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Week 6 Individual assignment- Audit Program Design Part III-

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Week 6 Individual assignment- Audit Program Design Part III- Due Monday, Day 7 Audit Program Design Part III (10 points). This paper should be posted as a Microsoft® Word attachment in the Individual forum and should adhere to APA formatting style. Design tests of controls, substantive tests of transactions, and analytical procedures for the following Apollo Shoes cycles: § Inventory and warehousing cycle § Cash cycle Please do not merely focus on statistical procedures; you should demonstrate an understanding of current industry practices including non-statistical procedures and integration of information technology into the auditing process. APOLLO SHOES, INC. An Audit Case to Accompany AUDITING AND ASSURANCE SERVICES Prepared by Timothy J. Louwers James Madison University J. Kenneth Reynolds Louisiana State University Acknowledgements We would like to gratefully acknowledge the following individuals for their assistance in preparing and completing this case. Sincere appreciation is due to Reagan McDougall, Meghan Peters, Denise Patterson, Bob Ramsay, and several classes of Louisiana State University students. Their suggestions greatly enhanced several portions of the case. However, we remain responsible for all errors of commission and omission. Introduction Apollo Shoes, Inc. is an audit case designed to introduce you to the entire audit process, from planning the engagement to drafting the final report. You are asked to assume the role of a veteran of two-to-three “busy” seasons, “in-charging” for the first time. While Apollo Shoes’ growth has been phenomenal (there has been a dramatic growth in unaudited net income over the past year), there are some concerns: the client doesn’t want your firm (Anderson, Olds, and Watershed (AOW)) to talk with the predecessor auditor, a labor strike is looming, and one of Apollo Shoes’ largest customers is suffering some financial difficulties. Because of busy season, there is little help, other than from an untrained intern. While the intern can do “grunt work,” such as vouching and gathering information for you, he appears incapable of preparing workpapers, making adjusting entries, or even getting good coffee and doughnuts. Assistance does come in the form of an objective, competent internal audit staff. Communication between client personnel and other firm members takes the form of e-mail messages from the engagement partner (Arnold Anderson), the engagement manager (Darlene Wardlaw), the intern (Bradley Crumpler), and the director of Apollo’s internal audit department (Karina Ramirez). Required assignments and memos are in bold print. Page indexing suggestions are given, but feel free to adjust page numbering as you see fit. The AOW intranet website (http://www.mhhe.com/louwers2e/) has many useful resources such as a repository of electronic documents (so that you won’t need to input data or retype documents) and an archive of e-mail messages and their attachments, all filed by account group. While we tried to make the case as realistic as possible, limitations remain. Since you are unable to follow up directly with client personnel, you may need to rely on some evidence with which you may be uncomfortable. In an actual audit, you would be able to inquire, observe, and otherwise follow-up on any questions that you have until you feel comfortable relying on the evidence. To make sure that the case can be completed in a reasonable amount of time, we cut some corners with respect to audit sampling. Understand that audit sampling plays a large role in actual audit practice. The information is sequential in nature. In other words, pay close attention to information disclosed early in the audit (for example, in the Board of Director’s minutes) as it may play a role in subsequent audit work. Similarly, the bank cutoff statement in the cash workpapers and invoices used for valuing inventory may be useful later in the search for unrecorded liabilities. Similarly, the bank confirmation contains information about long-term liabilities. Lastly, while it is difficult for us to believe that not everyone enjoys auditing as much as we do, we have tried to make the case both interesting and enjoyable (in a perverse sort of way). You can think of the project as a puzzle, in which you have to fill in all the pieces. Alternatively, you could look at the project as a murder mystery that needs a solution. In either case, have fun! Tim Louwers J. Kenneth Reynolds Harrisonburg, VA Baton Rouge, LA Table of Contents Introduction 1 Table of Contents 2 Planning 3 Internal Control Evaluation 49 Substantive Testing: Cash 62 Substantive Testing: Accounts Receivable 72 Substantive Testing: Inventory 83 Substantive Testing: Prepaids and Other Assets 107 Substantive Testing: Fixed Assets 113 Substantive Testing: Liabilities 117 Substantive Testing: Payroll 123 Audit Wrap-up 130 Date: Thu, 25 OCT 2007 00:42:35 +0000 From: "Darlene Wardlaw" Subject: Upcoming Apollo Shoes Engagement Attachment: <> Well, first let me congratulate you on your recent promotion. Although we have not worked on an engagement together before, I have heard many good things about you. I look forward to working with you on the new Apollo Shoes engagement. I understand that this is your first engagement to in-charge. Arnold Anderson (aka “Uncle Arnie”) will be the engagement partner; he is pretty sharp so you’ll have to stay on your toes. As engagement manager, I’ll try to help out as much as I can. Understand, however, that I am managing four other busy season engagements, so my interaction time with you will be limited. For now, I want you familiarize yourself with Apollo Shoes and help me out by doing the following: 1. SEC Filing: I have asked Larry Lancaster, President and chairman of the Apollo Shoes board of directors, to send you a copy of last year’s (2006) 10-K filing with the SEC. Review the information when you receive it, as it is one of the most important sources of information about a company. 2. Audit Committee Meeting: I have attached the minutes of an audit committee meeting that occurred last week. Please review the minutes of the meeting and draft an appropriate engagement letter (label it GA-1, for General and Administrative, page 1) addressed to Mr. Lancaster. (Since this is our first year on the engagement, you might want to check one of your old auditing textbooks for an example.) I’ll review the letter before getting Arnold to sign it. 3. Audit Team: Based upon the information that you glean from 1 and 2 above, do you see any need for special business knowledge in regard to the basic type of business and products Apollo manages? Do you see any need for special audit or accounting expertise for any of the work that we have agreed to perform? In other words, since you’ll be in the trenches, what kind of expertise do you want on your audit team? Just write a brief audit staffing memo (GA-2) telling me what expertise you need to complete the audit and I’ll see if I can get them assigned to the audit team. 4. Scheduling: We are going to have to work around your other engagements, but we have you tentatively scheduled for one week in October (next week) for bringing you up to speed on Apollo and its industry, and five straight weeks beginning the last week in December for engagement planning, internal control evaluation, and substantive testing. Finally, since most of our interaction will be by e-mail, please forgive me if I give you too much detail. Since we haven’t worked together before, I’d rather give you too much than too little until we get used to working together. DW Minutes of the Audit Committee, Apollo Shoes October 18, 2007 Present at Meeting: Arnold Anderson, CPA (partner in charge of the audit); Darlene Wardlaw, CPA (engagement manager); Eric Unum (Apollo ’s vice president of finance); Mary Costain (Apollo ’s treasurer); Samuel Carboy (Apollo ’s controller); and Karina Ramirez (Apollo ’s director of internal audit). The three members of the audit committee of the board and the corporate secretary also were present, but they did not enter into the conversation. Mr. Unum (VP finance): Well, I want to welcome the auditing firm of Anderson, Olds, and Watershed, CPAs to what we call the “Apollo Shoes Experience.” After our old auditors, Smith & Smith, CPAs, unexpectedly withdrew from the engagement, we were very happy to have a firm of your quality to come aboard. Mr. Anderson (partner on the audit): Well, we are always looking for high quality clients. By the way, why did your previous auditors resign? Mr. Unum (VP finance): I’d rather not talk about it. Arnold, will Darlene be in charge? Mr. Anderson (partner on the audit): Yes, and she will be assisted by several of our best staff, including a tax specialist and an information systems auditor. We need to keep up to date on your computer systems. Back to your previous auditors, with your permission, we would like to contact them. Mr. Unum (VP finance): Well, we’d rather you didn’t. There may be some litigation since they withdrew from the engagement with so little notice. Is it necessary for you to speak with them to accept the engagement? Mr. Anderson (partner on the audit): No, not really, but it does raise some concerns for our firm. Ms. Costain (treasurer): In the past, we have never had any unpleasant discoveries of embezzlement or theft, but we always want to be vigilant. Will you plan enough in-depth auditing to give us assurances about errors and frauds in the accounts? Ms. Wardlaw (manager on the audit): We will follow audit standards and base our audit work on samples of transactions. We plan the work to look for major errors and frauds in the accounts, but cleverly hidden schemes might not be discovered. According to the Sarbanes-Oxley Act of 2002, we will need to test the effectiveness of Apollo’s internal controls, as well as provide you the usual separate management letter on related findings. Ms. Ramirez (internal auditor): Darlene, I agree, it’s hard to uncover clever schemes. While I am new to Apollo, none of the projects that I have undertaken this year shows anything amiss, other than normal human error types or mistakes. Ms. Costain (treasurer): This year, we want to add some work to the audit. I am short on staff time and need to have you prepare the state franchise tax return as well as the federal tax returns. Ms. Wardlaw (manager on the audit): Our tax staffperson can do the state and federal returns, and I will have them reviewed by Maria Olds, our tax partner. In order to perform the tax work, Sarbanes-Oxley requires that we get prior approval from the audit committee to perform both the tax work as well as the audit. Mr. Anderson (partner on the audit): I assume you also want us to review the 10-K filing material? Mr. Unum (VP finance): Yes. Will you need any staff help from us? Ms. Ramirez (internal auditor): Last year, Apollo was able to save on audit fees when my staff prepared a stack of schedules and analyses that our previous auditors needed. Mr. Wardlaw (manager on the audit): Yes, Karina, I will give you a list of schedules for various accounts. I will appreciate your having them ready when we start fieldwork in mid January. Mr. Carboy (controller): Speaking of being ready, we will be able to give you a trial balance the day after December 31. Mr. Unum (VP finance): How much is this going to cost us? Mr. Anderson (partner on the audit): It is difficult to give you a fixed fee deal, but my estimate, considering the additional work, is $750,000. Darlene will let you know immediately if problems arise to cause the work to be more extensive. Mr. Unum (VP finance): Thank you. This has been a productive meeting of the minds. We look forward to your getting started next month. Meeting ended 5:30 P.M. /s/ Jeff Chesnut, Secretary C:/AudComMins—101807.doc/ Date: Fri, 26 OCT 2007 4:43:17 +0000 From: "Larry Lancaster" Subject: Attached 10-K Filing Attachments: <>, <<10K.doc>>, <> I am sorry that you were unable to attend the audit meeting last week, but Darlene Wardlaw said that you were busy with another client. She asked that I forward a copy of our 10-K directly to you. I’ve attached one that we sent out to all shareholders with the Letter to Shareholders attached. I’ve attached a copy of Apollo’s organizational table. Please let me know what my staff or I can do to help the audit go smoothly for you. I will have Karina Ramirez, our Director of Internal Audit, contact you to provide you with any other information that you need. Larry P.S. Do you play golf? This Apollo message (including any attachments) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message and are hereby notified that any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited. Letter to Fellow Shareholders Dear Fellow Shareholders, You may have noticed our competitor's focus on earth-bound activities and athletes. Our focus is in exactly the opposite direction. In actuality, the technological superiority of our products is at the point where our sales are limited only by the technological inferiority of other scientific fields (specifically, current transportation means). As space exploration continues, we intend to be among the first to market our products in new worlds. It is there that our technological advances in light and sound can combine with our rugged footwear to propel all galactic sports participants to their fullest potential. Back here on earth, the past year has been one of the most dynamic and exciting years since I began my tenure at Apollo Shoes. From the beginning, Apollo Shoes, Inc. has adapted itself to meet the needs of all its galactic customers and to take advantage of all opportunities supplied by exploration of new frontiers. After a record year when most companies may have wanted to relax and play it safe, we have decided to use this excitement to reach out further in our continuing mission: to make a difference in this galaxy. Our product lines, led by the flagship products SPOTLIGHT (for athletes who like to compete at night) and SIREN (designed specifically for police officers working the graveyard shifts in our nation's most dangerous cities) have met widespread acceptance. We have signed with some of this world's premier athletes as spokespersons for our products, including a recent winner of the grueling Alaska Iditarod who used his SPOTLIGHTs to guide his dogs to a late night finish line. We are currently negotiating with a soccer league to exclusively use our SIRENs; the shoe's flashing lights are designed to go off after every team goal! Our strategic management plans have allowed us to maintain a positive trend in income over the past several years, and this was no easy task, given the state of the galactic economy. Our net income for the year has been the best since we began operations four years ago. Next year appears even better! The strength of our results for the past year should not be confused with the truth of the times. This was a uniformly difficult year for all businesses. Due to the conflicts in foreign countries, and uncertainty with the Federal Reserve's adjustments of interest rates, consumer confidence has been negatively affected; therefore, fewer earth consumers are buying our state-of-the-art athletic equipment. All of our operating divisions were severely tested. I am proud of their responses. Although sales were not as strong as we had anticipated, our marketing plans will allow us to bounce back next year. With the advent of significant new breakthrough technology by Apollo Shoes, Inc.'s research and development team, Apollo Shoes, Inc. now has the possibility to take a leadership role in the galactic athletic footwear market. Apollo Shoes, Inc. has always been known for its leadership position in electronic shoe technology, but we are now committed to expanding our marketing focus. With new applied technologies, Apollo Shoes, Inc. can maintain its tradition of high tech electronic performance and style. We continue to work on and improve the SPEAKERSHOE, an athletic shoe with an amplified loudspeaker, originally designed for the international recording group "Mythic Meathook." We are hard at work on new ideas, such as the PHONESHOE, the sneaker with a cellular phone for those executives who like to simultaneously combine exercise with work. We anticipate that the PHONESHOE will capture a significant piece of this quickly expanding market. At Apollo Shoes, Inc., we like to briefly acknowledge achievement and then proceed to new challenges. This year was great only because it provided us with resources to expand operations and further technological progress. As we continue into this century of "more, faster, better," it is critical to continue this tradition because production, speed, and quality are critical elements for future success. We look forward to the challenge. Larry Lancaster Chairman, President and CEO <> -------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 COMMISSION FILE NUMBER 1-9Z40 APOLLO SHOES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MAINE X8-061325 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- COMMON STOCK, PAR VALUE, $1.00 PER SHARE STUDS SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 8, 2007, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was approximately $24,315,000. As of March 8, 2007, 8,105,000 shares of the registrant's Common Stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Definitive Proxy Statement dated December 12, 2006 for the Annual Meeting of Shareholders to be held on Tuesday, February 27, 2007 at the End of the Universe Restaurant in downtown Shoetown. APOLLO SHOES INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Item 1. Business i Item 2. Properties ii Item 3. Legal Proceedings iii Item 4. Submission of Matters to a Vote of Security Holders. iii Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. iii Item 6. Selected Financial Data iv Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations v Item 8. Financial Statements and Supplementary Data vi Item 9. Changes in and Disagreements with Accountants xix Item 10. Directors and Executive Officers of the Registrant xix Item 11. Executive Compensation xix Item 12. Security Ownership of Certain Beneficial Owners and Management. xix Item 13. Certain Relationships and Related Transactions. xix Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K xx This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements with regard to the Company's revenues, earnings, spending, margins, cash flow, orders, inventory, products, actions, plans, strategies and objectives. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "intend," "plan," "project," "will be," "will continue," "will result," "could," "may," "might," or any variations of such words or other words with similar meanings. Any such statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those discussed in such forward-looking statements. Prospective information is based on management's then current expectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions underlying such expectations or forecasts, become inaccurate. For a description of such risks, see the section below entitled "ISSUES AND UNCERTAINTIES." ITEM 1. BUSINESS. Apollo Shoes, Inc. is a planetary distributor specializing in technologically superior athletic podiatric products. The Company’s brands-- SIREN, SPOTLIGHT, and SPEAKERSHOE-- are used extensively in many athletic competitions, such as the Switzerland Watersports Games in Zurich. The Company is excited about this annual event that exhibits to the entire world the skills and spirit of outstanding Swiss aquatic athletes. The Company’s products are shipped to large and small retail outlets in a six-state area. The company stocks a wide range of shoe products and has a large base of retail store customers. Apollo operates from a large office, operations, and warehouse facility in the Shoetown, Maine area. Apollo Shoes, incorporated in the state of Delaware, is a public corporation. Its stock is traded in the over-the-counter market. No one presently owns more than 4 percent of the outstanding common stock. The company is subject to the reporting requirements of the Securities and Exchange Act of 1934. Organization and Personnel Apollo Shoes is a medium-sized corporation. It has over 100 employees organized in five departments headed by vice presidents. Marketing The marketing department handles advertising and direct contact with customers. The marketing department vice president supervises the sales staff, the advertising staff, and the customer relations staff. i Finance The finance department has two subordinate offices—the treasurer and the controller. The treasurer supervises the cashiers and the cash management professionals. The controller’s office has the following departments and personnel: billing department, accounts receivable/cash receipts department, accounts payable/cash disbursements department, inventory records department, payroll department, general ledger department, and financial statement department. Information Systems An information systems department was created this past year. At present, the staff consists of a Director of IS (information systems), a systems development project manager and two programmer/analysts, an operations manager (who also serves as the librarian and control clerk), and two machine operators. When the information systems department became active, the director was promoted to vice president. Apollo obtained a wireless local area network (LAN) multiserver soon after and began testing the hardware and software. Since the new computer system was designed and customized to Apollo’s needs, every effort was made to keep as many as possible of the procedures and business documents used in the manual system. This made the transition to the computer system easy on the employees, thus reducing training and employee objections to the computer. Operations The operations department contains production planning specialists and some production control professionals, who assist the marketing department in technical matters and assist customers with product specifications. Operations supervisors supervise hourly workers who move products from receiving, inventory, and shipping to serve customer demand. The department also supervises the timekeepers, who maintain the workers’ time clocks and collect payroll time cards. The operations department contains the critical functions of purchasing, receiving, and shipping. Inventory storekeeping responsibility is also in this department, with some inventory managers. For reasons lost to history, the department also has the mailroom and the personnel department. ITEM 2. PROPERTIES. Until February of 2004, the Company leased most of the properties that were used in its business. Its corporate headquarters relocated at that time to office facilities in Shoetown, Maine. At its corporate headquarters, the Company occupies approximately 10,000 square feet of space. A lease on an operations facility expires on June 30, 2007. This warehouse and distribution center is located approximately one mile from the Company headquarters and contains approximately 450,000 total square feet of usable space. ii ITEM 3. LEGAL PROCEEDINGS. On September 15, 2006, the Company agreed to settlement of a suit brought against the Company by a competitor for patent infringement for the Company's use of the Siren. While the Company denies any wrongdoing, the Company felt that the settlement would be preferable to a long litigation process. The final settlement totaled $11,695,000 ($19,172,000, net of a tax benefit of $7,477,000). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted during 2006 to a vote of security holders, through the solicitation of proxies or otherwise. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is quoted on the Security Traders, Underwriters, and Dealers System (STUDS) under the symbol APLS. The following table, derived from data supplied by STUDS, sets forth the quarterly high and low sale prices during 2006 and 2005. 2006 2005 High Low High Low First 14 5/8 3 3/8 4 3 1/2 Second 11 2 5/8 4 5/8 4 1/4 Third 8 1/4 3 1/4 8 1/8 4 Fourth 5 5/8 3 1/8 11 1/2 5 The stock price at closing on December 31, 2006, was $3 1/4 per share. As of December 31, 2006, there were approximately 15,342 holders of record of the Company's Common Stock including those shares held in "street name". The Company believes that it has in excess of 16,000 shareholders. The Company has never paid cash dividends on its Common Stock and the Board of Directors intends to retain all of its earnings to finance the development and expansion of its business. However, there can be no assurance that the Company can successfully expand its operations, or that such expansion will prove profitable. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition, and other factors considered relevant by the Company's Board of Directors. iii ITEM 6. SELECTED FINANCIAL DATA. APOLLO SHOES, INC. in thousands (except per share data) Income Statement Data Year Ended December 31 2006 2005 2004 2003 Net Sales $240,575 $236,299 $182,209 $138,920 Income Before Taxes $26,337 $54,680 $2,226 $1,757 Income Taxes $10,271 $21,634 $636 $502 Net Income $4,371 $1,745 $1,590 $1,255 Earnings Per Share $0.54 $0.22 $0.55 $0.44 Balance Sheet Data As of December 31, 2006 2005 2004 2003 Working Capital $20,482 $16,866 ($1,951) ($2,356) Total Assets $36,794 $21,304 $6,754 $6,062 Long Term Debt $0 $0 $0 $0 Shareholders' Equity $22,119 $17,748 $5,470 $3,880 iv ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2006 Financial Results Net sales for the year ended December 31, 2006 increased 2% to $240,575,000, when compared to the same period in 2005. The sales growth was primarily due to new products introduced during the 2006 fiscal year. The average selling price per product in the year ended December 31, 2006 increased approximately 2% from the year ended December 31, 2005. Gross profit for the year ended December 31, 2006 was 41% of sales compared with 49% for the year ended December 31, 2005. The decrease was primarily due to higher prices charged by our suppliers for raw materials. Selling, general and administrative expense for the year ended December 31, 2006 was 30% of net sales as compared to 26% for the year ended December 31, 2005. The increase of 16% to $71,998,000 was primarily the result of increases in staffing and increased professional expenses. The increased professional fees were primarily related to the settlement of litigation brought against us by a competitor. Rather than face a costly, lengthy litigation process, the Company decided to settle out of court. The Company vehemently denies any wrongdoing in the matter. Total research and development expenses for the year ended December 31, 2006 were 5% of net sales and increased by 10% when compared to the year ended December 31, 2005. The increase was primarily due to the addition of engineering personnel. Research and development activities were focused on continued development of PHONESHOE and SPEAKERSHOE technology. Liquidity and Capital Resources The Company's principal source of operating funds has been from proceeds from short-term borrowing against a $50 million line of credit. While the credit facility must be renewed each year, the Company foresees no problems with renewal for the foreseeable future. The Company intends to use its capital resources to expand its operations facilities and to increase research and development in order to maintain its competitive advantage in podiatric technology. There are no other significant capital requirements identified at this time. Management believes that the effect of inflation on the business of the Company for the past three years has been minimal. The Company believes that its current working capital of $20,482 million and anticipated working capital to be generated by future operations will be sufficient to support the Company's working capital requirements for the foreseeable future. v ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA STATEMENTS OF INCOME APOLLO SHOES, INC. in thousands (except per share data) For year ended, December 31, 2006 2005 Net Sales (Note 2) $240,575 $236,299 Cost of Sales $141,569 $120,880 Gross Profit $99,006 $115,419 Selling, General and Administrative Expenses $71,998 $61,949 Interest Expense (Note 7) $875 0 Other Expense (Income) ($204) ($1,210) Earnings from Continuing Operations Before Taxes $26,337 $54,680 Income Tax Expense (Note 10) $10,271 $21,634 Earnings from Continuing Operations $16,066 $33,046 Discontinued Operations, Net of tax benefit ($31,301) Extraordinary Item, Net of tax benefit (Note 11) ($11,695) Net Income $4,371 $1,745 Earnings Per Common Share From Continuing Operations $1.98 $4.08 Other ($1.44) ($3.86) Net Income $0.54 $0.22 Weighted shares of common stock outstanding 8,105 8,105 The accompanying notes are an integral part of the consolidated financial statements. vi STATEMENT OF FINANCIAL CONDITION APOLLO SHOES, INC. in thousands As of December 31 2006 2005 Assets Cash $3,245 $3,509 Accounts Receivable (Net of Allowances of $1,263 and 210, respectively) (Note 3) 15,148 2,738 Inventory (Note 4) 15,813 13,823 Prepaid Expenses 951 352 Current Assets $35,157 $20,422 Property, Plant, and Equipment (Note 5) 1,174 300 Less Accumulated Depreciation (164) (31) $1,010 $269 Investments (Note 6) 613 613 Other Assets 14 0 Total Assets $36,794 $21,304 Liabilities and Shareholder's Equity Accounts Payable and Accrued Expenses $4,675 $3,556 Short-Term Liabilities (Note 7) 10,000 0 Current Liabilities $14,675 3,556 Long-Term Debt (Note 7) 0 0 Total Liabilities $14,675 3,556 Common Stock 8,105 8,105 Additional Paid-in Capital 7,743 7,743 Retained Earnings 6,271 1,900 Total Shareholders' Equity $22,119 $17,748 Total Liabilities and Shareholders' Equity $36,794 $21,304 The accompanying notes are an integral part of the consolidated financial statements. vii STATEMENTS OF SHAREHOLDERS' EQUITY APOLLO SHOES, INC. in thousands Shares Par Value ($1 per share) Additional Paid-in Capital Retained Earnings Other Total Balance, December 31, 2004 2,873 $2,873 $2,442 $155 $0 $5,470 Net Income $1,745 $1,745 Exercise of Stock Options 232 $232 $301 $533 Other 5,000 $5,000 $5,000 $10,000 Balance, December 31, 2005 8,105 $8,105 $7,743 $1,900 $0 $17,748 Net Income $4,371 $4,371 Exercise of Stock Options 0 $0 $0 Other $0 Balance, December 31, 2006 8,105 $8,105 $7,743 $6,271 $0 $22,119 The accompanying notes are an integral part of the consolidated financial statements. viii CONSOLIDATED STATEMENTS OF CASH FLOWS APOLLO SHOES, INC. in thousands For the year ended December 31, 2006 2005 Cash Flows from Operating Activities Net Income $4,371 $1,745 Adjustments to Reconcile Net Income to Net Cash Provided Depreciation and Amortization $133 $26 Changes in Operating Assets and Liabilities Decrease (Increase) in Current Assets Accounts Receivable ($12,410) ($2,073) Inventory ($1,990) ($11,861) Prepaid Expenses ($599) ($123) Increase (Decrease) in Current Liabilities Accounts Payable and Accrued Expenses $1,119 $5,504 Total Adjustments ($13,747) ($8,527) Net Cash Provided by Operating Activities ($9,376) ($6,782) Cash Flows from Investing Activities Capital Expenditures ($874) ($255) Purchase of Other Assets ($14) Net Cash Provided by Investing Activities ($888) ($255) Cash Flows from Financing Activities Proceeds from the Issuance of Debt $10,000 Proceeds from the Issuance of Common Stock $10,533 Net Cash Provided by Financing Activities $10,000 $10,533 Net Increase (Decrease) in Cash ($264) $3,496 Cash at Beginning of Year $3,509 $13 Cash at End of Year $3,245 $3,509 The accompanying notes are an integral part of the consolidated financial statements. ix NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APOLLO SHOES, INC. 1. Summary of Significant Accounting Policies Business activity The Company develops and markets technologically superior podiatric athletic products under various trademarks, including SIREN, SPOTLIGHT, and SPEAKERSHOE. Marketable Securities Investments are valued using the market value method for investments of less than 20%, and by the equity method for investments greater than 20% but less than 50%. Cash equivalents Cash equivalents are defined as highly liquid investments with original maturities of three months or less at date of purchase. Inventory valuation Inventories are stated at the lower of First-in, First-out (FIFO) or market. Property and equipment and depreciation Property and equip¬ment are stated at cost. The Company uses the straight-line method of depreciation for all additions to property, plant and equipment. Intangibles Intangibles are amortized on the straight-line method over periods benefited. Net Sales Sales for 2006 and 2005 are presented net of sales returns and allowances of $4.5 million, and $0.9 million, respectively, and net of warranty expenses of $1.1 million, and $0.9 million, respectively. Income taxes Deferred income taxes are provided for the tax effects of timing differences in reporting the results of operations for financial statements and income tax purposes, and relate principally to valuation reserves for accounts receivable and inventory, accelerated depreciation and unearned compensation. Net income per common share Net income per common share is computed based on the weighted average number of common and common equivalent shares outstanding for the period. Reclassification Certain amounts have been reclassified to con¬form to the 2006 presentation. 2. Significant Customers Approximately 15%, and 11% of sales are to one customer for years ended December 31, 2006 and 2005, respectively. x 3. Accounts Receivable Accounts Receivable consists of the following at December 31: in thousands 2006 Trade Receivables $16,411 Employee and Officer Receivables 0 16,411 Less Allowance for Doubtful Accounts (1,263) Net Accounts Receivable $ 15,148 Amount charged to bad debt expense for the year ended December 31, 2006 was 1,622,000. Writeoffs for the year were approximately the same. 4. Inventories Inventories consist of the following at December 31: in thousands 2006 Siren $3,098 Speaker 9,571 Spotlight 6,156 18,825 Less Reserve for Inventory Obsolescence (3,012) Ending Inventory $15,813 5. Property and equipment Property is stated at cost net of accumulated depreciation. Property and Equipment at December 31 was as follows: in thousands 2006 Land $117 Buildings and Land Improvements 624 Machinery, Equipment and Office Furniture 433 Total Land, plant and equipment 1,174 Less Accumulated depreciation (164) Net Land, Plant and Equipment $1,010 xi 6. Investments In order to receive a higher rate of return on its excess liquid assets, the Company invested approximately $0.6 million in stock for a 25% share in the SHOCK-PROOF SOCKS Company in 2004. This investment is valued in the financial statements using the Equity method. SHOCK-PROOF SOCKS did not recognize any income and did not pay any dividends in 2005 and 2006. In addition, the Company incurred approximately $14,000 in legal fees to register the patent for the PHONESHOE. The asset will be amortized over its useful life of 17 years. 7. Debt At December 31, 2006, the Company had $10,000,000 outstanding in short-term borrowings under a $50 million secured revolving credit line with a local financial institution. The line of credit is secured by the Company’s inventory. The interest rate charged on this agreement is the Prime Rate plus 3%. This credit line is evaluated annually on June 30 by the lending institution. Annual maturities of debt obligations are as follows: 2007 $10,000,000 2008 0 Total Debt $10,000,000 8. Commitments Annual obligations under non cancelable operating leases are as follows: 2007 $1,200,000 Thereafter 0 Rent expense charged to operations for the years ended December 31, 2006 and 2005 was $2.6 million and $3.7 million, respectively. xii 10. Income taxes The provision (benefit) for income taxes consists of the following for the years ended December 31: 2006 2005 Current: Federal $ 2,025 $ 873 State 365 154 $ 2,390 $ 1,027 Deferred: Federal $ 340 $ (42) State 64 (7) $ 404 $ (49) $ 2,794 $ 978 Deferred income taxes are provided for the tax effects of timing differences in reporting the results of operations for financial statements and income tax purposes, and relate principally to valuation reserves for accounts receivable and inventory, accelerated depreciation and unearned compensation. A reconciliation of the statutory federal income tax provision to the actual provision follows for the years ended December 31: 2006 2005 Federal Statutory Rate 34.0% 34.0% State taxes, less federal benefit 6.0% 6.0% Research and experimentation credit (2.0%) (1.4%) Other 1.0% 1.0% Effective Tax Rate 39.0% 39.6% 11. Litigation On September 15, 2006, the Company agreed to settlement of a suit brought against the Company by a competitor for patent infringement for the Company's use of the Siren. While the Company denies any wrongdoing, the Company felt that the settlement would be preferable to a long litigation process. The final settlement totaled $11,695,000 ($19,172,000, net of a tax benefit of $7,477,000). 12. Related-party transactions On February 1, 2006, the Company purchased its operating facility and equipment from a company controlled by two previous directors and shareholders of the Company for $623,905.92. Currently, the Company leases a second facility and equipment from the same company for approximately $200,000 per month. The Company’s lease ends in June 2007 at which time all operations will be moved to the central headquarters building. xiii 13. Employee benefit plans The Company sponsors a defined-contribution retirement plan covering substantially all of its earth employees. Contributions are deter¬mined at the discretion of the Board of Directors. Aggregate contribu¬tions made by the Company to the plans and charged to operations in 2006, 2005 and 2004 were $3 million, $3 million and $3 million, respectively. 14. Concentrations of credit risk Financial instruments which potentially subject the Company to credit risk consist principally of trade receivables and interest-bearing investments. The Company sells a significant amount of its product to one retail distributor with sales operations located throughout North America, Europe and Asia Pacific. The Company is currently negotiating to increase its sales to that company, as well as enter into long-term relationships with two other large retail distributors. The Company performs on going credit evaluations of all of its customers and generally does not require collateral. The Company maintains adequate reserves for potential losses and such losses, which have been minimal, have been included in management's estimates. The Company places substantially all its interest-bearing investments with several major financial institutions. Corporate policy limits the amount of credit exposure to any one financial institution. xiv 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 material fact 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 fiscal quarter (the registrant’s fourth fiscal quarter 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 4, 2007 Larry Lancaster Joe Bootwell Larry Lancaster Joe Bootwell Chairman of the Board of Directors, President and CEO Executive Senior Vice-President and CFO xv REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of APOLLO SHOES, INC. We have audited the accompanying balance sheets of APOLLO SHOES, INC. as of December 31, 2006 and 2005 and the related statements of income, comprehensive income, shareholders’ equity, and cash flows for the two years in the period ended December 31, 2006. We have also audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that APOLLO SHOES, INC. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control ¬– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO criteria). APOLLO SHOES’ management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audits. We conducted 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 including 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 included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 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 transactions and dispositions of the assets of the company; (2) provide reasonable assurance that 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 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of APOLLO SHOES, INC. as of December 31, 2006 and 2005 and the results of its operations and cash flows for each of the three years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles. Also in our opinion, management’s assessment that APOLLO SHOES, INC. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Furthermore, in our opinion, APOLLO SHOES, INC. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria. Smith & Smith, CPA's Shoetown, Maine January 29, 2007 xvi CORPORATE INFORMATION Auditors Smith & Smith, CPA's 31rst Financial Avenue Shoetown, ME 00002 Transfer Agent and Registrar The Twenty-First National Bank of Maine is the Transfer Agent and Registrar for the Company's common stock and maintains shareholder accounting records. The Transfer Agent should be contacted on ques¬tions of changes in address, name or ownership; lost certificates and consolidation of accounts. The Twenty-First National Bank of Maine Shareholder Correspondence Post Office Box 1 Shoetown, ME 00002 Form 10 K For a copy of the Form 10 K Annual Report, filed with the Securities and Exchange Commission write to: Office of Investor Relations Apollo Shoes Inc. 100 Shoe Plaza Shoetown, ME 00001 Annual Meeting The Annual Meeting of Shareholders was held at 10:00 a.m., local time, on Tuesday, February 28, 2006 at the End of the Universe Restaurant in downtown Shoetown. Shareholders of record on February 14, 2006 were entitled to vote at the meeting. The PHONESHOE, SIREN, SPEAKERSHOE, and the SPOTLIGHT Designs are registered trademarks of Apollo Shoes, Inc. xvii BOARD OF DIRECTORS Larry Lancaster Chairman, President and CEO APOLLO SHOES, INC. Eric. P. Unum Vice-President - Finance *Fritz Brenner President The Widget Corporation *Ivan Gorr President Far More Drugs, Inc. *Harry Baker Executive Vice President and Treasurer Iguana Growers of America Inc. *Theodore Horstmann Minister of Commerce Anglonesia *Josephine Mandeville, PH.D., CPA Professor of Accountancy and Typing Graduate School of Business and Clerical Skills * External Directors CORPORATE OFFICERS Larry Lancaster Chairman, President and CEO Joe Bootwell Executive Senior Vice President and CFO Fred Durkin Vice-President - Marketing Daisy Gardner Vice-President - Operations Eric. P. Unum Vice-President - Finance Sue D. Fultz Vice-President - Legal Affairs Mary Costain Treasurer Jeff Chesnut Secretary xviii ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS Smith and Smith, CPAs, withdrew as the Company’s auditors after completing the 2006 audit. The auditors expressed concerns about “mutually incongruent goals.” The Company is considering legal action against the firm. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The president, Larry Lancaster, is both chairman of the board of directors and President and chief executive officer (CEO). Eric Unum (Vice-President – Finance) is also a member of the board, along with five outside (independent) directors who never worked for the Apollo organization. Three outside board members constitute the audit committee of the board. ITEM 11. EXECUTIVE COMPENSATION (Approximate amounts expressed in thousands) Larry Lancaster, Chairman, President and CEO 2,500 Sue D. Fultz, Vice-President - Legal Affairs 1,500 Joe Bootwell, Executive Senior Vice President and CFO 1,200 Fred Durkin, Vice-President – Marketing 1,000 Eric. P. Unum, Vice-President – Finance 590 Daisy Gardner, Vice-President – Operations 410 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Currently, no management personnel hold stock ownership in the Company ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On February 1, 2006, the Company purchased its operating facility and equipment from a company controlled by two previous directors and shareholders of the Company for $623,905.92. Currently, the Company leases a second facility and equipment from the same company for approximately $200,000 per month. The Company’s lease ends in June 2007 at which time all operations will be moved to the central headquarters building. The two previous directors are no longer associated with Apollo Shoes. xix ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K QUARTERLY RESULTS OF OPERATIONS (Unaudited) 2006 March 31 June 30 September 30 December 31 Total Net Sales $58,236 $59,759 $60,239 $62,341 $240,575 Gross Profit $24,372 $24,996 $24,356 $25,282 $99,006 S,G, & A Expenses $16,478 $17,695 $17,347 $20,478 $71,998 Net Income $4,815 $4,454 ($7,785) $2,887 $4,371 Earnings Per Share $0.59 $0.55 ($0.96) $0.36 $0.54 The Company filed one 8-K dealing with the withdrawal of its auditor on January 30, 2007. It is incorporated in this document by reference. <<10-K.Doc>> xx <> Date: Mon, 29 OCT 2007 07:14:35 +0000 From: "Karina Ramirez" Subject: Upcoming Apollo Shoes Engagement Attachment: <> Per your request, I have attached a copy of our accounting and procedures manual. We look forward to your upcoming fieldwork. Please let us know if there is anything else we can provide you to make your job easier. Karina Karina Ramirez Director, Internal Audit Apollo Shoes, Inc. This Apollo message (including any attachments) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message and are hereby notified that any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited. Apollo Shoes Accounting and Control Procedure Manual Sales and Accounts Receivable Daily batches of sales invoices shall be analyzed by sales totals in the athletic shoes product lines. Sales credits are coded to three product line sales revenue accounts. Charges to customer accounts should be dated the date of shipment. When sales invoices are recorded, the numerical sequence shall be checked by an accounts receivable clerk, and missing invoices must be located and explained. The items shipped shall be compared to the items billed for proper quantity, price, and other sales order terms. The general ledger supervisor shall compare the copy 2 daily batch total with the copy 4 individual accounts posting total sent from the accounts receivable department. Discrepancies shall be investigated to help assure that the customer subsidiary accounts are posted for the same total amount posted to the control account. At the end of each month, the total of the trial balance of customer account balances (prepared by the accounts receivable department) shall be reconciled to the general ledger control account by the general ledger supervisor. Sales invoice batches shall be dated with the date of shipment, and totals of batches (including product line sales for athletic shoes) shall be accumulated each month and recorded in the accounts receivable control and sales revenue accounts. The general ledger supervisor shall approve all monthly summary entries before they are posted to the general ledger. The treasurer shall approve all cash refunds and allowance credit memos for sales returns, after initiation by customer relations personnel. The marketing vice president shall periodically analyze sales activity by product lines in comparison to budgets and forecasts and prior years’ activity. Cash Management The monthly bank statements shall be mailed to the cash management department in the treasurer’s office. Personnel use the duplicate deposit slips retained when bank deposits were made, the cash receipts journal listing, and the cash disbursements listing to reconcile the general bank accounts. The payroll bank account is also reconciled, utilizing the payroll register retained by the treasurer’s office. Cash management personnel shall compare cash receipts journal daily deposit records with the bank deposits and duplicate deposit slips when the general bank account reconciliation is performed. At the discretion of the director of internal audit, internal auditors will occasionally make unannounced reviews of the bank account reconciliations. They may also prepare reconciliations without prior notice given to cash management personnel. Cash Receipts and Accounts Receivable Processing All cash receipts from customers related to sales shall be credited to accounts receivable individual and control accounts. The accounts receivable department shall post credits to individual customer accounts, dating the entries with the date of the remittance list. Statements of accounts receivable balances shall be mailed to customers each month by the accounts receivable accounting department. Customers’ reports of disputes or differences shall be handled by customer relations personnel in the marketing department. Cash Disbursements All disbursements shall be made by check, signed by the treasurer, including reimbursements of the petty cash funds. Checks shall be made payable to a named payee and not to “cash.” Blank check stock shall be kept under lock and key in the accounts payable accounting department. Under no circumstances may blank checks be signed by the treasurer. Voided and spoiled checks shall be transmitted to the treasurer for inspection and later filed in numerical order with paid checks. Cash disbursement journal entries shall be dated with the date of the check. The related monthly general ledger summary entries shall carry the date of the month summarized. Inventory Perpetual Records Inventory additions shall be dated with the date of the receiving report. Inventory issues shall be dated with the date of shipment. Fixed Asset Records and Transactions When acquisition costs exceed the capital budget authorization by 10 percent or more, the additional expenditure shall be approved by the treasurer and board of directors, in advance if possible. Zero salvage values shall be used in all depreciation calculations. Useful life and depreciation method assignments for financial statement calculations shall follow these general guidelines: Buildings Declining Balance 15 years Equipment Declining Balance 3-6 years All repair, maintenance, and capital additions less than $5,000 shall be expensed. Amounts over $5,000 should always be capitalized unless unusual conditions point to proper expensing. Attachment: <> Date: Mon, 29 OCT 2007 06:42:35 +0000 From: "Darlene Wardlaw" Subject: Upcoming Apollo Shoes Engagement Apollo denied our request to speak with the predecessor auditors because of “litigation concerns.” I’ve looked at the 8-K filed by Apollo and the auditors referenced in the 10-K. I didn’t attach a copy because it didn’t say much, just something about “incongruent goals,” blah, blah, blah. Against my advice, Arnold decided to accept the engagement anyway. Keep your eyes open! The good news is that the predecessor auditors, Smith and Smith, CPAs, have a good reputation, so you can use last year’s audited numbers from the 10-K. The bad news is that we don’t have access to prior year working papers. You’ll need to come up with programs for the substantive audit procedures for each of the functional balance sheet areas (indicated with an asterisk (*) below). You can download copies of the audit programs from AuditNet (www.auditnet.org) under “Auditors Sharing Audit Programs” or get them from an old auditing textbook. My preference is to place the audit programs at the beginning of each section. Label the sections as follows: GA series (GA-1, GA-2, etc.) General and Administrative (Planning) ICC series Revenue/Collection Cycle Internal Control Evaluation ICD series Purchasing/Disbursements Internal Control Evaluation ICP series Payroll Internal Control Evaluation A series Trial Balance/Financial Statements/Adjustments/Footnotes B series* Cash Substantive Workpapers C series* Accounts Receivable Substantive Workpapers D series* Inventory Substantive Workpapers E series* Prepaids Substantive Workpapers F series* Property, Plant and Equipment Substantive Workpapers I series* Other Assets Substantive Workpapers L series* Current Liabilities Substantive Workpapers N series* Notes Payable Substantive Workpapers Q series* Stockholders’ Equity Substantive Workpapers R series* Revenue Substantive Workpapers X series* Expenses Substantive Workpapers Because we are so understaffed during busy season, you are going to have to perform the bulk of the audit yourself. I was only able to get you a spring intern (Bradley Crumpler) from Caledonia State University (heck, I didn’t even know they had an accounting program!). He is the only unassigned person in the office right now. Because I am unsure of his training, I suggest that you only use him for “grunt work.” Also, I checked into the background and experience of Karina Ramirez, Apollo’s Internal Auditor. Apparently, she was an auditor with a Big 4 firm for 8 years before coming to Apollo and has served on the state CPA society’s ethics committee. I also went through her workpapers; they appear to be top-notch. Lastly, she reports directly to the Audit Committee, so we can rely on her to be objective. I think we can rely on her work during our engagement. DW P.S. Thanks for drafting the engagement letter. I only had to make a couple of changes before Arnold signed it. Date: Mon, 7 JAN 2008 12:45:39 +0000 From: "Darlene Wardlaw" Subject: Apollo Shoes minutes Attachments: << AudComMins—010307.doc>><< AudComMins—063007.doc>><< AudComMins—010308.doc>> Hope the inventory observation went well. I saw Bradley in the office working on some inventory stuff. He said that he would e-mail it to you when it was completed. Sorry I haven’t made it out to Apollo yet. I did meet with Jeff Chestnutt (Apollo’s corporate secretary) who allowed me to copy the minutes of the Board of Directors. The board of directors met twice during the period under audit, January 1 through December 31, and once more last week. I have attached copies. Study these minutes – they provide a history of every important event and transaction that Apollo has undergone during the past year. Make notes in the form below for the audit working papers of matters relevant for the audit of the 2007 financial statements. Prepare a working paper (GA-3) for my review with proper headings and these two columns: Information Relevant to 2007 Audit Audit Action Recommended You may want to stick a copy of the minutes in the workpapers (GA-3-1, GA-3-2, etc.) behind your memo when you are done with them. DW MEETING HELD JANUARY 3, 2007 Larry Lancaster, incoming 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 of the audit committee. The minutes of the December 15, 2006 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 January 2, 2007 and rolled into a long-term note payable with the Twenty-First National Bank of Maine, due January 1, 2008. 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 2007. The board approved these salaries by a 4-3 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 450,000 Internal Audit Director, Karina Ramirez 235,000 Treasurer, Mary Costain 222,000 Controller, Samuel Carboy 214,000 Mr. Lancaster encouraged everyone to watch the 2007 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 AudComMins—010308.doc MEETING HELD JUNE 30, 2007 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 3 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 2008 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 $8,810.13 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 $1,000,000 to Mr. Lancaster as a personal loan to cover personal legal expenses related to his previous employer. Mr. Unum further suggested that the promissory note plus accrued interest of 1% per year be due on June 30, 2045. 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. 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 authorized a draw of $44,053,000 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 MEETING HELD JANUARY 3, 2008 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 2007 audit. Ms. Mandeville moved, and Mr. Gorr seconded, a proposal to declare retroactively a cash dividend of $810,000 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 2, 2008 (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 2006. 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 2007, 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 AudComMins—010302.doc Date: Tue, 8 JAN 2008 08:49:35 +0000 From: "Darlene Wardlaw" Subject: Apollo Shoes Trial Balances Attachments: <<2007 Apollo Trial Balance.xls>>, <<2006 Apollo Trial Balance.xls>> I got a copy of Apollo’s 2007 year-end trial balance (attached) from Sam Carboy, Apollo’s Controller. I also got a copy of last year’s 2006 audited trial balance from Karina. I’ve attached copies of both to this e-mail and also posted them to the AOW intranet where you can also download them. I received it a week after he promised it to me, so apparently it wasn’t as clean a year-end close as he expected. I want you to put the numbers into three spreadsheets (one for the comparative (i.e., two-year) balance sheet (A-1), one for the comparative income statement (A-2), and one for the comparative statement of cash flows (A-3)). I know that everyone has a particular style of workpaper formatting, but my preference is for the following columns for the income statement and balance sheet: Acct # Acct Title W/P Ref Last year’s (Audited) Current Year (unaudited) Adjustments Current Year (Audited) Dr. Cr. DW Apollo Shoes, Inc Preclosing Trial Balance (Audited) December 31, 2006 Account ID Account Description Debit Credit 10100 Cash on Hand $1,987.28 10200 Regular Checking Account $198,116.52 10300 Payroll Checking Account $0.00 10400 Savings Account $3,044,958.13 11000 Accounts Receivable $16,410,902.71 11500 Allowance for Doubtful Accounts $1,262,819.88 12000 Inventory – Spotlight $18,825,205.24 12300 Reserve for Inventory Obsolescence $3,012,000.00 14100 Prepaid Insurance $743,314.38 14200 Prepaid Rent $200,000.00 14300 Office Supplies $7,406.82 14400 Notes Receivable-Current 14700 Other Current Assets 15000 Land $117,000.00 15100 Buildings and Land Improvements $623,905.92 15200 Machinery, Equipment, Office Furniture $433,217.10 17000 Accum. Depreciation $164,000.00 19000 Investments $612,691.08 19900 Other Noncurrent Assets $13,840.59 20000 Accounts Payable $4,633,118.09 23100 Sales Tax Payable $0.00 23200 Wages Payable $29,470.32 23300 FICA Employee Withholding $1,318.69 23350 Medicare Withholding $583.99 23400 Federal Payroll Taxes Payable $6,033.01 23500 FUTA Tax Payable 23600 State Payroll Taxes Payable $2,815.47 23700 SUTA Tax Payable 23800 FICA Employer Withholding $1,318.69 23900 Medicare Employer Withholding $583.99 24100 Line of Credit $10,000,000.00 24200 Current Portion Long-Term Debt 24700 Other Current Liabilities 27000 Notes Payable-Noncurrent 39003 Common Stock $8,105,000.00 39004 Paid-in Capital $7,743,000.00 39005 Retained Earnings $1,899,120.65 40000 Sales $246,172,918.44 41000 Sales Returns $4,497,583.20 42000 Warranty Expense $1,100,281.48 45000 Income from Investments $0.00 46000 Interest Income $204,302.81 50010 Cost of Goods Sold $141,569,221.61 57500 Freight $4,302,951.46 60000 Advertising Expense $897,140.01 61000 Auto Expenses $208,974.39 62000 Research and Development $31,212,334.17 64000 Depreciation Expense $133,000.00 64500 Warehouse Salaries $4,633,383.82 65000 Property Tax Expense $80,495.32 66000 Legal and Professional Expense $3,605,133.96 67000 Bad Debt Expense $1,622,425.99 68000 Insurance Expense $853,942.65 70000 Maintenance Expense $61,136.04 70100 Utilities $135,642.99 70110 Phone $76,373.78 70120 Postal $128,033.21 71000 Miscellaneous Office Expense $17,023.27 72000 Payroll Tax Exp $1,550,989.06 73000 Pension/Profit-Sharing Plan Ex $3,000,000.00 74000 Rent or Lease Expense $2,603,485.87 77500 Administrative Wages Expense $16,875,305.98 78000 Interest Expense $875,000.00 78500 Income Tax Expense – Federal $2,365,000.00 78510 Income Tax Expense – State $429,000.00 80000 Loss on Legal Settlement $19,172,000.00 $283,238,404.03 $283,238,404.03 Apollo Shoes, Inc Preclosing Trial Balance December 31, 2007 Account ID Account Description Debit Amt Credit Amt 10100 Cash on Hand $2,275.23 10200 Regular Checking Account $532,125.92 10300 Payroll Checking Account 10400 Savings Account $3,670,599.15 11000 Accounts Receivable $49,780,259.98 11400 Other Receivables $1,000,000.00 11500 Allowance for Doubtful Accounts $1,254,009.75 12000 Inventory $67,424,527.50 12300 Reserve for Inventory Obsolescence $867,000.00 14100 Prepaid Insurance $3,374,213.78 14200 Prepaid Rent 14300 Office Supplies $8,540.00 14400 Notes Receivable-Current 14700 Other Current Assets 15000 Land $117,000.00 15100 Buildings and Land Improvements $674,313.92 15200 Machinery, Equipment, Office Furniture $2,929,097.13 17000 Accum. Depreciation $610,000.00 19000 Investments $2,038,780.39 19900 Other Noncurrent Assets $13,840.59 20000 Accounts Payable $1,922,095.91 23100 Sales Tax Payable 23200 Wages Payable 23300 FICA Employee Withholding $4,291.25 23350 Medicare Withholding $11,414.99 23400 Federal Payroll Taxes Payable $118,086.12 23500 FUTA Tax Payable 23600 State Payroll Taxes Payable $42,397.24 23700 SUTA Tax Payable 23800 FICA Employer Withholding $4,291.25 23900 Medicare Employer Withholding $11,414.99 24100 Line of Credit $44,053,000.00 24200 Current Portion Long-Term Debt 24700 Other Current Liabilities 27000 Notes Payable-Noncurrent $10,000,000.00 39003 Common Stock $8,105,000.00 39004 Paid-in Capital $7,743,000.00 39005 Retained Earnings $6,270,483.64 40000 Sales - Spotlight $245,213,452.88 41000 Sales Returns $13,600,220.89 42000 Warranty Expense $1,158,128.47 45000 Income from Investments $1,426,089.31 46000 Interest Income $131,881.46 47000 Miscellaneous Income $2,145,000.00 50010 Cost of Goods Sold $130,246,645.26 57500 Freight $4,236,263.09 60000 Advertising Expense $986,854.01 61000 Auto Expenses $214,502.80 62000 Research and Development $212,864.02 64000 Depreciation Expense $446,000.00 64500 Warehouse Salaries $4,720,715.56 65000 Property Tax Expense $84,332.45 66000 Legal and Professional Expense $1,902,224.45 67000 Bad Debt Expense 68000 Insurance Expense $36,106.92 70000 Maintenance Expense $49,502.87 70100 Utilities $137,332.18 70110 Phone $52,599.02 70120 Postal $77,803.61 71000 Miscellaneous Office Expense $24,891.82 72000 Payroll Tax Exp $1,577,811.85 73000 Pension/Profit-Sharing Plan Ex $3,300,000.00 74000 Rent or Lease Expense $1,203,574.00 77500 Administrative Wages Expense $16,197,225.43 78000 Interest Expense $2,591,736.50 78500 Income Tax Expense - Federal $13,069,000.00 78510 Income Tax Expense - State $2,241,000.00 $329,932,908.79 $329,932,908.79 Date: Wed, 9 JAN 2008 10:44:22 +0000 From: "Darlene Wardlaw" Subject: Analytic Procedures 1. I need you to perform preliminary analytical procedures on the financial statements. a. Calculate common-size financial statements and dollar amount and percent changes. I suggest you simply make a copy of your spreadsheet from your pro-forma financial statements that I asked you to prepare yesterday and remove the adjustment columns. Have there been any significant changes that we need to examine closer? b. Calculate financial ratios. Assume the market value of the common stock is $24 million in both the current and prior years. Does anything jump out at you? c. If you have time, compare Apollo’s numbers with those of its closest competitors, Nike and Reebok. You can get those companies’ numbers from EDGAR (www.sec.gov). I am not sure if industry averages are available, but that too would be helpful. 2. Write a brief memo (GA-4) highlighting what you believe are potential problem areas. Include printouts of your calculations as support (GA-4-1, GA-4-2, etc.) DW Date: Wed, 9 JAN 2008 12:15:49 +0000 From: "Darlene Wardlaw" Subject: Materiality for Apollo Shoes Engagement You need to prepare a memo (GA-5) addressing materiality for Apollo Shoes. Remember that the workpapers document that we are following Generally Accepted Auditing Standards. In the memo, 1. Briefly describe independent auditors’ concept of materiality. 2. Describe some common relationships and other considerations used by auditors when assessing the dollar amount considered material. In other words, what are some common measures of materiality with respect to income, sales, and total assets? 3. Based upon your professional judgment and your discussion of items 1 and 2 above, determine an amount you consider to be a minimum material misstatement for Apollo Shoes and justify your recommendation in your memo. DW Date: Thur, 10 JAN 2008 1:15:49 +0000 From: "Darlene Wardlaw" Subject: SAS 99 Memo We need a memo (GA-6) addressing the potential for fraud for Apollo Shoes. This workpaper is necessary to document that we are following SAS 99 fraud guidance. Some things you might want to include in your memo: • Have you noticed any “red flags” in either the minutes or your analytic procedures so far? • Address fraud risk in general terms: types of risk (Remember that improper revenue recognition is always a “red flag.”), significance of risk, likelihood of risk (what is the probability of fraud?), pervasiveness or risk (is fraud risk centralized to one function or individual or is it throughout the organization?) • How might a fraud might be perpetrated and concealed in the entity • Suggest ways that we might alter our audit approach to address the potential for fraud, such as assignment of personnel, predictability of auditing procedures, and examination of journal entries and other adjustments We will need to get together with the entire audit team (you, me, and Bradley) for a “brainstorming” session next week. DW Date: Thu, 10 JAN 2008 07:42:35 +0000 From: "Arnold Anderson" Subject: Apollo Shoes and Computers Darlene mentioned your inquiry earlier this week, and yes, Anderson, Olds, and Watershed (AOW) was aware of Apollo’s mid-year computer installation. In fact, the planned conversion was discussed and AOW was advised of the conversion process by the director of internal audit. I haven’t thought about it much, so I appreciate you bringing it to my attention. The more I think about it, the more I am concerned about how the computer processing of the last two quarters’ transactions will affect our audit this year. Also, our firm has recently obtained several laptop computers but we have not used them on any audit to date. To be honest, I am not too comfortable with computers but I am interested in how they can increase our firm’s profitability. Any suggestions as to how computers might be used on the Apollo Shoes engagement? For example, can correspondence, memos, and auditing working papers be prepared and maintained on the computer? Could they save audit time as well as make the audit easier for me to supervise and review? Prepare a memo in the General and Administrative section of the current year workpapers (GA series) to document how planning might be affected by the computer processing of accounting transactions. I suggest you consider such things as the extent of computer usage, complexity of computer operations, organization structure of computer activities, availability of data, computer-assisted audit techniques, and need for specialized skills. “Uncle” Arnie Date: Thu, 10 JAN 2008 10:07:15 +0000 From: "Karina Ramirez" Subject: Upcoming Apollo Shoes Engagement Attachment: <> I’m sorry I missed you when you stopped by earlier today. Per your request, I have tried to summarize the new information processing system: The computer accounting system is a combination of a simple batch computer system and an advanced computer system. Accounting clerks directly enter accounting transactions from their terminals located in the various accounting departments; thus, entry is online. However, the transactions are not validated at entry to check for input errors. To prevent errors from entering the financial records, the transactions are not immediately posted to the various subsidiary ledgers maintained in the database. Validation occurs after the transactions are balanced by batch. The transactions are then posted to the ledgers by batches every night; therefore, the various databases, such as inventory, are only up-to-date as of the prior working day’s transactions. (I insisted that Apollo start the accounting processing in this mode to establish control. As employees become more familiar with the terminal entry and control over transaction entry proves adequate, I will consider moving to online data entry and online input validation.) In addition, Apollo Shoes is using a wireless local area network multiserver with a small information systems staff. This small staff cannot support all of the ideal division of duties that would provide the proper separation auditors desire among computer personnel. I’ve attached an excerpt from our workpapers that describes the system in more detail. I hope this summary satisfies your needs. Please let us know if there is any additional information that you require. Karina Karina Ramirez Director, Internal Audit Apollo Shoes, Inc. This Apollo message (including any attachments) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message and are hereby notified that any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited. The information systems department became active in June. At that time the director, Ernst Hathaway, was promoted to vice president. Apollo obtained a wireless local area network (LAN) multiserver soon after and began testing the hardware and software. The testing of the new computer system progressed throughout the early fall with the accounting processing run on both the old manual system and the new computer system for the month of September. On October 1, Apollo converted to the wireless multiserver system. As the new computer system was designed and customized to Apollo’s needs, every effort was made to keep as many as possible of the procedures and business documents used in the manual system. This made the transition to the computer system easy on the employees, thus reducing training and employee objections to the computer. Further, most of the controls and separation of duties previously described were retained. Hardware Description Apollo purchased a wireless local area network (LAN) multiserver, featuring 200 GB (gigabytes, or 200 billion bytes) of storage capacity. This system can support 400 terminals, but Apollo currently uses about 20. This system utilizes several disk drives where the computer software and the active accounting databases are stored. Two tape drives are online to provide the logging of transactions and to provide means to back up the data on the disk drives. The computer room contains two printers, a laser printer and a 1,000-lines-per-minute line printer. A printer bank is located in the accounting department. Accounting Software The financial accounting software is an integrated application combining a comprehensive set of general ledger, accounts receivable, and accounts payable functions. The financial accounting system allows online entry with online data validation and online posting. However, to provide better control, Apollo has elected to utilize batch entry, deferred validation, and deferred posting. In this mode, the data are not validated at the time of entry. A special input validation routine, which reports all validation errors, is employed after the batches are balanced. The erroneous entries can be corrected through maintenance functions. The transfers of transactions from the Accounts Receivable and Accounts Payable modules to the General Ledger module also are done in batch mode. Batches are validated and posted every night; thus, the detailed accounting records are never more than one day from being accurate. Two levels of security are provided in the system. The terminals require a special password. Access to any function (data entry, data review, review invocation) for each unique set of transactions is controlled by another set of passwords. Thus, allowed operations are isolated to the department that must enter and use the data. For example, the order entry accounting clerks cannot access the cash disbursement records or enter cash disbursement transactions without knowledge of the appropriate passwords. Organization and Duties of Information Systems Personnel The information systems department consists of Ernst Hathaway—the Vice President of Information Systems, a systems development project manager and two programmer/analysts, an operations manager (who also serves as the librarian and control clerk), and two machine operators. Following is a brief summary of the responsibilities and duties of each. Vice President of Information Systems (VP-IS). The VP-IS is responsible for computer processing operations. Included responsibilities include long-range planning, setting policy and procedures for information systems (IS) employees, approving all equipment purchases, and preparing the department budget. The VP-IS also provides the primary contact with other department vice presidents and has overall responsibility for training other department personnel in the use of the new system. The VP-IS works with the systems development manager and the various users to set priorities for the programmer/analysts. Systems Development Project Manager. The project manager is primarily responsible for all modifications to the financial accounting system and other systems development projects. He creates the specifications for projects after consultation with the users and assigns projects to the programmer/analysts. Other responsibilities include interface with the users on a one-to-one basis to resolve their problems and consider their requests for modifications, education of the programmer/analysts, and working with the vendor service representatives on software problems. Operations Manager. The operations manager’s primary responsibilities are to ensure that the computer is operating properly and to direct the work of the two operators. Additional duties include system security, librarian, database administrator, and control clerk. The operations manager also is the person who works with vendor hardware service and maintenance personnel. Date: Thu, 17 JAN 2008 7:42:53 +0000 From: "Darlene Wardlaw" Subject: Understanding the Revenue Cycle Attachment: <> I’ve attached a Sales internal control questionnaire from another engagement that I think you can use for Apollo. You may want to talk to Karina Ramirez to get answers to the questions. 1. Complete the ICQ for Apollo. For “yes” answers, add a comment stating which department and clerk performs the function. For “no” answers, describe the possible “errors” or “frauds” that could occur because of the control weakness. 2. I’ve started a flowchart and listed some strengths and weaknesses, but had to leave before I could finish it. See if you need to add any more strengths and/or weaknesses that you find from the ICQ and narrative descriptions of the revenue cycle. DW Internal Control Questionnaire—Sales Transaction Processing Assertions and Questions Yes, No, N/A Comments Occurrence assertion: 1. Is the credit department independent of the sales department? 2. Are sales of the following types controlled by the same procedures described below? Sales to employees, COD sales, disposals of property, cash sales, and scrap sales. 3. Is access to sales invoice blanks restricted? 4. Are pre-numbered bills of lading or other shipping documents prepared or completed in the shipping department? Completeness assertion: 5. Are sales invoice blanks pre-numbered? 6. Is the sequence checked for missing invoices? 7. Is the shipping document numerical sequence checked for missing bills of lading numbers? Accuracy assertion: 8. Are all credit sales approved by the credit department prior to shipment? 9. Are sales prices and terms based on approved standards? 10. Are returned sales credits and other credits supported by documentation as to receipt, condition, and quantity, and approved by a responsible officer? 11. Are shipped quantities compared to invoice quantities? 12. Are sales invoices checked for error in quantities, prices, extensions and footing, and freight allowances, and checked with customers’ orders? 13. Is there an overall check on arithmetic accuracy of period sales data by a statistical or product-line analysis? 14. Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting? Classification objective: 15. Does the accounting manual contain instructions for classifying sales? Cutoff objective: 16. Does the accounting manual contain instructions to date sales invoices on the shipment date? <> Date: Thu, 17 JAN 2008 13:02:47 +0000 From: "Karina Ramirez" Subject: Revenue and Collection Cycle Documentation I have excerpted from our workpapers a description of Apollo’s Accounting and Control Systems over the Revenue/Collection Cycle and Purchasing/Cash Disbursements. I’ve also gave a copy of a flowchart of sales transaction processing to Darlene. We have not developed one for the purchasing cycle yet, but we plan to do so once your audit is ended and our assistance is no longer necessary. Hope you find the info useful. Let me know if you have any questions. Karina Karina Ramirez Director, Internal Audit Apollo Shoes, Inc. This Apollo message (including any attachments) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message and are hereby notified that any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited. Apollo Accounting and Control Systems: Revenue and Collection Cycle As evident in the company organization chart, Apollo has several departments and offices concerned with management, accounting, and control. The company also has an abbreviated accounting and control manual, although the manual has not been kept up to date. Officers and employees have described accounting and control procedures informally under the heading of several transaction cycles. Their descriptions of the company's current revenue cycle activities appear below. Credit Approval and Sales Processing Customer orders are received in the mail, over the telephone, and over the counter by salesclerks in the marketing department. The clerks prepare written sales orders for telephone and counter customers, signing each one and asking the counter customers to sign in person. The sales orders contain the customer name, a customer number (assigned immediately for new customers), customer address, identification of products, and the quantity ordered. The sales order forms are kept in the salesclerks’ working area through which many people pass during the day. The sales order documents used in the offices are not prenumbered. The salesclerks prepare an estimate of the dollar amount of the order and write it on the form. The sales orders are then hand-carried to the credit manager, who is in the treasurer’s department. The credit manager checks the customers’ accounts receivable balances and other credit file information using a computer-based inquiry system. If credit is approved, the credit manager signs the sales order. If credit is not approved, the customer is asked to pay in advance, and the sales order is held until notification of payment is received from the cashier. The sales order is stamped “paid” and sent to the billing department. Likewise, when customers pay cash over the counter, the money is taken by the cashier, and the sales order is stamped “paid” and sent to the billing department. For bookkeeping convenience, these “cash” sales are treated the same as credit sales, with the invoice amount being charged to an account receivable set up for the customer, and the customer’s payment being applied immediately to the same account. After credit has been approved, or a payment received, the sales orders are sent to the billing department in the controller’s office. The billing clerks produce a four-copy sales invoice on a prenumbered invoice form. Using a screen facsimile on a personal computer, they insert the customer and product information from the customer order, the date, and the product unit prices from an approved price list. Sales taxes, delivery charges, and the invoice total are computed and put on the invoice. The sales invoice forms are kept in a locked closet in the billing department, and sheets in the numerical sequence are removed only for billing clerks’ immediate loading onto the computer printer. Copy 1 and copy 2 of the sales invoice, the customer order, and the sales order are sent to the accounts receivable accounting department, which is also in the controller’s office. These documents are held in invoice numerical order in a “pending shipment” file, awaiting matching with copy 4 of the invoice, which was first sent to the inventory stores department as authority for the storeskeeper to put the order together and move it to the shipping department. Copy 3 of the invoice is sent to the shipping department, where it is initially held in a “pending release” file. Shipment and Delivery Upon receipt of an invoice copy 4, which serves as the authorization to move goods to the shipping area, the inventory storeskeeper supervises removal of shoe products from shelves and bins. Copy 4 is sent to the shipping area with the products. In the shipping area, shipping employees remove copy 3 from the “pending release” file. They check both copy 3 and copy 4 for the correct quantity of each product, then pack the order in suitable boxes. Copy 3 is sent to the inventory records department in the controller’s office, where it serves as the source of entries to reduce the perpetual inventory records. If any items shown on the invoice are not shipped, the handlers are supposed to alter the invoice copies to show the correct quantity. When customers are on the premises, they can pick up their own orders at the shipping area, where they are asked to sign copy 4 as acknowledgment of receipt. Otherwise, a prenumbered bill of lading is filled out in two copies for shipments by contract truckers. Copy 1 of the bill of lading is attached to the shipment. Copy 2 of the bill of lading is sent with invoice copy 4 to the accounts receivable accounting department. Apollo Revenue Cycle Flowchart Apollo Accounting and Control Systems: Purchasing and Expenditure Cycle The employee prepares a purchase requisition and has a supervisor approve it. The supervisor retains Copy 2 of the pre-numbered purchase requisition for the department, sends Copy 1 to the Purchasing Department and Copy 3 to Accounts Payable. When the Purchase Department receives the purchase requisition, they search the approved vendor list and consult the listed prices for the goods desired for each vendor. Once a vendor has been selected, five copies of a pre-numbered purchase order are prepared. Copy 5 is retained in the purchasing department and filed with the accompanying purchase requisition. Copy 2 is sent back to the department who prepared the purchase requisition, where both source documents are filed by number together. Copy 3 is sent to the Receiving Department. However, their copy is modified so that the quantity of the items ordered is blacked-out. Copy 4 is sent to Accounts Payable. Copy 1 of the purchase order is sent to the selected vendor. When the goods are received, the invoice is sent to Accounts Payable and the packing slip is retained in Receiving. The Receiving department verifies the order by comparing the external packing slip with the internal purchase order. Then they count and inspect the items received. The blacked-out purchase order helps to ensure accurate counting of the items ordered. To further assure that the items received are counted, the receiving clerk is required to sign the receiving report. Once the manual process is complete, the inventory file is updated to reflect the goods received and three copies of a pre-numbered receiving report are prepared. Copy 1 and the goods received are sent to the department that requested the items, where it is filed with the accompanying purchase requisition and purchase order. The Receiving Department files Copy 2 of the receiving report with the packing slip and their copy of the purchase order. Copy 3 of the receiving report is sent to A/P where it, the purchase order, and the purchase requisition are compared to the vendor’s invoice for accuracy. The voucher package is then filed according to payment date. This allows the potential for taking any vendor discounts offered. When payment is due, a disbursement voucher is prepared and is sent to the cashier and the voucher package is sent to the Finance Department. Upon receipt of the disbursement voucher, the cashier will review, sign and cancel the disbursement voucher and prepare a check. The VP of Finance will sign the check after reviewing it with the voucher package for consistency and accuracy. The VP of Finance cancels the voucher package and sends it to A/P. The canceled disbursement voucher is sent to A/P from the cashier, where it is matched and filed with the accompanying canceled voucher package. The VP of Finance sends a copy of each signed check to A/P. The copy is then attached to the canceled voucher package and canceled disbursement voucher and filed as paid. A journal entry is recorded to show the payment of the payable. Date: Fri, 18 JAN 2008 08:13:24 +0000 From: "Darlene Wardlaw" Subject: Revenue Cycle Bridge Working Paper We need to make sure that we address the fraud auditing standard (SAS 99) in the workpapers, specifically the identification of potential for fraud (and errors for that matter) in the revenue cycle. I need you to prepare a bridge working paper (ICC-1) for the audit of Apollo Shoes as of December 31, 2007, addressing this issue. This is what I need you to do: 1. In the first column, use an index number (S-# or W-#) cross-referenced to your flowchart to indicate potential strength or weakness. 2. In the second column, describe the control activity (or lack thereof) that may serve to prevent, detect, or correct errors or frauds. Understand that Apollo may or may not have the control activity in place. If they do, we may test the control if that is cost-effective. If they don’t, we can propose the control as a management letter comment. 3. In the third column, describe the audit implications of the strengths/ weaknesses related to the control activities with respect to transactions or accounts reported in the financial statements (e.g., the presence of a credit check ensures that sales are only made to creditworthy customers; a lack of a credit check would allow sales to customers unable to pay, and therefore ultimately increase bad debt expense). 4. In the fourth column, describe specifically how (recalculation, reperformance, inquiry and observation, etc.) you would test the control. 5. Finally, add a fifth column for compensating audit procedures. If the control activity is not in place, or the control activity is in place but not effective, we need to determine what audit procedure (i.e., a compensating test) we could use to catch them. (For example, we can use customer confirmations to test the validity of the transactions if we can’t rely on the client’s controls.) I suggest that you get Bradley to audit a sample of sales transactions for compliance with these control procedures. The objectives of his work will be to (1) obtain control evidence about the validity, authorization, accuracy, and proper period recording of recorded sales, and (2) obtain control evidence about the accuracy and classification of sales postings to individual customer accounts receivable. If we don’t find any problems, maybe we won’t have to send out as many positive confirmations. DW Date: Mon, 21 JAN 2008 11:04:37 +0000 From: "Darlene Wardlaw" Subject: FW: Revenue Cycle Problems Bradley sent me a copy of his test of controls work that he did on sales transactions. (Please tell him to send his work to you, rather than me.) Based on what Bradley found, there looks to be some serious problems in Sales and A/R. You need to write a memo identifying and explaining the significance of the qualitative features indicated by these deviations. Some things you may want to think about: 1. If the control performance were uniform for the year, the deviations would be evenly distributed by month. 2. Apollo Shoes faced financial problems in the fourth quarter of the year. 3. Sales transactions with missing bills of lading suggest improperly recorded sales. 4. December is the month when deviations overstating sales can have the most effect on the financial statements. 5. The company reports financial results each calendar quarter ending in March, June, September, and December. 6. Lack of credit approval for sales generally suggests the company might experience collection problems. 7. Errors in billing customers generally might be expected to be a mixture of overcharges and undercharges to the customers. 8. For customer overcharges, what was the average delay between the invoice date and the date a credit memo was entered giving the customer credit to correct the mistake? 9. Can you find any qualitative characteristics not signaled by these indicators? Because of the problems noted, I don’t think we can rely on Apollo’s controls over revenue and accounts receivable. We will need to confirm most, if not all, of the accounts receivable balances. I suggest that you mail positive confirmations to those customers with accounts greater than $1,000,000 and negative confirmations to those with balances less than $1,000,000. Also, I suggest that you ask Apollo’s customers to verify total sales during the year. Normally, you wouldn’t do this because it is difficult for the customers to confirm a year’s worth of transactions. However, since there is a relatively small amount of sales transactions during the year, they should be able to confirm without a problem. I’ll talk to you about it more later. I don’t think you need to worry about customers with current zero balances. For now, just write the memo to be placed in the accounts receivable workpapers (C-series) about the problems that Bradley found and their affect on our audit procedures (more extensive testing, positive confirmations, etc.). DW Date: Mon, 21 JAN 2008 10:32:16 +0000 From: "Bradley Crumpler" Subject: Test of Controls Attachment: <> Of the 120 sales transactions you asked me to look at, I found 51 “deviations.” I have attached a list. These were the procedures that I used: 1. I randomly chose the sample of 120 transactions across the year with 10 from each calendar month. 2. I found all the invoices in the sample. None were missing. 3. All the invoices were properly posted to the general ledger sales and accounts receivable control accounts, and each was posted to the right customer’s individual account. 4. The invoices not listed had no deviations related to other documents, recalculations, or comparisons. 5. “No credit approval” means that the expected credit approval notation could not be found in the documents. 6. When “Wrong quantity billed” appears, a description of the effect follows. 7. “CM (date)” means the customer notified Apollo of an error and a credit memo was issued on the subsequent date. All credit memos generate debits to a sales returns account and credits to accounts receivable. 8. “Paid in full on time” means the customer paid the invoice when it was due. 9. “Missing BL”means the bill of lading (shipping document) could not be found. 10. “Wrong price” means the clerks put the wrong unit price on the invoice and billed the customer incorrectly. 11. “Arithmetic error” means I found the invoice multiplied and added to show an incorrect total. 12. . I found purchase orders from each customer except for the December shipment to Mall-Warts. Because there was no purchase order, I looked at the sales and shipping documents. The cost of the inventory shipped was $3,169,145.10. Apollo Shoes, Inc. ICC-2 Revenue Cycle Test of Controls Prepared by BC For Year Ended 12/31/2007 Reviewed by Deviation Sample # Invoice Month Day Amount Customer Deviation 1 21 39918 Sep. 23 $35,029 Nuke Me Wrong quantity. Overcharge $250. CM Nov. 5. 2 37 39357 Aug. 28 $11,326,574 Mall-Warts No credit approval. Unpaid as of Dec. 31. 3 50 35669 Apr. 18 $2,447,119 Mall-Warts No credit approval. Paid in full on time. 4 51 41612 Dec. 10 $2,165,501 Run For Your Life No credit approval. Unpaid as of Dec. 31 5 52 42056 Dec. 28 $730,588 Shoe Shack Wrong quantity. Overcharge $200. No CM. Unpaid. 6 61 40812 Nov. 3 $3,051,755 Neutralizer No credit approval. Unpaid as of Dec. 31. 7 66 39684 Sep. 13 $139,246 Imelda's Closet No credit approval. Paid in full on time. 8 67 33762 Feb. 21 $1,478,296 Mall-Warts No credit approval. Paid in full on time. 9 72 40004 Sep. 27 $35,029 Nuke Me Wrong quantity. Overcharge $180. CM Nov. 4. 10 86 40256 Oct. 8 $9,582 Wall of Shoes No credit approval. Unpaid as of Dec. 31. 11 89 34233 Mar. 5 $35,029 Nuke Me No credit approval. Paid in full on time. 12 91 39640 Sep. 11 $92,900 Pump It Up Shoes Arithmetic error. Overcharge $8,100. CM Nov. 1. 13 104 39036 Aug. 14 $35,079 Nuke Me Wrong price. Overcharge $50. CM Sept. 12 14 109 41326 Nov. 27 $45,258 Eight East No credit approval. Unpaid as of Dec. 31. 15 112 39113 Aug. 17 $524,239 Walkabout Wrong price. Overcharge $50. CM Sept. 1. 16 116 41754 Dec. 16 $10,458,848 Paul Bunion No credit approval. Unpaid as of Dec. 31. 17 121 33430 Feb. 11 $2,492,336 Paul Bunion Missing BL. Paid in full on time. 18 123 41774 Dec. 17 $3,376 Pump It Up Shoes No credit approval. Paid in full in Jan. 19 125 37526 June 14 $35,029 Nuke Me No credit approval. Paid in full on time. 20 132 42065 Dec. 29 $2,649 Doug's Arithmetic error. Overcharge $15. CM Jan. 15. 21 133 33217 Feb. 4 $35,029 Nuke Me No credit approval. Paid in full on time. 22 137 40725 Oct. 30 $146,446 Lockup Shoe Store No credit approval. Paid in full on time. 23 143 39160 Aug. 19 $110,002 Evil Spirt Wrong price. Overcharge $220. CM Sept. 30. 24 148 39130 Aug. 18 $112,239 Wild Hair Shoes Wrong price. Overcharge $50. CM Sept. 20. 25 161 38488 July 19 $4,333,275 Mall-Warts No credit approval. Paid in full 60 days. 26 161 38488 Wrong price. Overcharge $700. CM Aug. 5. 27 166 38816 Aug. 4 $3,000 Blue Bird Shoes Wrong price. Overcharge $2,000. CM Sept. 10. 28 180 41898 Dec. 22 $35,029 Nuke Me No credit approval. Paid in full in Jan. 29 186 39163 Oct. 19 $1,030,239 Tread Wrong price. Overcharge $1389. CM Dec. 4. (Neutralizer) 30 190 41341 Nov. 27 $13,332 Blue Bird Shoes No credit approval. Paid in full on time. 31 191 38669 July 27 $62,300 Intnl Soccer Federation Wrong price. Overcharge $100. CM Aug. 15. 32 193 35969 Apr. 24 $22,450 Pump It Up Shoes Missing BL. Paid in full on time. 33 225 39439 Aug. 31 $65,392 Custom Shoes No credit approval. Paid in full on time. 34 228 38191 July 6 $357,246 Pump It Up Shoes No credit approval. Paid in full on time. 35 228 38191 Wrong price. Overcharge $100. CM Aug. 6. 36 232 36111 May 1 $1,257,923 Mall-Warts No credit approval. Paid in full on time. 37 234 39485 Sep. 4 $35,069 Evil Spirt No credit approval. Paid in full on time. 38 238 40425 Oct. 16 $6,242 Blue Bird Shoes No credit approval. Paid in full on time. 39 240 32270 Jan. 6 $2,447,829 Mall-Warts No credit approval. Paid in full on time. 40 242 37498 June 13 $250,326 Sassy Shoes No credit approval. Paid in full on time. 41 245 41306 Nov. 26 $63,259 PayMore Shoes No credit approval. Unpaid as of Dec. 31. 42 252 38582 July 23 $5,249 Blue Bird Shoes No credit approval. Paid in full on time. 43 259 39057 Aug. 14 $4,792 Blue Bird Shoes Missing BL. Paid in full on time. 44 265 39578 Sep. 8 $63,259 Company B No credit approval. Unpaid as of Dec. 31. 45 268 35100 Apr. 1 $35,029 Nuke Me No credit approval. Paid in full on time. 46 269 38773 Aug. 1 $329,374 Trenchfoot Wrong price. Overcharge $35. CM Aug. 22. 47 280 38744 Aug. 1 $750,000 Intl Soccer Federation Wrong price. Overcharge $25. CM. Aug. 10. 48 289 39436 Aug. 31 $35,029 Nuke Me No credit approval. Paid in full on time. 49 291 38740 Aug. 1 $139,666 Sassy Shoes Wrong price. Overcharge $500. CM. Aug. 22 50 292 41976 Dec. 28 $5,765,082 Mall-Warts No credit approval. No purchase order. Unpaid as of Dec. 31. 51 296 40686 Oct. 28 $5,765,082 Sassy Shoes No credit approval. Unpaid as of Dec. 31. Date: Sat, 19 JAN 2008 00:35:24 +0000 From: "Darlene Wardlaw" Subject: Purchasing Cycle Bridge Working Paper I am glad that you don’t mind working on Saturdays. Welcome to “Busy Season!” Similar to what you did with the Revenue Cycle, I want you to prepare a bridge working paper for the audit of Apollo Shoes as of December 31, 2007, listing the major errors that could occur in the purchasing system and to describe the test of controls procedures for auditing related purchasing controls to determine whether reliable control exists. I don’t think that Apollo has enough purchase transactions that we need to rely on the controls (in other words, we’ll look at them all), but we need to document our finding for our 404 work: 1. In the first column, use an index number (S-# or W-#) to indicate potential strength or weakness. If you have time, you may want to prepare a purchasing cycle flowchart. Not required, but could be helpful. 2. In the second column, describe the control activity (or lack thereof) that may serve to prevent, detect, or correct errors or frauds. Understand that Apollo may or may not have the control activity in place. If they do, we may test the control if that is cost-effective. If they don’t, we can propose the control as a management letter comment. 3. In the third column, describe the audit implications of the strengths/ weaknesses related to the control activities with respect to transactions or accounts reported in the financial statements (e.g., the presence of a properly completed purchase order check ensures that purchases are authorized). 4. In the fourth column, describe how specifically how (recalculation, reperformance, inquiry and observation, etc.) you would test the control. 5. Finally, add a fifth column for compensating audit procedures. If the control activity is not in place, or the control activity is in place but not effective, we need to determine what audit procedure (i.e., a compensating test) we could use to catch them. (For example, we can use customer confirmations to test the validity of the transactions if we can’t rely on the client’s controls.) DW Date: Mon, 21 JAN 2008 15:37:42 +0000 From: "Darlene Wardlaw" Subject: Audit of Cash We received the bank confirmation and bank cutoff statement this morning. I left it in your mailbox at work. I would prefer that you audit cash rather than Bradley (let him stick to vouching documents to keep him out of trouble). A couple of points: 1. Don’t forget to trace from the cutoff bank statement to the outstanding check list to make sure that the listing is complete. 2. There was an adjustment made at the end of the year to other income that looks odd. If I remember correctly, there was a transaction in investments for the same amount. You may want to take a closer look. 3. The last check written in December was check number 3621. They use duplicate checks so I was able to look at the carbons when I was out at Apollo on Saturday. Talk to you soon. DW STANDARD FORM TO CONFIRM ACCOUNT BALANCE INFORMATION WITH FINANCIAL INSTITUTIONS 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 following information as of the close of business on 12/31/2007, regarding our deposit and loan balances. Please confirm the accuracy of the information, noting any exceptions to the information provided. If the balances have been left blank, please complete this form by 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 with 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 following 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% 3,284,192.03 0 3,670,599.15 2. We were directly liable to the financial institution for loans at the close of business on the date listed above as follows: ACCOUNT NO./ DESCRIPTION BALANCE* DATE DUE INTEREST RATE DATE THROUGH WHICH INTEREST IS PAID DESCRIPTION OF COLLATERAL Note#106316 Line of Credit, Acct#7500438 10,000,000 44,053,000 1/1/2008 2008 (revolving) 8.75% 9.75% 11/30/2007 11/30/2007 Inventory Inventory E.P Unum 1/9/2008 (Customer's Authorized Signature (Date) The information presented above by the customer is in agreement with our records. Although we have not conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our attention except as noted below. I.M. Rich 1/14/2008 (Financial Institution Authorized Signature) (Date) EXCEPTIONS AND OR COMMENTS No exceptions noted. Please return this form directly 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 form is prepared. Approved 1990 by American Bankers Association, American Institute of Certified Public Accounts, and Bank Administration Institute. Additional forms available from: AICPA - Order Department, P.O. Box 1003 NY, NY 10108-1003 Account 604-17-526-5 Page 1 of 2 Apollo Shoes, Inc. 100 Shoe Plaza Shoetown, ME 00001 *** Your Checking Acount 1-1-2008 THRU 1-18-2008 *** Your Previous Balance 3,284,192.03 Additions 3 Deposits 29,597,022.90 2 Transfers from other accounts 11,500,000.00 Deductions 55 Checks 12,181,004.11 3 Transfers to other accounts 29,365,369.20 Your Current Balance 2,843,841.62 CYC MC FREQ 01 01 M0000 Deposits and Other Additions Date Amount Date Amount 1/5/08 440,782.45 1/17/08 23,146,954.54 1/10/08 6,009,285.91 Checks and Other Withdrawals Check Date Amount Check Date Amount 3586 1/5/08 8,533.12 3590 1/12/08 10,587.77 3587 1/5/08 4,741.30 3603 1/12/08 14,766.54 3582 1/5/08 480,375.80 3604 1/12/08 15,816.16 3591 1/6/08 7,566.07 3606 1/12/08 2,794.07 3598 1/6/08 16,472.00 3583 1/13/08 9,606.37 3597 1/9/08 15,746.44 3584 1/13/08 823.27 3599 1/9/08 12,610.96 3588 1/13/08 14,122.85 3602 1/9/08 6,394.61 3592 1/13/08 5,684.08 3615 1/9/08 12,904.00 3594 1/13/08 12,741.49 3612 1/9/08 4,194.79 3595 1/13/08 988.55 3593 1/11/08 18,421.90 3601 1/13/08 5,717.19 3610 1/11/08 5,929.87 3605 1/13/08 4,807.21 3617 1/11/08 1,073.73 3607 1/13/08 2,667,006.32 3619 1/11/08 7,841.27 3608 1/13/08 9,515.15 3585 1/11/08 7,960.15 3609 1/13/08 1,501.40 3589 1/11/08 6,707.05 3613 1/13/08 17,205.98 Account 604-17-526-5 Page 2 of 2 Checks and Other Withdrawals Check Date Amount Check Date Amount 3621 1/13/08 11,137.19 3627 1/17/08 6,891.16 3596 1/16/08 10,014.94 3628 1/17/08 6,025.43 3600 1/16/08 200,000.00 3629 1/17/08 927.09 3611 1/16/08 1,266.85 3633 1/17/08 6,924.96 3616 1/16/08 9,338.02 3635 1/17/08 5,174.00 3614 1/16/08 14,366.46 3636 1/17/08 585.28 3618 1/16/08 13,377.14 3624 1/18/08 6,868.12 3620 1/16/08 2,566.30 3630 1/18/08 8,419.69 3622 1/17/08 6,683.93 3631 1/18/08 8,434,889.09 3623 1/17/08 2,937.13 3632 1/18/08 1,117.19 3625 1/17/08 124.81 3634 1/18/08 4,994.99 3626 1/17/08 15,216.88 Transfers to Other Accounts Date Amount Account 1/11/08 565,369.20 604-29-016-3 1/12/08 6,300,000.00 604-03-739-8 1/17/08 22,500,000.00 604-03-739-8 Transfers from Other Accounts Date Amount Account 1/13/08 3,500,000.00 604-03-739-8 1/18/08 8,000,000.00 604-03-739-8 Date: Mon, 14 JAN 2008 13:02:47 +0000 From: "Karina Ramirez" Subject: PBC Schedules We’ve completed the schedules that we agreed to prepare in our audit planning meeting. I’ve left them on your worktable in the conference room. According to your instructions, we’ve marked them PBC for “Prepared by Client.” I’ve attached copies to this e-mail as well as posted them to your firm’s intranet site as you directed. Let us know if you have any questions. I’ve also left some other documents that you requested last Friday, specifically copies of two bank deposit slips from early January that you requested for your accounts receivable work. Karina Karina Ramirez Director, Internal Audit Apollo Shoes, Inc. Apollo Shoes, Inc. B-1 Cash Lead Schedule Prepared by For Year Ended 12/31/2007 Reviewed by PBC (Audited) Unaudited Balance Balance Acct # Account Title 12/31/2006 12/31/2007 10100 Cash on Hand $1,987.28 $2,275.23 10200 Regular Checking Account $198,116.52 $532,125.92 10300 Payroll Checking Account $0.00 $0.00 10400 Savings Account $3,044,958.13 $3,670,599.15 $3,245,061.93 $4,205,000.30 Apollo Shoes Bank Reconciliation 12/31/2007 General Account Unadjusted book balance 51,750.12 Bank Adjustments 0.00 Amount to Balance 480,375.80 * Adjustment to balance posted to Cash and Controller's Clearing Account Adjusted book balance 532,125.92 Balance per bank statement 3,284,192.03 Add Deposits in transit 440,782.45 Deduct O/S Checks -3,192,848.56 Adjustment to Balance Adjusted bank balance 532,125.92 Payroll Account Unadjusted book balance 0.00 Bank adjustments 0.00 Adjusted book balance 0.00 Balance per bank statement 0.00 Add Deposits in transit 598,341.59 Deduct O/S Checks -598,341.59 Adjusted bank balance 0.00 Apollo Shoes, Inc Outstanding Checks December 31, 2007 PBC Check # Date Written Amount 3583 12/30/07 9,606.37 3584 12/30/07 823.27 3585 12/30/07 7,960.15 3586 12/30/07 8,533.12 3587 12/30/07 4,741.30 3588 12/30/07 14,122.85 3589 12/30/07 6,707.05 3590 12/30/07 10,587.77 3591 12/30/07 7,566.07 3592 12/30/07 5,684.08 3593 12/30/07 18,421.90 3594 12/30/07 12,741.49 3595 12/30/07 988.55 3596 12/30/07 10,014.94 3597 12/30/07 15,746.44 3598 12/30/07 16,472.00 3599 12/30/07 12,610.96 3600 12/30/07 200,000.00 3601 12/30/07 5,717.19 3602 12/30/07 6,394.61 3603 12/30/07 14,766.54 3604 12/30/07 15,816.16 3605 12/30/07 4,807.21 3606 12/30/07 2,794.07 3607 12/30/07 2,667,006.32 3608 12/30/07 9,515.15 3609 12/30/07 1,501.40 3610 12/30/07 5,929.87 3611 12/30/07 1,266.85 3612 12/30/07 4,194.79 3613 12/30/07 17,205.98 3614 12/30/07 14,366.46 3615 12/30/07 12,904.00 3616 12/30/07 9,338.02 3617 12/30/07 1,073.73 3618 12/30/07 13,377.14 3619 12/30/07 7,841.27 3620 12/30/07 2,566.30 3621 12/30/07 11,137.19 Total 3,192,848.56 Apollo Shoes, Inc Bank Deposit Slip Twenty First National Bank, Account #604-17-526-5 January 10, 2008 Customer Name Check Number Check Amount Pay More Shoes 16625 $526,004.85 Nuke Me 16949 $35,028.59 Shoe Shack 17309 $730,588.25 Trenchfoot 18544 $85,534.25 Imelda's Closet 11618 $96,452.11 Eight East 18369 $45,258.22 Feet Lamour 15299 $385,241.02 Neutralizer 18608 $3,053,144.23 Bad Boy Shoes 12818 $400,253.31 Wild Hair Shoes 12085 $252,769.26 Big Bob's Shoe Store 14819 $399,011.82 Total Deposit $6,009,285.91 Apollo Shoes, Inc Bank Deposit Slip Twenty First National Bank, Account #604-17-526-5 January 17, 2008 Customer Name Check Number Check Amount Run For Your Life Shoes 13289 $2,165,500.55 Hip Hop Shoes 14675 $695,542.21 International Soccer Federation 10531 $1,222,359.56 Walk About 13695 $932,653.33 Doug's Shoes 17097 $2,648.75 Custom Shoes 14659 $5,996.13 Blue Bird Shoes 11500 $11,844.63 Pump It Up Shoes 11186 $3,375.54 Hop Scotch Shoes 15820 $895,606.23 Sassy Shoes 19785 $5,765,081.85 Evil Spirit Shoes 15759 $86,450.60 Action Foot Shoes 10716 $793,544.22 Paul Bunion Footware 19851 $10,458,847.58 Shack's Shoe Shine 523 $3,000.00 Lock-Up Shoe Store 16514 $104,503.36 Total Deposit $23,146,954.54 Date: Mon, 28 JAN 2008 15:37:42 +0000 From: "Darlene Wardlaw" Subject: Audit of Accounts Receivable We received a number of account receivable (and one pre-paid insurance) confirmations that I put on your desk when I stopped by to talk to Samuel Carboy this morning. With the good response rate on the positive confirmations, you can probably start working on A/R now. While I think of it, you need to prepare a memo (C-2-1) addressing the following issues: 1. Describe the two forms of accounts receivable confirmation requests that you used and indicate the factors that you considered in determining which type to use. 2. What “alternative procedures” are you going to use to verify the existence of these accounts and the gross value of the receivables if the customers who receive positive confirmations never reply, even to a second request? Put the confirmations in the workpapers (C-2-2, C-2-3, C-2-4, etc.). Address any discrepancies between the client and the customer and propose adjustments as necessary. It would also be helpful to indicate the payments received by Apollo on the Aged Trial Balance Schedule (C-2). You can get these off of any early January deposits slips. If you get copies from the client, be sure to tie the totals into deposits indicated on the cutoff bank statement received directly from the bank. Lastly, the allowance for doubtful accounts looks pretty low. A/R goes up, but the allowance goes down? I need a separate workpaper (C-3) addressing the reasonableness of Apollo’s Allowance for Doubtful Accounts. You can specifically identify troubled accounts, look at subsequent cash collections, look at what Apollo’s competitors do, look at what Apollo has done in the past (bad debt expense as a % of sales, allowance for doubtful accounts as a % of total receivables) to develop your estimate of what should be in the allowance. Also consider current and previous A/R Turnover and Days’ Sales in A/R ratios. DW Apollo Shoes, Inc. C-1 Accounts Receivable Lead Schedule Prepared by For Year Ended 12/31/2007 Reviewed by PBC (Audited) Credits/ Unaudited Balance Receipts/ Balance Acct # Account Title 12/31/2006 Additions Writeoffs 12/31/2007 11000 Accounts Receivable $16,410,902.71 $231,613,231.99 $198,243,874.72 $49,780,259.98 11100 Advances to Employees $0.00 $0.00 $0.00 $0.00 11400 Other Receivables $0.00 $1,000,000.00 $0.00 $1,000,000.00 11500 Allowance for Doubtful Accounts ($1,262,819.88) $0.00 $8,810.13 ($1,254,009.75) $15,148,082.83 $232,613,231.99 $198,235,064.59 $49,526,250.23 Apollo Shoes, Inc. C-2 Accounts Receivable Aged Trial Balance Prepared by For Year Ended 12/31/2007 Reviewed by 2007 Conf Date Date Current Past Due 2008 Payments Net Sales Total Balance Type Mailed Received <30 Days 30-60 Days 60-90 Days >90 Days Received Pay More Shoes $586,779.54 $526,004.85 $526,004.85 Nuke Me $1,847,819.03 $35,028.59 $35,028.59 Run For Your Life Shoes $2,165,500.55 $2,165,500.55 $2,165,500.55 Shoe Shack $3,013,152.09 $730,588.25 $730,588.25 Tread $3,091,017.74 $1,388.75 $1,388.75 Mall-Wart $122,826,158.60 $20,549,225.88 $5,765,081.85 $14,784,144.03 Wall of Shoes $3,315,585.60 $9,582.25 $9,582.25 Trenchfoot $3,325,046.93 $85,534.25 $85,534.25 Shack's Shoe Shine $3,017,205.21 $4,952.77 $4,952.77 Imelda's Closet $2,942,005.95 $96,452.11 $96,452.11 Hip Hop Shoes $695,542.21 $695,542.21 $695,542.21 International Soccer Federation $3,228,779.92 $1,222,359.56 $1,222,359.56 Eight East $3,173,304.14 $45,258.22 $45,258.22 Company B $1,063,564.85 $63,258.65 $63,258.65 Feet Lamour $1,151,561.90 $385,241.02 $385,241.02 Walk About $3,015,119.00 $932,653.33 $932,653.33 Neutralizer $3,051,755.48 $3,051,755.48 ($1,388.75) $3,053,144.23 Doug's Shoes $3,211,903.23 $2,648.75 $2,648.75 Custom Shoes $575,619.27 $5,996.13 $5,996.13 Blue Bird Shoes $271,531.15 $11,844.63 $11,844.63 Bad Boy Shoes $435,286.26 $400,253.31 $400,253.31 Pump It Up Shoes $497,899.04 $3,375.54 $3,375.54 Hop Scotch Shoes $2,779,399.08 $895,606.23 $895,606.23 Sassy Shoes $15,178,041.85 $5,765,081.85 $5,765,081.85 Wild Hair Shoes $454,774.74 $252,769.24 $252,769.24 Evil Spirit Shoes $2,109,522.15 $86,450.60 $86,450.60 Action Foot Shoes $1,812,668.55 $793,544.22 $793,544.22 Big Bob's Shoe Store $3,105,982.56 $399,011.82 $399,011.82 Paul Bunion Footware $29,270,632.63 $10,458,847.58 $10,458,847.58 Lock-Up Shoe Store $1,499,730.29 $104,503.36 $104,503.36 Other Customers $8,900,342.45 $0.00 Total $231,613,231.99 $49,780,259.98 $23,211,090.52 $4,908,691.85 $6,813,074.93 $14,847,402.68 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, 2007, is $3,051,755.48 Purchases from Apollo Shoes during the year 2007 totaled $3,051,755.48 This balance is correct except as noted below: Our records indicate that we owe $1388.75 more than indicated above. We wrote a check to Apollo on 12/28 for $3,053,144.23 for 10 pallets of shoes. Date: 1/24/08 By: __Rudy Robinson______________________ Title: _Accounts Payable ______________ 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 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, 2007, is $20,549,225.88 Purchases from Apollo Shoes during the year 2007 totaled $122,826,158.60 These amounts are correct except as noted below: The amounts appear right, but we entered into involuntary bankruptcy on November 3. We told Apollo about this back at that time. We don’t know why they shipped us so many pairs in late December (including over 1600 pairs of size 23’s that we can’t even give away!)! We didn’t order them and we can’t afford to send them back! Date: 1/18/08 By: __Action Jackson____________ Title: _Liquidation Coordinator______ 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 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, 2007, is $2,165,500.55 Purchases from Apollo Shoes during the year 2007 totaled $2,165,500.55 This balance is correct except as noted below: Yes, we made one purchase from Apollo during the year, but we paid the entire amount on 1/8. Date: 1/18/08 By: __Justin Thompson_____________________ Title: _Accounts Payable Coordinator___________ 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 INFORMATION IS CORRECT, NO REPLY IS 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, 2007, is $1,388.75 Purchases from Apollo Shoes during the year 2007 totaled $3,091,017.74 This balance is correct except as noted below: We were told in November that our account had already been credited for the amount listed above for a return of 5 pairs of defective shoes. Total purchases agree with our records though. Date: __1/18/08 By: __Shoeless Joe Johanson____ Title: _President, Tread Shoes___ 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 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, 2007, is $10,458,847.58 Purchases from Apollo Shoes during the year 2007 totaled $29,270,632.63 This balance is correct except as noted below: No problems noted. Date: 1/25/08 By: __Kevin Bunion_______________________ Title: _VP-Finance, PBS ______________ 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 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, 2007, is $5,765,081.85 Purchases from Apollo Shoes during the year 2007 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 received from you people!!! Our sales are just running a little slowly this year, but we paid on the tenth, so quit hassling us! Date: __1/26/08_______________ By: __Sassy Spinelli______________ Title: _Founder, Sassy Shoes_¬______ 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 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, 2007, is $1,222,359.56 Purchases from Apollo Shoes during the year 2007 totaled $3,228,779.92 This balance is correct except as noted below: The amounts are correct as stated. I don’t think we are going to buy any more though. The sirens keep going off prematurely and it’s causing our fans to riot. Date: 1/25/08 By: __Foots McKinney____________________ Title: _Equipment Manager, ISF _____________ Date: Wed, 6 FEB 2008 10:24:53 +0000 From: "Darlene Wardlaw" Subject: Inventory For inventory, I’ve attached an inventory memo that I received from Bradley. I thought he sent you a copy already, but I don’t doubt that he didn’t. I don’t think he knows what an inventory observation memo is – you’ll have to write the memo based upon Bradley’s observation notes and what you observed when you were there on December 31. In addition to writing an inventory observation memo, you will need to tie in Bradley’s test counts on the client’s count sheets to Apollo’s Inventory Warehouse Report. Finally, tie the Inventory Warehouse Report to Apollo’s Inventory Status Report supplied by Karina last week. Next, judgmentally sample a number of unit costs from recent invoices and tie them to the Inventory Status Report. If the numbers agree, tie the Inventory Status Report into the Inventory Lead Schedule. Lastly, tie the lead schedule into the Trial Balance. Be careful to determine the proper accounts for adjustment when inventory is included or excluded from the physical count. By “included,” I mean that the inventory cost should already be in the general ledger balance shown in the trial balance. When the inventory is adjusted to match the physical count, the adjustment is to cost of goods sold. The Reserve for Inventory Obsolescence decreased significantly from last year. My conversation with Samuel Carboy indicated that they received a huge number of odd-sized shoes from their principal supplier last year against which the previous auditors made them set up a reserve. He indicated that, with the exception of the odd-sized shoes, Apollo generally turns over its entire inventory several times a year. As the quantity of odd sizes gradually decreases, the reserve has been decreased by reducing the reserve and Cost of Goods Sold. Date: Mon, 31 DEC 2007 4:43:52 +0000 To: “Darlene Wardlaw” From: "Bradley Crumpler" Subject: Apollo Shoes Inventory Observation While the “in-charge” was drinking coffee and scarfing down doughnuts with Karina, I was out in the warehouse counting! This is what I observed: • I saw the Apollo manager (Andrew Jacobs) giving instructions to the count teams. (I’ve attached a copy to put in the workpapers.) • Shoe boxes were stacked in pallets. Each pallet was six boxes wide by six boxes deep and stacked 30 boxes high (6X6X30=1080 boxes/pallet). Each pallet included all the same sizes of men’s, women’s and children’s shoes. According to the in-charge’s instructions, I had them open up a number of boxes throughout the warehouse to make sure that shoes were in each of them. Boy, were they upset about that! • Apollo personnel counted all inventory, including a shipment of shoes costing $8,434,889.09 that was received on December 31. The invoice shows the shipment was made from the Anglonesia Rehabilitation and Reprogramming Institute on December 26, “FOB Destination.” I attached a copy of the purchase invoice as well as the ones from the previous two purchases. These were the only shipments received in the last several months. I observed a count tag on every pallet. • There were a total of 98 count sheets. I recounted all the items on seven count sheets (attached). There were no differences between my test counts and those counted by the client. For some reason, the in-charge didn’t want me to let the Apollo people know what I was recounting! • I found some pallets of shoes stacked near the back of the warehouse (furthest from the shipping dock). They were covered with dust and looked very old. They were men’s size 23. When I asked the inventory foreman about them and whether they had any value, he just started laughing. He said that’s why the “reserve for inventory obesity” was so high. He said that they shipped out “a boatload of them (size 23’s) last week.” • I also spent 4 hours watching them count the supply closet. All the pencils were accounted for. I’m going home. Apollo Shoes Inventory Count Instructions 1. Counts will be performed in teams of two, consisting of a counter and a writer. 2. For each bin, identify the item located in it and the count of that item. If more than one item is in the bin, write in the bin number, the additional item description, and the count in the open space at the bottom of your count sheet. 3. After counting a bin, place an inventory count tag on the bin to mark it as having been counted. 4. After a team finishes its counts, each count team member should write his/her name in the "Count Team" line on each count sheet and the team should then turn in the sheets to the inventory manager. 5. After receiving the count sheets(s), the inventory manager will review and sign them, and then submit them to the inventory clerk for processing. 6. The inventory clerk will enter the counts into the computer system, run a variance report, and submit the variance report to the inventory manager. 7. The inventory manager will assign recounts for variances to the count teams. Each team will then recount the assigned bins and initial beside the recount on the count sheet. 8. The recounts will be resubmitted to the inventory manager, who will review and sign them, and then submit them to the inventory clerk for final entry. 9. There will be NO sales and NO movement of inventory during the count. INVENTORY COUNT SHEET December 31, 2007 SHEET NO. 81 COUNT TEAM R. Thomas, Q. Greene ENTERED BY B. Harrington REVIEWED BY A. Jacobs ` Quantity Pallet Location Sku# Style Type Size Counted C46 30180 Spotlight Men's 23 1080 C47 30180 Spotlight Men's 23 1080 C48 30180 Spotlight Men's 23 74 APOLLO SHOES, INC. INVENTORY COUNT SHEET December 31, 2007 SHEET NO. 20 COUNT TEAM J. Morris, T. Peters ENTERED BY G.R. Samuels REVIEWED BY A. Jacobs ` Quantity Pallet Location Sku# Style Type Size Counted A65 10200 Siren Women's 6.5 1080 A66 10200 Siren Women's 6.5 1080 A67 10200 Siren Women's 6.5 1080 A68 10200 Siren Women's 6.5 1080 A69 10200 Siren Women's 6.5 680 APOLLO SHOES, INC. INVENTORY COUNT SHEET December 31, 2007 SHEET NO. 37 COUNT TEAM S. Adams, H. Frey ENTERED BY E. Meadows REVIEWED BY A. Jacobs ` Quantity Pallet Location Sku# Style Type Size Counted B25 20040 Speaker Men's 7.5 1080 B26 20040 Speaker Men's 7.5 1080 B27 20040 Speaker Men's 7.5 1080 B28 20040 Speaker Men's 7.5 1080 B29 20040 Speaker Men's 7.5 1080 B30 20040 Speaker Men's 7.5 1080 B31 20040 Speaker Men's 7.5 1080 B32 20040 Speaker Men's 7.5 1080 B33 20040 Speaker Men's 7.5 1080 B34 20040 Speaker Men's 7.5 1080 B35 20040 Speaker Men's 7.5 1080 B36 20040 Speaker Men's 7.5 1080 B37 20040 Speaker Men's 7.5 1080 B38 20040 Speaker Men's 7.5 217 APOLLO SHOES, INC. INVENTORY COUNT SHEET December 31, 2007 SHEET NO. 56 COUNT TEAM K. Landry, L. Robertson ENTERED BY N. Johnston REVIEWED BY A. Jacobs ` Quantity Pallet Location Sk u# Style Type Size Counted B213 20220 Speaker Women's 8 1080 B214 20220 Speaker Women's 8 1080 B215 20220 Speaker Women's 8 1080 B216 20220 Speaker Women's 8 1080 B217 20220 Speaker Women's 8 1080 B218 20220 Speaker Women's 8 1080 B219 20220 Speaker Women's 8 1080 B220 20220 Speaker Women's 8 1080 B221 20220 Speaker Women's 8 1080 B222 20220 Speaker Women's 8 1080 B223 20220 Speaker Women's 8 1080 B224 20220 Speaker Women's 8 1080 B225 20220 Speaker Women's 8 1080 B226 20220 Speaker Women's 8 586 APOLLO SHOES, INC. INVENTORY COUNT SHEET December 31, 2007 SHEET NO. 64 COUNT TEAM R. Thomas, Q. Greene ENTERED BY B. Harrington REVIEWED BY A. Jacobs ` Quantity Pallet Location Sku# Style Type Size Counted C1 30010 Spotlight Men's 6 1080 C2 30010 Spotlight Men's 6 1080 C3 30010 Spotlight Men's 6 1080 C4 30010 Spotlight Men's 6 36 APOLLO SHOES, INC. INVENTORY COUNT SHEET December 31, 2007 SHEET NO. 96 COUNT TEAM R. Thomas, Q. Greene ENTERED BY B. Harrington REVIEWED BY A. Jacobs ` Quantity Pallet Location Sku# Style Type Size Counted C102 30330 Spotlight Women's 12 1080 C103 30330 Spotlight Women's 12 1080 C104 30330 Spotlight Women's 12 1080 C105 30330 Spotlight Women's 12 90 APOLLO SHOES, INC. INVENTORY COUNT SHEET December 31, 2007 SHEET NO. 3 COUNT TEAM J. Morris, T. Peters ENTERED BY G.R. Samuels REVIEWED BY A. Jacobs ` Quantity Pallet Location Sku# Style Type Size Counted A10 10030 Siren Men's 8 1080 A11 10030 Siren Men's 8 1080 A12 10030 Siren Men's 8 1080 A13 10030 Siren Men's 8 890 Apollo Shoes, Inc. D-1 Inventory Lead Schedule Prepared by For Year Ended 12/31/2007 Reviewed by PBC (Audited) Unaudited Balance Purchases/ Cost of Balance Acct # Account Title 12/31/2006 Additions Goods Sold 12/31/2007 12000 Inventory $18,825,205.24 $178,845,967.52 $130,246,645.26 $67,424,527.50 12300 Reserve for Inventory Obsolescence ($3,012,000.00) $0.00 ($2,145,000.00) ($867,000.00) $15,813,205.24 $178,845,967.52 $128,101,645.26 $66,557,527.50 Apollo Shoes, Inc Inventory Status Report Post Physical Inventory Count December 31, 2007 Inventory, 12/31/2006 Inventory, 12/31/2007 Sku# Style Type Size Quantity Unit Price Ext Price Quantity Unit Price Ext Price 10010 Siren Men's 7 507 138.08 70,006.56 4,002 139.76 559,319.52 10020 Siren Men's 7 1/2 544 138.08 75,115.52 4,572 139.76 638,982.72 10030 Siren Men's 8 660 138.08 91,132.80 4,130 139.76 577,208.80 10040 Siren Men's 8 1/2 718 138.08 99,141.44 4,079 139.76 570,081.04 10050 Siren Men's 9 529 138.08 73,044.32 4,337 139.76 606,139.12 10060 Siren Men's 9 1/2 1,007 138.08 139,046.56 4,640 139.76 648,486.40 10070 Siren Men's 10 997 138.08 137,665.76 4,840 139.76 676,438.40 10080 Siren Men's 10 1/2 912 138.08 125,928.96 4,585 139.76 640,799.60 10090 Siren Men's 11 539 138.08 74,425.12 3,644 139.76 509,285.44 10100 Siren Men's 11 1/2 756 138.08 104,388.48 1,774 139.76 247,934.24 10110 Siren Men's 12 509 138.08 70,282.72 3,632 139.76 507,608.32 10120 Siren Men's 12 1/2 581 138.08 80,224.48 2,420 139.76 338,219.20 10130 Siren Men's 13 631 138.08 87,128.48 1,424 139.76 199,018.24 10140 Siren Men's 13 1/2 423 138.08 58,407.84 746 139.76 104,260.96 10150 Siren Men's 14 324 138.08 44,737.92 408 139.76 57,022.08 10160 Siren Men's 14 1/2 496 138.08 68,487.68 352 139.76 49,195.52 10170 Siren Women's 5 538 138.08 74,287.04 1,827 139.76 255,341.52 10180 Siren Women's 5 1/2 849 138.08 117,229.92 2,581 139.76 360,720.56 10190 Siren Women's 6 995 138.08 137,389.60 4,129 139.76 577,069.04 10200 Siren Women's 6 1/2 614 138.08 84,781.12 5,000 139.76 698,800.00 10210 Siren Women's 7 768 138.08 106,045.44 5,781 139.76 807,952.56 10220 Siren Women's 7 1/2 980 138.08 135,318.40 3,491 139.76 487,902.16 10230 Siren Women's 8 926 138.08 127,862.08 4,756 139.76 664,698.56 10240 Siren Women's 8 1/2 820 138.08 113,225.60 2,650 139.76 370,364.00 10250 Siren Women's 9 936 138.08 129,242.88 4,573 139.76 639,122.48 10260 Siren Women's 9 1/2 839 138.08 115,849.12 2,673 139.76 373,578.48 10270 Siren Women's 10 649 138.08 89,613.92 2,072 139.76 289,582.72 10280 Siren Women's 10 1/2 510 138.08 70,420.80 1,715 139.76 239,688.40 10290 Siren Women's 11 631 138.08 87,128.48 740 139.76 103,422.40 10300 Siren Women's 11 1/2 513 138.08 70,835.04 658 139.76 91,962.08 10310 Siren Women's 12 701 138.08 96,794.08 609 139.76 85,113.84 10320 Siren Women's 12 1/2 737 138.08 101,764.96 823 139.76 115,022.48 10330 Siren Women's 13 301 138.08 41,562.08 968 139.76 135,287.68 22,440 3,098,515.20 94,631 13,225,628.56 Inventory, 12/31/2006 Inventory, 12/31/2007 Sku# Style Type Size Quantity Unit Price Ext Price Quantity Unit Price Ext Price 20010 Speaker Men's 6 498 230.07 114,574.86 7,123 116.71 831,325.33 20020 Speaker Men's 6 1/2 920 230.07 211,664.40 8,351 116.71 974,645.21 20030 Speaker Men's 7 1,019 230.07 234,441.33 9,170 116.71 1,070,230.70 20040 Speaker Men's 7 1/2 1,663 230.07 382,606.41 14,257 116.71 1,663,934.47 20050 Speaker Men's 8 1,302 230.07 299,551.14 11,540 116.71 1,346,833.40 20060 Speaker Men's 8 1/2 1,580 230.07 363,510.60 15,273 116.71 1,782,511.83 20070 Speaker Men's 9 1,778 230.07 409,064.46 15,425 116.71 1,800,251.75 20080 Speaker Men's 9 1/2 2,146 230.07 493,730.22 10,232 116.71 1,194,176.72 20090 Speaker Men's 10 2,248 230.07 517,197.36 14,260 116.71 1,664,284.60 20100 Speaker Men's 10 1/2 1,982 230.07 455,998.74 13,012 116.71 1,518,630.52 20110 Speaker Men's 11 1,720 230.07 395,720.40 9,170 116.71 1,070,230.70 20120 Speaker Men's 11 1/2 1,131 230.07 260,209.17 3,162 116.71 369,037.02 20130 Speaker Men's 12 1,267 230.07 291,498.69 2,239 116.71 261,313.69 20140 Speaker Men's 12 1/2 1,055 230.07 242,723.85 2,764 116.71 322,586.44 20150 Speaker Men's 13 673 230.07 154,837.11 1,360 116.71 158,725.60 20160 Speaker Women's 5 736 230.07 169,331.52 11,975 116.71 1,397,602.25 20170 Speaker Women's 5 1/2 1,137 230.07 261,589.59 13,569 116.71 1,583,637.99 20180 Speaker Women's 6 1,399 230.07 321,867.93 12,116 116.71 1,414,058.36 20190 Speaker Women's 6 1/2 1,548 230.07 356,148.36 12,890 116.71 1,504,391.90 20200 Speaker Women's 7 1,858 230.07 427,470.06 13,620 116.71 1,589,590.20 20210 Speaker Women's 7 1/2 1,527 230.07 351,316.89 14,905 116.71 1,739,562.55 20220 Speaker Women's 8 2,037 230.07 468,652.59 14,626 116.71 1,707,000.46 20230 Speaker Women's 8 1/2 2,248 230.07 517,197.36 14,116 116.71 1,647,478.36 20240 Speaker Women's 9 1,507 230.07 346,715.49 14,413 116.71 1,682,141.23 20250 Speaker Women's 9 1/2 1,757 230.07 404,232.99 12,083 116.71 1,410,206.93 20260 Speaker Women's 10 1,420 230.07 326,699.40 8,378 116.71 977,796.38 20270 Speaker Women's 10 1/2 1,041 230.07 239,502.87 3,256 116.71 380,007.76 20280 Speaker Women's 11 1,282 230.07 294,949.74 2,260 116.71 263,764.60 20290 Speaker Women's 11 1/2 1,120 230.07 257,678.40 1,051 116.71 122,662.21 41,599 9,570,681.93 286,596 33,448,619.16 Inventory, 12/31/2006 Inventory, 12/31/2007 Sku# Style Type Size Quantity Unit Price Ext Price Quantity Unit Price Ext Price 30010 Spotlight Men's 6 898 203.50 182,743.00 3,276 205.27 672,464.52 30020 Spotlight Men's 6 1/2 752 203.50 153,032.00 2,346 205.27 481,563.42 30030 Spotlight Men's 7 1,046 203.50 212,861.00 2,518 205.27 516,869.86 30040 Spotlight Men's 7 1/2 776 203.50 157,916.00 3,147 205.27 645,984.69 30050 Spotlight Men's 8 624 203.50 126,984.00 3,107 205.27 637,773.89 30060 Spotlight Men's 8 1/2 864 203.50 175,824.00 2,560 205.27 525,491.20 30070 Spotlight Men's 9 980 203.50 199,430.00 3,361 205.27 689,912.47 30080 Spotlight Men's 9 1/2 774 203.50 157,509.00 3,187 205.27 654,195.49 30090 Spotlight Men's 10 710 203.50 144,485.00 2,641 205.27 542,118.07 30100 Spotlight Men's 10 1/2 1,310 203.50 266,585.00 2,633 205.27 540,475.91 30110 Spotlight Men's 11 1,244 203.50 253,154.00 2,161 205.27 443,588.47 30120 Spotlight Men's 11 1/2 808 203.50 164,428.00 2,304 205.27 472,942.08 30130 Spotlight Men's 12 442 203.50 89,947.00 1,518 205.27 311,599.86 30140 Spotlight Men's 12 1/2 170 203.50 34,595.00 565 205.27 115,977.55 30150 Spotlight Men's 13 268 203.50 54,538.00 939 205.27 192,748.53 30160 Spotlight Men's 14 394 203.50 80,179.00 1,270 205.27 260,692.90 30170 Spotlight Men's 15 354 203.50 72,039.00 1,320 205.27 270,956.40 30180 Spotlight Men's 23 3,854 197.16 759,854.64 2,234 197.16 440,455.44 30190 Spotlight Women's 5 520 203.50 105,820.00 1,884 205.27 386,728.68 30200 Spotlight Women's 5 1/2 518 203.50 105,413.00 3,760 205.27 771,815.20 30210 Spotlight Women's 6 722 203.50 146,927.00 4,096 205.27 840,785.92 30220 Spotlight Women's 6 1/2 842 203.50 171,347.00 4,582 205.27 940,547.14 30230 Spotlight Women's 7 666 203.50 135,531.00 3,531 205.27 724,808.37 30240 Spotlight Women's 7 1/2 1,394 203.50 283,679.00 4,901 205.27 1,006,028.27 30250 Spotlight Women's 8 1,024 203.50 208,384.00 3,779 205.27 775,715.33 30260 Spotlight Women's 8 1/2 924 203.50 188,034.00 4,489 205.27 921,457.03 30270 Spotlight Women's 9 1,028 203.50 209,198.00 4,316 205.27 885,945.32 30280 Spotlight Women's 9 1/2 1,290 203.50 262,515.00 4,134 205.27 848,586.18 30290 Spotlight Women's 10 1,188 203.50 241,758.00 3,762 205.27 772,225.74 30300 Spotlight Women's 10 1/2 652 203.50 132,682.00 2,071 205.27 425,114.17 30310 Spotlight Women's 11 928 203.50 188,848.00 3,127 205.27 641,879.29 30320 Spotlight Women's 11 1/2 986 203.50 200,651.00 3,079 205.27 632,026.33 30330 Spotlight Women's 12 542 203.50 110,297.00 3,330 205.27 683,549.10 30340 Spotlight Women's 12 1/2 472 203.50 96,052.00 3,185 205.27 653,784.95 30350 Spotlight Women's 13 408 203.50 83,028.00 2,063 205.27 423,472.01 30,372 6,156,267.64 101,176 20,750,279.78 INVOICE Page 1 of 2 No 1004345 Anglonesia Rehabilitation and Reprogramming Institute 31XPZ Chancellor Anglonesia, GH327MQ Date 8/13/2007 VIA: Cargo, Freight paid by Shipper Terms: 2/10, net 30, FOB Destination Bill To: Ship To: Apollo Shoes Apollo Shoes One Shoe Place One Shoe Place Shoetown, ME 00001 Shoetown, ME 00001 Item # Description Quantity Unit Price Total MS1001GX Men's Siren Size 7 2034 139.76 284,271.84 MS1002GX Men's Siren Size 7.5 2571 139.76 359,322.96 MS1003GX Men's Siren Size 8 2446 139.76 341,852.96 MS1004GX Men's Siren Size 8.5 4,289 139.76 599,430.64 MS1005GX Men's Siren Size 9 4908 139.76 685,942.08 MS1006GX Men's Siren Size 9.5 4,881 139.76 682,168.56 MS1007GX Men's Siren Size 10 5104 139.76 713,335.04 MS1008GX Men's Siren Size 10.5 5,064 139.76 707,744.64 MS1009GX Men's Siren Size 11 3976 139.76 555,685.76 MS1010GX Men's Siren Size 11.5 1,985 139.76 277,423.60 MS1011GX Men's Siren Size 12 1835 139.76 256,459.60 MS1012GX Men's Siren Size 12.5 1247 139.76 174,280.72 MS1013GX Men's Siren Size 13 720 139.76 100,627.20 MS1014GX Men's Siren Size 13.5 393 139.76 54,925.68 MS1015GX Men's Siren Size 14 234 139.76 32,703.84 MS1016GX Men's Siren Size 14.5 365 139.76 51,012.40 WS1017GX Women's Siren Size 5 1915 139.76 267,640.40 WS1018GX Women's Siren Size 5.5 2,849 139.76 398,176.24 WS1019GX Women's Siren Size 6 2427 139.76 339,197.52 WS1020GX Women's Siren Size 6.5 2580 139.76 360,580.80 WS1021GX Women's Siren Size 7 3027 139.76 423,053.52 WS1022GX Women's Siren Size 7.5 2093 139.76 292,517.68 WS1023GX Women's Siren Size 8 2832 139.76 395,800.32 WS1024GX Women's Siren Size 8.5 3,128 139.76 437,169.28 WS1025GX Women's Siren Size 9 5419 139.76 757,359.44 WS1026GX Women's Siren Size 9.5 2,781 139.76 388,672.56 WS1027GX Women's Siren Size 10 2275 139.76 317,954.00 WS1028GX Women's Siren Size 10.5 989 139.76 138,222.64 WS1029GX Women's Siren Size 11 408 139.76 57,022.08 WS1030GX Women's Siren Size 11.5 698 139.76 97,552.48 WS1031GX Women's Siren Size 12 693 139.76 96,853.68 WS1032GX Women's Siren Size 12.5 929 139.76 129,837.04 WS1033GX Women's Siren Size 13 520 139.76 72,675.20 MS2001MX Men's Speaker Size 6 3841 116.71 448,283.11 MS2002MX Men's Speaker Size 6.5 4681 116.71 546,319.51 MS2003MX Men's Speaker Size 7 5021 116.71 586,000.91 MS2004MX Men's Speaker Size 7.5 7592 116.71 886,062.32 MS2005MX Men's Speaker Size 8 6116 116.71 713,798.36 MS2006MX Men's Speaker Size 8.5 17363 116.71 2,026,435.73 MS2007MX Men's Speaker Size 9 17,029 116.71 1,987,454.59 MS2008MX Men's Speaker Size 9.5 11064 116.71 1,291,279.44 MS2009MX Men's Speaker Size 10 14,748 116.71 1,721,239.08 Page 2 of 2 MS2010MX Men's Speaker Size 10.5 14866 116.71 1,735,010.86 MS2011MX Men's Speaker Size 11 4807 116.71 561,024.97 MS2012MX Men's Speaker Size 11.5 1666 116.71 194,438.86 MS2013MX Men's Speaker Size 12 2,480 116.71 289,440.80 MS2014MX Men's Speaker Size 12.5 1492 116.71 174,131.32 MS2015MX Men's Speaker Size 13 782 116.71 91,267.22 WS2020MX Women's Speaker Size 7 7079 116.71 826,190.09 WS2025MX Women's Speaker Size 9.5 7,099 116.71 828,524.29 WS2026MX Women's Speaker Size 10 4787 116.71 558,690.77 WS2027MX Women's Speaker Size 10.5 1670 116.71 194,905.70 WS2028MX Women's Speaker Size 11 2399 116.71 279,987.29 WS2029MX Women's Speaker Size 11.5 579 116.71 67,575.09 MS3001MG Men's Spotlight Size 6 1836 205.27 376,875.72 MS3002MG Men's Spotlight Size 6.5 1227 205.27 251,866.29 MS3003MG Men's Spotlight Size 7 1375 205.27 282,246.25 MS3004MG Men's Spotlight Size 7.5 1729 205.27 354,911.83 MS3005MG Men's Spotlight Size 8 1808 205.27 371,128.16 MS3006MG Men's Spotlight Size 8.5 1322 205.27 271,366.94 MS3007MG Men's Spotlight Size 9 1797 205.27 368,870.19 MS3008MG Men's Spotlight Size 9.5 1719 205.27 352,859.13 MS3009MG Men's Spotlight Size 10 2679 205.27 549,918.33 MS3010MG Men's Spotlight Size 10.5 3,089 205.27 634,079.03 MS3011MG Men's Spotlight Size 11 2286 205.27 469,247.22 MS3012MG Men's Spotlight Size 11.5 2,428 205.27 498,395.56 MS3013MG Men's Spotlight Size 12 904 205.27 185,564.08 MS3014MG Men's Spotlight Size 12.5 284 205.27 58,296.68 MS3015MG Men's Spotlight Size 13 488 205.27 100,171.76 MS3016MG Men's Spotlight Size 14 661 205.27 135,683.47 MS3017MG Men's Spotlight Size 15 1494 205.27 306,673.38 WS3019MG Women's Spotlight Size 5 1005 205.27 206,296.35 WS3020MG Women's Spotlight Size 5.5 2142 205.27 439,688.34 WS3021MG Women's Spotlight Size 6 2376 205.27 487,721.52 WS3022MG Women's Spotlight Size 6.5 2536 205.27 520,564.72 WS3023MG Women's Spotlight Size 7 1935 205.27 397,197.45 WS3024MG Women's Spotlight Size 7.5 2504 205.27 513,996.08 WS3025MG Women's Spotlight Size 8 2013 205.27 413,208.51 WS3026MG Women's Spotlight Size 8.5 4627 205.27 949,784.29 WS3027MG Women's Spotlight Size 9 4,778 205.27 980,780.06 WS3028MG Women's Spotlight Size 9.5 2461 205.27 505,169.47 WS3029MG Women's Spotlight Size 10 3,675 205.27 754,367.25 WS3030MG Women's Spotlight Size 10.5 2369 205.27 486,284.63 WS3031MG Women's Spotlight Size 11 3,317 205.27 680,880.59 WS3032MG Women's Spotlight Size 11.5 1658 205.27 340,337.66 WS3033MG Women's Spotlight Size 12 1981 205.27 406,639.87 WS3034MG Women's Spotlight Size 12.5 3555 205.27 729,734.85 WS3035MG Women's Spotlight Size 13 1179 205.27 242,013.33 Subtotal 41,478,351.70 Tax 0.00 Freight 0.00 Miscellaneous 0.00 Total Billed Price 41,478,351.70 INVOICE Page 1 of 2 No 1004346 Anglonesia Rehabilitation and Reprogramming Institute 31XPZ Chancellor Anglonesia, GH327MQ Date 12/2/07 VIA: Cargo, Freight paid by Shipper Terms: 2/10, net 30, FOB Destination Bill To: Ship To: Apollo Shoes Apollo Shoes One Shoe Place One Shoe Place Shoetown, ME 00001 Shoetown, ME 00001 Item # Description Quantity Unit Price Total MS1001GX Men's Siren Size 7 2233 139.76 312,084.08 MS1002GX Men's Siren Size 7.5 2,339 139.76 326,898.64 MS1003GX Men's Siren Size 8 2070 139.76 289,303.20 MS1011GX Men's Siren Size 12 2,112 139.76 295,173.12 MS1012GX Men's Siren Size 12.5 1266 139.76 176,936.16 MS1013GX Men's Siren Size 13 844 139.76 117,957.44 MS1014GX Men's Siren Size 13.5 410 139.76 57,301.60 MS1015GX Men's Siren Size 14 234 139.76 32,703.84 WS1019GX Women's Siren Size 6 2411 139.76 336,961.36 WS1020GX Women's Siren Size 6.5 2,936 139.76 410,335.36 WS1021GX Women's Siren Size 7 2896 139.76 404,744.96 WS1022GX Women's Siren Size 7.5 1,990 139.76 278,122.40 WS1028GX Women's Siren Size 10.5 909 139.76 127,041.84 WS1029GX Women's Siren Size 11 374 139.76 52,270.24 WS1033GX Women's Siren Size 13 555 139.76 77,566.80 MS2001MX Men's Speaker Size 6 3,706 116.71 432,527.26 MS2002MX Men's Speaker Size 6.5 4983 116.71 581,565.93 MS2003MX Men's Speaker Size 7 5,078 116.71 592,653.38 MS2004MX Men's Speaker Size 7.5 7955 116.71 928,428.05 MS2005MX Men's Speaker Size 8 6,902 116.71 805,532.42 MS2011MX Men's Speaker Size 11 5015 116.71 585,300.65 MS2012MX Men's Speaker Size 11.5 1,805 116.71 210,661.55 MS2014MX Men's Speaker Size 12.5 1465 116.71 170,980.15 MS2015MX Men's Speaker Size 13 696 116.71 81,230.16 WS2016MX Women's Speaker Size 5 13490 116.71 1,574,417.90 WS2017MX Women's Speaker Size 5.5 14,487 116.71 1,690,777.77 WS2018MX Women's Speaker Size 6 13030 116.71 1,520,731.30 WS2019MX Women's Speaker Size 6.5 13,453 116.71 1,570,099.63 WS2020MX Women's Speaker Size 7 7154 116.71 834,943.34 WS2021MX Women's Speaker Size 7.5 15,923 116.71 1,858,373.33 WS2022MX Women's Speaker Size 8 16235 116.71 1,894,786.85 WS2023MX Women's Speaker Size 8.5 16,288 116.71 1,900,972.48 WS2024MX Women's Speaker Size 9 15121 116.71 1,764,771.91 WS2025MX Women's Speaker Size 9.5 6,587 116.71 768,768.77 WS2026MX Women's Speaker Size 10 4663 116.71 544,218.73 WS2027MX Women's Speaker Size 10.5 1,809 116.71 211,128.39 WS2029MX Women's Speaker Size 11.5 560 116.71 65,357.60 MS3001MG Men's Spotlight Size 6 1,696 205.27 348,137.92 MS3002MG Men's Spotlight Size 6.5 1258 205.27 258,229.66 MS3003MG Men's Spotlight Size 7 1,444 205.27 296,409.88 MS3004MG Men's Spotlight Size 7.5 1853 205.27 380,365.31 MS3005MG Men's Spotlight Size 8 1,757 205.27 360,659.39 Page 2 of 2 MS3006MG Men's Spotlight Size 8.5 1296 205.27 266,029.92 MS3007MG Men's Spotlight Size 9 1,713 205.27 351,627.51 MS3008MG Men's Spotlight Size 9.5 1617 205.27 331,921.59 MS3013MG Men's Spotlight Size 12 806 205.27 165,447.62 MS3014MG Men's Spotlight Size 12.5 291 205.27 59,733.57 MS3015MG Men's Spotlight Size 13 557 205.27 114,335.39 MS3016MG Men's Spotlight Size 14 703 205.27 144,304.81 WS3019MG Women's Spotlight Size 5 1,041 205.27 213,686.07 WS3020MG Women's Spotlight Size 5.5 2132 205.27 437,635.64 WS3021MG Women's Spotlight Size 6 2,060 205.27 422,856.20 WS3022MG Women's Spotlight Size 6.5 2495 205.27 512,148.65 WS3023MG Women's Spotlight Size 7 1,970 205.27 404,381.90 WS3024MG Women's Spotlight Size 7.5 2478 205.27 508,659.06 WS3025MG Women's Spotlight Size 8 1,945 205.27 399,250.15 WS3028MG Women's Spotlight Size 9.5 2098 205.27 430,656.46 WS3032MG Women's Spotlight Size 11.5 1,574 205.27 323,094.98 WS3033MG Women's Spotlight Size 12 1721 205.27 353,269.67 WS3035MG Women's Spotlight Size 13 1,192 205.27 244,681.84 Subtotal 31,211,151.78 Tax 0.00 Freight 0.00 Miscellaneous 0.00 Total Billed Price 31,211,151.78 INVOICE Page 1 of 2 No 1004347 Anglonesia Rehabilitation and Reprogramming Institute 31XPZ Chancellor Anglonesia, GH327MQ Date 12/26/2007 VIA: Cargo, Freight paid by Shipper Terms: 2/10, net 30, FOB Destination Bill To: Ship To: Apollo Shoes Apollo Shoes One Shoe Place One Shoe Place Shoetown, ME 00001 Shoetown, ME 00001 Item # Description Quantity Unit Price Total MS1001GX Men's Siren Size 7 892 139.76 124,665.92 MS1002GX Men's Siren Size 7.5 1128 139.76 157,649.28 MS1003GX Men's Siren Size 8 1073 139.76 149,962.48 MS1014GX Men's Siren Size 13.5 173 139.76 24,178.48 MS1015GX Men's Siren Size 14 103 139.76 14,395.28 MS1016GX Men's Siren Size 14.5 160 139.76 22,361.60 WS1017GX Women's Siren Size 5 841 139.76 117,538.16 WS1019GX Women's Siren Size 6 1065 139.76 148,844.40 WS1020GX Women's Siren Size 6.5 1132 139.76 158,208.32 WS1021GX Women's Siren Size 7 1328 139.76 185,601.28 WS1022GX Women's Siren Size 7.5 919 139.76 128,439.44 WS1023GX Women's Siren Size 8 1243 139.76 173,721.68 WS1024GX Women's Siren Size 8.5 1373 139.76 191,890.48 WS1025GX Women's Siren Size 9 2378 139.76 332,349.28 WS1026GX Women's Siren Size 9.5 1220 139.76 170,507.20 WS1027GX Women's Siren Size 10 998 139.76 139,480.48 WS1028GX Women's Siren Size 10.5 434 139.76 60,655.84 WS1029GX Women's Siren Size 11 179 139.76 25,017.04 WS1030GX Women's Siren Size 11.5 306 139.76 42,766.56 WS1032GX Women's Siren Size 12.5 408 139.76 57,022.08 MS2001MX Men's Speaker Size 6 1685 116.71 196,656.35 MS2003MX Men's Speaker Size 7 2203 116.71 257,112.13 MS2004MX Men's Speaker Size 7.5 3331 116.71 388,761.01 MS2005MX Men's Speaker Size 8 2684 116.71 313,249.64 MS2011MX Men's Speaker Size 11 2109 116.71 246,141.39 MS2012MX Men's Speaker Size 11.5 731 116.71 85,315.01 MS2013MX Men's Speaker Size 12 1088 116.71 126,980.48 MS2014MX Men's Speaker Size 12.5 655 116.71 76,445.05 MS2015MX Men's Speaker Size 13 343 116.71 40,031.53 WS2020MX Women's Speaker Size 7 3106 116.71 362,501.26 WS2026MX Women's Speaker Size 10 2100 116.71 245,091.00 WS2027MX Women's Speaker Size 10.5 733 116.71 85,548.43 WS2028MX Women's Speaker Size 11 1053 116.71 122,895.63 MS3001MG Men's Spotlight Size 6 806 205.27 165,447.62 MS3002MG Men's Spotlight Size 6.5 538 205.27 110,435.26 MS3003MG Men's Spotlight Size 7 603 205.27 123,777.81 MS3004MG Men's Spotlight Size 7.5 759 205.27 155,799.93 Page 2 of 2 MS3005MG Men's Spotlight Size 8 793 205.27 162,779.11 MS3006MG Men's Spotlight Size 8.5 580 205.27 119,056.60 MS3008MG Men's Spotlight Size 9.5 754 205.27 154,773.58 MS3009MG Men's Spotlight Size 10 1176 205.27 241,397.52 MS3011MG Men's Spotlight Size 11 1003 205.27 205,885.81 MS3012MG Men's Spotlight Size 11.5 1065 205.27 218,612.55 MS3014MG Men's Spotlight Size 12.5 125 205.27 25,658.75 MS3015MG Men's Spotlight Size 13 214 205.27 43,927.78 MS3017MG Men's Spotlight Size 15 656 205.27 134,657.12 WS3019MG Women's Spotlight Size 5 441 205.27 90,524.07 WS3022MG Women's Spotlight Size 6.5 1113 205.27 228,465.51 WS3023MG Women's Spotlight Size 7 849 205.27 174,274.23 WS3028MG Women's Spotlight Size 9.5 1080 205.27 221,691.60 WS3029MG Women's Spotlight Size 10 1613 205.27 331,100.51 WS3031MG Women's Spotlight Size 11 1456 205.27 298,873.12 WS3032MG Women's Spotlight Size 11.5 728 205.27 149,436.56 WS3035MG Women's Spotlight Size 13 518 205.27 106,329.86 Subtotal 8,434,889.09 Tax 0.00 Freight 0.00 Miscellaneous 0.00 Total Billed Price 8,434,889.09 Apollo Shoes, Inc Inventory Warehouse Report -- Post Physical Inventory Count (1 of 3) December 31, 2007 Pallet Total Pallet Total Pallet Location Sku# Style Type Size Quantity Quantity Pallet Location Sku# Style Type Size Quantity Quantity A1 10010 Siren Men's 7 1,080 A53 10140 Siren Men's 13 1/2 746 746 A2 10010 Siren Men's 7 1,080 A54 10150 Siren Men's 14 408 408 A3 10010 Siren Men's 7 1,080 A55 10160 Siren Men's 14 1/2 352 352 A4 10010 Siren Men's 7 762 4,002 A56 10170 Siren Women's 5 1,080 A5 10020 Siren Men's 7 1/2 1,080 A57 10170 Siren Women's 5 747 1,827 A6 10020 Siren Men's 7 1/2 1,080 A58 10180 Siren Women's 5 1/2 1,080 A7 10020 Siren Men's 7 1/2 1,080 A59 10180 Siren Women's 5 1/2 1,080 A8 10020 Siren Men's 7 1/2 1,080 A60 10180 Siren Women's 5 1/2 421 2,581 A9 10020 Siren Men's 7 1/2 252 4,572 A61 10190 Siren Women's 6 1,080 A10 10030 Siren Men's 8 1,080 A62 10190 Siren Women's 6 1,080 A11 10030 Siren Men's 8 1,080 A63 10190 Siren Women's 6 1,080 A12 10030 Siren Men's 8 1,080 A64 10190 Siren Women's 6 889 4,129 A13 10030 Siren Men's 8 890 4,130 A65 10200 Siren Women's 6 1/2 1,080 A14 10040 Siren Men's 8 1/2 1080 A66 10200 Siren Women's 6 1/2 1,080 A15 10040 Siren Men's 8 1/2 1,080 A67 10200 Siren Women's 6 1/2 1,080 A16 10040 Siren Men's 8 1/2 1,080 A68 10200 Siren Women's 6 1/2 1080 A17 10040 Siren Men's 8 1/2 839 4,079 A69 10200 Siren Women's 6 1/2 680 5,000 A18 10050 Siren Men's 9 1,080 A70 10210 Siren Women's 7 1,080 A19 10050 Siren Men's 9 1,080 A71 10210 Siren Women's 7 1,080 A20 10050 Siren Men's 9 1,080 A72 10210 Siren Women's 7 1,080 A21 10050 Siren Men's 9 1,080 A73 10210 Siren Women's 7 1,080 A22 10050 Siren Men's 9 17 4,337 A74 10210 Siren Women's 7 1,080 A23 10060 Siren Men's 9 1/2 1,080 A75 10210 Siren Women's 7 381 5,781 A24 10060 Siren Men's 9 1/2 1,080 A76 10220 Siren Women's 7 1/2 1,080 A25 10060 Siren Men's 9 1/2 1,080 A77 10220 Siren Women's 7 1/2 1,080 A26 10060 Siren Men's 9 1/2 1,080 A78 10220 Siren Women's 7 1/2 1,080 A27 10060 Siren Men's 9 1/2 320 4,640 A79 10220 Siren Women's 7 1/2 251 3,491 A28 10070 Siren Men's 10 1,080 A80 10230 Siren Women's 8 1,080 A29 10070 Siren Men's 10 1,080 A81 10230 Siren Women's 8 1,080 A30 10070 Siren Men's 10 1,080 A82 10230 Siren Women's 8 1,080 A31 10070 Siren Men's 10 1,080 A83 10230 Siren Women's 8 1,080 A32 10070 Siren Men's 10 520 4,840 A84 10230 Siren Women's 8 436 4,756 A33 10080 Siren Men's 10 1/2 1,080 A85 10240 Siren Women's 8 1/2 1,080 A34 10080 Siren Men's 10 1/2 1,080 A86 10240 Siren Women's 8 1/2 1,080 A35 10080 Siren Men's 10 1/2 1,080 A87 10240 Siren Women's 8 1/2 490 2,650 A36 10080 Siren Men's 10 1/2 1,080 A88 10250 Siren Women's 9 1,080 A37 10080 Siren Men's 10 1/2 265 4,585 A89 10250 Siren Women's 9 1,080 A38 10090 Siren Men's 11 1,080 A90 10250 Siren Women's 9 1,080 A39 10090 Siren Men's 11 1,080 A91 10250 Siren Women's 9 1,080 A40 10090 Siren Men's 11 1,080 A92 10250 Siren Women's 9 253 4,573 A41 10090 Siren Men's 11 404 3,644 A93 10260 Siren Women's 9 1/2 1,080 A42 10100 Siren Men's 11 1/2 1,080 A94 10260 Siren Women's 9 1/2 1,080 A43 10100 Siren Men's 11 1/2 694 1,774 A95 10260 Siren Women's 9 1/2 513 2,673 A44 10110 Siren Men's 12 1,080 A96 10270 Siren Women's 10 1,080 A45 10110 Siren Men's 12 1,080 A97 10270 Siren Women's 10 992 2,072 A46 10110 Siren Men's 12 1,080 A98 10280 Siren Women's 10 1/2 1,080 A47 10110 Siren Men's 12 392 3,632 A99 10280 Siren Women's 10 1/2 635 1,715 A48 10120 Siren Men's 12 1/2 1,080 A100 10290 Siren Women's 11 740 740 A49 10120 Siren Men's 12 1/2 1,080 A101 10300 Siren Women's 11 1/2 658 658 A50 10120 Siren Men's 12 1/2 260 2,420 A102 10310 Siren Women's 12 609 609 A51 10130 Siren Men's 13 1,080 A103 10320 Siren Women's 12 1/2 823 823 A52 10130 Siren Men's 13 344 1,424 A104 10330 Siren Women's 13 968 968 B1 20010 Speaker Men's 6 1,080 B33 20040 Speaker Men's 7 1/2 1,080 B2 20010 Speaker Men's 6 1,080 B34 20040 Speaker Men's 7 1/2 1,080 B3 20010 Speaker Men's 6 1,080 B35 20040 Speaker Men's 7 1/2 1,080 B4 20010 Speaker Men's 6 1,080 B36 20040 Speaker Men's 7 1/2 1,080 B5 20010 Speaker Men's 6 1,080 B37 20040 Speaker Men's 7 1/2 1,080 B6 20010 Speaker Men's 6 1,080 B38 20040 Speaker Men's 7 1/2 217 14,257 B7 20010 Speaker Men's 6 643 7,123 B39 20050 Speaker Men's 8 1,080 B8 20020 Speaker Men's 6 1/2 1,080 B40 20050 Speaker Men's 8 1,080 B9 20020 Speaker Men's 6 1/2 1,080 B41 20050 Speaker Men's 8 1,080 B10 20020 Speaker Men's 6 1/2 1,080 B42 20050 Speaker Men's 8 1,080 B11 20020 Speaker Men's 6 1/2 1,080 B43 20050 Speaker Men's 8 1,080 B12 20020 Speaker Men's 6 1/2 1,080 B44 20050 Speaker Men's 8 1,080 B13 20020 Speaker Men's 6 1/2 1,080 B45 20050 Speaker Men's 8 1,080 B14 20020 Speaker Men's 6 1/2 1,080 B46 20050 Speaker Men's 8 1,080 B15 20020 Speaker Men's 6 1/2 791 8,351 B47 20050 Speaker Men's 8 1,080 B16 20030 Speaker Men's 7 1,080 B48 20050 Speaker Men's 8 1,080 B17 20030 Speaker Men's 7 1,080 B49 20050 Speaker Men's 8 740 11,540 B18 20030 Speaker Men's 7 1,080 B50 20060 Speaker Men's 8 1/2 1,080 B19 20030 Speaker Men's 7 1,080 B51 20060 Speaker Men's 8 1/2 1,080 B20 20030 Speaker Men's 7 1,080 B52 20060 Speaker Men's 8 1/2 1,080 B21 20030 Speaker Men's 7 1,080 B53 20060 Speaker Men's 8 1/2 1,080 B22 20030 Speaker Men's 7 1,080 B54 20060 Speaker Men's 8 1/2 1,080 B23 20030 Speaker Men's 7 1,080 B55 20060 Speaker Men's 8 1/2 1,080 B24 20030 Speaker Men's 7 530 9,170 B56 20060 Speaker Men's 8 1/2 1,080 B25 20040 Speaker Men's 7 1/2 1,080 B57 20060 Speaker Men's 8 1/2 1,080 B26 20040 Speaker Men's 7 1/2 1,080 B58 20060 Speaker Men's 8 1/2 1,080 B27 20040 Speaker Men's 7 1/2 1,080 B59 20060 Speaker Men's 8 1/2 1,080 B28 20040 Speaker Men's 7 1/2 1,080 B60 20060 Speaker Men's 8 1/2 1,080 B29 20040 Speaker Men's 7 1/2 1,080 B61 20060 Speaker Men's 8 1/2 1,080 B30 20040 Speaker Men's 7 1/2 1,080 B62 20060 Speaker Men's 8 1/2 1,080 B31 20040 Speaker Men's 7 1/2 1,080 B63 20060 Speaker Men's 8 1/2 1,080 B32 20040 Speaker Men's 7 1/2 1,080 B64 20060 Speaker Men's 8 1/2 153 15,273 Apollo Shoes, Inc Inventory Warehouse Report -- Post Physical Inventory Count (2 of 3) December 31, 2007 B65 20070 Speaker Men's 9 1,080 B151 20170 Speaker Women's 5 1/2 1,080 B66 20070 Speaker Men's 9 1,080 B152 20170 Speaker Women's 5 1/2 1,080 B67 20070 Speaker Men's 9 1,080 B153 20170 Speaker Women's 5 1/2 1,080 B68 20070 Speaker Men's 9 1,080 B154 20170 Speaker Women's 5 1/2 1,080 B69 20070 Speaker Men's 9 1,080 B155 20170 Speaker Women's 5 1/2 1,080 B70 20070 Speaker Men's 9 1,080 B156 20170 Speaker Women's 5 1/2 1,080 B71 20070 Speaker Men's 9 1,080 B157 20170 Speaker Women's 5 1/2 1,080 B72 20070 Speaker Men's 9 1,080 B158 20170 Speaker Women's 5 1/2 1,080 B73 20070 Speaker Men's 9 1,080 B159 20170 Speaker Women's 5 1/2 1,080 B74 20070 Speaker Men's 9 1,080 B160 20170 Speaker Women's 5 1/2 1,080 B75 20070 Speaker Men's 9 1,080 B161 20170 Speaker Women's 5 1/2 609 13,569 B76 20070 Speaker Men's 9 1,080 B162 20180 Speaker Women's 6 1,080 B77 20070 Speaker Men's 9 1,080 B163 20180 Speaker Women's 6 1,080 B78 20070 Speaker Men's 9 1,080 B164 20180 Speaker Women's 6 1,080 B79 20070 Speaker Men's 9 305 15,425 B165 20180 Speaker Women's 6 1,080 B80 20080 Speaker Men's 9 1/2 1,080 B166 20180 Speaker Women's 6 1,080 B81 20080 Speaker Men's 9 1/2 1,080 B167 20180 Speaker Women's 6 1,080 B82 20080 Speaker Men's 9 1/2 1,080 B168 20180 Speaker Women's 6 1,080 B83 20080 Speaker Men's 9 1/2 1,080 B169 20180 Speaker Women's 6 1,080 B84 20080 Speaker Men's 9 1/2 1,080 B170 20180 Speaker Women's 6 1,080 B85 20080 Speaker Men's 9 1/2 1,080 B171 20180 Speaker Women's 6 1,080 B86 20080 Speaker Men's 9 1/2 1,080 B172 20180 Speaker Women's 6 1,080 B87 20080 Speaker Men's 9 1/2 1,080 B173 20180 Speaker Women's 6 236 12,116 B88 20080 Speaker Men's 9 1/2 1,080 B174 20190 Speaker Women's 6 1/2 1,080 B89 20080 Speaker Men's 9 1/2 512 10,232 B175 20190 Speaker Women's 6 1/2 1,080 B90 20090 Speaker Men's 10 1,080 B176 20190 Speaker Women's 6 1/2 1,080 B91 20090 Speaker Men's 10 1,080 B177 20190 Speaker Women's 6 1/2 1,080 B92 20090 Speaker Men's 10 1,080 B178 20190 Speaker Women's 6 1/2 1,080 B93 20090 Speaker Men's 10 1,080 B179 20190 Speaker Women's 6 1/2 1,080 B94 20090 Speaker Men's 10 1,080 B180 20190 Speaker Women's 6 1/2 1,080 B95 20090 Speaker Men's 10 1,080 B181 20190 Speaker Women's 6 1/2 1,080 B96 20090 Speaker Men's 10 1,080 B182 20190 Speaker Women's 6 1/2 1,080 B97 20090 Speaker Men's 10 1,080 B183 20190 Speaker Women's 6 1/2 1,080 B98 20090 Speaker Men's 10 1,080 B184 20190 Speaker Women's 6 1/2 1,080 B99 20090 Speaker Men's 10 1,080 B185 20190 Speaker Women's 6 1/2 1,010 12,890 B100 20090 Speaker Men's 10 1,080 B186 20200 Speaker Women's 7 1,080 B101 20090 Speaker Men's 10 1,080 B187 20200 Speaker Women's 7 1,080 B102 20090 Speaker Men's 10 1,080 B188 20200 Speaker Women's 7 1,080 B103 20090 Speaker Men's 10 220 14,260 B189 20200 Speaker Women's 7 1,080 B104 20100 Speaker Men's 10 1/2 1,080 B190 20200 Speaker Women's 7 1,080 B105 20100 Speaker Men's 10 1/2 1,080 B191 20200 Speaker Women's 7 1,080 B106 20100 Speaker Men's 10 1/2 1,080 B192 20200 Speaker Women's 7 1,080 B107 20100 Speaker Men's 10 1/2 1,080 B193 20200 Speaker Women's 7 1,080 B108 20100 Speaker Men's 10 1/2 1,080 B194 20200 Speaker Women's 7 1,080 B109 20100 Speaker Men's 10 1/2 1,080 B195 20200 Speaker Women's 7 1,080 B110 20100 Speaker Men's 10 1/2 1,080 B196 20200 Speaker Women's 7 1,080 B111 20100 Speaker Men's 10 1/2 1,080 B197 20200 Speaker Women's 7 1,080 B112 20100 Speaker Men's 10 1/2 1,080 B198 20200 Speaker Women's 7 660 13,620 B113 20100 Speaker Men's 10 1/2 1,080 B199 20210 Speaker Women's 7 1/2 1,080 B114 20100 Speaker Men's 10 1/2 1,080 B200 20210 Speaker Women's 7 1/2 1,080 B115 20100 Speaker Men's 10 1/2 1,080 B201 20210 Speaker Women's 7 1/2 1,080 B116 20100 Speaker Men's 10 1/2 52 13,012 B202 20210 Speaker Women's 7 1/2 1,080 B117 20110 Speaker Men's 11 1,080 B203 20210 Speaker Women's 7 1/2 1,080 B118 20110 Speaker Men's 11 1,080 B204 20210 Speaker Women's 7 1/2 1,080 B119 20110 Speaker Men's 11 1,080 B205 20210 Speaker Women's 7 1/2 1,080 B120 20110 Speaker Men's 11 1,080 B206 20210 Speaker Women's 7 1/2 1,080 B121 20110 Speaker Men's 11 1,080 B207 20210 Speaker Women's 7 1/2 1,080 B122 20110 Speaker Men's 11 1,080 B208 20210 Speaker Women's 7 1/2 1,080 B123 20110 Speaker Men's 11 1,080 B209 20210 Speaker Women's 7 1/2 1,080 B124 20110 Speaker Men's 11 1,080 B210 20210 Speaker Women's 7 1/2 1,080 B125 20110 Speaker Men's 11 530 9,170 B211 20210 Speaker Women's 7 1/2 1,080 B126 20120 Speaker Men's 11 1/2 1,080 B212 20210 Speaker Women's 7 1/2 865 14,905 B127 20120 Speaker Men's 11 1/2 1,080 B213 20220 Speaker Women's 8 1,080 B128 20120 Speaker Men's 11 1/2 1,002 3,162 B214 20220 Speaker Women's 8 1,080 B129 20130 Speaker Men's 12 1,080 B215 20220 Speaker Women's 8 1,080 B130 20130 Speaker Men's 12 1,080 B216 20220 Speaker Women's 8 1,080 B131 20130 Speaker Men's 12 79 2,239 B217 20220 Speaker Women's 8 1,080 B132 20140 Speaker Men's 12 1/2 1,080 B218 20220 Speaker Women's 8 1,080 B133 20140 Speaker Men's 12 1/2 1,080 B219 20220 Speaker Women's 8 1,080 B134 20140 Speaker Men's 12 1/2 604 2,764 B220 20220 Speaker Women's 8 1,080 B135 20150 Speaker Men's 13 1,080 B221 20220 Speaker Women's 8 1,080 B136 20150 Speaker Men's 13 280 1,360 B222 20220 Speaker Women's 8 1,080 B137 20160 Speaker Women's 5 1,080 B223 20220 Speaker Women's 8 1,080 B138 20160 Speaker Women's 5 1,080 B224 20220 Speaker Women's 8 1,080 B139 20160 Speaker Women's 5 1,080 B225 20220 Speaker Women's 8 1,080 B140 20160 Speaker Women's 5 1,080 B226 20220 Speaker Women's 8 586 14,626 B141 20160 Speaker Women's 5 1,080 B227 20230 Speaker Women's 8 1/2 1,080 B142 20160 Speaker Women's 5 1,080 B228 20230 Speaker Women's 8 1/2 1,080 B143 20160 Speaker Women's 5 1,080 B229 20230 Speaker Women's 8 1/2 1,080 B144 20160 Speaker Women's 5 1,080 B230 20230 Speaker Women's 8 1/2 1,080 B145 20160 Speaker Women's 5 1,080 B231 20230 Speaker Women's 8 1/2 1,080 B146 20160 Speaker Women's 5 1,080 B232 20230 Speaker Women's 8 1/2 1,080 B147 20160 Speaker Women's 5 1,080 B233 20230 Speaker Women's 8 1/2 1,080 B148 20160 Speaker Women's 5 95 11,975 B234 20230 Speaker Women's 8 1/2 1,080 B149 20170 Speaker Women's 5 1/2 1,080 B235 20230 Speaker Women's 8 1/2 1,080 B150 20170 Speaker Women's 5 1/2 1,080 B236 20230 Speaker Women's 8 1/2 1,080 Apollo Shoes, Inc Inventory Warehouse Report -- Post Physical Inventory Count (3 0f 3) December 31, 2007 B237 20230 Speaker Women's 8 1/2 1,080 B260 20250 Speaker Women's 9 1/2 1,080 B238 20230 Speaker Women's 8 1/2 1,080 B261 20250 Speaker Women's 9 1/2 1,080 B239 20230 Speaker Women's 8 1/2 1,080 B262 20250 Speaker Women's 9 1/2 1,080 B240 20230 Speaker Women's 8 1/2 76 14,116 B263 20250 Speaker Women's 9 1/2 1,080 B241 20240 Speaker Women's 9 1,080 B264 20250 Speaker Women's 9 1/2 1,080 B242 20240 Speaker Women's 9 1,080 B265 20250 Speaker Women's 9 1/2 1,080 B243 20240 Speaker Women's 9 1,080 B266 20250 Speaker Women's 9 1/2 203 12,083 B244 20240 Speaker Women's 9 1,080 B267 20260 Speaker Women's 10 1,080 B245 20240 Speaker Women's 9 1,080 B268 20260 Speaker Women's 10 1,080 B246 20240 Speaker Women's 9 1,080 B269 20260 Speaker Women's 10 1,080 B247 20240 Speaker Women's 9 1,080 B270 20260 Speaker Women's 10 1,080 B248 20240 Speaker Women's 9 1,080 B271 20260 Speaker Women's 10 1,080 B249 20240 Speaker Women's 9 1,080 B272 20260 Speaker Women's 10 1,080 B250 20240 Speaker Women's 9 1,080 B273 20260 Speaker Women's 10 1,080 B251 20240 Speaker Women's 9 1,080 B274 20260 Speaker Women's 10 818 8,378 B252 20240 Speaker Women's 9 1,080 B275 20270 Speaker Women's 10 1/2 1,080 B253 20240 Speaker Women's 9 1,080 B276 20270 Speaker Women's 10 1/2 1,080 B254 20240 Speaker Women's 9 373 14,413 B277 20270 Speaker Women's 10 1/2 1,080 B255 20250 Speaker Women's 9 1/2 1,080 B278 20270 Speaker Women's 10 1/2 16 3,256 B256 20250 Speaker Women's 9 1/2 1,080 B279 20280 Speaker Women's 11 1,080 B257 20250 Speaker Women's 9 1/2 1,080 B280 20280 Speaker Women's 11 1,080 B258 20250 Speaker Women's 9 1/2 1,080 B281 20280 Speaker Women's 11 100 2,260 B259 20250 Speaker Women's 9 1/2 1,080 B282 20290 Speaker Women's 11 1/2 1,051 1,051 C1 30010 Spotlight Men's 6 1,080 C62 30220 Spotlight Women's 6 1/2 1,080 C2 30010 Spotlight Men's 6 1,080 C63 30220 Spotlight Women's 6 1/2 262 4,582 C3 30010 Spotlight Men's 6 1,080 C64 30230 Spotlight Women's 7 1,080 C4 30010 Spotlight Men's 6 36 3,276 C65 30230 Spotlight Women's 7 1,080 C5 30020 Spotlight Men's 6 1/2 1,080 C66 30230 Spotlight Women's 7 1,080 C6 30020 Spotlight Men's 6 1/2 1,080 C67 30230 Spotlight Women's 7 291 3,531 C7 30020 Spotlight Men's 6 1/2 186 2,346 C68 30240 Spotlight Women's 7 1/2 1,080 C8 30030 Spotlight Men's 7 1,080 C69 30240 Spotlight Women's 7 1/2 1,080 C9 30030 Spotlight Men's 7 1,080 C70 30240 Spotlight Women's 7 1/2 1,080 C10 30030 Spotlight Men's 7 358 2,518 C71 30240 Spotlight Women's 7 1/2 1,080 C11 30040 Spotlight Men's 7 1/2 1,080 C72 30240 Spotlight Women's 7 1/2 581 4,901 C12 30040 Spotlight Men's 7 1/2 1,080 C73 30250 Spotlight Women's 8 1,080 C13 30040 Spotlight Men's 7 1/2 987 3,147 C74 30250 Spotlight Women's 8 1,080 C14 30050 Spotlight Men's 8 1,080 C75 30250 Spotlight Women's 8 1,080 C15 30050 Spotlight Men's 8 1,080 C76 30250 Spotlight Women's 8 539 3,779 C16 30050 Spotlight Men's 8 947 3,107 C77 30260 Spotlight Women's 8 1/2 1,080 C17 30060 Spotlight Men's 8 1/2 1,080 C78 30260 Spotlight Women's 8 1/2 1,080 C18 30060 Spotlight Men's 8 1/2 1,080 C79 30260 Spotlight Women's 8 1/2 1,080 C19 30060 Spotlight Men's 8 1/2 400 2,560 C80 30260 Spotlight Women's 8 1/2 1,080 C20 30070 Spotlight Men's 9 1,080 C81 30260 Spotlight Women's 8 1/2 169 4,489 C21 30070 Spotlight Men's 9 1,080 C82 30270 Spotlight Women's 9 1,080 C22 30070 Spotlight Men's 9 1,080 C83 30270 Spotlight Women's 9 1,080 C23 30070 Spotlight Men's 9 121 3,361 C84 30270 Spotlight Women's 9 1,080 C24 30080 Spotlight Men's 9 1/2 1,080 C85 30270 Spotlight Women's 9 1,076 4,316 C25 30080 Spotlight Men's 9 1/2 1,080 C86 30280 Spotlight Women's 9 1/2 1,080 C26 30080 Spotlight Men's 9 1/2 1,027 3,187 C87 30280 Spotlight Women's 9 1/2 1,080 C27 30090 Spotlight Men's 10 1,080 C88 30280 Spotlight Women's 9 1/2 1,080 C28 30090 Spotlight Men's 10 1,080 C89 30280 Spotlight Women's 9 1/2 894 4,134 C29 30090 Spotlight Men's 10 481 2,641 C90 30290 Spotlight Women's 10 1,080 C30 30100 Spotlight Men's 10 1/2 1,080 C91 30290 Spotlight Women's 10 1,080 C31 30100 Spotlight Men's 10 1/2 1,080 C92 30290 Spotlight Women's 10 1,080 C32 30100 Spotlight Men's 10 1/2 473 2,633 C93 30290 Spotlight Women's 10 522 3,762 C33 30110 Spotlight Men's 11 1,080 C94 30300 Spotlight Women's 10 1/2 1,080 C34 30110 Spotlight Men's 11 1,081 2,161 C95 30300 Spotlight Women's 10 1/2 991 2,071 C35 30120 Spotlight Men's 11 1/2 1,080 C96 30310 Spotlight Women's 11 1,080 C36 30120 Spotlight Men's 11 1/2 1,080 C97 30310 Spotlight Women's 11 1,080 C37 30120 Spotlight Men's 11 1/2 144 2,304 C98 30310 Spotlight Women's 11 967 3,127 C38 30130 Spotlight Men's 12 1,080 C99 30320 Spotlight Women's 11 1/2 1,080 C39 30130 Spotlight Men's 12 438 1,518 C100 30320 Spotlight Women's 11 1/2 1,080 C40 30140 Spotlight Men's 12 1/2 565 565 C101 30320 Spotlight Women's 11 1/2 919 3,079 C41 30150 Spotlight Men's 13 939 939 C102 30330 Spotlight Women's 12 1,080 C42 30160 Spotlight Men's 14 1,080 C103 30330 Spotlight Women's 12 1,080 C43 30160 Spotlight Men's 14 190 1,270 C104 30330 Spotlight Women's 12 1,080 C44 30170 Spotlight Men's 15 1,080 C105 30330 Spotlight Women's 12 90 3,330 C45 30170 Spotlight Men's 15 240 1,320 C106 30340 Spotlight Women's 12 1/2 1,080 C46 30180 Spotlight Men's 23 1,080 C107 30340 Spotlight Women's 12 1/2 1,080 C47 30180 Spotlight Men's 23 1,080 C108 30340 Spotlight Women's 12 1/2 1,025 3,185 C48 30180 Spotlight Men's 23 74 2,234 C109 30350 Spotlight Women's 13 1,080 C49 30190 Spotlight Women's 5 1,080 C110 30350 Spotlight Women's 13 983 2,063 C50 30190 Spotlight Women's 5 804 1,884 C51 30200 Spotlight Women's 5 1/2 1,080 C52 30200 Spotlight Women's 5 1/2 1,080 C53 30200 Spotlight Women's 5 1/2 1,080 C54 30200 Spotlight Women's 5 1/2 520 3,760 C55 30210 Spotlight Women's 6 1,080 C56 30210 Spotlight Women's 6 1,080 C57 30210 Spotlight Women's 6 1,080 C58 30210 Spotlight Women's 6 856 4,096 C59 30220 Spotlight Women's 6 1/2 1,080 C60 30220 Spotlight Women's 6 1/2 1,080 C61 30220 Spotlight Women's 6 1/2 1,080 Date: Wed, 30 JAN 2008 10:24:53 +0000 From: "Darlene Wardlaw" Subject: Prepaids and Other Assets Prepaids Audit prepaids, but don’t spend too much time on them. There just isn’t a lot of exposure there. Because the amounts are not significant, let “the Crumpler” do most of the legwork (vouching invoices, examining cancelled checks, examining titles, etc.) for you on prepaids and fixed assets. On second thought, insurance expense looks really low compared to last year’s – better check it out. Other Assets Since I know that your hands have been full, I tried to help out with other assets. With the information below, I think you can complete the Investments and other assets sections (I-1): 1. By luck, Shock-Proof Socks is one of our firm’s clients. I checked with Dave Masterson, the audit manager, about how the company is doing. He said that after reporting no income for several years, they struck gold in 2007, reporting total income of $3,782,854.04. The company has yet to pay out any dividends though. 2. When I had lunch with Eric Unum, we discussed Apollo’s recent purchase of Synergizer Battery stock. He indicated that Larry eventually wanted to purchase controlling stock in the company when Apollo started moving production in-house. While in his office, I examined the broker’s confirmation, the cancelled check (# 3582), and examined the stock certificate for 20,000 shares in Apollo’s name. The price of the stock was unchanged as of December 31 from its purchase price of 23 5/8. Personally, I would be surprised if Apollo will ever be able to purchase even 5% of Synergizer’s stock. 3. You may want to think about the Phoneshoe patent, since the company has decided to discontinue research and development efforts on it. 4. Investment income is comprised the equity earning in Shock-Proof Socks and a transfer from the Controller’s Clearing Account for $480,375.80. The clearing account is a temporary account Apollo uses for out of balance items and transactions they can’t identify. If there is a balance at the end of the year, they either recognize miscellaneous income or expense to clear it out. The amount is the same amount as the December 26 purchase of the investment in Synergizer. You may want to investigate this further. 5. Do some analytic procedures on interest income to make sure that it is reasonable with respect to the interest rate on the bank confirmation and compared to last year. DW Acadiana Insurance Agency 2132 Highland Road, Suite 225 Baton Rouge, LA 70803 Phone: XXX-XXX-XXXX January 23, 2008 Anderson, Olds and Watershed Certified Public Accountants Shoetown, ME This is to confirm that during 2007, Apollo Shoes, Inc. had the following insurance policies listed with this agency: State Fire Insurance: Policy # 624-3200, fire and extended coverage on plant building and contents, $50,000,000, $100,000 deductible, dated January 1, 2005, 4-year term, premium $1,414,414.92. Ironworks Insurance Group: Policy # l645-O32-692, corporate vehicle liability, $500,000, dated January 1, 2005, 3-year term, premium $108,320.76. Rock Solid Fidelty: Policy # UTK-394, fidelity bond on employees and directors, $250,000, dated January 1, 2007, 5-year term, premium $ 2,667,006.32. The previous fidelity bond policy (UTK-393) expired as of December 31, 2006. It was a one-year policy with a premium of $464,232. Sincerely Yours, Bubba Thibodeaux Louisiana Insurance Agency Apollo Shoes, Inc. E-1 Prepaid Expenses Lead Schedule Prepared by For Year Ended 12/31/2007 Reviewed by PBC (Audited) Unaudited Balance Amortization/ Balance Acct # Account Title 12/31/2006 Additions Disposals 12/31/2007 14100 Prepaid Insurance $743,314.38 $2,667,006.32 $36,106.92 $3,374,213.78 14200 Pre Paid Rent $200,000.00 $1,003,574.00 $1,203,574.00 $0.00 14300 Office Supplies $7,406.82 $26,025.00 $24,891.82 $8,540.00 $950,721.20 $3,696,605.32 $1,264,572.74 $3,382,753.78 Apollo Shoes, Inc. I-1 Other Assets Lead Schedule Prepared by For Year Ended 12/31/2007 Reviewed by PBC (Audited) Unaudited Cost Balance Acct # Date Description 12/31/2006 Additions Deletions 12/31/2007 19000 Equity Investments 6/24/2004 Shock Proof Socks, Inc. 25% Share $612,691.08 $945,713.51 $0.00 $1,558,404.59 12/26/2007 Synergizer Battery Company 20,000 shares purchased at $23 5/8 per share on 12/26. (Commission costs amounted to 7,875.80) $0.00 $480,375.80 $480,375.80 $612,691.08 $1,426,089.31 $0.00 $2,038,780.39 19900 Other Non-current Assets 12/31/2006 Phoneshoe patent registration expenses $13,840.59 $0.00 $0.00 $13,840.59 $626,531.67 $1,426,089.31 $0.00 $2,052,620.98 Date: Thur, 7 FEB 2008 12:35:15 +0000 From: "Bradley Crumpler" Subject: Prepaids Well I did all your work for you (again!): • I examined five cancelled checks written during the year for $200,000 each for building rental through June 30, 2007. Even though they moved into a new building in February 2006, they couldn’t get out of their lease until this year. • As I noted in my e-mail about the inventory observation, I observed the counting of office supplies on December 31. They all appeared to be there. • I don’t know or understand what you want me to do with the insurance confirmation. I’ll let you do that. Date: Wed, 30 JAN 2008 10:24:53 +0000 From: "Darlene Wardlaw" Subject: Fixed Assets They purchased quite a bit of computer equipment in the last couple of years. When you audit PP&E, let “the Crumpler” do most of the legwork (vouching invoices, examining cancelled checks, examining titles, etc.) for you. Given all of the recent additions, make sure that the depreciation amounts are correct. Apollo Shoes, Inc. F-1 Fixed Asset Detail Listing Prepared by 12/31/2007 Reviewed by PBC Depreciation Expense Fixed Asset Tag Acquisition Date Description Cost Estimated Useful Life 2004 2005 2006 2007 Accumulated Depreciation A32767 7/3/2004 Landrover $45,000.00 5 5000 $9,000.00 $9,000.00 $9,000.00 $32,000.00 A32766 9/1/2005 Jaguar $102,000.00 5 $6,800.00 $20,400.00 $20,400.00 $47,600.00 A32768 9/1/2005 Landrover $51,000.00 5 $3,400.00 $10,200.00 $10,200.00 $23,800.00 A32769 9/1/2005 Landrover $51,000.00 5 $3,400.00 $10,200.00 $10,200.00 $23,800.00 A32764 9/1/2005 Landrover $51,000.00 5 $3,400.00 $10,200.00 $10,200.00 $23,800.00 2/1/2006 Land $117,000.00 $0.00 2/1/2006 Building $623,905.92 15 $38,127.58 $41,593.73 $79,721.31 Miscellaneous 2/1/2006 Office furniture $38,178.54 6 $5,832.81 $6,363.09 $12,195.90 PC0001 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0002 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0003 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0004 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0005 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0006 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0007 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0008 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0009 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0010 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0011 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0012 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0013 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0014 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0015 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0016 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0017 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 PC0018 2/1/2006 Smart Chip 5 Ghz PC $5,279.93 3 $1,613.31 $1,759.98 $3,373.29 4/14/2007 Repair/Repaint original building $50,408.00 30 $1,260.20 $1,260.20 E00001 7/6/2007 New computing system $1,200,519.90 5 $120,051.99 $120,051.99 M0001 1/5/2007 Machinery $1,295,359.98 5 $185,051.43 $185,051.43 $3,720,411.05 $5,000.00 $26,000.00 $133,000.00 $446,000.00 $610,000.01 Date: Thur, 7 FEB 2008 12:35:15 +0000 From: "Bradley Crumpler" Subject: PP&E I mean, do you ever work?!? So here is what I found out: According to Sam Shaw, the fixed asset coordinator, Apollo Shoes moved into new quarters and acquired new equipment in February 2006. Up to that time, Apollo purchased only a fleet of vehicles for key executives and rented everything else. (All of their salesmen rent cars on an as needed basis for visiting clients.) Since the move, there have been only three major capital additions: • Apollo repaired damage to the new building from a hurricane in April. Also, the building was repainted at the same time. I examined an invoice from ZZZ Best Building Repair Company for $50,408.00 as well as the cancelled check. • The company purchased and installed new machinery to make shoes themselves. Apparently, they have been buying all the shoes pre-made from an overseas company. The machinery was installed in January, but hasn’t yet been operated. They hope to start production in January 2008. I examined an invoice for $1,295,359.98 as well as the cancelled check. • Apollo purchased and installed a new computer system in July. I examined three invoices and related cancelled checks for $1,200,519.90. One was to Smart Chip for $1,000,000. One was to FastMove for moving services for $519.90. The third was to Professor Josephine Mandeville for $200,000 for “system analysis consulting.” • I scanned the invoices in the Repairs and Maintenance account. Repairs and small capital additions (<$5,000) were expensed according to company policy. • I examined the titles of the land, building, and vehicles. All listed “Apollo Shoes, Inc.” as titleholder. Date: Thu, 7 FEB 2008 16:35:38 +0000 From: "Bradley Crumpler" Subject: Search for Unrecorded Liabilities Hey, chill out! I am just doing this gig while I wait to qualify for the PGA tour! Ok, so I went back over your review notes and this is what I did: 1. From the cutoff bank statement in the B-series workpapers, I got a list of all the checks that cleared by January 18. 2. I removed all checks written before 12/31, as they would not relate to December 31 outstanding liabilities anyway. 3. I then traced the remaining checks to the voucher packets. The information is posted in the attached workpaper (L-3). 4. Per your instructions, I also examined documents in the open purchase order file, the unmatched receiving report file, and the unmatched invoice file (something that I forgot to do in my initial search audit procedures). How am I supposed to know if Apollo owes any money or not? I am going back to the driving range. If you want to stay out of trouble with Darlene, I suggest you’d better prepare the working paper and any necessary adjustments. Apollo Shoes, Inc. L-1 Schedule of Current Liabilities Prepared by For Year Ended 12/31/2007 Reviewed by PBC Acct # Account Title 2006 2007 20000 Accounts Payable $4,633,118.09 $1,922,095.91 23100 Sales Tax Payable $0.00 $0.00 23200 Wages Payable $29,470.32 $0.00 23300 FICA Employee Withholding $1,318.69 $4,291.25 23350 Medicare Withholding $583.99 $11,414.99 23400 Federal Payroll Taxes Payable $6,033.01 $118,086.12 23500 FUTA Tax Payable $0.00 $0.00 23600 State Payroll Taxes Payable $2,815.47 $42,397.24 23700 SUTA Tax Payable $0.00 $0.00 23800 FICA Employer Withholding $1,318.69 $4,291.25 23900 Medicare Employer Withholding $583.99 $11,414.99 Apollo Shoes, Inc. L-2 Accounts Payable Schedule Prepared by For Year Ended 12/31/2007 Reviewed by PBC List of Approved Vendors Anglonesian Institute for Reprograming and Rehabilitation $0.00 B. Franklin's LP&E $0.00 Fleur de Lis Catering $6,868.12 Just Boxes $0.00 Lawyers "R" Us, LLC $1,902,224.45 Office Hacks Supplies $1,117.19 Sign Up! $4,994.99 Smart Chip $0.00 Squint Telephone and Cellular $6,891.16 Synergizer Battery Company $0.00 Tiger Jaguar Dealership $0.00 Zrocks $0.00 $1,922,095.91 Apollo Shoes, Inc. L-3 Search for Unrecorded Liabilities Prepared by BC For Year Ended 12/31/2007 Reviewed by From Cutoff Bank Statement: From Check Register From Voucher Packet Check Date Amount Date of Check Payee Invoice Date Description 3622 1/17/08 $6,683.93 1/13/2008 Smart Chip 12/27/2007 Annual computer maintenance contract—2008 3623 1/17/08 $2,937.13 1/13/2008 Tiger Jaguar Dealership 1/9/2008 Automobile maintenance on 1/9/08 3624 1/18/08 $6,868.12 1/13/2008 Fleur de Lis Catering 12/31/2007 Catered Holiday party 3625 1/17/08 $124.81 1/13/2008 Office Hacks 1/13/2008 Office supplies purchased 1/7/08 3626 1/17/08 $15,216.88 1/13/2008 B. Franklin's LP&E 1/10/2008 "For December electricity" 3627 1/17/08 $6,891.16 1/13/2008 Squint Cellular 1/5/2007 December telephone bill 3628 1/17/08 $6,025.43 1/13/2008 Sam Shaw N/A Car washes for fleet of automobiles on 1/13. 3629 1/17/08 $927.09 1/13/2008 Just Boxes 1/7/2008 Packaging material ordered 1/7/08. 3630 1/18/08 $8,419.69 1/13/2008 Synergizer Battery Company 1/3/2008 The goods were received on January 6 with bill of lading showing a January 3 shipping date and marked FOB, Shipping - Chicago. 3631 1/18/08 $8,434,889.09 1/13/2008 Anglonesia R&R Institute 12/26/2007 The receiving report was dated December 31. The accounts payable clerk indicated that the office party was held the afternoon of the 31st and the receiving report was probably not forwarded until the next working day so was not included in year-end accounts payable. This inventory was counted and included in the physical inventory at the end of the year. 3632 1/18/08 $1,117.19 1/13/2008 Office Hacks 12/31/2007 Business cards, picked up 12/30/07 3633 1/17/08 $6,924.96 1/13/2008 Smart Chip 1/13/2008 Computer purchased 1/13/08 3634 1/18/08 $4,994.99 1/13/2008 Sign Up! 12/31/2007 New logos on vehicles on 12/31/07 3635 1/17/08 $5,174.00 1/13/2008 Zrocks 1/13/2008 Copy machine purchased 1/13/08 3636 1/17/08 $585.28 1/13/2008 Smart Chip 1/13/2008 Computer supplies picked up 1/13/08 Apollo Shoes, Inc. N-1 Notes Payable Schedule Prepared by For Year Ended 12/31/2007 Reviewed by PBC (Audited) Unaudited Balance Balance Acct # Account Title 12/31/2006 Additions Payments 12/31/2007 27000 Notes Payable-Noncurrent $0.00 2/2/06 $10,000,000.00 $10,000,000.00 24100 Line of Credit $10,000,000.00 6/30/07 $44,053,000.00 2/2/06 $10,000,000.00 $44,053,000.00 24200 Current Portion Long-Term Debt $0.00 $0.00 $10,000,000.00 $54,053,000.00 $10,000,000.00 $54,053,000.00 Date: Mon, 11 FEB 2008 16:37:45 From: "Darlene Wardlaw" Subject: Payroll One area that we haven’t looked at yet is payroll. Can you get the documentation from Karina for payroll and then complete a “bridge workpaper” like you did for the Revenue and Purchasing cycles? As you review the flowchart, enter circled S- and W-symbols for strengths and weaknesses to cross-reference to your workpapers. Prepare a bridge working paper (ICP-1) describing the strengths and weaknesses identified by number on the payroll flowchart. For each strength, describe one or more test of controls audit procedures that might be used to gather evidence on the control. For each weakness indicate the effect on year-end substantive audit procedures. Substantive Payroll Procedures (L-4) I don’t suggest doing any detail testing on payroll. Because there has been little turnover, we can use analytic procedures to get the comfort necessary. Last year’s numbers should be close to the current year. Also, the internal auditors have been watching payroll closely. Simply obtain a copy of the year-end payroll register and tie in the ending number (“earnings for year”) to the trial balance. Compare current year numbers to last years to see if they are reasonable. You may want to compare key executives’ salaries with those authorized in the Board minutes to make sure that they are reasonable. Don’t forget to accrue for wages payable and other payroll accruals for the last day of December (Apollo’s last payday was December 28). You won’t need to accrue for State and Federal Unemployment as they are applied only to the first $7,000 of income. Date: Tue, 12 FEB 2008 07:01:02 +0000 From: "Karina Ramirez" Subject: Payroll Info Here is the information you requested on our payroll processing: 1. All hourly employees (clerical and warehouse personnel) are paid biweekly (every 10 workdays) based on hours recorded on time cards maintained by a time clock machine. The time cards are approved by the supervisors. The supervisors take the approved time cards to the payroll department. Salaried employees also are paid biweekly based on a salary schedule approved by the finance committee of the board of directors. 2. The personnel department must approve all new hires, terminations, and hourly rate changes. Forms for each of these actions also are approved by appropriate supervisors and are kept in the personnel office. The personnel clerks notify payroll of the changes by a “payroll change” document. 3. The payroll department maintains the individual employees’ payroll records and the forms signed by employees for all pay deductions. 4. Every two weeks, Martha, a clerk in the payroll department, prepares the payroll register (multicopy) from the time cards and the information of the individual payroll records. Martha uses a “write-it-once” system that also prepares a form indicating gross pay, each deduction, net pay, and year-to-date totals. Martha calls this form the “take-home sheet.” Willie, a second clerk, checks Martha’s work and recalculates the gross pay and all deductions. 5. Two copies of the payroll register and the take-home sheets are sent to the accounts payable department where they are used to prepare a separate voucher for each payroll take-home sheet. The checks then are prepared. Both copies of the payroll register, the voucher, the checks, and the accompanying take-home sheets are sent to the treasurer’s office. 6. Mary Costain, the treasurer, reviews the payroll register and the take-home sheets and compares them to the checks and signs the checks. Her secretary takes the hourly employees’ checks (and accompanying take-home sheets) to their supervisors for distribution. The salaried employees pick up their checks from the treasurer’s office. One copy of the payroll register representing paid checks is filed in the treasurer’s office. The second copy and the vouchers are marked PAID and returned to accounts payable. 7. The supervisors distribute the checks every other Friday, holding those not claimed until the employee returns to work. I think that this should answer all your questions, but if not, just give me a call. Karina Karina Ramirez Director, Internal Audit Apollo Shoes, Inc. This Apollo message (including any attachments) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message and are hereby notified that any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited. Apollo Shoes, Inc. Payroll Flowchart December 31, 2007 Apollo Shoes, Inc Employee Earning Statement Through 12/28/2007 Warehouse Salaries Employee Withholding Employer Withholding YTD Pay 6.20% 1.45% 15% 7% Net 3.80% 0.80% 6.20% 1.45% EE ID Annual Scale Gross FICA Medicare Fed Tax Maine Tax Pay SUTA FUTA FICA Medicare Total 1005 103,768.80 Hourly 3,991.11 0.00 57.87 598.67 279.38 3,055.19 0.00 0.00 0.00 57.87 57.87 1011 127,635.69 Hourly 4,909.07 0.00 71.18 736.36 343.63 3,75 7.89 0.00 0.00 0.00 71.18 71.18 1013 77,275.53 Hourly 2,972.14 184.27 43.10 445.82 208.05 2,090.90 0.00 0.00 184.27 43.10 227.37 1018 82,016.43 Hourly 3,154.48 195.58 45.74 473.17 220.81 2,219.18 0.00 0.00 195.58 45.74 241.32 1022 85,955.34 Hourly 3,305.97 204.97 47.94 495.90 231.42 2,325.75 0.00 0.00 204.97 47.94 252.91 1023 127,360.26 Hourly 4,898.47 0.00 71.03 734.77 342.89 3,749.78 0.00 0.00 0.00 71.03 71.03 1025 79,650.15 Hourly 3,063.47 189.93 44.42 459.52 214.44 2,155.15 0.00 0.00 189.93 44.42 234.36 1029 94,284.72 Hourly 3,626.34 224.83 52.58 543.95 253.84 2,551.13 0.00 0.00 224.83 52.58 277.41 1031 118,798.65 Hourly 4,569.18 0.00 66.25 685.38 319.84 3,497.71 0.00 0.00 0.00 66.25 66.25 1034 127,361.70 Hourly 4,898.53 0.00 71.03 734.78 342.90 3,749.82 0.00 0.00 0.00 71.03 71.03 1035 79,689.24 Hourly 3,064.97 190.03 44.44 459.75 214.55 2,156.21 0.00 0.00 190.03 44.44 234.47 1037 122,823.75 Hourly 4,723.99 0.00 68.50 708.60 330.68 3,616.21 0.00 0.00 0.00 68.50 68.50 1044 116,722.47 Hourly 4,489.33 0.00 65.10 673.40 314.25 3,436.58 0.00 0.00 0.00 65.10 65.10 1048 130,548.09 Hourly 5,021.08 0.00 72.81 753.16 351.48 3,843.64 0.00 0.00 0.00 72.81 72.81 1055 94,627.47 Hourly 3,639.52 225.65 52.77 545.93 254.77 2,560.40 0.00 0.00 225.65 52.77 278.42 1057 103,424.01 Hourly 3,977.85 0.00 57.68 596.68 278.45 3,045.04 0.00 0.00 0.00 57.68 57.68 1063 125,699.67 Hourly 4,834.60 0.00 70.10 725.19 338.42 3,700.89 0.00 0.00 0.00 70.10 70.10 1069 111,764.49 Hourly 4,298.63 0.00 62.33 644.80 300.90 3,290.60 0.00 0.00 0.00 62.33 62.33 1080 122,065.47 Hourly 4,694.83 0.00 68.07 704.22 328.64 3,593.89 0.00 0.00 0.00 68.07 68.07 1082 121,541.55 Hourly 4,674.68 0.00 67.78 701.20 327.23 3,578.46 0.00 0.00 0.00 67.78 67.78 1084 129,178.44 Hourly 4,968.40 0.00 72.04 745.26 347.79 3,803.31 0.00 0.00 0.00 72.04 72.04 1091 110,736.18 Hourly 4,259.08 0.00 61.76 638.86 298.14 3,260.33 0.00 0.00 0.00 61.76 61.76 1092 168,946.20 Salary 6,497.93 0.00 94.22 974.69 454.86 4,974.17 0.00 0.00 0.00 94.22 94.22 1094 86,215.44 Hourly 3,315.98 205.59 48.08 497.40 232.12 2,332.79 0.00 0.00 205.59 48.08 253.67 1095 108,568.32 Hourly 4,175.70 0.00 60.55 626.36 292.30 3,196.50 0.00 0.00 0.00 60.55 60.55 1096 131,450.01 Hourly 5,055.77 0.00 73.31 758.37 353.90 3,870.19 0.00 0.00 0.00 73.31 73.31 1097 145,018.08 Hourly 5,577.62 0.00 80.88 836.64 390.43 4,269.67 0.00 0.00 0.00 80.88 80.88 1098 128,599.74 Hourly 4,946.14 0.00 71.72 741.92 346.23 3,786.27 0.00 0.00 0.00 71.72 71.72 1099 122,058.51 Hourly 4,694.56 0.00 68.07 704.18 328.62 3,593.68 0.00 0.00 0.00 68.07 68.07 1100 89,699.61 Hourly 3,449.99 213.90 50.02 517.50 241.50 2,427.06 0.00 0.00 213.90 50.02 263.92 1108 88,116.66 Hourly 3,389.10 210.12 49.14 508.37 237.24 2,384.23 0.00 0.00 210.12 49.14 259.27 1110 122,899.41 Hourly 4,726.90 0.00 68.54 709.04 330.88 3,618.44 0.00 0.00 0.00 68.54 68.54 1117 94,272.42 Hourly 3,625.86 224.80 52.58 543.88 253.81 2,550.79 0.00 0.00 224.80 52.58 277.38 1125 83,564.49 Hourly 3,214.02 199.27 46.60 482.10 224.98 2,261.06 0.00 0.00 199.27 46.60 245.87 1126 103,317.78 Hourly 3,973.76 0.00 57.62 596.06 278.16 3,041.91 0.00 0.00 0.00 57.62 57.62 1127 116,309.88 Hourly 4,473.46 0.00 64.87 671.02 313.14 3,424.43 0.00 0.00 0.00 64.87 64.87 1131 91,954.83 Hourly 3,536.72 219.28 51.28 530.51 247.57 2,488.09 0.00 0.00 219.28 51.28 270.56 1133 111,540.06 Hourly 4,290.00 0.00 62.21 643.50 300.30 3,284.00 0.00 0.00 0.00 62.21 62.21 1138 92,049.85 Hourly 3,540.38 219.50 51.34 531.06 247.83 2,490.66 0.00 0.00 219.50 51.34 270.84 1143 110,120.16 Hourly 4,235.39 0.00 61.41 635.31 296.48 3,242.19 0.00 0.00 0.00 61.41 61.41 1147 106,821.72 Hourly 4,108.53 0.00 59.57 616.28 287.60 3,145.08 0.00 0.00 0.00 59.57 59.57 1149 119,472.63 Hourly 4,595.10 0.00 66.63 689.27 321.66 3,517.55 0.00 0.00 0.00 66.63 66.63 1155 106,791.66 Hourly 4,107.37 0.00 59.56 616.11 287.52 3,144.19 0.00 0.00 0.00 59.56 59.56 Total 4,720,715.56 181,565.98 2,907.73 2,632.71 27,234.90 12,709.62 136,081.03 0.00 0.00 2,907.73 2,632.71 5,540.44 Administrative Salaries 1006 147,544.74 Hourly 5,674.80 0.00 82.28 851.22 397.24 4,344.06 0.00 0.00 0.00 82.28 82.28 1007 205,557.27 Salary 7,906.05 0.00 114.64 1,185.91 553.42 6,052.08 0.00 0.00 0.00 114.64 114.64 1008 126,438.21 Salary 4,863.01 0.00 70.51 729.45 340.41 3,722.63 0.00 0.00 0.00 70.51 70.51 1009 114,147.12 Hourly 4,390.27 0.00 63.66 658.54 307.32 3,360.75 0.00 0.00 0.00 63.66 63.66 1010 157,465.71 Salary 6,056.37 0.00 87.82 908.46 423.95 4,636.15 0.00 0.00 0.00 87.82 87.82 1012 185,026.50 Salary 7,116.40 0.00 103.19 1,067.46 498.15 5,447.61 0.00 0.00 0.00 103.19 103.19 1014 96,849.63 Hourly 3,724.99 230.95 54.01 558.75 260.75 2,620.53 0.00 0.00 230.95 54.01 284.96 1016 113,542.59 Hourly 4,367.02 0.00 63.32 655.05 305.69 3,342.96 0.00 0.00 0.00 63.32 63.32 1017 98,373.84 Hourly 3,783.61 0.00 54.86 567.54 264.85 2,896.35 0.00 0.00 0.00 54.86 54.86 1020 164,490.00 Salary 6,326.54 0.00 91.73 948.98 442.86 4,842.97 0.00 0.00 0.00 91.73 91.73 1024 219,534.30 Salary 8,443.63 0.00 122.43 1,266.54 591.05 6,463.60 0.00 0.00 0.00 122.43 122.43 1026 103,302.45 Hourly 3,973.17 0.00 57.61 595.98 278.12 3,041.46 0.00 0.00 0.00 57.61 57.61 1027 173,850.00 Salary 6,686.54 0.00 96.95 1,002.98 468.06 5,118.55 0.00 0.00 0.00 96.95 96.95 1028 133,880.04 Hourly 5,149.23 0.00 74.66 772.38 360.45 3,941.74 0.00 0.00 0.00 74.66 74.66 1030 126,714.36 Salary 4,873.63 0.00 70.67 731.04 341.15 3,730.76 0.00 0.00 0.00 70.67 70.67 1032 119,813.16 Hourly 4,608.20 0.00 66.82 691.23 322.57 3,527.58 0.00 0.00 0.00 66.82 66.82 1033 202,068.83 Salary 7,771.88 0.00 112.69 1,165.78 544.03 5,949.37 0.00 0.00 0.00 112.69 112.69 1038 106,509.30 Hourly 4,096.51 0.00 59.40 614.48 286.76 3,135.88 0.00 0.00 0.00 59.40 59.40 1039 95,184.00 Hourly 3,660.92 226.98 53.08 549.14 256.26 2,575.46 0.00 0.00 226.98 53.08 280.06 1040 178,179.33 Salary 6,853.05 0.00 99.37 1,027.96 479.71 5,246.01 0.00 0.00 0.00 99.37 99.37 1042 235,207.23 Salary 9,046.43 0.00 131.17 1,356.96 633.25 6,925.04 0.00 0.00 0.00 131.17 131.17 1043 195,113.52 Salary 7,504.37 0.00 108.81 1,125.65 525.31 5,744.59 0.00 0.00 0.00 108.81 108.81 1045 146,509.47 Hourly 5,634.98 0.00 81.71 845.25 394.45 4,313.58 0.00 0.00 0.00 81.71 81.71 1046 222,825.09 Salary 8,570.20 0.00 124.27 1,285.53 599.91 6 ,560.48 0.00 0.00 0.00 124.27 124.27 1047 177,904.74 Salary 6,842.49 0.00 99.22 1,026.37 478.97 5,237.93 0.00 0.00 0.00 99.22 99.22 1049 185,038.71 Salary 7,116.87 0.00 103.19 1,067.53 498.18 5,447.97 0.00 0.00 0.00 103.19 103.19 1050 214,066.50 Salary 8,233.33 0.00 119.38 1,235.00 576.33 6,302.61 0.00 0.00 0.00 119.38 119.38 1052 199,654.68 Salary 7,679.03 0.00 111.35 1,151.85 537.53 5,878.29 0.00 0.00 0.00 111.35 111.35 1053 195,261.00 Salary 7,510.04 0.00 108.90 1,126.51 525.70 5,748.93 0.00 0.00 0.00 108.90 108.90 1054 78,526.50 Salary 3,020.25 187.26 43.79 453.04 211.42 2,124.75 0.00 0.00 187.26 43.79 231.05 1056 81,561.82 Salary 3,136.99 194.49 45.49 470.55 219.59 2,206.87 0.00 0.00 194.49 45.49 239.98 1058 160,954.08 Salary 6,190.54 0.00 89.76 928.58 433.34 4,738.86 0.00 0.00 0.00 89.76 89.76 1059 146,297.53 Hourly 5,626.83 0.00 81.59 844.02 393.88 4,307.34 0.00 0.00 0.00 81.59 81.59 1060 249,390.42 Salary 9,591.94 0.00 139.08 1,438.79 671.44 7,342.63 0.00 0.00 0.00 139.08 139.08 1061 105,141.36 Hourly 4,043.90 0.00 58.64 606.58 283.07 3,095.60 0.00 0.00 0.00 58.64 58.64 1065 135,983.34 Hourly 5,230.13 0.00 75.84 784.52 366.11 4,003.66 0.00 0.00 0.00 75.84 75.84 1067 165,144.33 Salary 6,351.71 0.00 92.10 952.76 444.62 4,862.23 0.00 0.00 0.00 92.10 92.10 1070 118,654.23 Hourly 4,563.62 0.00 66.17 684.54 319.45 3,493.45 0.00 0.00 0.00 66.17 66.17 1071 170,887.71 Salary 6,572.60 0.00 95.30 985.89 460.08 5,031.33 0.00 0.00 0.00 95.30 95.30 1073 647,310.74 Salary 24,896.57 0.00 361.00 3,734.49 1,742.76 19,058.32 0.00 0.00 0.00 361.00 361.00 1074 199,111.17 Salary 7,658.12 0.00 111.04 1,148.72 536.07 5,862.29 0.00 0.00 0.00 111.04 111.04 1076 98,425.71 Hourly 3,785.60 0.00 54.89 567.84 264.99 2,897.88 0.00 0.00 0.00 54.89 54.89 1077 79,254.27 Salary 3,048.24 188.99 44.20 457.24 213.38 2,144.44 0.00 0.00 188.99 44.20 233.19 1078 138,738.18 Hourly 5,336.08 0.00 77.37 800.41 373.53 4,084.77 0.00 0.00 0.00 77.37 77.37 1081 114,289.35 Hourly 4,395.74 0.00 63.74 659.36 307.70 3,364.94 0.00 0.00 0.00 63.74 63.74 1083 184,532.25 Salary 7,097.39 0.00 102.91 1,064.61 496.82 5,433.06 0.00 0.00 0.00 102.91 102.91 1085 67,114.63 Salary 2,581.33 160.04 37.43 387.20 180.69 1,815.97 0.00 0.00 160.04 37.43 197.47 1087 195,261.00 Salary 7,510.04 0.00 108.90 1,126.51 525.70 5,748.93 0.00 0.00 0.00 108.90 108.90 1088 81,693.59 Salary 3,142.06 194.81 45.56 471.31 219.94 2,210.44 0.00 0.00 194.81 45.56 240.37 1089 119,868.33 Hourly 4,610.32 0.00 66.85 691.55 322.72 3,529.20 0.00 0.00 0.00 66.85 66.85 1090 1,100,000.00 Salary 42,307.69 0.00 613.46 6,346.15 2,961.54 32,386.54 0.00 0.00 0.00 613.46 613.46 1107 122,305.86 Salary 4,704.07 0.00 68.21 705.61 329.29 3,600.97 0.00 0.00 0.00 68.21 68.21 1119 219,314.95 Salary 8,435.19 0.00 122.31 1,265.28 590.46 6,457.14 0.00 0.00 0.00 122.31 122.31 1121 228,518.80 Salary 8,789.18 0.00 127.44 1,318.38 615.24 6,728.12 0.00 0.00 0.00 127.44 127.44 1141 144,213.03 Salary 5,546.66 0.00 80.43 832.00 388.27 4,245.96 0.00 0.00 0.00 80.43 80.43 1163 1,320,000.00 Salary 50,769.23 0.00 736.15 7,615.38 3,553.85 38,863.85 0.00 0.00 0.00 736.15 736.15 1280 1,650,000.00 Salary 63,461.54 0.00 920.19 9,519.23 4,442.31 48,579.81 0.00 0.00 0.00 920.19 920.19 1310 2,750,000.00 Salary 105,769.23 0.00 1,533.65 15,865.38 7,403.85 80,966.35 0.00 0.00 0.00 1,533.65 1,533.65 1330 235,000.00 Salary 9,038.46 0.00 131.06 1,355.77 632.69 6,918.94 0.00 0.00 0.00 131.06 131.06 1340 449,679.93 Salary 17,295.38 0.00 250.78 2,594.31 1,210.68 13,239.61 0.00 250.78 250.78 Total 16,197,225.43 605,674.83 1,383.52 8,782.28 90,851.22 42,397.24 462,260.56 0.00 0.00 1,383.52 8,782.28 10,165.80 Grand Total 20,917,940.99 787,240.81 4,291.25 11,414.99 118,086.12 55,106.86 598,341.59 0.00 0.00 4,291.25 11,414.99 15,706.24 Date: Wed, 13 FEB 2008 11:27:00 +0000 From: "Darlene Wardlaw" Subject: Revenue and Expenses Well, things are coming to a close. The last thing that we have to do is to look at revenues (R-1) and expenses (X-1). We can tie down most of the numbers from the work that we have done previously. For example, we can feel pretty good about the revenue that was confirmed in the accounts receivable testing (C-series). Use analytic procedures on returns and warranty expense to make sure that they are reasonable. They should be comparable to last year’s numbers compared to sales. For expenses that we have not examined already: 1. Use analytic procedures for those that should be comparable to those in the previous year. For example, for the payroll taxes, compare last year’s numbers as a percentage (ratio) of payroll expense and compare to this year’s ratio. Cost of Goods Sold should remain relatively constant as a percentage of sales, unless suppliers’ costs have gone up or sales prices have changed. The same should be true for freight and warranty expenses. 2. For those expenses subject to management discretion, double-check the board of directors’ minutes for explanations of fluctuations. For example, I know that the company severely cut back on Research and Development during the current year. 3. Other information: a. Legal expense was confirmed directly in the attorney’s letter. b. Have they recorded our fee for the 2007 audit? c. With Apollo’s extensive use of e-mail now, I think postage and phone expenses are down from last year. d. Has interest expense been accrued? Apollo Shoes, Inc. R - 1 Schedule of Revenues Prepared by For Year Ended 12/31/2007 Reviewed by PBC (Audited) Unaudited Balance Balance Acct # Account Title 12/31/2006 12/31/2007 Comments 40000 Sales $246,172,918.44 $245,213,452.88 41000 Sales Returns ($4,497,583.20) ($13,600,220.89) 42000 Warranty Expense ($1,100,281.48) ($1,158,128.47) Net Sales $240,575,053.76 $230,455,103.52 45000 Income from Investments $0.00 $1,426,089.31 46000 Interest Income $204,302.81 $131,881.46 47000 Miscellaneous Income $0.00 $2,145,000.00 $240,779,356.57 $234,158,074.29 Apollo Shoes, Inc. X - 1 Schedule of Expenses Prepared by For Year Ended 12/31/2007 Reviewed by PBC (Audited) Unaudited Balance Balance Acct # Account Title 12/31/2006 12/31/2007 Comments 50000 Cost of Goods Sold $141,569,221.61 $130,246,645.26 57500 Freight $4,302,951.46 $4,236,263.09 60000 Advertising Expense $897,140.01 $986,854.01 61000 Auto Expenses $208,974.39 $214,502.80 62000 Research and Development $31,212,334.17 $212,864.02 64000 Depreciation Expense $133,000.00 $446,000.00 64500 Warehouse Salaries $4,633,383.82 $4,720,715.56 65000 Property Tax Expense $80,495.32 $84,332.45 66000 Legal and Professional Expense $3,605,133.96 $1,902,224.45 67000 Bad Debt Expense $1,622,425.99 $0.00 68000 Insurance Expense $853,942.65 $36,106.92 70000 Maintenance Expense $61,136.04 $49,502.87 70100 Utilities $135,642.99 $137,332.18 70110 Telephone Expense $76,373.78 $52,599.02 70120 Postage Expense $128,033.21 $77,803.61 71000 Miscellaneous Office Expense $17,023.27 $24,891.82 72000 Payroll Tax Exp $1,550,989.06 $1,577,811.85 73000 Pension/Profit-Sharing Plan Ex $3,000,000.00 $3,300,000.00 74000 Rent or Lease Expense $2,603,485.87 $1,203,574.00 77500 Administrative Wages Expense $16,875,305.98 $16,197,225.43 78000 Interest Expense $875,000.00 $2,591,736.50 78500 Income Tax Expense - Federal $2,365,000.00 $13,069,000.00 78510 Income Tax Expense - State $429,000.00 $2,241,000.00 89000 Other Expense $19,172,000.00 $0.00 $236,407,993.58 $183,608,985.84 Apollo Shoes, Inc. Q-1 Stockholders' Equity Lead Schedule Prepared by For Year Ended 12/31/2007 Reviewed by PBC (Audited) Unaudited Balance Net Income/ Repurchases/ Balance Acct # Account Title 12/31/2006 Additions Dividends 12/31/2007 39003 Common Stock $8,105,000.00 $8,105,000.00 39004 Paid-in Capital $7,743,000.00 $7,743,000.00 39005 Retained Earnings $6,270,483.64 $6,270,483.64 $22,118,483.64 $0.00 $0.00 $22,118,483.64 Date: Fri, 15 FEB 2008 11:27:00 +0000 From: "Darlene Wardlaw" Subject: Subsequent Events Well this audit turned out to be a little more interesting than we initially expected, didn’t it? Hope you didn’t run into too much trouble when you crossed the picket lines. I’ve attached the last set of minutes from Apollo’s Board of Directors. You need to prepare a memo (to be placed in the A series with the financial statements) on these subsequent events and how you believe we should address them. Include the following in your memo: 1. An explanation of the reasons subsequent events must be disclosed in the financial statements even though they occurred after the balance sheet date. Include in your explanation the difference between the disclosure of Type I and Type II subsequent events. 2. Give the audit procedures that, in addition to verbal inquiry and the client’s representation letter, should be performed as part of the subsequent event audit work. 3. Discuss the accounting and/or disclosure, if any, you would recommend for the subsequent events discussed in the minutes, stating all details that should be disclosed. I’ve also attached the letter that we received from Apollo’s attorney. DW MEETING HELD FEBRUARY 13, 2008 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 3 meeting were reviewed and approved. Saul Panzer and King Stout, Apollo’s top 2 salesmen, presented a proposal for building and marketing custom-made PrivyShoes, a novelty item for water skiers. Since a plan to build and market similar shoes for marathon runners had not been successful, the board tabled the proposal for the time being. Sue Fultz reported that depositions were ongoing in the litigation action discussed at the January 3 meeting. No further information was available. Eric Unum reported on Mall-Warts bankruptcy proceedings. Sales have decreased significantly as a result of the loss of Apollo’s largest customer. Plans were discussed to increase sales to Apollo’s other customers. In the meantime, as a result of reduced sales, operations activity was curtailed in mid-January and some workers were laid off. On February 8, all the remaining workers went on strike. To date the strike is unsettled. Meeting ended 7:30 P.M. /s/ Jeff Chesnut, Secretary Perley Stebbins, Esquire Lawyers “R” Us, LLC Augusta Bangor Jay Shoetown February 15, 2008 Anderson, Olds, and Watershed, CPAs, LLC Shoetown, ME 00001 Dear Sir or Madam: I write to respond to your letter of audit inquiry regarding Apollo Shoes, Inc. With respect to this client, my firm was engaged to litigate three cases. Two cases were ultimately dismissed during 2007, resulting in no legal liability. While the remaining case is in the preliminary deposition stage, I will try to provide details of the litigation below: On January 5, 2008, a class action suit alleging gross negligence and violation of implied warranty of merchantability was brought against Apollo for $12,000,000. The action stems from the use of one of the Company's products (the Spotlight) in an aquatic environment, specifically the 1st Annual Swiss Aquatic Games held in January 2007. During the athletic competition, immersion of the company’s products in water allegedly caused severe electrical shock to the wearer(s), purportedly resulting in numbness in the extremities and loss of all leg hair. The action involves unique characteristics wherein authoritative legal precedents bearing directly on the plaintiff’s claims do not seem to exist. While we believe the plaintiff will have serious problems establishing Apollo’s liability, if the plaintiff is successful, the damages awarded may be substantial. While the company intends to vigorously defend itself in this action, it is reasonably possible that the loss could reach $10,000,000 after legal fees are considered. As of December 31, our billed, but unpaid, legal fees resulting from the two cases dismissed in 2007 amounted to $1,902,224.45. Please feel free to contact me should you have any additional questions on these matters. Sincerely, Perley Stebbins Perley Stebbins, Esq. Date: Wed, 20 FEB 2008 07:15:25 +0000 From: "Darlene Wardlaw" Subject: Management Representation letter You need to draft a proposed management representation letter to be prepared on Apollo’s letterhead stationery for Arnold to review when he returns. The letter is to be addressed to Anderson, Olds, & Watershed from Apollo’s CEO and CFO. Include all the required items and any additional points you think are necessary based on the following (see SAS 85, AU 333): • We know of no frauds or violations of laws by either management or employees. • There is one legal matter covered in the attorney’s letter which has been received. • There are several subsequent events that the client had disclosed to you. • There are no capital stock repurchase options, compensating balances, or agreements to repurchase assets previously sold. • All material adjustments have been made to the financial statements. Remember, we draft the letter; management has to sign it. That will be Arnold’s job – to get them to sign the letter. He will also have to be the bearer of the bad news --- all the adjustments that we have found. You need to also draft the management certification statement required by Sarbanes-Oxley. You can find a copy in last year’s 10-K. DW Date: Fri, 22 FEB 2008 10:02:09 +0000 From: "Darlene Wardlaw" Subject: Apollo Adjusting Entries Well we are nearing the end of the Apollo Shoes engagement. To wrap up the workpapers, you need to do the following tasks: 1. Propose the adjustments to the financial statements you believe necessary for Arnold to give the standard unqualified report on the Apollo Shoes financial statements. a. Review the Apollo cash audit for possible adjustments. b. Review the search for unrecorded liabilities audit work for possible adjustments. (Be careful to determine the proper accounts for adjustment when inventory is included or excluded from the physical count and compilation. “Included” means that the inventory cost is already in the general ledger balance shown in the trial balance. When the previous recorded inventory was adjusted to match the physical count, the adjustment was to cost of goods sold.) c. Review the property, plant, and equipment and prepaids audit work for possible adjustments. d. Review the liabilities audit work for possible adjustments. e. Review the findings about subsequent events and propose adjusting journal entries if any. f. Review the findings from the various expense analyses and your proposed adjusting journal entries, if any. g. Adjust the income tax expense to reflect an income tax rate of 40 percent for all income (and set up a corresponding income tax payable). The tax return and financial statement income are identical, so there are no deferred or prepaid income taxes resulting from timing differences. The tax department “codeheads” will take a closer look when they prepare the corporate returns. 2. Prepare a “scoresheet” working paper for the proposed adjusting journal entries. 3. While we will tell them of everything that we have found, it will be their responsibility to make or not make the entries. Remember to keep materiality in mind. Arnold will fight hardest for the adjustments that will materially affect the financial statements. Date: Fri, 22 FEB 2008 10:15:35 +0000 From: "Darlene Wardlaw" Subject: Analysis of Accounting of Apollo Estimates I forgot to include this in my last e-mail: The company incorporated several estimates in its current year financial statements. Auditing standards (specifically, SAS 99) require consideration of individual estimates and consideration of all estimates taken together. The audit objective is to determine whether the estimates contribute a material bias to the measurement of income. I know that Apollo uses at least three estimates that affect bottom line numbers: • Allowance for Doubtful Accounts Receivable. Has the company reserved enough for uncollectible accounts? • Depreciable Assets. The company acquired and placed in service new equipment during the year. Depreciation was calculated on a straight-line basis, with zero salvage, for periods specified by company policy. Are the useful lives appropriate and salvage values reasonable? • Inventory Obsolescence. Has Apollo reserved an appropriate amount for potential obsolescence in its inventory? Is there inventory that has little or no marketable value? • Warranty Expense. Has Apollo reserved an appropriate amount for warranty expense? Have the amounts (especially as a percentage of sales) been stable or changed significantly? Write a brief one-page memo analyzing management’s estimates described above to put in the A-series workpapers. For each one, determine (calculate) the auditor’s “range of reasonableness estimate.” Do the company’s estimates produce a bias toward overstatement or understatement of income (before income taxes and after income taxes)? Explain the relative size of the bias amounts in comparison to (1)income in the unaudited financial statements, and (2)income in the adjusted financial statements, taking the proposed adjustments into account. DW P.S. I have kept Arnold posted on what is going on at Apollo. I made him promise to throw a nice end-of-audit party when we are done. Date: Thu, 28 FEB 2008, 00:42:35 +0000 From: "Darlene Wardlaw" Subject: Drafting Financial Statements Well, Arnold spoke with Larry Lancaster about your proposed adjustments in a four-hour meeting. They (Apollo) admitted they missed some adjustments at the end of the year and have (grudgingly) agreed to make all of the entries except the ones related to the Mall-Warts account (i.e., those related to the December sale and any adjustment to the Allowance for Doubtful Accounts). Larry is arguing that even though Mall-Warts is in bankruptcy, they will come out of it and be able to pay Apollo the amounts owed, including the questionable December sale. Arnold and I disagree. 1. Prepare the balance sheet as of December 31, 2007, and the income statement for the year ended December 31, 2007 assuming Apollo doesn’t adjust sales and accounts receivable for the questionable December sale. (Remember that even though we are drafting the statements; Apollo’s management is responsible for them.) 2. Prepare a cash flow statement for the year ended December 31, 2007. 3. Identify information you believe should be included in notes to the financial statements. Draft the notes. You can use last year’s as a guide. 4. Also, you may want to draft any management letter comments on anything you believe Apollo Shoes can do better from an operational economy and/or efficiency perspective, or methods of strengthening their internal controls. Even though we do not intend to be Apollo’s auditor next year, we want to maintain our professionalism. All of these workpapers should be in the A-series workpapers. DW Date: Fri, 29 FEB 2008 06:14:29 +0000 From: "Darlene Wardlaw" Subject: Drafting the audit report One last thing to do and then we can wash our hands of the whole thing. You need to draft an audit report to go with the financial statements you drafted (put it in the A-series workpapers). 1. You should date the report as of the end of fieldwork next week (March 7, 2008). 2. Remember that we didn’t audit Apollo last year, so we will probably need to refer to the “other auditors” who audited the previous year’s financial statements. 3. Adjust the report to reflect the fact that Apollo didn’t adjust its accounts receivable/allowance/sales for the Mall-Warts problems. 4. What do you think about a going-concern disclosure? We will probably need a memo in the workpapers (A-series) addressing this issue and discussing the reasons why we should or shouldn’t give them a going concern paragraph. 5. Any subsequent events that need disclosure?
Submitted: 4 years ago.
Category: Homework

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