Audit of Inventory Late in December, the Registeraccountant (RA) firm of Radbod & van Weg accepted an audit engagement at Brandewyn Juwelen, BV, a company that deals largely in diamonds. Brandewyn Juwelen has retail jewelry stores in several Netherlands cities and a diamond wholesale store in Amsterdam. The wholesale store also sets the diamonds in rings and other quality jewelry. The retail stores place orders for diamond jewelry with the wholesale store in Amsterdam. A buyer employed by the wholesale store purchases diamonds in the Amsterdam diamond market; the wholesale store then fills orders from the retail stores and from independent customers and maintains a substantial inventory of diamonds. The corporation values its inventory by the specific identification cost method.

Required:

Assume that at the inventory date you are satisfied that Brandewyn Juwelen has no items left by customers for repair or sale on consignment and that no inventory owned by the corporation is in the possession of outsiders.

A. Discuss the problems the auditors should anticipate in planning for the observation of the physical inventory on this engagement because of the: 1 different locations of inventories; 2 nature of the inventory.

B. Assume that a shipment of diamond rings was in transit by corporation 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? [Adapted and reprinted with permission from AICPA. Copyright © 2000 & 1985 by American Institute of Charterred Accountants]