Reference no: EM132988093
Question - Sparrow Limited is a Canadian company engaged in a wholesaling business and currently distributes three major product lines. Over the years, the company has distributed several other product lines, only to discontinue them when the competition became too intense. During the past three years, one of its product lines, the carbon filtering systems, has suffered a continual decline in sales volume and has had a negative effect on the company's operating profits. At December 31, 2020, a significant portion of the inventory of carbon filtering systems was about two years old. In October 2020, management decided to discontinue distribution of carbon filtering systems, and notified the company's customers that it would continue to sell the inventory on hand but would no longer accept orders for items that would have to be purchased from a manufacturer. After this notice was sent to the company's customers, the sales volume of carbon filtering systems declined even further. Therefore, management decided in early 2021 to sell this inventory in bulk to one of the company's competitors. Management informs you in February 2021 that it is currently negotiating the sale with one competitor and that the asking price is $1,100,000, which it is confident it will get. It is unwilling to permit you to review any documentation supporting the current negotiations because of a commitment made not to disclose the purchaser's identity. It also informs you that the only firm written offer received so far is from a second competitor and the amount of this offer is $800,000. it is prepared to provide you with a copy of this offer.
Based on these facts, management concludes that a write down of $500,000 (i.e., to the amount of $1,100,000 currently being negotiated) is all that is required. Management believes that this should be treated as a non-recurring item and will make any disclosure you request, but will not change its position on this item.
Required - Discuss the effect of this issue on the auditor's report.