1) How should you have addressed each of the items during audit?

Answer) Inventory valudation change: It would be analyzed if the change in inventory valuation is required as a need to value the inventory in a fair way resulting in fair and true picture of inventory rather than to window dress the balance sheet by manipulating the profits through inventroy valuation. If it is considered to be genuine and the change represents the financial information in true and fair view, tgen this would be highlighted out as change in the inventory policy in the audit report. The impact of the change in the policy in the Income statement would be quantified and reported in audit report.

Vendor payment extension: Further investigation would be performed to understand if the extension of the vendor payments is as per the usual business or if it is resulting in the nature of borrowings. The scenario would be further investigated from Transfer pricing and other regulation point of view and make necessary reclass if the substance over form on analysis results in conclusion that the extension of vendor payments is borrowing rather than trade payables in normal business sense.

In addition, would also look out for any related party transactions in the vendor payment.

Based on the conclusion above, it would be categorized accoridngly in the Balance sheet

Client bankruptcy: Assess if the provision exist against the client receivables which has become bankrupt and if not, it would be provided 100%.

On-going litigations: With respect to the litigation in which the lawyer has indicated that the client would probably win, it would be disclosed as a contingent liability. In other 2 cases, where the chances of losing is high, the best estimate of the outflow of the amount in case of losing the case will be determined by discussion with management and the legal counsel, and necessary provision will be made. If the range is decided as USD 100,000 to USD 250,000, then based on prudent principle, USD 250,000 would be accounted for as provision.

In addition to the above, will further assess if the client bankruptcy, extended vendor payment terms, etc do indicate the risk of going concern assumption and hence would assess future economic flows and conclude on the going concern. Audit opinion would be qualified highlighting on the inventory change, extended vendor payments if these do indicate that there are probabilities of misstatement but not too material and pervasive to provide an adverse opinion. However, based on the audit procedures performed above and also going concern is in stake, an adverse opinion would be provided.

As on the date of the audit report, it is clearly evident that all the necessray procedures were performed for subsequent event whereby at that point, the client was in a position to win and hence it was only considered as a contingent liablity. Since the event turned out to be that the client lost the claim but after the audit report was released, depending on the materiality of the same, it has to be assessed if there is a need to take any action to inform the stakeholders on the credibility of the reliance of the audit report. But if the claim is not material based on the size of the Company, then it can be considered as prior period adjustment in the subsequent financial statements