Ardmore Beer Distributors, Inc. Identification of Tests of Controls for the Revenue Cycle LEARNING OBJECTIVES Upon completion of this case, students will be able to: Identify typical documents and records needed to record transactions within the revenue cycle. Understand typical control activities implemented to record transactions within the revenue cycle. Know which control activities a client can utilize to reduce the probability of a material misstatement. Recognize the management assertions to which certain control activities pertain. Specify appropriate tests of controls for each client control activity. INTRODUCTION Ardmore Beer Distributors (ABD) is a closely held business that was founded twenty-seven years ago by Michael Donohoe and Timothy Bauer. ABD is a distributor that purchases and sells domestic and international beer to retail stores located in medium-sized markets. The company does not have any clients located in major cities such as Philadelphia or New York. The primary focus of the company is to maintain a broad selection of beers, both inexpensive and premium, at a low cost and then resell its inventory to small retail outlets that have difficulty obtaining adequate, or any, amounts of the various types of beer. ABD is capable of keeping its costs low by purchasing large blocks of over-production by firms, ordering quantities of various beers during off-peak periods, and sourcing inventory directly from individual breweries thus saving suppliers on shipping costs. Additionally, ABD manages its labor costs by leveraging lower-cost labor where it can. For example, workers in its warehouses are typically undergraduates with ages ranging between 18 and 21. Over the course of the past year, ABD purchased beer from 30 different domestic and 80 different international beer companies. The brands that ABD carry include Miller, Budweiser, Stella, Victory, Dogfish Head, Rochefort, and Westmalle. At the current time, ABD has two warehouses. The first is located in Wilmington, DE and the second is located in Fayetteville, NC. In the prior year, ABD had 148 retail beer store customers and net sales of $16,548,951. Generally, sales are strongest in the third and fourth quarters of the calendar year with sales being the weakest in the second quarter. BACKGROUND ABD is compelled to have an audit of its annual financial statements under the requirements of its loan agreement with its primary financial institution. The audit must be completed consistent with AICPA professional standards for the audit of a nonpublic company. Your audit firm is
Ardmore Beer Distributors, Inc. Identification of Tests of Controls for the Revenue Cycle LEARNING OBJECTIVES Upon completion of this case, students will be able to: Identify typical documents and records needed to record transactions within the revenue cycle. Understand typical control activities implemented to record transactions within the revenue cycle. Know which control activities a client can utilize to reduce the probability of a material misstatement. Recognize the management assertions to which certain control activities pertain. Specify appropriate tests of controls for each client control activity. INTRODUCTION Ardmore Beer Distributors (ABD) is a closely held business that was founded twenty-seven years ago by Michael Donohoe and Timothy Bauer. ABD is a distributor that purchases and sells domestic and international beer to retail stores located in medium-sized markets. The company does not have any clients located in major cities such as Philadelphia or New York. The primary focus of the company is to maintain a broad selection of beers, both inexpensive and premium, at a low cost and then resell its inventory to small retail outlets that have difficulty obtaining adequate, or any, amounts of the various types of beer. ABD is capable of keeping its costs low by purchasing large blocks of over-production by firms, ordering quantities of various beers during off-peak periods, and sourcing inventory directly from individual breweries thus saving suppliers on shipping costs. Additionally, ABD manages its labor costs by leveraging lower-cost labor where it can. For example, workers in its warehouses are typically undergraduates with ages ranging between 18 and 21. Over the course of the past year, ABD purchased beer from 30 different domestic and 80 different international beer companies. The brands that ABD carry include Miller, Budweiser, Stella, Victory, Dogfish Head, Rochefort, and Westmalle. At the current time, ABD has two warehouses. The first is located in Wilmington, DE and the second is located in Fayetteville, NC. In the prior year, ABD had 148 retail beer store customers and net sales of $16,548,951. Generally, sales are strongest in the third and fourth quarters of the calendar year with sales being the weakest in the second quarter. BACKGROUND ABD is compelled to have an audit of its annual financial statements under the requirements of its loan agreement with its primary financial institution. The audit must be completed consistent with AICPA professional standards for the audit of a nonpublic company. Your audit firm is