Please identify the accounting issues and how these items should be handled for the following case.

HAPPY LUCK JEWELLERY INC.

As you are new to the firm, I wanted to start you off with something easy. HLJ is about the most straightforward client I have. The company has no debt other than current payables. The two brothers are not keen on expansion as they like the idea of personally running a small boutique shop. Even their taxes are pretty simple. For example, every year, Bruce and Tommy take a salary of $150,000 to $200,000 each. After such remuneration, the companys pre-tax income has, over the past few years, been around $250,000. At this years July 31 year-end, they are expecting similar results, even though sales will have increased to at least $6 million from last years $5.4 million. As HLJs taxable income is well below the small business deduction limit, we dont have to worry about accruing bonuses or other remuneration planning that is necessary for most clients.

Ive always been surprised that the Lees would want to pay extra for a review when HLJs financial statements are only used by them and the tax department. A couple of times, Ive tried to talk them down to a Notice to Reader, but they have always said that they like the idea of having experts look at their books at least once a year. As in other years, I dont see any independence problems in doing this work or any reason why HLJ shouldnt continue to meet our firms client acceptance policies. To make things even simpler, HLJs accounting policies are based on the Accounting Standards for Private Enterprises, and they have chosen to use the taxes payable method of accounting for the companys taxes.

Here are the notes that I took during my meeting today with Bruce and Tommy. (Jack hands you the attached Exhibit I). I would like you to prepare two engagement planning memos relating to this upcoming year-end. Firstly, I want a memo that I can pass along to the junior staff that will actually be doing the HLJ review work. In this memo, please discuss the accounting and income tax issues that you identify during our discussions or by reviewing my notes. Let us know how you think these items should be handled. Secondly, Id like you to prepare a memo solely for my purposes. This memo should outline any unusual review engagement issues resulting from the accounting issues or income tax issues identified.

Exhibit I

Notes from Meeting with Bruce and Tommy Lee

1. At HLJs 2013 year-end, the company held an inventory of 300 ounces of gold having a purchase cost of $1,150 U.S. per ounce (which at an exchange rate of $1 Canadian = $0.9388 U.S. resulted in a cost of $1,225 per ounce Canadian). At July 31, 2013, the market value for gold was $1,130 U.S. per ounce (also $1,130 Canadian). As a result, for fiscal 2013 year-end, gold inventory was written down by $28,500. Currently, gold has increased in value to $1,305 U.S. per ounce ($1,350 Canadian). 200 ounces of the gold in the 2013 inventory will still be held by HLJ at its fiscal 2014 year-end.