Question

 

Western Trading Company is a sole proprietorship engaged in the grain brokerage business. On December 31, 20X0, the entire grain inventory of the company was stored in outside bonded warehouses. The company's procedure of pricing inventories in these warehouses includes comparing the actual cost of each commodity in inventory with the market price as reported for transactions on the commodity exchanges at December 31. A write-down is made on commodities in which cost is in excess of market. During the course of the 20X0 audit, the auditors verified the company's computations. In addition to this, they compared the book value of the inventory with market prices at February 15, 20X1, the last day of fieldwork. The auditors noted that the market prices of several of the commodities had declined sharply subsequent to year-end, until their market price was significantly below the commodities' book values.

The inventory was repriced by the auditors on the basis of the new market prices, and the book value of the inventory was found to be in excess of market value on February 15 by approximately $21,000. The auditors proposed that the inventories be written down by $17,000 to this new market value, net of gains on the subsequent sales. The management protested this suggestion, stating that in their opinion the market decline was only temporary and that prices would recover in the near future. They refused to allow the write-down to be made. Accordingly, the auditors qualified their audit opinion for a departure from generally accepted accounting principles.

Required:

1. Were the auditors justified in issuing a qualified opinion in this situation? Discuss fully, including alternative courses of action.
2. State your opinion as to the course of action that was appropriate in this situation.

Answer 1

Facts of the Case: Grain brokerage deals in grains and apply the valuation principle of IAS 2 lower of cost or NRV . In December 20X0 the Inventory are recorded at lower of cost or NRV in few items of inventory records.

but in auditors opinion they are recommending for change in valuation of inventory to 17000 $ instead of book value recorded at 21000 $ a share per valuation dated 15 February,

As per IAS 2 states that valuation of inventory should be lower of cost or NRV on balance sheet date and if any further changes are therein which has impact on the valuation of inventory and provided condition should exist on balance sheet date as per IAS 8 only then impact for the same should be reflected .

here simply lowering the value of inventory on date other than balance sheet date irrespective of any conditions exist on balance sheet date is not justifiable recommendations as per IAS 2 and IAS 8

hence issuing qualified report is not justifiable. If conditions be as stated in IAS 8 persist then adjustment will be made otherwise disclosure only will be suffice in the same.