Apollo_Shoes

SAS 99 MEMO December 31, 2010 TO: FILES FROM: Anderson, Olds, and Watershed Audit Manager SUBJECT: Planning Memo – SAS99 SAS 99 is a generally accepted auditing standard, “Consideration of Fraud in a Financial Statement Audit”, that discusses types of fraud possible in financial statements and analytical procedures relevant to finding and correcting fraudulent statements. It establishes standards and provides guidance to auditors to help them plan and perform their audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. As the auditor, it is our responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Red flags within the Apollo engagement. * In the minutes from the October 18, 2005 meeting, it was stated that the former auditor, Smith & Smith, CPAs, unexpectedly withdrew from the engagement. The vice president of finance, Mr. Unum, declined to discuss this matter further, because there may be pending litigation involved. * Also, in the work paper-indexing document, a different auditor, Jones and Douglas, CPAs, is named as the previous auditor. * Lancaster seems to be overpowering and demanding. His attitude could be hiding or encouraging fraud in the company. He makes threats regarding sales levels and potential problems and seems to circumvent the internal control procedures. Also, his bonuses are much larger than those of other board members. It might be prudent to look over transactions that he is involved in. * After testing internal controls, there were 51 deviations from a total sample of 120 transactions. That means that about 42.5% of the total transactions may be wrong. Some of this may be due to fraud or may be an attempt to conceal a fraud. * With regards to the analysis, we will need to look into how income has grown so high in just a year, increase of forty-six million dollars, while sales are down over ten million dollars. This could potentially be fraudulent and will need to be verified. * We may also have to look into how expenses have dropped so much in the year with the cost of goods sold and sales remaining constant. This may not be an issue but is worth looking into. * As a new and growing shoe company in a field with very successful competitors (Nike, Adidas, Reebok, etc), there may be an attempt to overstate income or profits. The pressure of keeping up with the competition may cause fraudulent acts to occur.