Shoe Zoo Inc.

: A Practice in Electronic Work Papers, Tick Mark Preparation, and Client

Communication through the Audit of Property, Plant, and Equipment
CASE
Abstract:
In this case, students are required to audit a companys gross property, plant, and equipment and
depreciation expense accounts. Students are provided with electronic working papers which
include the audit program, as well as documents prepared by the client and select prior year
working papers. In order to successfully complete the audit, students will have to obtain
explanations and other assistance from the client. The case furthers audit education by
illuminating to students how concepts learned in the classroom translate into practice. The case
has several specific learning objectives. First, the case familiarizes students with electronic
working papers which allows them to practice their Excel skills. Second, the case provides
students with an opportunity to audit property, plant, and equipment additions using substantive
details testing and to test depreciation expense using substantive analytical procedures. Third,
students must consider internal controls and the implications errors have on internal control
effectiveness. Fourth, the case helps students improve documentation skills by writing tick mark
explanations. Finally, the case provides students practice with professional verbal
communications through client interviews. The case is appropriate for an undergraduate audit or
a beginning graduate level audit and assurance class.

Keywords: electronic work papers, substantive analytical procedures, tick marks, client
interviewing skills.

Introduction and Background

Shoe Zoo, Inc. was founded 20 years ago by a young entrepreneur interested in providing
high fashion shoes to the public at an affordable price. What started as one small store front in
My Town, GA has since expanded into a thriving business with 15 store locations in large cities
throughout the southeast region of the country and two office/distribution facilities. Shoe Zoo
owns the two office/distribution facilities and rents store front space for their 15 locations in
popular indoor or outdoor malls. Over the past 20 years, Shoe Zoo has strived to maintain its
original goal, to provide brand name shoes for the whole family, including casual shoes, dressy
shoes, boots, sandals, and athletic shoes, at an affordable price. Shoe Zoo is a family owned
business, Kerzman and Lee LLP has audited Shoe Zoos financial statements for the last three
years. Over those three years, Shoe Zoo has consistently reported positive earnings and has had a
small but steady increase in revenues, consistent with the industry trend.
As a staff auditor with Kerzman and Lee LLP, you have been assigned to perform two
tasks related to the audit of Property, Plant, and Equipment (PPE) for Shoe Zoo, Inc: perform
substantive detail testing of gross PPE additions and perform substantive analytical procedures to
test depreciation expense. You will find three files attached that you will need to complete these
tasks: an Excel file titled Excel Work Papers, a Word document titled PBC Documents and a
Word document titled Prior Year Work Papers.
You will document your completion of the audit in the Excel Work Papers file provided.
Materiality for PPE has been set at $1,000. There have been no material misstatements in the
PPE account in previous years and no changes in personnel or accounting methods. Your team is
using a control reliance strategy and the senior has completed the internal controls testing. The
overall Risk of Material Misstatement for PPE is assessed as low. This is your first audit, and you
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want to impress your senior. One way to do so is through your documentation skills, in
particular, your tick mark explanations. Tick marks are used to indicate to your senior that you
have performed a certain task or obtained additional information regarding an amount. The
explanation/meaning of each tick mark you use should be included on a tick mark legend that
will immediately follow the working paper. Your senior will be most impressed with tick mark
explanations that are clear, objective, and concise, but yet still informative enough so that he/she
knows what work you performed and conclusions you reached.1
Prior to fieldwork, the senior requested several documents from the client that you will
need to successfully complete your portion of the audit. The client has provided those documents
and you will find them in the PBC Documents file, where PBC stands for prepared by client. In
addition to these documents, you will also need last years audit work paper files to fully
complete your portion of the audit. The senior has pulled the prior year work papers and has
included the documents you will need in the file titled Prior Year Work Papers.
As you complete your audit, you will notice that not all of the information you need is
included in the PBC Documents and Prior Year Work Papers files. Therefore you may need to
ask the client for additional documents and explanations. Your main contact at the client is the
controller, J.M. Perkins. Yet another way to impress your senior and also the client is through
your communications with the client. You want to be sure that you are fully prepared and
professional in your communications with the client. This includes properly greeting the client,
acting in a friendly and professional manner, asking clear and concise questions that you
prepared prior to your meeting, and asking follow-up questions if necessary. Also, remember that
obtaining evidence solely through verbal inquiry of the client is not sufficient audit evidence.
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See the glossary immediately following the case for further explanation of the terms control reliance strategy,
internal controls, Risk of Material Misstatement, materiality, and tick mark.

Therefore, you must corroborate all client explanations by examining documents that validate
what they are telling you.
Requirements
Task 1 Substantive Detail Testing of Gross PPE Additions
Perform the steps in the Audit Program Testing of Gross Property, Plant, and Equipment,
located in the fourth tab of the Excel Work Papers file and labeled WP #5600 Audit Program.
The first three tabs of the Excel Work Papers file contain work papers that have been completed
by the senior which document the Property, Plant, and Equipment acquisition process and the
results of internal controls testing for the acquisition process. The completed control testing work
papers are provided for you in the event that you find errors as you are completing the steps in
WP #5600 Audit Program. Should you find an error(s), you will need to consider and
document the impact the error(s) has on controls in a tick mark on the work paper where the
error is discovered. As you are completing the steps in the Audit Program, be sure to document
any work performed on the appropriate work paper in the Excel Work Papers file. After you
complete each step sign off on both the Excel Work Paper and the Audit Program itself and
indicate on the Audit Program which management assertion you think the step best addresses. A
list of the management assertions is provided in the glossary. Use the following guidance and tips
as you complete each step.
1. Step 1 of the Audit Program (WP #5600 Audit Program) requires the auditor to
obtain and foot a trial balance from the client. The trial balance contains the prior year
and current year balances in all general ledger accounts. Your senior has already
obtained this trial balance and used audit software to break up the trial balance into
separate Lead Sheets for each major area of testing.
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Your senior provided you with the Property Lead Sheet (WP #5610 Lead Sheet)
which you will use in your property testing. Therefore, the senior completed a portion
of this audit step for you. To finish completing the step, you will need to foot (i.e.,
add) the columns on the lead sheet. You may use a commonly used tick mark symbol
f to indicate that you performed the footing and that the totals are mathematically
accurate. Commonly used tick marks, such as f, do not need to be defined in the
tick mark legend. Place an f symbol to the bottom of each column that properly
foots down. If any balances are not mathematically accurate, you must use a specific
tick mark (such as {a}, {b}, {c}, etc.) to explain the difference. Upon completing this
step, sign off on Step 1 of the Audit Program below the senior sign off.2

2. Step 2 of the Audit Program requires you to agree the prior year (i.e., 2010) property
account balances listed in the Property Lead Sheet to the prior year balances from the
clients 2010 audited financial statements. If the amounts listed in the 2010 column of
the Lead Sheet agree to amounts you find in the prior year audited financials, you
should indicate that they agree by placing a commonly used tick mark PY in the
tick mark column to the right of each balance. If any account balance does not agree,
you will need to perform additional investigation as to why it does not agree and then
document the reasons using a different specific tick mark. Using a specific tick mark
means that you place a symbol such as {a}, {b}, {c}, and so on next to the balance
that does not agree and then write your explanation for why the number does not

See glossary for further explanation of the terms audit program, trial balance, lead sheet, and foot.

agree in the tick mark legend following the Property Lead Sheet.

3. Step 3 of the Audit Program requires you to obtain a schedule showing changes made
to the property accounts since the end of last year (12/31/2010) to the end of the
current year (12/31/2011). This is sometimes referred to as a Roll Forward schedule
since it shows how the prior year audited balances changed via additions and
disposals during the 2011 year to result in the ending 12/31/2011 balances. A Roll
Forward is useful because your audit firm has already subjected the beginning
property balances (i.e., as of 12/31/2010) to testing last year and believed them to be
reliable. Instead of testing the entire balance of property at 12/31/2011, your audit
firm can simply test any 2011 changes to the property accounts since last year when
the balances were tested.

Your senior has already obtained the Roll Forward from the client and given it to you
(see WP#5615 Roll Forward in the Work Paper File). To complete Step 3, you
simply need to test that the roll forward activity shown is mathematically accurate
across all rows and down all columns. Remember, indicate with the commonly used
tick mark f if row and column totals are accurate. If any balances are not
mathematically accurate, you must use a specific tick mark (such as {a}, {b}, {c},
etc.) to explain the difference.3

See glossary for further explanation of the term Roll Forward.

4. Step 4 of the Audit Program requires you to agree the beginning (12/31/2010) and
ending (12/31/2011) balances per the Roll Forward to the respective balances on the
Property Lead Sheet. This step is needed because your audit firm plans on testing the
activity listed in the Roll Forward (i.e., 2011 additions and disposals), and it is
important that that the property balances before and after the activity match with the
trial balance amounts. For each balance on the Roll Forward that agrees to the
corresponding balance on the Property Lead Sheet, write the work paper number of
the Property Lead Sheet to the right of the balance. Be sure to include a crossreference to the Property Roll Forward work paper next to each balance on the
Property Lead Sheet work paper as well.

If any balances do not agree, you must investigate the difference and use a specific
tick mark (such as {a}, {b}, {c}, etc.) to explain the difference. One way you can
provide reconciling detail (i.e., show how it doesnt tie) is by pulling the amount to
the bottom of the work paper. You would do this by inserting a capital letter (A, B,
and so forth) beside the amount and then again at the bottom of the work paper where
you provide the reconciliation.4

5. Step 5 of the Audit Program requires you to begin the process of testing current year
property additions. Note that your senior has already set up a work paper for you to
document your additions testing (see WP#5615-A Additions Testing). The senior
has also previously obtained the detailed listing of all additions to property accounts

See glossary for further explanation, as well as an example, of reconciliation.

made during the current year from the client. You will find the listing in the PBC
Documents file.

You will need to make sure the listing foots and agrees to the total additions listed on
the Property Roll Forward. Your senior has advised you that the best way to show that
the balance per the additions listing matches the additions total per the Roll Forward
is to complete the top half of the Additions Testing work paper. Be sure to properly
reference and cross-reference any amounts obtained from other work papers. Any
material difference noted needs to be investigated and the results of the investigation
should be discussed in a tick mark explanation.

6. Step 6 of the Audit Program requires the auditor to make a sample of additions from
the detailed additions listing. Please note that your senior has already performed the
appropriate calculations to determine a required sample size of two (see the Additions
Testing work paper and tick mark {a} for more details). The senior has also already
marked which two specific additions you should test, as indicated with a check mark
on the Additions Listing included in the PBC Documents file. Because the senior
completed this step already, you will notice the seniors sign-off on the Audit
Program, indicating that you can proceed to the next step.

Step 7 of the Audit Program asks you to vouch each addition selection. The
supporting documents required are all invoices and checks related to the purchase of
the selected property. The senior previously requested this information from the
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client, therefore you will find these documents in the PBC Documents file.5
Document your testing in the Additions Testing work paper using the format already
set up for you by your senior on the work paper. Any issues or discrepancies noted
should be explained in a specific tick mark.

7. Step 8 requires you to obtain evidence that the two additions selected for testing
actually exist. To do this, you must verify the physical existence of the additions
selected. This means physically observing each asset or otherwise confirming with
knowledgeable client personnel outside of the accounting department that the asset
exists and was in good working order as of 12/31/2011. To perform this step you must
interview the client.

Document the performance of this step in the Additions Testing work paper by
placing a specific tick mark in the column Physical Existence Verified. Keep in
mind that your tick marks should be clear and concise, but should also include
enough detail so that your senior or other reviewers can follow exactly what you did
to verify physical existence.

After completing this step, you will have completed all the testing in this area.
Therefore, you should sign-off on each excel work paper that you have completed
(i.e., the Property Lead Sheet, the Roll Forward, and the Additions Testing work
papers) underneath each work paper number in the upper right-hand corner.

See glossary for further explanation of the term vouch.

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CASE GLOSSARY
Below is further explanation of audit terminology used in the case. The terms are listed in order
of reference in the case material.

Control Reliance Strategy The auditor has chosen to rely on the companys internal controls
over a certain area. Therefore audit testing involves testing internal controls to determine
effectiveness. If controls are effective, auditors will rely on internal controls and perform less
substantive testing in that area.

Internal Controls The policies and procedures a company has in place to safeguard assets,
ensure reliable financial reporting, ensure compliance with laws and regulations, and increase the
efficiency of operations.

Risk of Material Misstatement The risk that a material misstatement exists in the financial
statements, whether caused by error or fraud.

Materiality The magnitude of a misstatement or omission that would have changed or

influenced the judgment or decisions of a reasonable person relying on that information.

Tick Mark a symbol indicating a certain task has been performed. Upon completing a task or
obtaining more information regarding an amount, an auditor will denote that work has been done
by placing a tick mark (such as a letter or symbol) next the relevant amount on the work paper.
The auditor will then describe in a tick mark legend what the tick mark itself means, i.e., exactly
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what work was performed and what conclusion was reached as a result. Tick mark legends
typically appear at the bottom of the work paper on which it appears or on a separate work paper
immediately following. Individual firms often have standard tick marks to denote commonly
performed audit tasks. For example, a common task throughout the audit is to verify that
beginning balances agree to prior year ending balances. For common tasks such as this, firms
often have a policy of using the same tick mark, i.e., a standard tick mark, each time that
particular task is performed. For example, the firm may use the tick mark PY to denote that the
auditor verified that the beginning balance agrees to the prior year ending balance. The auditor
would continue to use the tick mark PY on any working paper where the beginning balance in
question was verified to the prior year ending balance. Standard tick mark symbols, such as
PY in this example, require no further explanation in a tick mark legend, as they are typically
defined earlier in the audit work paper file.

Audit Program a list of procedures and tasks to be performed by the auditor to complete a
portion of an audit.

Trial Balance a list of the companys prior year and current year general ledger accounts and
ending balances. The sum of all debit balances should equal the sum of all credit balances.

Lead Sheet a working paper created by the auditor that shows the detailed general ledger
accounts that make up a financial statement account (Messier et al. 2008). Auditors typically
place a lead sheet in the beginning of the section of the audit file that contains working papers

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and support for that financial statement account. Completed working papers and support should
indicate balances that agree to the lead sheet.

Foot to add a column down.

Management Assertions about Account Balances at the Period End6

Existence assets, liabilities, and equity interests exist.

Rights and obligations the entity holds or controls the right to assets, and liabilities are
the obligation of the entity.

Completeness all assets, liabilities, and equity interests that should have been recorded
have been recorded.

Valuation and allocation assets, liabilities, and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.

Roll Forward a schedule that shows details of how accounts changed over the year, categorized
into a beginning balance column, additions column, a disposals or subtractions column, and an
ending balance column. The ending balances should equal the beginning balances plus any
additions and minus any disposals (subtractions).

Reconciliation demonstrating that amounts do not agree and showing the amount by which
they differ. For example, if the Property Lead Sheet indicated a gross property balance of

Definitions of management assertions are directly quoted from Messier et al. (2008 p.40).

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$150,000, yet the Property Roll Forward indicated a gross property balance of $149,500, you
would need to provide a reconciliation. You would do so by placing a capital letter A beside
the gross property balance on the Property Lead Sheet and then again at the bottom of the
Property Lead Sheet where the reconciliation is performed. The reconciliation for this example
would be as follows:
A

150,000

Per Roll Forward 149,500 5615

Difference

500 {a}

The difference of $500, indicated by the specific tick mark {a}, would be further explained (or
deemed immaterial) in the tick mark legend. The 5615 is a cross reference to the Roll Forward
work paper number.

Vouch to verify an amount by tracing it back to supporting documents.

REFERENCES
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Messier, W., S. Glover, and D. Prawitt. 2008. Auditing and Assurance Services: A Systematic
Approach. Sixth Edition. New York, NY: McGraw-Hill Irwin.

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