Case Assignment:
In a minimum of 850-words paper, respond to Case attached to this assignment page.
Ensure that your paper is organized and formatted to APA 6th edition.
Minimum: 1 reference
Case 16-1
The Audit of SSM
Background
Steve’s Shoe Makers Inc. (SSM), a company that is publicly traded on the New York
Stock Exchange, manufactures and distributes high-performance athletic footwear and
apparel. Established in Philadelphia in 2000 as a small, family-owned business, SSM has
expanded to include a wholly owned subsidiary, Steve’s Shoes LLC. SSM’s corporate
management is based in Philadelphia, and the manufacturing and distribution plants are
located in Houston and Los Angeles.
You have been hired as SSM’s external auditor and have been assigned to test SSM’s
related parties and its relationships and transactions with related parties in accordance
with PCAOB AS 2410 (formerly PCAOB AS 18).
You have spoken with SSM’s CEO, Dain Blanton, who believes that the processes and
controls in place at SSM would result in the identification of any related-party
relationship that would require further investigation or possible disclosure in the financial
statements. Further, he has stated that the company does not have any related-party
events or transactions that would need to be disclosed in the current-year annual financial
statements in accordance with ASC 850.
See the appendix below for SSM’s organizational structure.
Management’s Processes and Controls
To understand management’s processes and controls over related parties and its
relationships and transactions with them, you obtain SSM’s relevant process flow
narrative from management, which states the following:
Before hiring a new employee, the human resources manager performs a
background check. Employees hired for management positions must disclose their
significant ownership interests. SSM’s legal department maintains a listing of
these disclosures (“related-parties listing”) and periodically checks the disclosed
relationships against SSM’s vendor and customer master file. Annually, before
SSM files its 10-K, management signs representations indicating that to the best
of its knowledge, SSM did not enter into any related-party transactions that were
not disclosed in the financial statements. Management also discloses any changes
in its significant equity ownership or investments at this time. A review of the
representations is performed by the legal department, the related-parties listing is
updated for any new related parties identified, and the records are maintained in a
locked room.
Risks of Material Misstatement
As a result of the risk-assessment procedures performed, you have determined that the
risks of material misstatement listed below apply to the audit of SSM. You have also determined that none of the identified and assessed risks of material misstatement are
significant risks. (Note that there are additional risks of material misstatement regarding
related parties and relationships and transactions with related parties; however, this case
study only focuses on the risks outlined below.)
R_RP_1: Related parties and transactions with related parties may not be appropriately
identified.
R_RP_2: Related-party transactions are not recorded in accordance with applicable
accounting standards.
R_RP_3: Related-party transactions are recorded:
• For transactions that did not occur or are pending.
• At incorrect amounts.
• In the incorrect period.
R_RP_4: Related-party transactions are recorded:
• For transactions that lack a business purpose.
• Without taking into account the counterparty’s financial capability.
R_RP_5: The related-party disclosure includes transactions that:
• May not have occurred.
• Lack a business purpose.
• Are not recorded on terms equivalent to those prevailing in an arm’slength transaction and are not disclosed as such.
R_RP_6: The related-party disclosure does not sufficiently describe related-party
transactions in accordance with the applicable financial reporting framework.
Required
1. In accordance with paragraphs .05–.07 of PCAOB AS 2410 (formerly PCAOB
AS 18), auditors are required to inquire of the audit committee, management, and
others in the company regarding their knowledge of related parties and
relationships and transactions with related parties. Use SSM’s organizational chart
in the appendix below as a resource to identify others in the company who you
would consider asking about such knowledge. Explain your rationale for selecting
these individuals.
2. Are management’s processes and controls over related parties and over relatedparty relationships and transactions sufficient? Why or why not?
3. Given the need for management to identify, authorize and approve, and account
for and disclose its related parties and its relationships and transactions with
related parties, what are the types of processes and control activities that
management should consider?
4. Given the requirement in paragraph .14 of PCAOB AS 2410 (formerly PCAOB
AS 18), what procedures would you perform to test the accuracy and
completeness of the related-parties listing and of relationships and transactions
with related parties?
5. What would be the implications on the audit if an undisclosed related-party
transaction was identified during the completion of audit testing?
Entity Organizational Chart
Steve’s Shoes LLC
Houston, TX
Steve’s Shoes LLC
Los Angeles, CA
Steve’s Shoes LLC
SSM Corporate
Philadelphia, PA
Management Organizational Chart
SSM Management
Na Li
Sales and Marketing Manager
Sybil Newell
Chief Operating Officer
Lars Frolander
Chief Financial Officer
Helen Volk
Human Resources Manager
Ken Briggs
Director of Payroll
Jonathan Edwards
Director of Legal Department
Dain Blanton
Chief Executive Officer
SSM Board of Directors
SSM Accounting and Finance
Suni Park
Payroll Clerk
Tina Parshin
Payroll Manager
Neil Walker
Data Center Mgr
Pia Hansen
Programming Mgr
Gete Wami
Network Mgr
Mounir Sabet
Information Systems Officer
Steffi Jones
A/P Clerk
*Multiple Other
A/P Clerks*
Juan Perez
A/P Supervisor
Multiple
Accounting
Clerks
Maree Fish
Payroll Supervisor
Sara Harstick
Accounting Mgr
Angela Tamas
A/R Clerk
*Multiple Other
A/R Clerks*
Denis Kapustin
A/R Supervisor
Wei Lang
Credit Controller
Randhir Singh
Reporting Mgr
Ashley Callus
Financial Controller
Multiple
Internal
Auditors
Hector Mendez
Internal Audit
Manager
Lars Frolander
Chief Financial Officer
SSM Operations
See Distribution
Dept in Separate
Org Chart
Syed Ali
Distribution Manager
Multiple
Line
Supervisors
Bronwyn Mayer
Prod Supervisor
Alex Giladay
Houston Plant Mgr
Multiple
Line
Supervisors
Hughes Obry
Prod Supervisor
Annie Famose
Los Angeles Plant Mgr
Andre Willms
Production Manager
Multiple
Purchasing Clerks
Linda Thom
Houston Purchasing
Supervisor
Multiple
Purchasing Clerks
Robert Lane
Los Angeles Purchasing
Supervisor
Penelope Heyns
Purchasing Manager
Sybil Newell
Chief Operating Officer
