CASE 10.5 Southeast Shoe Distributor, Inc.

Performance of Tests of Balances for the Expenditure Cycle

(Acquisitions and Cash Disbursements)
MARK S. BEASLEY FRANK A. BUCKLESS STEVEN M. GLOVER DOUGLAS F. PRAWITT

LEARNING OBJECTIVES
After completing and discussing this case you should be able to

[1] Recognize common documents and records used in the expenditure cycle
[2] Recognize common tests of balances for accounts payable
[3] Perform tests of balances for accounts payable
[4] Evaluate the results of tests of balances for accounts payable using a nonstatistical approach
[5] Recognize the linkage of substantive tests of balances to management assertions

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 resells mens,
womens, and childrens shoes to retail shoe stores located in small to midsize communities. The
companys basic strategy is to obtain a broad selection of designer-label and name-brand
footwear at low prices for resell to small one-location retail stores. SSD targets stores that have a
difficult time obtaining reasonable quantities of designer and name-brand footwear. The
company is able to keep the cost of footwear low by (1) selectively purchasing large blocks of
production over-runs, over-orders, mid- and late- season deliveries and last seasons stock from
manufacturers and other retailers at significant discounts, (2) sourcing in-season name-brand and
branded designer footwear directly from factories in Brazil, Italy, and Spain, and (3) negotiating
favorable prices with manufacturers by ordering footwear during off-peak production periods
and taking delivery at one central warehouse.

During the year, the company purchased merchandise from over 50 domestic and international
vendors, independent resellers, manufacturers and other retailers that have frequent excess
inventory. Designer and name-brand footwear sold by the company include the following:
Amalfi, Clarks, Dexter, Fila, Florsheim, Naturalizer, and Rockport. At the present time, SSD has
one warehouse located in Atlanta, Georgia. Last year SSD 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.
The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, 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. SSD is a fictitious company.
All characters and names represented are fictitious; any similarity to existing companies or persons is purely coincidental.

BACKGROUND
SSD is required to have an audit of its annual financial statements to fulfill requirements of loan
agreements with financial institutions. This audit is to be completed in accordance with the
AICPA professional standards for the audit of nonpublic companies. Your audit firm is in the
process of completing the audit for the fiscal 2014 financial statements in accordance with these
professional standards. The audit senior for this engagement is Jorge Hernandez. The two audit
staff assigned to this engagement are Joy Avery and you. The two of you are responsible for
performing the tests of balances and analytical tests outlined in the expenditure cycle audit
program (referenced in the top right-hand corner as E 2).

The general ledger accounts related to purchasing and cash disbursement activities at SSD
include the following:

Inventory Purchases
Purchase Discounts
Purchase Returns and Allowances
Freight In
Administrative Expenses
Warehousing Expenses
Selling Expenses
Prepaid Assets
Accounts Payable

Joy Avery has already performed audit procedures 1 and 2 listed on audit schedule E 2. Her work
is documented on audit schedules E 2, E 10, E 50, and E 51. Additionally, Joy has selected the
audit sample for audit procedure 3 as noted on audit schedule E 52.