WESTERN TRADING COMPANY: INVENTORY VALUATION CASE
Western Trading Company is a grain brokerage business. The company is a sole proprietorship. For purposes of grains inventory valuation at year-end, the company follows a practice of marking-down inventory values where market prices on commodities exchanges are lower than the actual costs of the company's grains in inventory. Relevant market prices are as of 31 December. The company had adjusted inventory values as of 31 December, prior to the performance of an outside audit.
As a part of their field work, outside auditors determined that market values for the company's grains inventory had declined further by 15 February, the last day of the field audit. The auditors proposed a further write-down of the company's grains inventory, to account for the further drop in market values between 31 December and 15 February.
The company refused to accept the proposed additional write-down of the grains inventories, contending that the further market decline was temporary. As a consequence, the auditors issued a qualified opinion, stating that the company had deviated from generally accepted accounting procedures (GAAP) in the valuation of its grains inventory.
The auditor's justification for the issuance of a qualified opinion is assessed in this research. Additionally, the rationale for an alternative opinion·(1) unqualified, justified departure from GAAP, (2) adverse opinion, or (3) disclaimer of opinion·is discussed.
Statement of Auditing Standard (SAS) No. 31 issued by the American Institute of Certified Public Accountants (AICPA) requires auditors to collect enough relevant evidence to lend credence to the items reflected in the financial statement. SAS No. 31 defines this requirement as being relevant to the existence, completeness, valuation, rights and obligations, and presentation and disclosure of all assets and liabilities.
With respect to valuation speci...