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Complete the Inventory audit section: Just part 3 and 4 please. 3- Tie the Inventory Warehouse Report to Apollo?s Inventory Status Report supplied by Karina last week. 4- 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. Review the Planning section with emphasis on the Workpaper Indexing, Trial Balances, and Apollo Shoes Minutes and the Accounts Receivable section with emphasis on the Audit of Accounts Receivable ? confirmations. ++++++++++++++++++Workpaper Indexing++++++++++++++ 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. ++++++++++++++++++Trial Balances++++++++++++++ Is attached ++++++++++++++++++Apollo Shoes Minutes++++++++++++++ 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?010307.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?063007.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?010308.doc ++++++++++++++++Audit of Accounts Receivable++++++++++ 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. 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 _____________

 

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