You are completing the audit of Derban Automative Inc. (DAI), a new client, and encountered the following issues. For each issue, describe the impact upon the December 31, 2013 financial statement audit, and any further actions that you should take: (4 Marks for each situation. 1 mark for each valid point for a situation)

Based on your communication with the previous auditor, you learned that the previous auditors had a dispute with DAI management concerning the valuation of inventory. The previous auditor provided a clean opinion since the inventory balance was not material, but resigned anyway because of the poor relations with DAIs management.

Inventory consists of raw materials, semi-processed liquids, and finished goods. The fourth quarter inventory count was attended by the previous auditors, who have provided a copy of their working papers related to the inventory count to your firm.

The fourth quarter inventory count resulted in a significant write-down of work-in-progress and finished goods inventory. Management thinks that the write-down may have been caused by outdated standard costs.