Financial

Company Background

Kobyashi Maru Pet Food USA, Limited is a subsidiary of a Chinese company and is preparing to issue an audit report, completed by your independent audit team, covering comparative balance sheets as of December 31, 2006 and 2005, and the income statements, statements of owners’ equity and cash flow statements for the three years ended on December 31, 2006.

The Company’s common stock is traded on the New York Stock Exchange and the Chinese Exchange.

Each of the following sets of facts is an INDEPENDENT audit reporting scenario and should be addressed separately of the others. You will address each scenario in an APA style research paper that also will address the reporting inaccuracies that differing international accounting standards create. You will combine your findings into a comprehensive research document of 3-5 pages excluding title page and references. Detailed analysis is necessary as are references for your conclusions.

Segment Reporting

Kobyashi Moru Pet Food, USA Limited, (hereinafter called Kobyashi Moru) does not disclose segment information for its various divisions and profit centers because Chinese accounting standards do not require it. The Securities and Exchange Commission (SEC) does not require such disclosures or reporting delineations in required SEC filings for foreign issuers of stock or securities.

Indicate the effect of the above cited differences on your audit report that will be widely used by stakeholders and potential stakeholders in the United States.

Explanatory and Opinion Paragraphs

Kobyashi Moru reports its inventory, fixed assets, depreciation and cost of goods sold on a current value basis (fair market value on the date of the financial statements).

Such accounting violates the cost principle of US GAAP. There is a disclosure of the pertinent facts stating this in a footnote on the key financial statements.

What factors as the auditor of record, should you consider in deciding whether to issue a qualified or an adverse opinion in your final audit report?

Draft the appropriate language, using text and scholarly research references for the explanatory and opinion paragraphs for:

a) A qualified opinion

b) An adverse opinion

Financial Statements Prepared using Chinese and GAAP Standards

Kobyashi Moru prepares two sets of financial statements; one set using Chinese standards and GAAP (as meager as those standards may be) and the other for use in the US attempting to conform to US GAAP. The Chinese financials contain a single footnote describing the accounting principles used in the original books of entry.

How should you report on these two sets of statements in your final audit report?

Effect of Foreign Accounting Standards

In the preceding independent scenarios and research, you will have found significant conflicting issues between global reporting standards that will affect every audit engagement that addresses books of original entry that utilize foreign GAAP that are translated into financial statements. Your previous coursework has taught you that in order for stakeholders to accurately address financial performance metrics, they have to be based on standards that are consistent and that follow US GAAP rules.

Comparative analyses can only take place in an environment of stable, static and consistent rules.