You are auditing the financial statements of Lam Company Limited ("Lam") for the year ended 30 September 2021. The following is an exchange between Miss Lee, the financial controller of Lam, and your assistants during a meeting reviewing the draft financial statements prepared by Miss Lee:

Assistants:

We noticed that at 30 September 2021, your company held some inventories acquired for distribution to Western. Since the expected distribution agreement with Western did not materialize and the goods have been made to Western's specific requirements and USA standards, you may need to write off the inventories if you are not able to sell then at a price above their cost before the approval of the financial statements. This is also consistent with your company's established policy to write off all goods with an age over six months after the reporting period.

Miss Lee:

I am not sure I agree with you. The inventories at cost of HK$8 million were purchased for Western and we are in the process of claiming Western for the losses we suffered. We are also contacting other buyers in the USA to try to sell these specialized goods. Some of them may be willing to take the inventories although we don't know whether the will happen at this moment.

Lam insists that the inventories ordered specifically for Western, which amounted to HK$8 million at 30 September 2021, should be carried at cost. Your assistants proposed to qualify the auditor's report. The paragraphs on the basis of opinion and the opinion of their draft report are as follows

Basis for Qualified Opinion

The evidence available to us was limited because the company's inventories at 30 September 2021 comprise inventories of HK$8 million ordered to the specific requirements of an intended customer who had not taken delivery of the goods. Since the company was negotiating with other potential buyers for the inventories, it was no certain as to the net realizable value of the inventories as at 30 September 2021 There were no other satisfactory audit procedures that we could adopt to confirm that the carrying amount of the inventories was properly stated.

Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view of the state of the company's affairs as at 30 September 2021 and of its profit and cash flows for year then ended and have been properly prepared in accordance with the Companie Ordinance.

Discussion

Explain to your assistants why the draft report is not appropriate and revise the wording of the draft report to your satisfaction.

Answer rating: 100% (QA)

Basis for Qualified Opinion The evidence available to us was limited because the companys inventorie... View the full answer