On October 14, Montevista Inc. made deposits with an overseas supplier totaling $500,000 for the production of specialty items. On October 27, the supplier closed due to political unrest in the country. Montevista hired an international trade consultant to gain more information about the situation. The consultant concluded on January 11 that it is unlikely that the deposit will be recovered. Montevista purchases over $3 million worth of items from this supplier every year. Year-end for the Montevista audit is December 31, and the is due to be signed on February 26.
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a. Discuss what audit procedures would be used to gather evidence about this situation.
b. What is the appropriate treatment of this item in the December 31 financial statements?