Audit Report of the 2006 Financial Report
To all shareholders of Sichuan Top Software Investment Co., Ltd.:
We have audited the accompanying financial statements of Sichuan Top Software Investment Co., Ltd. (hereinafter referred to as "Top Software Company"), including the balance sheet as of December 31, 2006, the income statement and profit distribution statement for the year 2006, the cash flow statement for the year 2006, and the notes to the financial statements.
1. Management's Responsibility for the Financial Statements
The management of Top Software Company is responsible for the preparation of the financial statements in accordance with the Enterprise Accounting Standards and the provisions of the "Enterprise Accounting System." This responsibility includes: (1) designing, implementing, and maintaining internal controls related to the preparation of financial statements to ensure that the financial statements are free from material misstatement due to fraud or error; (2) selecting and applying appropriate accounting policies; (3) making reasonable accounting estimates.
2. Matters Leading to Inability to Express an Opinion
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Limitations on Audit Scope (1) As described in Note 8.1 of the financial statements, as of December 31, 2006, Top Software Company had provided guarantees totaling 1,427,705,100 yuan. As of December 31, 2005, the company had estimated guarantee losses of 1,001,173,700 yuan. In 2006, the estimated liabilities decreased by 16,013,500 yuan due to the release of guarantees, leaving an estimated liability balance of 985,160,200 yuan as of December 31, 2006. Due to the inability to obtain evidence regarding the repayment ability of the guaranteed parties and whether the guarantee obligations had been released as of December 31, 2006, we are unable to make a professional judgment on the reasonableness of the estimated guarantee losses. (2) As of December 31, 2006, the balance of other receivables was 763,108,500 yuan, including amounts receivable from Sichuan Huapu Software Development Co., Ltd. and two other companies totaling 355,890,600 yuan; the balance of other payables was 104,881,100 yuan, including amounts payable to Beijing Maitop Technology Development Co., Ltd. and five other companies totaling 46,664,100 yuan. Due to the company's failure to provide the latest contact addresses for the relevant debtors and creditors, we were unable to perform confirmation and other audit procedures to obtain sufficient and appropriate audit evidence. (3) As of December 31, 2006, the balance of the provision for bad debts for other receivables was 565,468,200 yuan, the balance of the impairment provision for long-term equity investments was 12,722,500 yuan, and the balance of the impairment provision for intangible assets was 16,656,300 yuan. Due to the limitations on conditions, we were unable to obtain sufficient and appropriate audit evidence to make a professional judgment on the reasonableness of the bad debt provisions and impairment provisions recognized by Top Software Company.
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Going Concern As shown in the accompanying financial statements, Top Software Company incurred a loss of 238,933,200 yuan in 2006, marking four consecutive years of significant losses. As of December 31, 2006, the company's net assets were -1,399,509,000 yuan, with a debt-to-asset ratio of 758%, indicating severe insolvency. Furthermore, the company's business operations and those of its subsidiaries are essentially halted, with major operating assets auctioned off, and the equity of its main subsidiaries frozen or sealed, resulting in a large amount of overdue debts and court judgments. The company faces a severe shortage of cash for operational activities and may not be able to liquidate assets or repay debts in the normal course of business. There is significant uncertainty regarding the company's ability to continue as a going concern. As of the date of this report, Top Software Company has also failed to provide sufficient and appropriate evidence regarding measures to improve its financial condition and enhance its going concern capability. Therefore, we are unable to make a professional judgment on the reasonableness of the going concern assumption used in the preparation of the 2006 financial statements.