问题：One of your audit clients is Tye Co a company providing petrol, aviation fuel and similar oil based products to the government of the country it is based in. Although the company is not listed on any stock exchange, it does follow best practice regarding corporate governance regulations. The audit work for this year is complete, apart from the matter referred to below.

　　As part of Tye Co’s service contract with the government, it is required to hold an emergency inventory reserve of

　　6,000 barrels of aviation fuel. The inventory is to be used if the supply of aviation fuel is interrupted due to unforeseen events such as natural disaster or terrorist activity.

　　This fuel has in the past been valued at its cost price of $15 a barrel. The current value of aviation fuel is $120 a barrel. Although the audit work is complete, as noted above, the directors of Tye Co have now decided to show the

　　‘real’ value of this closing inventory in the financial statements by valuing closing inventory of fuel at market value, which does not comply with relevant accounting standards. The draft financial statements of Tye Co currently show a profit of approximately $500,000 with net assets of $170 million.

　　Required:

　　(a) List the audit procedures and actions that you should now take in respect of the above matter.

　　解析：(a) Valuation of aviation inventory

　　– Review GAAP to ensure that there are no exceptions for aviation fuel or inventory held for emergency purposes which

　　would suggest a market valuation should be used.

　　– Calculate the difference in valuation. The error in inventory valuation is $105 * 6,000 barrels or $630k, which is a

　　material amount compared to profit.

　　– Review prior year working papers to determine whether a similar situation occurred last year and ascertain the outcome

　　at that stage.

　　– Discuss the matter with the directors to obtain reasons why they believe that market value should be used for the

　　inventory this year.

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　　– Warn the directors that in your opinion, aviation fuel should be valued at the lower of cost or net realisable value (that

　　is $15/barrel) and that using market value will result in a modification to the audit report.

　　– If the directors now amend the financial statements to show inventory valued at cost, then consider mentioning the issue

　　in the weakness letter and do not modify the audit report in respect of this matter.

　　– If the directors will not amend the financial statements, quantify the effect of the disagreement in the valuation method

　　– the sum of $630,000 is material to the financial statements as Tye Co’s income statement figure is decreased from a

　　small loss to a loss of $130,000 although net assets decrease by only about 0·3%.

　　– Obtain a management representation letter from the directors of Tye Co confirming that market value is to be used for

　　the emergency inventory of aviation fuel.

　　– If the directors will not amend the financial statements, draft the relevant sections of the audit report, showing a

　　qualification on the grounds of disagreement with the accounting policy for valuation of inventory.

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