Levi-Strauss (Levi) is a large supplier of jeans to Wal-Mart and was one of the first to sign the vendor-managed inventory agreement. As part of the agreement, Wal-Mart agrees to provide important shelf space to Levi and its brands of jeans. In turn, Levi agrees to

• Set competitive selling prices for the product.

• Retain ownership of the goods until purchased by a consumer.

• Monitor sales and restock the store with the types and size of jeans that will enhance total sales.

• Deliver products in a timely fashion so that Wal-Mart stores are never out of stock.

• Monitor changes in consumer preferences and notify Wal-Mart of any major changes in consumer preferences or suggestions for marketing their product.

Wal-Mart agrees to implement security in the stores to ensure that all goods leaving the store are purchased. The trading partner agreement spells out how to handle disputes related to inventory shrinkage. Because Wal-Mart does not own the merchandise in the store, it does not have a formal receiving function. Levi is required to mark all the goods with bar codes for checkout. Wal-Mart agrees to notify Levi if jeans are returned to the store for credit (Wal-Mart takes credit for the purchase from Levi). WalMart further agrees to transfer funds to Levi at the end of the next business day for all Levi sales made during the previous day. Finally, Wal-Mart agrees to send to Levi—in an agreed-upon electronic form—all the sales data for each store on a daily basis.

Required:

a. When does Levi record the sale of jeans to Wal-Mart?

b. Where is a significant amount of Levi inventory located at the end of the year?

c. What audit procedures would you recommend to audit the year-end inventory account of Levi? Explain the rationale for your choices.

d. Would a tagging and tracing approach be the best approach for Levi to ensure that all its transactions are recorded in the proper period?

e. Does Levi need assurance that Wal-Mart’s data processing system is providing correct information in order to manage Levi correctly and to ensure that its financial statements will be auditable? Explain.