DiamondsForever has been operating in the diamond business for four years and deals almost exclusively in investment diamonds. Although they occasionally purchase other stones, these purchases are on the basis of special order requests from existing clients. These special order stones are bought from local suppliers and are generally sold within a few days and, as such, they are never material to the total inventory.

DiamondsForever purchases both certified individual diamonds and non-certified parcels of diamonds from a single supplier, DiamondsLast. The certified diamonds arrive wrapped in individual soft paper wrappers that show the diamond categorization details on the front. The recorded details include color (which indicates quality), cut (which indicates shape), clarity (which indicates defects), and carat (which indicates weight). A unique inventory number is assigned to each diamond wrapper and is written on the top right-hand corner of the front of the wrapper. These details are also recorded in the inventory records, along with the purchase price extracted from the supplier invoice. The inventory of wrapped diamonds is stored in inventory number order in a diamond storage box holding similarly classified diamonds. The storage boxes are held in the safe located in the CEO's office. The CEO is the only person to have the safe code.

The non-certified diamonds included in each purchase arrive as a single diamond parcel in a zip-seal plastic bag. The total carat weight is shown on the front of this bag. The diamonds purchased as a diamond parcel are sorted and split into smaller parcels. These smaller parcels are constructed by sorting and categorizing the purchased parcel of diamonds according to color, cut, clarity, and carat. The categorized diamonds are then stored in parcels in small pre-numbered zip- seal plastic bags. These parcels are sold by DiamondsForever according to the parcel carat weight. Each of the categorized diamond parcel bags includes an inventory record sheet identifying the parcel number, the total quantity and total carat weight of the diamonds in the parcel, as well as the color, cut, clarity, and carat of each diamond in the parcel. This inventory record sheet is used as a subsidiary inventory record, with only the total number, total carat weight, and apportioned purchase price of the diamonds included in the main inventory records. To establish the purchase price of each small parcel, the total purchase price of the original purchased parcel is apportioned on a per-carat basis using the following formula: total purchase price 3 (carat weight of small parcel/ total carat weight of purchased parcel). Similar to the individually wrapped diamonds, the diamond parcel zip-seal bags are stored in inventory number order in a diamond storage box. The storage boxes are held in the safe located in the CEO's office, along with the storage boxes for the individually wrapped certified diamonds.

You are the new audit senior on the 20X1 year-end audit of DiamondsForever. In planning for this audit, your audit manager has asked you to familiarize yourself with both the physical inventory and the inventory recording system for the diamond parcels. Your audit manager has asked that you specifically consider the key audit assertions that need to be considered in relation to the audit of the diamond parcel inventory and the individually wrapped certified diamonds.

Requirement 1: Inventory

Discuss and complete Answer Template A. As part of your inventory familiarization process, you are required to discuss and provide answers to the following two questions by completing Answer Template A, provided in Exhibit 1. [Note: To assist you in answering the questions, Answer Template A lists the account balance assertions]:

Questions:

(a)Discuss and determine the key Account Balance Assertions that may be at risk for the diamond inventory, and

(Note: To assist you in completing this Answer Template, recall that the Account Balance

Assertions include: Presentation, Existence, Rights/Obligations, Completeness, and Valuation.)

(b)Discuss and determine whether the sample of individually wrapped certified diamonds and the sample inventory parcel, including the inventory record, provides evidence that indicates any specific Account Balance Assertion is at risk for the 20X1 year-end audit.