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Auditing: Design controls for Apollo Shoes inventory

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Design a proposal for appropriate controls to cover inventory based on the Apollo Shoes case.
View inventory tab on http://www.mhhe.com/business/accounting/louwers/apollo.html.

Date: Sat, 31 DEC 2005 4:43:52 +0000
To: "Darlene Wardlaw" <[email protected]>
From: "Bradley Crumpler" <[email protected]>
Subject: Apollo Shoes Inventory Observation

While the "in-charge" was drinking coffee and scarfing down doughnuts with Karina, I was out in the warehouse counting! This is what I observed:

- I saw the Apollo manager (Andrew Jacobs) giving instructions to the count teams. (I've attached a copy to put in the workpapers.)

- Shoe boxes were stacked in pallets. Each pallet was six boxes wide by six boxes deep and stacked 30 boxes high (6X6X30=1080 boxes/pallet). Each pallet included all the same sizes of men's, women's and children's shoes. According to the in-charge's instructions, I had them open up a number of boxes throughout the warehouse to make sure that shoes were in each of them. Boy, were they upset about that!

- Apollo personnel counted all inventory, including a shipment of shoes costing $8,434,889.09 that was received on December 31. The invoice shows the shipment was made from the Anglonesia Rehabilitation and Reprogramming Institute on December 26, "FOB Destination." I attached a copy of the purchase invoice as well as the ones from the previous two purchases. These were the only shipments received in the last several months. I observed a count tag on every pallet.

- There were a total of 98 count sheets. I recounted all the items on seven count sheets (attached). There were no differences between my test counts and those counted by the client. For some reason, the in-charge didn't want me to let the Apollo people know what I was recounting!

- I found some pallets of shoes stacked near the back of the warehouse (furthest from the shipping dock). They were covered with dust and looked very old. They were men's size 23. When I asked the inventory foreman about them and whether they had any value, he just started laughing. He said that's why the "reserve for inventory obesity" was so high. He said that they shipped out "a boatload of them (size 23's) last week."

- I also spent 4 hours watching them count the supply closet. All the pencils were accounted for.

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Solution Summary

Your response is 373 words and gives you seven ideas to improve controls for Apollo Shoes given the inventory data presented.

Solution Preview

I can suggest some controls that seem appropriate for this client given the details in the case. Here are my suggestions:

1. Review sales returns (to see if shipment of odd size comes back and that was just a fraud to get it out of the warehouse during the count).

2. Purchases seem very high given sales. It makes me wonder why. For example, look at size 9 Men's speaker shoe - the item with the highest dollar amount. They have 15,425 units on hand. They bought 17,029 in August of this shoe. So, they sell about 1,604 per month in ...

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