Southeast Shoe Distributor, Inc.

:
Identification of Tests of Controls
for the Revenue Cycle
(Sales and Cash Receipts)
LEARNING OBJECTIVES
After completing and discussing this assignment you should be able to
Recognize common documents and records used to record transactions in the
revenue cycle
Recognize common control activities used to process transactions in the revenue
cycle
Identify client control activities that reduce the likelihood of material
misstatements
Link client control activities to management assertions
Identify tests of controls for each control activity identified
INTRODUCTION
Southeast Shoe Distributor (SSD) is a closely-owned business that was founded
10 years ago by Stewart Green and Paul Williams. SSD is a distributor that purchases and
sells men's, women's, and children's shoes to retail shoe stores located in small to midsize
communities. The company's basic strategy is to obtain a broad selection of designerlabel and name-brand merchandise at low prices and resell the merchandise to small, onelocation, retail stores that have difficulty obtaining reasonable quantities of designer and
name-brand merchandise. The company is able to keep the cost of merchandise low by
(1) selectively purchasing large blocks of production overruns, overorders, mid- and lateseason deliveries, and previous season's stock from manufacturers and other retailers at
significant discounts, (2) sourcing in-season name-brand and branded designer
merchandise directly from factories in Brazil, Italy, and Spain, and (3) negotiating
favorable prices with manufacturers by ordering merchandise during off-peak production
periods and taking delivery at one central warehouse.
During the year, the company purchased merchandise from more than 50
domestic and international vendors, independent resellers, manufacturers, and other
retailers that frequently have excess inventory. Designer and name-brand footwear sold
by the company during the year include the following: Amalfi, Clarks, Dexter, Fila,
Florsheim, Naturalizer, and Rockport. At the current time, SSD has one warehouse
located in Atlanta, Georgia. Last year, SSD had 123 retail shoe store customers and had
net sales of $7,311,214. Sales are strongest in the second and fourth calendar-year
quarters, with the first calendar-year quarter substantially weaker than the rest.
BACKGROUND INFORMATION ABOUT THE AUDIT

SSD is required to have an audit of its annual financial statements to fulfill

requirements of loan agreements with financial institutions. The general ledger accounts
SSD has related to sales and cash collection activities are
Sales
Sales Discounts
Sales Returns and Allowances
Uncollectible Account Expense
Accounts Receivable
Allowance for Uncollectible Accounts
In accordance with professional standards, Susan Mansfield, audit manager, reviewed
SSD's control environment, risk assessment policies, 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 304). 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 the company'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 sales and cash receipt transactions are not
materially misstated and (2) identifying tests of controls that would test the design and
operating effectiveness of internal control activities identified.
REQUIREMENTS
Complete steps 5 through 7 in the Revenue Cycle Planning Audit Program
Identification of Tests of Controls (working paper R 1-1) and document your work in
working papers R 1-1, R 31, R 32, R 33, R 40-1, and R 40-2. Bill Zander completed steps
1 through 4 and has documented the results of his work in working papers RI-1, R 30-1,
R 30-2, R 30-3, and R 30-4 (Note: you should assume that only control activities
identified in the flowcharts exist). Audit steps 5, 6, and 7 can be completed separately.
Your instructor will indicate which steps you are to complete.

This case was prepared by Frank A. Buckless, Ph.D. and Mark S. Beasley, Ph.D. of North Carolina
State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young
University, as a basis for class discussion. It is not intended to illustrate either effective or ineffective
handling of an administrative situation.
Copyright 2000 by Prentice-Hall, Inc. ISBN 0-13-016948-X.

Reference: R 1-1
Prepared by: BZ
Date: 6/12/OX
Reviewed by:

Southeast Shoe Distributor, Inc.

Revenue Cycle Planning Audit ProgramIdentification of Tests of Controls
Year Ended: December 31, 200X
Audit Procedures

Initial

Date

W/P Ref.

1. Obtain and study a copy of the client's policies

and procedures manuals related to sales and
cash receipts.

BZ

6/12/OX

N/A

2. Discuss with and observe client personnel

performing control activities related to sales
and cash receipts.

BZ

6/12/OX

N/A

3. Perform a document walk-through of the client's

policies and procedures related to sales and cash
receipts.

BZ

6/12/OX

N/A

4. Obtain or prepare a flowchart for sales and cash

receipts showing control activities, document flows,
and records.

BZ

6/12/OX

R30-1 to
R30-4

5. Use the control activities matrix to identify client

control activities that reduce the likelihood of
material misstatements for management assertions
related to sales and cash receipts.

R31
R32

6. Use the planning audit test matrices to identify

potential tests of controls.

R40-1
R40-2

7. Based on the previous procedures, identify internal

control deficiencies that may need to be reported
to the client on the internal control deficiencies
schedule.

R33

Reference:
R 30-1
Prepared by:
BZ
Date:
6/12/OX
Reviewed by:

Southeast Shoe Distributor, Inc.

Revenue CycleSales Flowchart
For the Year Ended December 31, 200X
Sales Clerk

Office Manager

Reference:
R 30-2
Prepared by:
BZ
Date:
6/12/OX
Reviewed by:

Southeast Shoe Distributor, Inc.

Revenue CycleSales Flowchart
For the Year Ended December 31, 200X
Shipping

Accounting Clerk

Reference: R30-3
Prepared by: BZ
Date:
6/12/OX
Reviewed by:

Southeast Shoe Distributor, Inc.

Revenue CycleCash Receipts Flowchart
For the Year Ended December 31, 200X
Receptionist

Accounting Clerk

Reference: R 30-4
Prepared by: BZ
Date:
6/12/OX
Reviewed by:

Southeast Shoe Distributor, Inc.

Revenue CycleCash Receipts Flowchart
For the Year Ended December 31, 200X
Office Manager

Reference:R 33
Prepared by:
BZ
Date:
6/12/OX
Reviewed by:

Southeast Shoe Distributor, Inc.

Revenue CycleInternal Control Deficiencies
For the Year Ended December 31, 200X
Internal Control Deficiencies
1) The client does not internally verify the proper general
ledger account classification for sales and cash-receipt
transactions.

Legend:
RCReportable Condition (Yes or No)
MWMaterial Weakness (Yes or No)

Client Personnel
Discussed With

RC

MW

No

No