Accounting Question

Read the Planning and Internal Control sections of the file attached. Reflect on how you can use this information and your notes to meet the objectives and complete the assignments.

Prepare a 1-2 page paper outlining key take aways from the reading. This should be in APA format and have a cover page (not included in the 1-2 pages of content), and include 5-10 key take aways from the reading. No references required.

Apollo Shoes, Inc
Trial Balance (Audited)
12/31/20×6
Account ID
Account Description
10100 Cash on Hand
10200 Regular Checking Account
10300 Payroll Checking Account
10400 Savings Account
11000 Accounts Receivable
11500 Allowance for Doubtful Accounts
12000 Inventory – Spotlight
12300 Reserve for Inventory Obsolescence
14100 Prepaid Insurance
14200 Prepaid Rent
14300 Office Supplies
14400 Notes Receivable-Current
14700 Other Current Assets
15000 Land
15100 Buildings and Land Improvements
15200 Machinery, Equipment, Office Furniture
17000 Accum. Depreciation
19000 Investments
19900 Other Noncurrent Assets
20000 Accounts Payable
23100 Sales Tax Payable
23200 Wages Payable
23300 FICA Employee Withholding
23350 Medicare Withholding
23400 Federal Payroll Taxes Payable
23500 FUTA Tax Payable
23600 State Payroll Taxes Payable
23700 SUTA Tax Payable
23800 FICA Employer Withholding
23900 Medicare Employer Withholding
24100 Line of Credit
24200 Current Portion Long-Term Debt
24700 Other Current Liabilities
27000 Notes Payable-Noncurrent
39003 Common Stock
39004 Paid-in Capital
39005 Retained Earnings
PBC
A-1
Debit
1,987.28
198,116.52
3,044,958.13
16,410,902.71
18,825,205.24
743,314.38
200,000.00
7,406.82
117,000.00
623,905.92
433,217.10
572,691.08
53,840.59
–
Credit
1,262,819.88
3,012,000.00
164,000.00
4,633,118.09
29,470.32
1,318.69
583.99
6,033.01
2,815.47
1,318.69
583.99
10,000,000.00
8,105,000.00
7,423,000.00
2,219,120.65
40000 Sales
41000 Sales Returns
42000 Warranty Expense
45000 Income from Investments
46000 Interest Income
47000 Miscellaneous Income
50010 Cost of Goods Sold
57500 Freight
60000 Advertising Expense
61000 Auto Expenses
62000 Research and Development
64000 Depreciation Expense
64500 Warehouse Salaries
65000 Property Tax Expense
66000 Legal and Professional Expense
67000 Bad Debt Expense
68000 Insurance Expense
70000 Maintenance Expense
70100 Utilities
70110 Phone
70120 Postal
71000 Miscellaneous Office Expense
72000 Payroll Tax Exp
73000 Pension/Profit-Sharing Plan Ex
74000 Rent or Lease Expense
77500 Administrative Wages Expense
78000 Interest Expense
78500 Income Tax Expense – Federal
78510 Income Tax Expense – State
80000 Loss on Legal Settlement
Total
4,497,583.20
1,100,281.48
141,569,221.61
4,302,951.46
897,140.01
208,974.39
31,212,334.17
133,000.00
4,633,383.82
80,495.32
3,605,133.96
1,622,425.99
853,942.65
61,136.04
135,642.99
76,373.78
128,033.21
17,023.27
1,550,989.06
3,000,000.00
2,603,485.87
16,875,305.98
875,000.00
2,365,000.00
429,000.00
19,172,000.00
283,238,404.03
246,172,918.44
204,302.81
283,238,404.03
Apollo Shoes, Inc
Preclosing Trial Balance
12/31/20×7
Account ID
Account Description
10100 Cash on Hand
10200 Regular Checking Account
10300 Payroll Checking Account
10400 Savings Account
11000 Accounts Receivable
11400 Other Receivables
11500 Allowance for Doubtful Accounts
12000 Inventory
12300 Reserve for Inventory Obsolescence
14100 Prepaid Insurance
14200 Prepaid Rent
14300 Office Supplies
14400 Notes Receivable-Current
14700 Other Current Assets
15000 Land
15100 Buildings and Land Improvements
15200 Machinery, Equipment, Office Furniture
17000 Accum. Depreciation
19000 Investments
19900 Other Noncurrent Assets
20000 Accounts Payable
23100 Sales Tax Payable
23200 Wages Payable
23300 FICA Employee Withholding
23350 Medicare Withholding
23400 Federal Payroll Taxes Payable
23500 FUTA Tax Payable
23600 State Payroll Taxes Payable
23700 SUTA Tax Payable
23800 FICA Employer Withholding
23900 Medicare Employer Withholding
24100 Line of Credit
24200 Current Portion Long-Term Debt
24700 Other Current Liabilities
27000 Notes Payable-Noncurrent
39003 Common Stock
39004 Paid-in Capital
39005 Retained Earnings
40000 Sales
41000 Sales Returns
42000 Warranty Expense
45000 Income from Investments
46000 Interest Income
47000 Miscellaneous Income
50010 Cost of Goods Sold
57500 Freight
60000 Advertising Expense
61000 Auto Expenses
62000 Research and Development
64000 Depreciation Expense
64500 Warehouse Salaries
65000 Property Tax Expense
66000 Legal and Professional Expense
67000 Bad Debt Expense
68000 Insurance Expense
70000 Maintenance Expense
70100 Utilities
70110 Phone
70120 Postal
71000 Miscellaneous Office Expense
72000 Payroll Tax Exp
73000 Pension/Profit-Sharing Plan Ex
74000 Rent or Lease Expense
77500 Administrative Wages Expense
78000 Interest Expense
78500 Income Tax Expense – Federal
78510 Income Tax Expense – State
78600 Controllers’ Clearing Account
Total
PBC
A-2
Debit
2,275.23
557,125.92
3,645,599.15
51,515,259.98
1,250,000.00
67,724,527.50
3,424,213.78
8,540.00
117,000.00
674,313.92
2,929,097.13
1,998,780.39
53,840.59
11,100,220.89
1,158,128.47
130,196,645.26
4,240,263.09
1,036,854.01
210,502.80
528,870.44
446,000.00
4,720,715.56
99,332.45
4,913,224.45
36,106.92
35,502.87
137,332.18
52,599.02
77,803.61
24,891.82
1,577,811.85
3,630,375.80
1,206,574.00
16,197,225.43
2,591,736.50
8,900,000.00
3,100,000.00
330,119,291.01
Credit
1,239,009.75
846,000.00
610,000.00
1,922,095.91
8,439.65
11,414.99
118,086.12
55,106.86
8,439.65
11,414.99
44,403,000.00
12,000,000.00
8,105,000.00
7,423,000.00
6,590,483.64
242,713,452.88
1,426,089.31
131,881.46
2,166,000.00
330,375.80
330,119,291.01
APOLLO SHOES, INC.
Client File
An Audit Case to Accompany
AUDITING AND ASSURANCE SERVICES
Prepared by
Timothy Louwers
Brad Roof
7th Edition
Page 1
Acknowledgements
We would like to gratefully acknowledge the following individuals for their assistance in
preparing and completing this case. Sincere appreciation is due to Cal Christian, Marcia Croteau,
Loretta Manktelow, Reagan McDougall, Meghan Peters, Denise Patterson, Bob Ramsay, J.
Kenneth Reynolds, Mike Shaub, and several classes of Louisiana State University and James
Madison University students. Their suggestions greatly enhanced several portions of the case.
However, we remain responsible for all errors of commission and omission.
Page 2
Introduction
APOLLO SHOES, INC.
An Audit Case to Accompany
AUDITING AND ASSURANCE SERVICES, 7th Edition
PLEASE READ THROUGH THE NEXT TWO PAGES BEFORE BEGINNING YOUR
WORK ON THE CASE
Apollo Shoes, Inc. is an audit case designed to introduce you to the entire audit process, from
engagement through drafting the appropriate audit report. In order to complete the case, you are
asked to assume the role of an in-charge auditor that has worked for three “busy” seasons. This is
your firm’s first time auditing Apollo Shoes and it is your first audit client as the primary “incharge” on the audit engagement team.
While Apollo Shoes’ growth has been phenomenal (there has been a dramatic growth in revenue
and net income during 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.
There is help, from an untrained intern. While the intern can do “fundamental work,” such as
gathering audit evidence for you, he appears incapable of preparing audit documentation, making
adjusting entries, or even getting acceptable responses from the client. Also, there is assistance on
the audit in the form of an objective, competent internal audit staff. Communication between
client personnel and other firm members usually takes the form of e-mail messages from the
engagement partner (Arnold Anderson), the engagement manager (Darlene Wardlaw), the intern
(Timothy Crumpler), and the director of Apollo’s internal audit department (Karina Ramirez).
Author-suggested assignments and memos are in bold princluded throughout the case. Page
indexing suggestions are given, but feel free to adjust page numbering as you see fit.
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 audit documentation for cash
and invoices used for valuing inventory may be useful later in the search for unrecorded liabilities
and the bank confirmation contains information about long-term liabilities.
Overall, we strongly believe that this case will help you learn by actually completing tasks that
would be completed by an auditor. For example, among other skills, an auditor must learn to
identify and gather appropriate evidence, create audit documentation and produce an audit trail.
Apollo Shoes is the first step in learning these skills.
Page 3
Finally, 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 even enjoyable (at times). In fact, 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!
Table of Contents
Introduction ……………………………………………………………………………………………………………………………… 3
Table of Contents ……………………………………………………………………………………………………………………… 4
Planning ………………………………………………………………………………………………………………………………….. 5
Internal Control Evaluation ……………………………………………………………………………………………………… 57
Page 4
Page 5
Date: 21 OCT 20×7 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 work as an 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 to familiarize yourself with
Apollo Shoes and help me out by doing the following:
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 (20×6) 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 being audited.
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 (one-page) audit staffing memo (GA-2) telling me
what expertise (e.g., tax specialist, IT specialist, etc.) 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.
1.
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
Page 6
Minutes of the Audit Committee, Apollo Shoes
October 17, 20×7
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 an income
tax specialist and an information technology auditor. We need to keep up to date on your computer information
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.
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 of
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 staff person 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.
Ms. 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 near the beginning of January.
Mr. Carboy (controller): Speaking of being ready, we will be able to give you a trial balance the day after December
31, on New Year’s Day!.
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.
Secretary
Page 7
/s/ Jeff Chesnut,
Date: 22 OCT 20×7 4:43:17 +0000
From: “Larry Lancaster”
Subject: Attached 10-K Filing
Attachments: , ,
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.
Page 8
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
overnight 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 is already on track to be 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 specifically and the overall economy more generally, 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.
Indeed, 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
Page 9
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 prior achievements and then
proceed to new challenges. This year was great only because it provided us with the
resources to expand our operations and help enable our further technological progress. As
we move forward to 20×7 and beyond, we recognize that we need to provide “more, faster,
and better” to our markets. 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
Page 10
——————————-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, 20×6
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 incorporation or
organization)
(IRS Employer 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 7, 20×7, 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 7, 20×7, 8,105,000 shares of the registrant’s Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement dated December 12, 20×6 for the Annual Meeting of Shareholders to be held
on Tuesday, February 4, 20×7 at the End of the Universe Restaurant in downtown Shoetown.
Page 11
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
Page 12
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.
ITEM 1. BUSINESS.
Apollo Shoes, Inc. (the “Company”) 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
Page 13
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
A significant reorganization and enhancement of the information systems department was
implemented 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 reorganized information systems department went into effect, the director was
promoted to vice president. Apollo obtained a new 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 old
system. This made the transition to the new system easy on the employees, thus reducing
training and employee objections to the changes.
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 20×6, 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, 20×7. 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
Page 14
ITEM 3. LEGAL PROCEEDINGS.
On September 12, 20×6, 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 20×6 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 20×6 and 20×5.
20×6
First
Second
Third
Fourth
High
$14.625
$11.00
$8.25
$5.625
20×5
Low
$3.375
$2.625
$3.25
$3.125
High
$4.00
$4.625
$8.125
$11.50
The stock price at closing on December 31, 20×6, was $3.25 per share.
As of December 31, 20×6, 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.
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Low
$3.50
$4.25
$4.00
$5.00
ITEM 6. SELECTED FINANCIAL DATA.
APOLLO SHOES, INC.
in thousands (except per share data)
Income Statement Data
Year Ended December 31
20×6
20×5
20×4
20×3
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,
20×6
20×5
20×4
20×3
Working Capital
$20,482
$16,866
($1,951)
($2,356)
Total Assets
$36,794
$21,304
$6,754
$6,062
$0
$0
$0
$0
$22,119
$17,748
$5,470
$3,880
Long-Term Debt
Shareholders’ Equity
iv
Page 16
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
20×6 Financial Results
Net sales for the year ended December 31, 20×6 increased 2% to $240,575,000, when
compared to the same period in 20×5. The sales growth was primarily due to new products
introduced during the 20×6 fiscal year. The average selling price per product in the year
ended December 31, 20×6 increased approximately 2% from the year ended December 31,
20×5.
Gross profit for the year ended December 31, 20×6 was 41% of sales compared with 49%
for the year ended December 31, 20×5. 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, 20×6 was 30%
of net sales as compared to 26% for the year ended December 31, 20×5. 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.
Liquidity and Capital Resources
The Company’s principal source of operating funds has been from proceeds from short-term
borrowing against a $50,000,000 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 $20,482,000 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.
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Page 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
APOLLO SHOES, INC.
in thousands (except per share data)
For the year ended, December 31,
20×6
20×5
Net Sales (Note 2)
Cost of Sales
Gross Profit
$240,575
$141,569
$99,006
$236,299
$120,880
$115,419
Selling, General and Administrative Expenses
Interest Expense (Note 7)
Litigation Expense (Note 10)
Other Expense (Income)
Earnings from Continuing Operations
Before Taxes
Income Tax Expense (Note 9)
Earnings from Continuing Operations
Discontinued Operations, Net of tax benefit
Net Income
$71,998
$875
($19,172)
($204)
$61,949
0
0
($1,210)
$7,165
$2,794
$4,371
$4,371
$54,680
$21,634
$33,046
($31,301)
$1,745
Earnings Per Common Share
From Continuing Operations
Other
Net Income
$0.54
($0.00)
$0.54
$4.08
($3.86)
$0.22
Weighted shares of common stock outstanding
8,105
8,105
The accompanying notes are an integral part of the consolidated financial statements.
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Page 18
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
APOLLO SHOES, INC.
in thousands
As of December 31
20×6
20×5
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)
573
613
Other Assets (Note 6)
54
0
$36,794
$21,304
Accounts Payable and Accrued Expenses
$4,675
$3,556
Short-Term Liabilities (Note 7)
10,000
0
$14,675
3,556
0
0
$14,675
3,556
Common Stock
8,105
8,105
Additional Paid-in Capital
7,423
7,743
Retained Earnings
6,591
1,900
$22,119
$17,748
$36,794
$21,304
Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Long-Term Debt (Note 7)
Total Liabilities
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
The accompanying notes are an integral part of the consolidated financial statements.
vii
Page 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
APOLLO SHOES, INC.
in thousands
Balance, December 31, 20×4
Shares
Par Value
($1 per share)
Additional Paidin Capital
Retained
Earnings
Other
Total
2,873
$2,873
$2,122
$475
$0
$5,470
Net Income
Exercise of Stock Options
$1,745
$1,745
232
$232
$301
$533
Other
5,000
$5,000
$5,000
$10,000
Balance, December 31, 20×5
8,105
$8,105
$7,423
Net Income
Exercise of Stock Options
$2,220
$0
$4,371
0
$4,371
$0
$0
Other
Balance, December 31, 20×6
$0
8,105
$8,105
$7,423
$6,591
$0
The accompanying notes are an integral part of the consolidated financial statements.
viii
Page 20
$17,748
$22,119
CONSOLIDATED STATEMENTS OF CASH FLOWS
APOLLO SHOES, INC.
in thousands
For the year ended December 31,
20×6
20×5
Cash Flows from Operating Activities
Net Income
$4,371
$1,745
$133
$26
Accounts Receivable
($12,410)
($2,073)
Inventory
($1,990)
($11,861)
($599)
($123)
$1,119
$5,504
Total Adjustments
($13,747)
($8,527)
Net Cash Provided by Operating Activities
($9,376)
($6,782)
($834)
($255)
Adjustments to Reconcile Net Income to Net Cash Provided
Depreciation and Amortization
Changes in Operating Assets and Liabilities
Decrease (Increase) in Current Assets
Prepaid Expenses
Increase (Decrease) in Current Liabilities
Accounts Payable and Accrued Expenses
Cash Flows from Investing Activities
Capital Expenditures
Purchase of Other Assets
($54)
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.
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Page 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APOLLO SHOES, INC. (all amounts are thousands, except per share)
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 equipment 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 20×6 and 20×5 are presented net of sales returns and allowances of $4,500 and
$900, respectively, and net of warranty expenses of $1,100 and $900, 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 prior year amounts have been reclassified to conform to the 20×6
presentation.
2. Significant Customers
Approximately 15%, and 11% of sales are to one customer for years ended December 31, 20×6 and
20×5, respectively.
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3. Accounts Receivable
Accounts Receivable consists of the following at December 31:
in thousands
20×6
Trade Receivables
Employee and Officer Receivables
$16,411
0
Less Allowance for Doubtful Accounts
16,411
(1,263)
Net Accounts Receivable
$ 15,148
Amount charged to bad debt expense for the year ended December 31, 20×6 was $1,622. Write-offs
for the year were approximately the same.
4. Inventories
Inventories consist of the following at December 31:
in thousands
20×6
Siren
Speaker
Spotlight
$3,098
9,571
6,156
Less Reserve for Inventory Obsolescence
18,825
(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
20×6
Land
Buildings and Land Improvements
Machinery, Equipment and Office Furniture
$117
624
433
Total Land, plant and equipment
Less Accumulated depreciation
1,174
(164)
Net Land, Plant and Equipment
$1,010
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6. Investments and Other Assets
In order to receive a higher rate of return on its excess liquid assets, the Company invested
approximately $600 to purchase a 35% share (Class A Common Stock) in the SHOCK-PROOF
SOCKS Company in 20×5. This investment is valued in the financial statements using the Equity
method. SHOCK-PROOF SOCKS did not report net income and did not pay any dividends in 20×5
and 20×6. In addition, on December 31, 20×6, the Company incurred approximately $54 in legal
fees to register the patent for the PHONESHOE.
7. Debt
At December 31, 20×6, the Company had $10,000 outstanding in short-term borrowings under a
$50,000 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:
20×7
$10,000
8. Commitments
Annual obligations under non-cancelable operating leases are as follows:
20×7
Thereafter
$1,200
0
Rent expense charged to operations for the years ended December 31, 20×6 and 20×5 was $2,600
and $3,700 million, respectively.
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9. Income taxes
The provision (benefit) for income taxes consists of the following for the years ended December 31:
Current:
Federal
State
Deferred:
Federal
State
20×6
20×5
$ 2,025
365
$ 2,390
$ 873
154
$ 1,027
$ 340
64
$ 404
$ (42)
(7)
$ (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:
Federal Statutory Rate
State taxes, less federal benefit
Research and experimentation credit
Other
Effective Tax Rate
20×6
20×5
34.0%
6.0%
(2.0%)
1.0%
39.0%
34.0%
6.0%
(1.4%)
1.0%
39.6%
10. Litigation
On September 12, 20×6, 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 ($19,172 net of a tax benefit of $7,477).
11. Related-party transactions
On February 1, 20×6, the Company purchased its operating facility and equipment from a company
controlled by two previous directors and shareholders of the Company for $624. Currently, the
Company leases a second facility and equipment from the same company for approximately $200
per month. The Company’s lease ends in June 20×7 at which time all operations will be moved to
the central headquarters building.
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12. Employee benefit plans
The Company sponsors a defined-contribution retirement plan covering substantially all of its earth
employees. Contributions are determined at the discretion of the Board of Directors. Aggregate
contributions made by the Company to the plans and charged to operations in 20×6 and 20×5 were
$3,000 and $3,000, respectively.
13. 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.
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Page 26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of APOLLO SHOES, INC.
We have audited the accompanying consolidated statements of financial condition of APOLLO SHOES,
INC. as of December 31, 20×6 and 20×5 and the related consolidated statements of income, shareholders’
equity, and cash flows for each of the two years in the period ended December 31, 20×6. 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, 20×6, 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 included 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.
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In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of APOLLO SHOES, INC. as of December 31, 20×6 and 20×5 and the
results of its operations and cash flows for each of the two years in the period ended December 31, 20×6 in
conformity with U.S. generally accepted accounting principles. Also in our opinion, APOLLO SHOES,
INC. maintained, in all material respects, effective internal control over financial reporting as of December
31, 20×6, based on the COSO criteria.
Smith & Smith, CPA’s
Shoetown, Maine
January 24, 20×7
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CORPORATE INFORMATION
Auditors
Smith & Smith, CPA’s
31st 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 questions 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 19, 20×6 at the End of the Universe Restaurant in downtown Shoetown.
Shareholders of record on February 5, 20×6 were entitled to vote at the meeting.
The PHONESHOE, SIREN, SPEAKERSHOE, and the SPOTLIGHT Designs are
registered trademarks of Apollo Shoes, Inc.
xvi
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BOARD OF DIRECTORS
Larry Lancaster
Chairman, President and CEO
APOLLO SHOES, INC.
Eric. P. Unum
Vice-President – Finance
*Fritz Brenner
(Audit Committee)
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
(Audit Committee)
Minister of Commerce
Anglonesia
*Dr. Josephine Mandeville, CPA
(Audit Committee Chair)
Professor of Accountancy and Typing
Graduate School of Business and Clerical Skills
* External Directors
xvii
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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
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Smith and Smith, CPAs, withdrew as the Company’s auditors after completing the 20×6
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
Sue D. Fultz, Vice-President – Legal Affairs
Joe Bootwell, Executive Senior Vice President and CFO
Fred Durkin, Vice-President – Marketing
Eric. P. Unum, Vice-President – Finance
Daisy Gardner, Vice-President – Operations
$2,500
1,500
1,200
1,000
590
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, 20×6, the Company purchased its operating facility and equipment from a
company controlled by two previous directors and shareholders of the Company for $623.
Currently, the Company leases a second facility and equipment from the same company for
approximately $200 per month. The Company’s lease ends in June 20×7 at which time all
operations will be moved to the central headquarters building. The two previous directors
are no longer associated with Apollo Shoes.
xvix
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
20×6
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,
20×7. It is incorporated in this document by reference.
xx
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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 1, 20×7
Larry Lancaster
Joe Bootwell
Larry Lancaster
Chairman of the Board of Directors,
President and CEO
Joe Bootwell
Executive Senior Vice-President and CFO
xxi
Page 34
Apollo Shoes Inc.
Organizational Chart
As of 9/30/20×7
Audit
Committee
Board of Directors
Larry Lancaster
Chairman, President, &
CEO
Karina Ramirez
Internal Audit
Joe Bootwell
Executive Sr. VP & CFO
Sue Fultz
Legal Affairs
Daisy Gardner
VPOperations
Mary Costain
Treasurer
Page 35
Ernst
Hathaway
VP – IT
Systems
Fred Durkin
VPMarketing
Samuel Carboy
Controller
Susan
Richards
Credit
Manager
Eric Unum
VP- Finance
Date:24 OCT 20×7 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.
Page 36
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 verified 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 ensure 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 reconciled 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.
Page 37
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
Equipment
Straight-line
Straight-line
15 years
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.
Page 38
Note from the authors: Use the following calendar when performing audit procedures that
require exact knowledge of when during the week the fiscal year-ends. Having December
31 as a business day adds clarity to information in the case and enriches opportunities to
develop auditing skills.
Calendar
December 20×7
January 20×8
Sun
Mon
Tues
Weds
Thu
Fri
Sat
7
14
21
28
1
8
15
22
29
2
9
16
23
30
3
10
17
24
31
4
11
18
25
5
12
19
26
6
13
20
27
Page 39
Sun
Mon
Tues
Weds
Thu
Fri
Sat
4
11
18
25
5
12
19
26
6
13
20
27
7
14
21
28
1
8
15
22
29
2
9
16
23
30
3
10
17
24
31
Date: 24 OCT 20×7 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. My advice to you for this engagement is to 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 audit documentation. 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 perhaps 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.)
ICC series
ICD series
ICP series
A series
B series*
C series*
D series*
E series*
F series*
I series*
L series*
N series*
Q series*
R series*
X series*
General and Administrative (Planning)
Revenue/Collection Cycle Internal Control Evaluation
Purchasing/Disbursements Internal Control Evaluation
Payroll Internal Control Evaluation
Trial Balance/Financial Statements/Adjustments/Footnotes
Cash Substantive Audit Documentation
Accounts Receivable Substantive Audit Documentation
Inventory Substantive Audit Documentation
Prepaids Substantive Audit Documentation
Property, Plant and Equipment Substantive Audit Documentation
Other Assets Substantive Audit Documentation
Current Liabilities Substantive Audit Documentation
Notes Payable Substantive Audit Documentation
Stockholders’ Equity Substantive Audit Documentation
Revenue Substantive Audit Documentation
Expenses Substantive Audit Documentation
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 (Timothy 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 audit documentation; 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.
Page 40
Date: 13 JAN 20×8 12:45:39 +0000
From: “Darlene Wardlaw”
Subject: Apollo Shoes minutes
Hope the inventory observation went well. I saw Timothy 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 Chestnut (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 documentation of matters relevant for the audit of the 20×7 financial
statements. Prepare audit documentation (GA-3) for my review with proper headings and these
two columns:
Information Relevant to 20×7 Audit
Audit Action Recommended
You may want to stick a copy of the minutes in the audit documentation (GA-3-1, GA-3-2, etc.)
behind your memo when you are done with them.
DW
Page 41
MEETING HELD JANUARY 6, 20X7
Larry Lancaster, 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**
Ivan Gorr*
Harry Baker*
Fritz Brenner**
Theodore Horstmann**
Eric Unum
* Outside director ** Outside director and member of the audit committee.
The minutes of the December 16, 20×6 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 February 2, 20×7 and
rolled into a note payable with the Twenty-First National Bank of Maine, due January 1, 20×8.
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 20×7 as well as
stipends for outside Board Members of $90,000 each. The board approved these salaries and stipends by a 61 vote:
20×7 Salary
President and CEO, Larry Lancaster
$2,750,000
Exec Sr. VP and CFO, Joe Bootwell
1,320,000
VP Marketing, Fred Durkin
VP Finance, Eric Unum
1,100,000
649,000
VP Legal Affairs, Sue Fultz
VP Operations, Daisy Gardner
1,650,000
451,000
Internal Audit Director, Karina Ramirez
Treasurer, Mary Costain
235,000
222,000
Controller, Samuel Carboy
214,000
Mr. Lancaster encouraged everyone to watch the 20×7 Super Bowl 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.
Page 42
/s/ Jeff Chesnut, Secretary
MEETING HELD JUNE 30, 20×7
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**
Ivan Gorr*
Harry Baker*
Fritz Brenner**
Theodore Horstmann**
Eric Unum
* Outside director ** Outside director and member of the audit committee.
The minutes of the January 6 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 costcutting 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 20×8 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 $23,810.13 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 $1,250,000 to Mr. Lancaster’s personal secretary as a personal loan to
cover personal legal expenses related to her previous employer. Mr. Unum further suggested that the
promissory note plus accrued interest of 1% per year be due on June 30, in 50 years. 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; he would cash it and give it to his secretary.
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 authorize a draw of $44,403,000 on the Company’s line of credit on July 1. This proposal was
unanimously approved.
Meeting ended 7:30 P.M.
AudComMins—0630×7.doc
Page 43
/s/ Jeff Chesnut, Secretary
MEETING HELD JANUARY 6, 20X8
Larry Lancaster, chairman of the board, presided over the regular meeting, beginning at 2 P.M. All members
were present:
Larry Lancaster
Josephine Mandeville**
Ivan Gorr*
Harry Baker*
Fritz Brenner**
Theodore Horstmann**
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 20×7 audit.
Ms. Mandeville moved, and Mr. Gorr seconded, a proposal to declare retroactively a cash dividend of
$860,000 payable March 1, 20×8, to stockholders of record on December 31, 20×7. Approved by a vote of 5–
2.
Ms. Fultz, VP-Legal affairs, stated that on January 5, 20×8 (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 20×7. 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, 20×7. Approved by a 4–3 vote.
President, Larry Lancaster
VP Marketing, Fred Durkin
$200,000
50,000
VP Finance, Eric Unum
VP Information Systems, Ernst Hathaway
50,000
50,000
VP Legal Affairs, Sue Fultz
VP Operations, Daisy Gardner
50,000
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 20×7, 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 Super Bowl ad this year.
Meeting ended 8:30 P.M.
Page 44
/s/ Jeff Chesnut, Secretary
Date: 14 JAN 20×8 08:49:35 +0000
From: “Darlene Wardlaw”
Subject: Apollo Shoes Trial Balances
Attachments: ,
I got a copy of Apollo’s 20×7 year-end trial balance (attached) from Sam Carboy, Apollo’s
Controller. I also got a copy of last year’s 20×6 audited pre-closing 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
audit documentation formatting, but my preference is for the following columns for the income
statement and balance sheet:
Acct
#
DW
Page 45
Acct
Title
W/P
Ref
Last
year’s
(Audited)
Current
Year
(unaudited)
Adjustments
Dr.
Cr.
Current
Year
(Audited)
Apollo Shoes, Inc
Preclosing Trial Balance
31-Dec-x7
Account ID
Account Description
Debit Amt
Credit Amt
$2,275.23
10100
Cash on Hand
10200
Regular Checking Account
10300
Payroll Checking Account
10400
Savings Account
$3,645,599.15
11000
Accounts Receivable
$51,515,259.98
11400
Other Receivables
$1,250,000.00
11500
Allowance for Doubtful Accounts
12000
Inventory
12300
Reserve for Inventory Obsolescence
14100
Prepaid Insurance
14200
Prepaid Rent
14300
Office Supplies
14400
Notes Receivable-Current
14700
Other Current Assets
15000
Land
15100
Buildings and Land Improvements
15200
Machinery, Equipment, Office Furniture
17000
Accum. Depreciation
19000
Investments
19900
Other Noncurrent Assets
20000
Accounts Payable
23100
Sales Tax Payable
23200
Wages Payable
23300
FICA Employee Withholding
$8,439.65
23350
Medicare Withholding
$11,414.99
23400
Federal Payroll Taxes Payable
$118,086.12
23500
FUTA Tax Payable
23600
State Payroll Taxes Payable
23700
SUTA Tax Payable
23800
FICA Employer Withholding
23900
Medicare Employer Withholding
24100
Line of Credit
24200
Current Portion Long-Term Debt
24700
Other Current Liabilities
27000
Notes Payable-Noncurrent
$12,000,000.00
39003
Common Stock
$8,105,000.00
39004
Paid-in Capital
$7,423,000.00
39005
Retained Earnings
$6,590,483.64
40000
Sales – Spotlight
41000
Sales Returns
$11,100,220.89
42000
Warranty Expense
$1,158,128.47
45000
Income from Investments
46000
Interest Income
47000
Miscellaneous Income
50010
Cost of Goods Sold
Page 46
$557,125.92
$1,239,009.75
$67,724,527.50
$846,000.00
$3,424,213.78
$8,540.00
$117,000.00
$674,313.92
$2,929,097.13
$610,000.00
$1,998,780.39
$53,840.59
$1,922,095.91
$55,106.86
$8,439.65
$11,414.99
$44,403,000.00
$242,713,452.88
$1,426,089.31
$131,881.46
$2,166,000.00
$130,196,645.26
Account ID
Account Description
Debit Amt
57500
Freight
$4,240,263.09
60000
Advertising Expense
$1,036,854.01
61000
Auto Expenses
$210,502.80
62000
Research and Development
$528,870.44
64000
Depreciation Expense
$446,000.00
64500
Warehouse Salaries
$4,720,715.56
65000
Property Tax Expense
66000
Legal and Professional Expense
67000
Bad Debt Expense
68000
Insurance Expense
70000
Maintenance Expense
$35,502.87
70100
Utilities
$137,332.18
70110
Phone
$52,599.02
70120
Postal
$77,803.61
71000
Miscellaneous Office Expense
72000
Payroll Tax Exp
$1,577,811.85
73000
Pension/Profit-Sharing Plan Ex
$3,630,375.80
74000
Rent or Lease Expense
$1,206,574.00
77500
Administrative Wages Expense
$16,197,225.43
78000
Interest Expense
$2,591,736.50
78500
Income Tax Expense – Federal
$8,900,000.00
78510
Income Tax Expense – State
$3,100,000.00
78600
Controller’s Clearing Account
$99,332.45
$4,913,224.45
$36,106.92
$24,891.82
$330,375.80
$330,119,291.01
Page 47
Credit Amt
$330,119,291.01
Apollo Shoes, Inc
Preclosing Trial Balance (Audited)
31-Dec-x6
Account ID
Account Description
Debit
Credit
$1,987.28
10100
Cash on Hand
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
12000
Inventory – Spotlight
12300
Reserve for Inventory Obsolescence
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
19000
Investments
$572,691.08
19900
Other Noncurrent Assets
$53,840.59
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
23400
Federal Payroll Taxes Payable
23500
FUTA Tax Payable
23600
State Payroll Taxes Payable
23700
SUTA Tax Payable
23800
FICA Employer Withholding
23900
Medicare Employer Withholding
24100
Line of Credit
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
$7,423,000.00
39005
Retained Earnings
$2,219,120.65
40000
Sales
41000
Sales Returns
$4,497,583.20
42000
Warranty Expense
$1,100,281.48
Page 48
$1,262,819.88
$18,825,205.24
$3,012,000.00
$164,000.00
$583.99
$6,033.01
$2,815.47
$1,318.69
$583.99
$10,000,000.00
$246,172,918.44
$0.00
45000
Income from Investments
46000
Interest Income
50010
Cost of Goods Sold
57500
Freight
60000
Advertising Expense
$897,140.01
61000
Auto Expenses
$208,974.39
62000
Research and Development
64000
Depreciation Expense
$133,000.00
64500
Warehouse Salaries
$4,633,383.82
65000
Property Tax Expense
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
78500
Income Tax Expense – Federal
$2,365,000.00
78510
Income Tax Expense – State
$429,000.00
80000
Loss on Legal Settlement
$204,302.81
$141,569,221.61
$4,302,951.46
$31,212,334.17
$80,495.32
$875,000.00
$19,172,000.00
$283,238,404.03
Page 49
$283,238,404.03
Date: 6 JAN 20×8 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
Page 50
Date: 15 JAN 20×8 12:15:49 +0000
From: “Darlene Wardlaw”
Subject: Materiality for Apollo Shoes Engagement
You now need to prepare a memo (GA-5) addressing materiality for Apollo Shoes. Remember
that the audit documentation must follow 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
Page 51
Date: 16 JAN 20×8 1:15:49 +0000
From: “Darlene Wardlaw”
Subject: Memo on Consideration of Potential Fraud
We need a memo (GA-6) addressing the potential for fraud (both misappropriation of assets and
fraudulent financial reporting) for Apollo Shoes. This audit documentation is necessary to
document that we are following the professional literature concerning fraud consideration. 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 of risk (is fraud risk centralized to one function or
individual or is it throughout the organization?)
How might a fraud 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 Timothy) for a
“brainstorming” session next week.
DW
Page 52
Date: 16 JAN 20×8 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 information systems department reorganization. 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 changed IT
processing of the last two quarters’ transactions will affect our audit this year.
Prepare a memo in the General and Administrative section of the current year audit
documentation (GA series) to document how planning might be affected by the change in IT
systems at Apollo. I am unsure of the extent to which the company followed the recommended
procedures in the Systems Development Life Cycle. I suggest you consider which areas of the
audit may be affected most by this change, and discuss the data considerations that we will need
to make. I would recommend addressing such things as the extent of IT processing in various
accounting cycles, the complexity of the IT processing, the organization structure of the IT
department, availability of data, computer-assisted audit techniques including the use of software
such as IDEA or Tableau, and the need for specialized skills. You may want to reference an
Auditing and Information Technology module in your old auditing textbook.
“Uncle” Arnie
Page 53
Date: 16 JAN 20×8 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 technology system:
The new IT 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 IT personnel.
I’ve attached an excerpt from our documentation 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.
Page 54
Information System
The reorganized IT 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 IT
system and the new system for the month of September. On October 1, Apollo converted to the wireless multiserver system. As
the new IT 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 old system. This made the transition to the new system easy on the employees,
thus reducing training and employee objections to the new IT system. Further, most of the controls and separation of duties
previously described were retained.
Hardware Description
Apollo installed a wireless Local Area Network (LAN), featuring 10 TB (terabytes, or 10 trillion bytes) of storage capacity. This system
can support 400 client machines, but Apollo currently uses about 20. This system utilizes a Storage Area Network (SAN) for database
storage, file management system and redundancy. Network printers are located in each 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 IT Personnel
The IT 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.
Page 55
Page 56
Date: 13 JAN 20×8 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
Page 57
Internal Control Questionnaire—Sales Transaction Processing
Assertions and Questions
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 manua…