I first wanted to thank you for congratulating me on my recent promotion; I look forward to working with you on the new Apollo Shoes engagement. I have read all the information you sent me about Apollo Shoes to gain a better understanding of the company, and I feel like I have a firm grasp of the company structure and environment. After reviewing the company’s last three board of directors meetings, I determined what expertise would be necessary to carry out the audit on Apollo Shoes. If you can assign these staff to our audit team, the productivity and effectiveness of the audit will increase significantly. The first staff member that would be greatly helpful to our audit team would be an information technology specialist. In the board meeting held on June 30, the board authorized up to $1.2 million for the purchase and installation of a new information system. However, to fund the purchase and pay other expenses, the board authorized a draw of over $44 million, which seems very excessive.
Having an IT specialist will help us determine the total cost of installing a new information system and bring light to why the board drew over $44 million to fund the purchase. Another staff member that would be helpful to our audit team would be a property, plant, and equipment specialist. Despite authorizing the purchase of equipment totaling $1.3 million in January of 2014, the equipment was still not set up during the January 2015 board meeting. A property, plant, and equipment specialist could help us determine the accounting implications of purchasing the equipment in 2014 and still not having it set up in 2015, as far as depreciation and cost recognition are concerned. Quite possibly the most important staff member that we will need on our audit team is a lawyer or legal expert, for a variety of different situations.
The first and most glaring situation that will need to be addressed is the board advancing $1,250,000 directly to Mr. Lancaster to cover personal legal expenses for his secretary. Recording it in other receivables instead of employee advances and drawing a check directly to Mr. Lancaster set off a red flag for us and we would like a legal expert to look further into the situation. Another situation that will need the attention of a legal expert is a class action suit that was brought against Apollo Shoes for gross negligence and violation of warranty for $12,000,000. A legal expert could help us determine the probability that Apollo Shoes will lose the case.
The company does not have insurance to cover these types of actions, so losing this case could have huge implications on their cash balances. One of the last situations we would like the legal expert to look into was the retroactive declaration of dividends in January of 2015. At that board meeting, they approve to declare the dividends in the previous year, which we are not sure is allowed, so a legal expert could give us better insight into the situation. These three specialists seem to be the most necessary staff members after reviewing all of the company’s board meetings, and they will be of substantial help if you could assign them to our audit team. If I determine that I need any additional staff support in the future, I will let you know throughout the audit process.