Following are the complete financial statements of Yu Manufacturing Corporation and the auditor's report of the examination for the year ended January 31, 2001. The examination was conducted by John Smith, sole practitioner, who has examined the corporation's financial statements and has reported on them for many years.

Required List and discuss the deficiencies of the auditor's report pre¬ pared by John Smith. Your discussion should include justifi¬ cation that the matters you cited are deficiencies. (Do not check the additions in the statements. Assume that the addi¬ tions are correct.)
(AICPA adapted)

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YU MANUFACTURING CORPORATION Statements of Condition January 31, 2001 and 2000 2001 2000 Assets Current assets: Cash Accounts receivable, pledged-less allowance for doubtful accounts of $3,800 in 2001 and $3,000 in 2000 (see note) $ 43,822 $ 51,862 65,298 Inventories, pledged-at average cost, not in excess of replacement cost Other current assets 148,910 46,922 118,264 6.280 5.192 Total current assets $264,310 $222,240 Capital assets: Land at cost 38,900 62,300 Buildings at cost, less accumulated amortization of $50,800 in 2001 and $53,400 in 2000 174,400 150,200 Machinery and equipment at cost, less accumulated amortization of $30,500 in 2001 and $25,640 in 2000 98,540 78.560 Total capital assets $311,840 Total assets $576,150 $291,060 $513,300 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 27,926 Other liabilities Current portion of long-term mortgage payable Income taxes payable Total current liabilities Long-term liabilities: 68,743 3,600 46.840 $147,109 $ 48,161 64,513 3,600 30.866 $147,140 Mortgage payable 90.400 Total liabilities $237.509 94,000 $241,140 Shareholders' equity: Capital stock, no par value, 1,000 shares authorized, issued and outstanding $100,000 $100,000 Retained earnings 236.641 172,160 Total shareholders' equity $338.641 $272,160 Total liabilities and shareholders' equity $576.150 $513.300