Apollo Shoes 7e Solution Liabilities

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The document discusses the audit of current and long-term liabilities. It provides some guidance and points out areas that students may overlook or find challenging. Limited guidance is expected as the audit nears completion.

The main tasks involved in auditing current liabilities include performing a search for unrecorded liabilities, preparing internal control documentation for payroll, and performing substantive payroll testing.

When auditing long-term liabilities, the guidance will be limited. Important items to record include interest payable, bonus payable, and dividends payable. New accounts may need to be created for amounts not previously recorded.

Teaching Notes

The liability portion of the audit will consist of both current liabilities and long-term
liabilities. We will have two lead schedules (current and long-term). The current
liabilities section will also require the students to test payroll expense and interest
expense. Darlene does not give many instructions in the current liabilities section. The
students will have to use an audit plan to determine what to do.

Current Liabilities

Task: Apollo Page


 Darlene doesn’t provide any instruction, but must complete and 120
document the work Bradley did.
 Perform search for unrecorded liabilities 120
 Prepare a SSAE 16 Memo for Payroll Internal Controls 126
 Substantive Payroll Procedures 126

Long-Term Liabilities

Task: Apollo Page


 Audit Long-Term Liabilities 120
 Audit Interest Expense 120

Points to Remember
 The guidance in this section from Darlene is very limited. It should be pointed
out to the students that this happens as the audit nears its end, the amount of
guidance that they will receive will be less and less as everyone gets busy to meet
deadlines.

 Use of the audit plan will be very important.

 The search for unrecorded liabilities is conducted in this section. This is a very
important part of the audit that should be emphasized.

 Several of these liabilities will be related to expenses and will provide support for
the related expense (e.g. attorney fees and payroll expense).

 Many students will forget to accrue the audit fee mentioned in the Board of
Director minutes at the beginning of the audit. Many students will also forget to
record an accrued liability for the 2017 bonuses approved in the January 6, 2018
Board meeting.
 There will be a question concerning the Anglonesia R&R Institute invoice. On D-
4, we note that it was been received on December 31st. This liability SHOULD be
recorded. In the Inventory it was counted and included. Thus, to make inventory
balance, costs of goods sold must have been adjusted. Thus, the entry to record
this will be to adjust CGS.

 Payroll will also need to be tested. The 2017 calendar used in this case does not
have the actual year-end. December 31, 2017 is on a Wednesday for this case.
The actual 31st is a Sunday. Wednesday was chosen so students would have to
address payroll accruals in the case. Per the manual, payroll is paid on Fridays, so
payroll expense needs to be accrued for three days (30% of 12/26 payroll).

 The Payroll Flow Chart and Bridge Working Paper should be included in Internal
Controls.

 Under the Notes payable section, interest expense should also be tested.

 Interest Payable, Bonus Payable and Dividends Payable accounts are added to the
current liabilities lead schedule. There are no existing accounts related to these
amounts, so the student will have to create new ones.

 In the search for unrecorded liabilities Check No. 3628 is payment to Sam Shaw
for washing cars. Shaw is an employee of the firm which makes this a related
party transaction. And, although only a few thousand dollars, this does not
appear to an arm’s-length transaction as the cost per car greatly exceeds any
reasonable rate for washing cars. The aggregate cost for a complete detailing of
all Apollo owned cars would be far less than half this amount. There is no basis
in the case for proposing any adjustment, but students should be suspicious of the
transaction, and a few should identify that it is a related party transaction. This
can also be the basis for a discussion around, “Is there such a thing as an
immaterial related party transaction?”
Audit plan – Current Liabilities (L)

Audit Procedures Audit W/P Ref. Initials


Objectives
Accounts Payable
1 Obtain a trial balance of recorded accounts
payable as of year-end.
a Foot it and trace the total
to the general ledger
account.
b Vouch a sample of
balances to vendors'
statements. Review the
trial balance for related-
party payables.
2 When concerned about the possibility of
unrecorded payables, send confirmations to
creditors, especially those with small or zero
balances and those with whom the company
has done significant business.
3 Conduct a search for unrecorded liabilities
by examining open vouchers, vendors'
invoices and statements received, and cash
payments made for a period after year-end.
4 Inquire about terms that justify classifying
payables as long term instead of current.

Other Current Liabilities

1 For estimated liabilities, such as warranties,


determine and evaluate the basis of
estimation, and recalculate the estimate.
2 Obtain written client representations about
related party payables and pledges of assets
as collateral for liabilities.
Apollo Shoes, Inc. L-1
Schedule of Current Liabilities Prepared by
PBC For Year Ended 12/31/2017 Reviewed by
Adjustments
Acct 2017 Audited
# Account Title 2016 2017 WP AJE # Debit Credit Balance
GL $12,800,105.9 $14,722,201.8
20000 Accounts Payable PY $4,633,118.09 $1,922,095.91 L-2 #9 7 8
22000 Income Taxes Payable PY $0.00 GL $0.00 0.00
23100 Sales Tax Payable PY $0.00 GL $0.00 $0.00
23200 Wages Payable PY $29,470.32 GL $0.00 L-4 #10 $236,172.00 $236,172.00
23300 FICA Employee Withholding PY $1,318.69 GL $8,439.65 $8,439.65
23350 Medicare Withholding PY $583.99 GL $11,414.99 $11,414.99
23400 Federal Payroll Taxes Payable PY $6,033.01 GL $118,086.12 $118,086.12
23500 FUTA Tax Payable PY $0.00 GL $0.00 $0.00
23600 State Payroll Taxes Payable PY $2,815.47 GL $55,106.86 $55,106.86
23700 SUTA Tax Payable PY $0.00 GL $0.00 $0.00
23800 FICA Employer Withholding PY $1,318.69 GL $8,439.65 $8,439.65
23900 Medicare Employer Withholding PY $583.99 GL $11,414.99 $11,414.99
24600 Interest Payable PY $0.00 GL $0.00 N-1 #13 $419,920.90 $419,920.90
24700 Bonuses Payable $0.00 $0.00 L4 #14 $450,000.00 $450,000.00
24800 Dividends Payable PY $0.00 GL $0.00 Q-1 #12 $860,000.00 $860,000.00
$14,766,198.8 $16,901,197.0
Total Liabilities PY $4,675,242.25 $2,134,998.17 $0.00 74
f f f f f
f – footed GL – agreed to trial balance on GA-6
PY – Agreed to P/Y Workpapers
AJE#9 Cost of Goods Sold $8,434,889.09
Utilities $ 15,216.88
Auditing Fees $ 750,000.00
Legal fees $3,600,000.00
Accounts Payable $12,800,105.97
To record unrecorded liabilities discovered when reviewing subsequent cash disbursements L-2
Apollo Shoes, Inc. L-2
Accounts Payable Schedule Prepared by
For Year Ended 12/31/2017 Reviewed by
PBC
Adjustments Audited
List of Approved Vendors Balance Debit Credit Balance WP
#
Anglonesian Institute for $0.00 $8,434,889.09 $8,434,889.09 L-3
Reprograming and Rehabilitation

B. Franklin's LP&E $0.00 $15,216.88 $15,216.88 L-3

Fleur de Lis Catering $6,868.12 $6,868.12 L-3

Just Boxes $0.00 $0.00 %

Lawyers "R" Us, LLC $1,902,224.45 3,600,000 $5,502,224.45 L-3, X-


3

Office Hacks Supplies $1,117.19 $1,117.19 L-3

Sign Up! $4,994.99 $4,994.99 L-3

Smart Chip $0.00 $0.00 %

Squint Telephone and Cellular $6,891.16 $6,891.16 L-3

Synergizer Battery Company $0.00 $0.00 %

Tiger Jaguar Dealership $0.00 $0.00 %

Zrocks $0.00 $0.00 %

Anderson, Olds, and Watershed $0.00 $750,000.00 $750,000.00 GA-1

$1,922,095.91 $12,800105.9 $14,722,201.88


7
L-1 L-1 L-1

% No amount was due for these customers

AJE#9 Cost of Goods Sold $8,434,889.09


Utilities $ 15,216.88
Audit Fees $ 750,000.00
Legal Fees $3,600,000.00
Accounts Payable $12,800,105.97

To record unrecorded liabilities.


Apollo Shoes, Inc. L-3
Search for Unrecorded Liabilities Prepared by BC
For Year Ended 12/31/2017 Reviewed by

From Cutoff Bank


Statement: From Check Register From Voucher Packet
Chec
k Date Amount Date of Check Payee Invoice Date Description
3622 1/13/18 $6,683.93 1/10/2018 Smart Chip 12/27/2017 Annual computer maintenance contract—2018
3623 1/13/18 $2,937.13 1/10/2018 Tiger Jaguar Dealership 1/9/2018 Automobile maintenance on 1/9/18
3624 1/14/18 $6,868.12 L-2 1/10/2018 Fleur de Lis Catering 12/31/2017 Catered Holiday party
3625 1/13/18 $124.81 1/10/2018 Office Hacks 1/13/2018 Office supplies purchased 1/7/18
3626 1/13/18 $15,216.88 L-2 1/10/2018 B. Franklin's LP&E 1/6/2018 "For December electricity"
3627 1/13/18 $6,891.16 L-2 1/10/2018 Squint Cellular 1/5/2018 December telephone bill
3628 1/13/18 $6,025.43 1/10/2018 Sam Shaw N/A Car washes for fleet of automobiles on 1/13.

3629 1/13/18 $927.09 1/10/2018 Just Boxes 1/7/2018 Packaging material ordered 1/7.
3630 1/14/18 $8,419.69 1/10/2018 Synergizer Battery Company 1/3/2018 The goods were received on January 6 with bill of lading
showing a January 3 shipping date and marked FOB, Shipping
- Chicago.

3631 1/14/18 $8,434,889.09 L-2 1/10/2018 Anglonesia R&R Institute 12/26/2017 The receiving report was dated December 30. The accounts
payable clerk indicated that the office party was held the
afternoon of the 30th and the receiving report was probably not
forwarded until the next working day so was not included in
year-end accounts payable. This inventory was counted and
included in the physical inventory at the end of the year.

3632 1/14/18 $1,117.19 L-2 1/10/2018 Office Hacks 12/31/2017 Business cards, picked up 12/30/17
3633 1/13/18 $6,924.96 1/10/2018 Smart Chip 1/13/2018 Computer purchased 1/10/18
3634 1/14/18 $4,994.99 L-2 1/10/2018 Sign Up! 12/31/2017 New logos on vehicles on 12/31/17
3635 1/13/18 $5,174.00 1/10/2018 Zrocks 1/13/2018 Copy machine purchased 1/13/18
3636 1/13/18 $585.28 1/10/2018 Smart Chip 1/13/2018 Computer supplies picked up 1/10/18

Note: Check No. 3628. Sam Shaw is an employee of the firm. Although only a few thousand dollars, this is an exorbitant
amount for washing the limited number of Apollo owned cars, and is also a related party transaction.
Apollo Shoes, Inc. N-1
Notes Payable Schedule Prepared by
For Year Ended 12/31/2017 Reviewed by

PBC (Audited) Unaudited Audited


Balance Balance Adjustments Balance
Acct # Account Title 12/31/16 12/31/17 AJE# Debit Credit 12/31/17
27000 Notes Payable-Noncurrent $0.00 $12,000,000.00 AJE #11 $12,000,000.00 $0.00 B-3
TB TB

24100 Line of Credit $10,000,000.00 $44,403,000.00 $44,403,000.00 B-3


TB TB

24200 Current Portion Long-Term Debt $0.00 $0.00 AJE#11 $12,000,000.00 $12,000,000.00 B-3
TB TB

$10,000,000.00 $56,403,000.00 $12,000,000.00 $12,000,000.00 $56,403,000.00


f f f f F
f – footed
TB – agreed to trial balance on GA-6

AJE#11
3
N-1-1 270000 Notes Payable-NonCurrent $12,000,000.00
24200 Current Portion LTD $12,000,000.00

To reclass from LTD to Current


AJE #13
N-1-1 Interest Expense 419,920.90
Interest Payable 419,920.90

An entry must be made to accrue interest expense on the line of credit


for December.
N-1-1
Notes Payable Roll Forward
For the Year Ended 12/31/2017

Year-End Balance 12/31/2016 $ 0.00 N-1


Additions 12,000,000.00 B-3, GA-3.1
Payments (0.00)

Year-End Balance $12,000,000,00 N-1, *

* As noted on B-3 and GA-3.1, the $10,000,000 line of credit was rolled into a $12 million note payable. This debt is due on
1/1/2018, so it is reclassed to current.

AJE #11 27000 Notes Payable-NonCurrent $12,000,000.00


24200 Current Portion LTD $12,000,000.00

Line of Credit Roll Forward


For the Year Ended 12/31/2017

Year-End Balance 12/31/2016 $ 10,000,000.00 N-1


Additions 44,403,000.00 B-3, GA-3-2
Deletions ( 10,000,000.00) B-3, GA-3-1

Year-End Balance $ 44,403,000.00 N-1

Note: The original LOC of $10,000,000.00 was rolled into a $12,000,000 note payable on 2-2-14. On 6/1/17 a new LOC of
$44,403,000 was entered into.
Interest Expense Accrual
For the Year Ended 12/31/2017

Interest Expense Accrual 12 months 6 months Total Expense per t


X-1

1) Line of Credit 9.16% $44,403,000 7/1/2017 N/A $2,033,657.40 $2,033,657.40

2) Long Term Note Payable 8.15% $12,000,000 1/2/2017 $978,000.00 N/A $978,000.00

Total Accrual for Year End $3,011,657.40 2,591,736.50 7.26


Note: Based on the interest calculation, total interest expense for the year should have been $3,011,657.40
and only $2,591,736.50 was recorded. Thus, an adjustment of $419,920.90 is required. This understated
interest expense amount is very close to 1 month’s worth of interest, which is consistent with the bank
confirmation that says interest has only been paid through 11/30/2017.
AJE# 13 Interest Expense 419,920.90
Interest Payable 419,920.90

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