Late in December 1999, your public accounting firm accepted an audit engagement at Fine Jewelers, Inc., a corporation that maintains a diamond wholesale store in New York City and retail jewelry stores in several Eastern cities. A buyer employed by the wholesale store purchases diamonds in the New York diamond market. The wholesale store carries a substantial inventory of diamonds that are set in rings and in other quality jewelry based on orders from the retail stores and from independent customers.

The corporation values inventory by the specific identification cost method.

Required: 

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

1. Discuss problems the auditor should anticipate confronting on the physical inventory as a result of the:

a. Different locations of the inventories.

b. Type of inventory.

2.

a. Explain how your audit program for this inventory would differ from that used for most other inventories,

b. Draft procedures for the audit of the corporation's diamond and diamond jewelry inventories, identifying any steps that you would apply only to the retail stores or to the wholesale store.

3. Assume that a shipment of diamond rings was in transit by 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?