Overnout manufacturers DVDs. Early in 2012 Overnout had a public offering of its stock to raise new capital. Overnout needed even more capital and secured a short-term revolving line of credit at its bank. These lines of credit expire at its year-end of September 30. Overnout had anticipated booming sales for Christmas and had built up inventories. Some problems have developed though and its stock prices have dropped from $20 to $7 because: 1. The federal government is going to require that all DVDs must be capable of picking up satellite signals directly (these DVDs will be called DVD-S). But no DVD-S can be sold before December 31, 2012 and in fact no DVD-S can even be shipped prior to December 31. Furthermore, no DVDs can be sold after 12/31/12. 2. As of the audit date of September 30, 2012, Overnout could not pay off its revolving debt and renegotiating with the bank is essential to the continuation of the company. The new shareholders are threatening suit because of alleged misrepresentations in the public offering prospectus. 3. The fiscal year ending September 30, 2012, will show a nice profit but the third and fourth quarters will have significant losses. The company is anxious for you to complete your 9/30/12 audit. The bank is extending the line of credit to October 20, 2012 and is anxious to see your auditor's report, with the inference that something other than a clean opinion will seriously influence the bank's willingness to continue the loan. As you explore this problem you note the following factors: 1. There are four other publicly held companies in the business of selling DVDs, all with December 31 year-ends. Their interim reports show that they are also suffering. The largest company has just arranged a $20,000,000 financing package with a major group of banks. 2. Two other competitors' interim reports state that they are reducing their DVD inventories and are in heavy DVD-S production. A price war is developing on DVDs because of large inventories by competitors. 3. Overnout has a considerable number of DVDs in inventory but has not reduced its price yet because the DVD can be converted to a DVD-S for $25. Further, they are producing a DVD-1 which can be converted to DVD-S for only $5 per unit. 4. Overnout is predicting they can sell its inventory of DVDs during the Christmas sales period because many customers will want to give DVDs for Christmas, many customers will be willing to buy the conversion kits for $25 so they can convert to DVD-S, very few DVDs will be left in inventory at 12/31/12, and any DVD-1 left over can be converted for only $5 by Overnout to DVD-S. 5. The storm clouds over the industry have resulted in investment analysts' reports that the industry is overcrowded and demand will never be as great as before. One report says there will be a considerable shake-out of companies, with only the well-financed coming through. 6. The industry has opened a lobbying office in Washington to convince Congress to "stop the Dumping" by foreign manufactures. Legislators from Overnout's state seem convinced that import duties will be substantially increased. You are pondering the major question--is this company on its way out? Is Overnout already done for but you don't know for sure? Or is Overnout the thriving concern that management expects to exist after they live through a bureaucratically imposed hiatus? The company is anxious for your answer because they must promptly arrange a continuation of their bank financing. YOU ARE THE AUDITOR! HOW WOULD YOU GO ABOUT RESOLVING THIS PROBLEM? ISSUE A CORRECT AUDIT REPORT. HAVE ENOUGH SUPPORTING DOCUMENTATION TO VERIFY YOUR DECISION