorded on this account earlier in the
year that have been paid, so the company could be legitimate and just operating under a
very generic name.
31. 31. Document Title: ICP-1 Date: February 7, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Payroll Memo This memo addresses the SSAE 16 report
that was provided by the payroll processing company and whether or not this independent
report serves to fulfill our audit obligations under Section 404 of the Sarbanes-Oxley Act
of 2002 (SOX). There are two kinds of SOC 1 (SSAE 16) reports that can be used by the
user entity's financial auditors, known as Type 1 and Type 2. Both types enable a user
auditor to perform risk assessment procedures and a Type 2 report additionally allows a
user auditor to also assess the risk of material misstatements of the financial statement
assertions that would be effected by the service organization's processing procedures. The
Independent Service Auditor's Report that was provided to us for the audit of Roll Pay
Payroll Services, Inc. appears to be a Type 2 report. We can therefore use this SSAE 16
report in order to fulfill our audit obligations.
32. 32. Document Title: ICP-1-1 Independent Service Auditor’s Report on a Description of a
Service Organization’s System and the Suitability of the Design and Operating
Effectiveness of Controls To the Board of Directors of Roll Pay Payroll Services, Inc.:
Scope We have examined Roll Pay Payroll Services, Inc.’s description of its systemfor
processing userentities' payroll transactions throughout the period January 1, 2014
through December 31, 2014 and the suitability of the design and operating effectiveness
of controls to achieve the related control objectives stated in the description. Service
organization's responsibilities On page 11 of the description, Roll Pay Payroll Services,
Inc. has provided an assertion about the fairness of the presentation of the description and
suitability of the design and operating effectiveness of the controls to achieve the related
control objectives stated in the description. Roll Pay Payroll Services, Inc. is responsible
for preparing the description and for the assertion,including the completeness, accuracy,
and method of presentation of the description and the assertion,providing the services
covered by the description, specifying the control objectives and stating them in the
description, identifying the risks that threaten the achievement of the control objectives,
selecting the criteria, and designing,implementing, and documenting controls to achieve
the related control objectives stated in the description. Service auditor's responsibilities
Our responsibility is to express an opinion on the fairness of the presentation of the
description and on the suitability of the design and operating effectiveness of the controls
to achieve the related control objectives stated in the description, based on our
examination. We conducted our examination in accordance with attestation standards
established by the American Institute of Certified Public Accountants.Those standards
require that we plan and perform our examination to obtain reasonable assurance about
whether, in all material respects,the description is fairly presented and the controls were
suitably designed and operating effectively to achieve the related control objectives stated
in the description throughout the period January 1, 2014 through December 31, 2014. An
examination of a description of a service organization's systemand the suitability of the
design and operating effectiveness of the service organization's controls to achieve the
related control objectives stated in the description involves performing procedures to
obtain evidence about the fairness of the presentation of the description and the suitability
of the design and operating effectiveness of those controls to achieve the related control
objectives stated in the description. Our procedures included assessing the risks that the
description is not fairly presented and that the controls were not suitably designed or
operating effectively to achieve the related control objectives stated in the description.
Our procedures also included testing the operating effectiveness of those controls that we
consider necessary to provide reasonable assurance that the related control objectives
stated in the description were achieved. An examination engagement of this type also
includes evaluating the overall presentation of the description and the suitability of the
control objectives stated therein, and the suitability of the criteria specified by the service
organization and described at page 12. We believe that the evidence we obtained is
sufficient and appropriate to provide a reasonable basis for our opinion. Inherent
limitations Because of their nature, controls at a service organization may not prevent, or
detect and correct, all errors or omissions in processing or reporting transactions. Also,
the projection to the future of any evaluation of the fairness of the presentation of the
description, or conclusions about the suitability of the design or operating effectiveness
of the controls to achieve the related control objectives is subject to the risk that controls
at a service organization may become inadequate or fail.
33. 33. Opinion In our opinion, in all material respects,based on the criteria described in Roll
Pay Payroll Services, Inc.’s assertion on page 11, a. the description fairly presents the
systemfor processing userentities' payroll transactions throughout the period January 1,
2014 through December 31, 2014. b. the controls related to the control objectives stated
in the description were suitably designed to provide reasonable assurance that the control
objectives would be achieved if the controls operated effectively throughout the period
January 1, 2014 through December 31, 2014. c. the controls tested,which were those
necessary to provide reasonable assurance that the control objectives stated in the
description were achieved, operated effectively throughout the period January 1, 2014
through December 31, 2014. Description of tests of controls The specific controls tested
and the nature, timing, and results of those tests are listed on pages 15–18. Restricted use
This report, including the description of tests ofcontrols and results thereof on pages 15-
18, is intended solely for the information and use of Roll Pay Payroll Services, Inc.,
userentities of Roll Pay Payroll Services, Inc.’s system for processing userentities' payroll
transactions during some or all of the period January 1, 2014 through December 31,
2014, and the independent auditors of such userentities, who have a sufficient
understanding to considerit, along with other information including information about
controls implemented by user entities themselves, when assessing the risks of material
misstatements of user entities' financial statements.This report is not intended to be and
should not be used by anyone other than these specified parties. MichaelScarn,CPA
January 25, 2015 Scranton, PA
34. 34. Document Title: L-4 Date: February 7, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Substantive Payroll Procedures Memo This memo is
meant to address the substantive payroll procedures necessary to fulfill our obligation as
auditors for Apollo Shoes Inc. As there has been little turnover and Apollo's internal
auditors watch payroll closely, we did not have to do any detailed testing on payroll.
Instead, we used analytic procedures to get to the comfort level needed. I was able to tie
Apollo's wage expenses and withholding amounts from the payroll register (L-5) to the
balances listed on the company's year-end trail balance (GA-4-4). Warehouse salaries
increased 1.88% and administrative wages decreased 4.02% from 2013 totals. These
figures were calculated before the adjusting journal entries needed to record wages
accrued between the last payroll date and the end of the calendar year have been made. If
the adjusting journal entries are made, warehouse salaries would increase by 3.06% and
administrative wages would only decrease by 0.30%. Payroll tax expenses had increased
1.73%, before adjusting journal entries, and would increase to 5.74% once the adjusting
journal entries have been made (X-1). Executive salaries and Board member stipends that
were approved in the January 6, 2014 meeting minutes were also confirmed with the
payroll register (GA-6-1). Wages payable that had accrued for the last few days of
December are estimated to be $682,097.99, which estimated payroll tax expenses being
$62,219.14. In addition, approved bonuses for the year ending 2014 that were approved
during the January 6, 2015 board meeting were not reflected in the trial balance (GA-6-
3). An adjusting entry will need to made to add the $450,000 in bonuses to the Bonuses
Payable and corresponding expense accounts.
35. 35. Document Title: R-1 & X-1 Date: February 9, 2015 To: Darlene Wardlaw From:
Jennifer Babcock Subject: Apollo Shoes Revenue & Expenses Memo We have now
completed our audit of the revenue and expense accounts for Apollo Shoes Inc. This
memo is intended to discuss our finding regarding these accounts. These findings are
based on the information that was provided to us in the trial balances, board or directors
meeting minutes, and other relevant documentation. We used analytic procedures to
evaluate all of the revenue and expense accounts. We discovered that while Apollo's sales
had decreased by 1.41%, sales returns and warranties had both increased by 146.8% and
5.06% respectively. This is either the result of erroneous postings to the sales returns and
warranties accounts, or may be due to Apollo over-shipping inventory or possibly
sending a higher number of defective merchandise. If the adjusting entry is made to
reverse the illegitimate sale that was made to Mall-Warts on December 28, 2014, then
sales will show a decrease of 3.75% from the previous year. The Income from
Investments and Miscellaneous Income accounts are both new in 2014 and neither
account has been explained to us regarding the sources of the income. Income from
Investments could be from dividends received from Apollo's Investments, but this
amount seems far too high. An adjustment was made to this account in the amount of the
$330,375.80 that was transferred over from the Controller's Clearing Account. This
amount was the result of check #3582 having supposedly been cancelled, although it
doesn't appear that the amount was ever actually removed from Apollo's banking records
since they had to add the amount back in order to get their records to balance since they
didn't include the check in with the rest of the check still outstanding as of December 31,
2014. Miscellaneous income will need to be investigate further as the amount of
$2,166,000 is too high to be considered "miscellaneous" and should at the very least be
moved into an appropriate income account, assuming that the income is even legitimate.
There is also a possibility that Interest Income has not yet been accrued for a portion of
the year based on the decrease of 35.45% from 2013. This could also be due to Apollo
having maintained a smaller balance in the company's savings account throughout the
year. Advertising expenses had increase by 15.57% from the prior year and this was
likely due to the increase in cost associated with purchasing an advertisement spot during
the 2014 Superbowl. Research and Development expenses dropped 98.31%, which is not
concerning since Mr. Lancaster had stated at the June 30, 2014 board meeting that
research and development costs were being cut due to the decrease in demand for Apollo
merchandise. Depreciation Expense increased 235.34% from 2013, which is due to the
company having purchased $1.3 million in equipment and $1.2 million in computer
software and hardware. Property tax expense increased 23.40%, which will need to be
researched further in order to insure that the increase in this account is correct. In
addition, Legal and Professional Expense increased by 36.28%, which is due to the
increased need for legal expertise due to various ligations. However, since Apollo has not
yet recorded the $750,000 that was approved in the January 6, 2015 meeting minutes for
36. 36. auditing fees, the percentage increase will actually be 57.09% after the adjusting entry
has been made. Bad Debt Expense had a zero balance at the end of 2014 due to Apollo's
failure to calculate an appropriate value for the Allowance for Doubtful Accounts
account. If Apollo goes ahead with making our suggested adjusting entry, the Bad Debt
Expense account will show an increase of 979.36%. Insurance Expense decreased by
95.77%, which may be due to the fact that Apollo is no longer leasing an additional
building and decided to move all operations to their headquarters. Maintenance Expense
decreased 41.93%, which may need to be researched. While Apollo has a smaller
operating space to maintain, they also had additional equipment. Apollo's comparison
trial balance showed an increase of only 1.25% for their Utilities account, however, they
had missed an invoice for December electricity that will need to be entered for 2014.
Once this adjustment has been made, Utilities shows an increase of 12.46%, which may
be due to Apollo's increased use of computers in 2014. Telephone Expense and Postage
Expense are both down 31.13% and 39.23% respectively, which is primarily due to
Apollo's increased use of email correspondence. Office Supplies Expense increased by
46.22%, which will need to inquired about to verify the reason for the increase in
supplies. Contributions to the Employee Benefit plan increased by 10%, in an attempt to
appease growing employee dissatisfaction. Interest Expense increased by 244.25%,
which resulted from a substantial increase in the use of short- term loans. The
$10,000,000 that had been advanced from Apollo's Line of Credit in 2013 was rolled
over into a short-term, $12,000,000 loan through Twenty-First National Bank of Maine
on February 2, 2014. The company then chose to advance another $44,403,000 of their
$50 million Line of Credit on July 1, 2014. Federal and State Income Taxes also
increased 276.32% and 622.61% respectively, largely due to the lack of the tax credit that
Apollo was able to use in 2013.
37. 37. Document Title: A-1 Date: February 11, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Subsequent Events Memo This memo addresses the
subsequent events that were revealed in the February 9, 2015 Board of Directors meeting
minutes. Subsequent events are those that are occur after the financial statements date,
but before the date of the auditor's report. There are two types of subsequent events, those
that provide additional evidence of conditions that existed at the date of the financial
statements (Type I) and those that provide additional evidence of conditions that came
into existence after the date of the financial statements (Type II). Our primary concern
with subsequent events is ensuring that any material events that could affect the fairness
of the financial statements and disclosures are properly identified and disclosed with the
rest of the client's financial statement information. Once a subsequent event has been
identified, the auditors should: (1) obtain an understanding of the procedures that
management performed in order to identify material subsequent events, (2) inquire of
management and those charged with governance as to the existence of subsequent events
(corroborated through written representations), (3) read the meeting minutes of managers,
owners, and those charged with governance that are held after the date of the financial
statements, and (4) review the client's latest interim financial statements, if applicable. In
Apollo's Board of Directors meeting that was held on February 9, 2015, management
discussed their ongoing litigations and Mall-Warts bankruptcy. As we were already
aware of Mall-Warts bankruptcy during our initial audit, we will continue to advocate
that Apollo should consider including Mall-Warts' substantial outstanding balance in
their Allowance for Doubtful Accounts estimations. Apollo needs to disclose the fact that
the company's remaining workers have all gone on strike as of February 8, 2015. We do
not have enough information at this time to be able to get a feel for how long this strike
might last, but the strike could last for some time, effectively shutting down Apollo's
operations. In regards to the three 2014 litigations that were brought against Apollo, two
of them were dropped, resulting in no legal liability for Apollo. The third litigation is still
ongoing, and while Apollo's lawyers believe that the suit has only a low chance of being
successful, the amount that would be due if the suit is to succeed could be substantial. As
a result, while I don't think we should require Apollo to make a journal entry to record
this possible liability, it should be mentioned in the disclosure notes to the financial
statements. In addition, it appears that there is another $3,000,000 in legal fees for 2014
that Apollo's lawyers have not yet sent an invoice for. Knowing this, I would highly
recommend that an adjusting journal entry be made to account for these fees (if Apollo
has not already done so).
38. 38. Document Title: A-2 Apollo Shoes, Inc. Shoetown, ME Anderson, Olds, and
Watershed February 16,2015 This representation letter is provided in connection with
your audit of the financial statements of Apollo Shoes, Inc. for the year ended December
31, 2014 for the purpose of expressing an opinion as to whether the financial statements
give a true and fair view of (present fairly, in all material respects) the financial position
of Apollo Shoes, Inc. as of December 31, 2014 and of the results of its operations and its
cash flows for the year then ended in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Certain representations in this
letter are described as being limited to matters that are material. Items are considered
material, regardless of size, if they involve an omission or misstatement of accounting
information that, in the light of surrounding circumstances, makes it probable that the
judgment of a reasonable person relying on the information would be changed or
influenced by the omission or misstatement. We acknowledge our responsibility for the
fair presentation of the financial statements in conformity with generally accepted
accounting principles. We confirm, to the best of our knowledge and belief, the following
representations: 1. The financial statements referred to above are fairly presented in
conformity with generally accepted accounting principles. 2. We have made available to
you all-- a. Financial records and related data b. Minutes of the meetings of stockholders,
directors, and committees of directors, or summaries of actions of recent meetings for
which minutes have not yet been prepared. 3. There have been no communications from
regulatory agencies concerning noncompliance with or deficiencies in financial reporting
practices. 4. There are no material transactions that have not been properly recorded in
the accounting records underlying the financial statements. 5. There has been no-- a.
Fraud involving management or employees who have significant roles in internal control.
b. Fraud involving others that could have a material effect on the financial statements.
39. 39. 6. The company has no plans or intentions that may materially affect the carrying
value or classification of assets and liabilities. 7. The following have been properly
recorded or disclosed in the financial statements: a. Related-party transactions, including
sales, purchases, loans, transfers, leasing arrangements, and guarantees, and amounts
receivable from or payable to related parties. b. Guarantees, whether written or oral,
under which the company is contingently liable. c. Significant estimates and material
concentrations known to management that are required to be disclosed in accordance with
the AICPA’s Statement of Position 94-6, ‘‘Disclosure of Significant Risks and
Uncertainties.’’ 8. There are no— a. Violations or possible violations of laws or
regulations whose effects should be considered for disclosure in the financial statements
or as a basis for recording a loss contingency. b. Unasserted claims or assessments that
our lawyer has advised us are probable of assertion and must be disclosed in accordance
with Financial Accounting Standards Board (FASB) Statement No. 5, ‘‘Accounting for
Contingencies.’’ c. Other liabilities or gain or loss contingencies that are required to be
accrued or disclosed by FASB Statement No. 5. 9. The company has satisfactory title to
all owned assets, and there are no liens or encumbrances on such assets nor has any asset
been pledged as collateral. 10. The company has complied with all aspects of contractual
agreements that would have a material effect on the financial statements in the event of
noncompliance. 11. To the best of our knowledge and belief, no events have occurred
subsequent to the balance-sheet date and through the date of this letter that would require
adjustment to or disclosure in the aforementioned financial statements. (Senior Executive
Officer) (Senior Financial Officer)
40. 40. Document Title: A-3 CERTIFICATIONS We, Larry Lancaster and Joe Bootwell,
certify that: 1. We have reviewed this annual report on Form 10-K of Apollo Shoes, Inc.;
2. Based on our knowledge, this report does not contain any untrue statement of a
material fact or omit to state a materialfact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; 3. Based on our knowledge, the financial
statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report; 4. We are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such
disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared; b)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures,as of the end of the period covered by this report based on such
evaluation; and c) Disclosed in this report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s most recent fiscalquarter (the
registrant’s fourth fiscalquarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and 5. We have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent
functions): a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial
information; and b) Any fraud,whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal control over
financial reporting. Date: February 16, 2015 Larry Lancaster Joe Bootwell Larry
Lancaster Joe Bootwell Chairman of the Board of Directors, President and CEO
Executive Senior Vice-President and CFO
41. 41. Document Title: A-6 Date: February 18, 2015 To: Darlene Wardlaw From: Jennifer
Babcock Subject: Apollo Shoes Analysis of Accounting Estimates Memo This memo
addresses the material accounting estimates that are used by Apollo Shoes, Inc. Typically
accounting estimates are left up to the client's management to decide, however, if we
determine during the course of an audit that substantial bias is being exerted over a
particular estimate, we may suggest an adjustment in order to prevent material
misstatements in the financial statements and disclosures. The following accounting
estimates are calculated by Apollo Shoes:  Allowance for Doubtful Accounts 
Depreciable Assets  Inventory Obsolescence  Warranty Expense While Apollo's 2013
estimates for the Allowance for Doubtful Accounts appeared to be reasonable, we have
determined that their estimates for 2014 are far below what they should be, especially
considering the large increase in accounts receivable, the bankruptcy of one of Apollo's
largest customers, the current economic downturn, and Apollo's failure to appropriately
review customers for credit approval. A typical method for determining a base estimate
for the Allowance for Doubtful Accounts is by using a percentage of Total Accounts
Receivables. To begin with, 5% may be a reasonable percentage to use as a base, with
higher percentages used depending on any other circumstances that could have an effect
on the collectability of receivables. As Apollo's ending audited A/R balance was
$45,750,178.13, anywhere from 5%- 10% of this balance could be considered reasonable,
or between $2,287,508.91 - $4,575,017.83. For 2014, we calculated a much higher
amount due to the involuntary bankruptcy of Apollo's largest customer and the customer's
large outstanding balance. This bias is potentially inflating Apollo's income and causing a
material misstatement in the company's financial information. Apollo's estimate useful
life assumptions appear to be appropriate, apart from the building, appears to have been
purchased in 2013. The useful life should probably be 30 years rather than 15 years. The
would make the useful life estimate for the capitalized expenses (repairs/repaint)
appropriate as they should match the life of the building. The salvage value for the
building should be higher than zero as it is unlikely that the building would not be worth
anything if the company were to sell it 15 - 30 years down the road. The rest of the fixed
assets should be okay having a salvage value of zero. The straight-line method of
depreciation is reasonable for all of Apollo's fixed assets. Apollo currently has a large
balance in their Reserve for Inventory Obsolescence account. This is primarily due to a
large shipment of Size 23 shoes that Apollo received from a vendor that the
42. 42. company has been having difficulty selling. This inventory is likely to have little to
no marketable value due to the lack of demand for Size 23 shoes, combined with the
large quantity that Apollo currently has in stock. As it is highly unlikely that Apollo will
be able to sell even a small portion of this inventory before the merchandise becomes
obsolete, management made the decision to move the value of this inventory into their
Reserve for Inventory Obsolescence account. A typical method for determining a base
estimate for the Reserve for Inventory Obsolescence account is by using a percentage of
Total Inventory. To start off with, a company might use anywhere from 1%-5% as a
reasonable percentage, with higher or lower percentages being used depending on the life
of the inventory and other circumstances that could have a material effect on
obsolescence of inventory. Apollo's ending audited Inventory balance was
$71,323,609.35, so a reasonable amount to use for the Reserve for Inventory
Obsolescence might be anywhere from $713,236.35 - $3,566,180.47. This is amount is
pretty close to what Apollo is using for this account. While Apollo's 2013 estimates for
their Warranty Expense account appeared to be reasonable, the amount added to this
account for 2014 seems a bit high, especially considering the fact that Apollo's sales for
2014 decrease from the year before. A typical method for determining a base estimate for
the Warranty Expense is by using a percentage of Total Sales. To begin with, 5% may be
a reasonable percentage to use as a base, with higher percentages being used depending
on any other circumstances that could have an effect on the collectability of receivables.
To start off with, a company might use 0.5% as a reasonable starting percentage, with
higher or lower percentages being used depending on the inventory and other
circumstances that could have a material effect on the defectiveness of inventory.
Apollo's ending audited Sales balance was $236,948,371.03, so a reasonable amount to
use for the Reserve for Inventory Obsolescence might be $1,184,741.85. This is amount
is pretty close to what Apollo is using for this account, the increase in Warranty Expense
compared to Total Sales may have been a result of Apollo using a more relevant
percentage amount for this account.

Recommended

How can investments in aid make a difference abroad, and in Canada?World Vision
CanadaSponsored Content


Learning to Teach Online

Online Course - LinkedIn Learning


Learning Management Systems (LMS) Quick Start

Online Course - LinkedIn Learning


Data-Driven Presentations with Excel and PowerPoint 2016

Online Course - LinkedIn Learning


Apollo Shoes Audit Case

Jennifer Babcock

Jennifer Babcock Resume 2016

Jennifer Babcock

Jennifer Babcock Recomendation Letter For Employment 5-12-16


Jennifer Babcock

Insights Profile

Jennifer Babcock

AI and Machine Learning Demystified by Carol Smith at Midwest UX 2017

Carol Smith

The AI Rush

Jean-Baptiste Dumont

10 facts about jobs in the future

Pew Research Center's Internet & American Life Project

You might also like