Question 3 (15 marks)

You are the in charge auditor for Johnny Gold Jewellers (JGJ) which has seven stores in the Toronto area. The fiscal year end of the company is December 31. The company deals in precious and semi-precious stones and high quality costume jewellery. Diamond engagement rings make up over 50% of sales and 10, 14, and 18 carat gold chains make up another 20%. During peak demand periods, for example just before Christmas and Valentines Day, Mr. Gold acquires on consignment jewellery from another manufacturer.

The president, Johnny Gold, is an accredited geologist. Mr. Gold attends auctions in New York and London several times a year. The rough cut gems are ground and polished in JGJs lab in the flagship store and distributed among the seven stores. Mr. Gold needs to anticipate well in advance what he believes the latest trends in costume jewellery will be. Mr. Golds track record is excellent but occasionally he misses the mark and has to sell some of the jewellery at a substantial discount. The company plans to do its inventory count on December 31, 2015.

Perpetual inventory records are kept in each store, which should balance to a control account kept in the main branch. Documentation for all purchases is kept in the main branch. Mark-ups average 150% on cost.

All inventories are insured with a 50% co-insurance clause, and employees are bonded. All employees receive a bonus based on sales for the last 2 weeks in December. The bonus is based on the numbers of years working at JGJ as well as a percentage of sales.

It is now December 10, 2015 and you are preparing for the physical inventory count on December 31, 2015.

Required

Explain briefly five specific risk factors related to the counting and valuation of JGJs inventory at December 31, 2015. For each risk identify the management assertion and one audit procedure to address the assertion (12 marks).