You are a senior manager in a local accounting firm with two offices and 3 partners. Your firm provides the external auditor of Huawe smartphone Ltd (Huawe) which innovates, designs and manufactures the smartphones for a variety of markets. The market for Huawe electronic components continues to grow. Currently the smartphone accounts for 55% of the mobile phones that are sold worldwide.

Jiang is the audit senior in charge of the external audit of Huawe, for the year ended 31 Dec 2019. However, she left the company on 13 Jan 2020. You took over all the works from Jiang. During the subsequent events review on Huawe for the year 2020, you found that inventory in the statement of financial position at the cost of RMB 400,000 was sold out for RMB 300,000 on 20 Jan 2020. You communicated with the management of Huawe to make an adjustment in respect of this matter. However, management has refused your advice.

The draft financial statements for the year ended 31 Dec 2020 show

• A profit before tax of RMB 780,000

• Total assets of RMB 1,800,000.

Required:

a) State the action with the reasons which you should be taken after the reporting period date in

relation to the inventory cost.

In addition, a meeting note written by Jiang have just come to your attention,

“a local newspaper reports a batch of smartphone produced by Huawe was found to impair customers’ hearing on the date of 25 Jan 2020. 10 major retailers have stopped to make orders from Huawe and lawyers acting on behalf of the consumers who have the hearing damages are claiming a significant financial compensation against the Huawe.” A few of small suppliers of Huawe has changed the payment for material purchases from credit term to cash-on-delivery transaction. The management of the Huawe has suspended several oversea projects that are in the proceeding.

b) Discuss whether or not the financial statements for the year-end require amendment in relation to going concern.