You are involved in your CPA firm’s first audit of Zorostria, a retailer of artwork, primarily...

You are involved in your CPA firm’s first audit of Zorostria, a retailer of artwork, primarily paintings and photographs purchased from artists in Southeast Asia (particularly Vietnam, Cambodia, and Laos). Zorostria has stores in seven cities throughout the United States, Mexico, and Canada.

Discuss difficulties you should anticipate in planning the observation of physical inventory on this engagement because of:

The different locations of stores.
The nature of artwork
Assume that Zorstria’s records indicate that it shipped goods on December 31 for a very major sale to a customer in Edmonton, Alberta, Canada.

(1) Since it was shipped as of December 31, does this represent a dale for the year ended on that date?

(2) What additional audit steps could be taken to determine that the sale is valid?

Expert Solution

a. The auditors must control all inventories until they have been counted to be certain that artwork is not transferred from one store to another store and is included in inventory more than once. The locations of the stores being in three different countries raises issues as to observing the count of the artwork. The auditors will have to determine whether all locations must be observed by considering the risks of material misstatement.

b.

The valuation of the inventory is a difficult issue. While it may be possible to determine whether the cost of the items has been properly recorded, whether that cost is in excess of market value is necessary.

c. 1. Whether the sale is valid depends upon its terms. Shipments made FOB shipping point on December 31 represent valid sales, while those made FOB destination do not become sales until the goods are received by the purchaser.

2. The auditors must determine that it is a valid sale to a legitimate customer. This may be done through confirmation and/or by examination of documentation relating to the sale (e.g., customerâ€™s purchase order).

ekkarill92 answered 2 years ago

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