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the runershop
Case 11.1
Instructional Notes

The Runners Shop:
Litigation Support Review of Audit
Documentation for Notes Payable

Mark S. Beasley, Frank A. Buckless,
Steven M. Glover, Douglas F. Prawitt


INSTRUCTIONAL OBJECTIVES

To provide hands-on experience with evaluating audit documentation.
To illustrate the auditor’s objectives and purposes when documenting the audit work performed.
To highlight the care required by auditors when documenting audit work.
To illustrate the linkage of management assertions to audit evidence in the context of auditing Notes Payable.

KEY FACTS

The Runners Shop (TRS) was a family owned business founded seventeen years ago.
TRS sold athletic footwear and related products for runners.
TRS had four retail locations located in Charlottesville, Virginia; Richmond, Virginia; College Park, Maryland; and Cary, North Carolina.
TRS had Net Sales of $2,217,292 and a Net Loss of $50,980 for 2004.
TRS filed for bankruptcy protection in July of 2005 because of a cash shortage. The cash shortage resulted from TRS’s inability to turn a profit, after four years of operations, with its three expansion stores (Richmond, Virginia; College Park, Maryland; and Cary, North Carolina).
TRS was required to have an audit of its financial statements to fulfill requirements of its loan agreements with First Commercial Bank and National Bank and Trust.
Both lending institutions lost their outstanding loan balances when TRS filed for bankruptcy.
The annual financial statements of TRS were audited by Green and Brown, LLP for the last ten years.
Green and Brown, LLP issued a standard unqualified opinion for TRS’s 2004 financial statements.
The two lending institutions jointly filed a lawsuit against Green and Brown, LLP alleging that it did not perform the audit in accordance with generally accepted auditing standards.
The law firms representing the defendant and the plaintiffs are currently conducting discovery procedures.

USE OF

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