Late in December $2007,$ 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 wholsale store on the inventory date?

Assignment $2$

Your audit client, Household Appliances, Inc., operates a retail store in the center of town. Lacking sufficient storage space, Household keeps undisplayed inventory in a public warehouse outside of town. The warehouse receives inventory from suppliers and, on request from your client by a shipping advice or telephone call, delivers merchandise to customers or to the retail outlet. The accounts are maintained at the retail store by a bookkeeper. Each month the warehouse sends to the bookkeeper a quantity report indicating opening balance, receipts, deliveries, and ending balance. The bookkeeper compares book quantities on hand at month end with the warehouse report and adjusts the books to agree with the

report. No physical counts of the merchandise at the warehouse were made by your client during the year. You are now preparing for your audit of the current year's financial statements. Last year you issued an unqualified opinion.

Required:

$1.$ Design audit procedures for observing the physical inventory of Household Appliances, Inc:

a$.$ At the retail outlet, and

b$.$ At the warehouse.

$2.$ As part of your tests, would you verify inventory quantities at the warehouse by:

a$.$ A warehouse confirmation? Why?

b$.$ Test counts of inventory at the warehouse? Why?

$3.$ Since the bookkeeper adjusts the books to quantities shown on the warehouse report each month, what significance would you attach to the year$-$end adjustments if they were substantial? Discuss.

$4.$ Assume you are unable to satisfy yourself as to the inventory. Could you issue an

unqualified opinion? Why?

$($AICPA Adapted$)$

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