Late in December 19X9, your CPA firm accepted an audit engagement at Fine Jewelers, Inc., a corporation that deals largely in diamonds. The corporation has retail jewelry stores in several Eastern cities and a diamond wholesale store in New York Citv. The wholesale store also sets the diamonds in rings and in other quality jewelry.

The retail stores place orders for diamond jewelry with the wholesale store in New York City. A buyer employed by the wholesale store purchases diamonds in the New York diamond market, and the wholesale store then fills the orders from the retail stores and from independent customers and maintains a substantial inventory of diamonds. The corporation values its inventory by the specific identification cost method.

Required:

Assume that at the inventory date you are satisfied that Fine Jewelers, Inc., has no items left by customers for repair or sale on consignment and that no inventory owned by the corporation is in the possession of outsiders.

a. Discuss the problems the auditor should anticipate in planning for the observation of the physical inventory on this engagement because of the

(1) Different locations of inventories.

(2) Nature of the inventory.

b. (1) Explain how your audit program for this inventory would be different from that used for most other inventories.

(2) Prepare an audit program for the verification of the corporation's diamond and diamond jewelry inventories, identifying any steps that would apply only to the retail stores or the wholesale store.

c. Assume that a shipment of diamond rings was in transit by corporation messenger from the wholesale store to a retail store on the inventory date. What additional audit steps would you take to satisfy yourself as to the gems that were in transit from the wholesale store on the inventory date?

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Inventory Cutoff Test Acs Company 12-31-X Initials Date Prepared Adjustments Cast of Accounts Description Selling Price Shipping Receiving Receivable Sales Date Inventory Date >>>Dr.edu>Drye Payable Sales 6000 12-28-11 12-27-21 8000 c d 4 " 12.38 71 12.2971 5000 313 39 1 7-9-82 3000 3231227 1-3-22 7000 123227 12-22 9000-812-31-21 12-31-21 4322 1922 4000 5000 1-3-22 7-231-27 6000 1-6-20 1-5-22 15000 12-27-11 12-27-21 422-37-11 17000-312-28-11 12-31-21 1-3-22 C 8000 1231-11-33-27 7-3-22 7000 1232-27 7-3-82 1482 B 6000 3-3-22 12:33-09 16-37-21 2000 3-3-12 12-37-17 2-3-82 7000-8 7-11-12 12-37-27 32 4000- 17-4-22 11-5-012 Purchases: a