Raven Limited is a Canadian company engaged in a wholesaling business and currently distributes three major product
Question:
Raven Limited is a Canadian company engaged in a wholesaling business and currently distributes three major product lines. Over the years, the company has distributed several other product lines, only to discontinue them when the competition became too intense. During the past three years, one of its product lines, the carbon filtering systems, has suffered a continual decline in sales volume and has had a negative effect on the company's operating profits. At December 31, 2000, a significant portion of the inventory of carbon filtering systems was about two years old.
In October 2001, management decided to discontinue dis¬ tribution of carbon filtering systems, and notified the com¬ pany's customers that it would continue to sell the inventory on hand but would no longer accept orders for items that would have to be purchased from a manufacturer. After this notice was sent to the company's customers, the sales vol¬ ume of carbon filtering systems declined even further. There¬ fore, management decided in early 2002 to sell this inventory in bulk to one of the company's competitors.
Management informs you in Feburary 2002 that it is cur¬ rently negotiating the sale with one competitor and that the asking price is \($1,100,000\), which it is confident it will get. It is unwilling to permit you to review any documentation sup¬ porting the current negotiations because of a commitment made not to disclose the purchaser's identity. It also informs you that the only firm written offer received so far is from a second competitor and the amount of this offer is \($800,000\). It is prepared to provide you with a copy of this offer.
Based on these facts, management concludes that a write¬ down of \($500,000\) (i.e., to the amount of \($1,100,000\) currently being negotiated) is all that is required. Management believes that this should be treated as an extraordinary item and will make any disclosure you request, but will not change its position on this item.
Required Discuss the effect of this issue on the auditor's report.
Step by Step Answer:
Auditing And Other Assurance Services
ISBN: 9780130091246
9th Canadian Edition
Authors: Alvin Arens, James Loebbecke, W Lemon, Ingrid Splettstoesser