Special Explanation on Partial Elimination of Major Impact Related to the 2017 Audit Report's Disclaimer of Opinion by the Board of Directors

Special Explanation on Partial Elimination of Major Impact Related to the 2017 Audit Report's Disclaimer of Opinion by the Board of Directors

The accounting firm Shanghui (Special General Partnership) issued a disclaimer of opinion on the financial report of Anhui Huaxin International Holdings Co., Ltd. for the year 2017 (Shanghui Report [2018] No. 3429).

I. Matters Involved in the Disclaimer of Opinion in the 2017 Audit Report

1. Significant Uncertainty Regarding Going Concern

   1. As stated in Note 13, "Subsequent Events to the Balance Sheet," the company faces numerous overdue matters: there is a severe shortage of cash available for operating activities.
   2. As of December 31, 2017, the company's consolidated accounts receivable amounted to RMB 4.471 billion, and consolidated interest receivable was RMB 57 million. As of the approval date of the financial statements, the overdue balance of accounts receivable from factoring business was RMB 1.468 billion, and the overdue balance of accounts receivable from re-export business was RMB 1.019 billion, with overdue interest receivable from factoring business approximately RMB 18 million. The overdue accounts receivable accounted for 55.63% of the consolidated accounts receivable balance, and overdue interest receivable accounted for 31.58% of the consolidated interest receivable balance.
   3. As of December 31, 2017, the company's consolidated current liabilities amounted to RMB 3.332 billion. Due to tight funds, the company was unable to repay maturing debts. The overdue debts included a loan of RMB 294 million from Everbright Xinglong Trust Co., Ltd., a directed financing amount of RMB 85 million issued through the Shenzhen United Property Rights Exchange, and commercial acceptance bills payable to suppliers Shanghai Yidian Energy Holdings Co., Ltd. amounting to RMB 55 million, as well as accounts payable to suppliers MEIDU ENERGY (SINGAPORE) PTE LTD, Zhuhai Haixia Petroleum Co., Ltd., and Tianjin Guomao Petrochemical Co., Ltd. totaling RMB 360 million. The overdue debts accounted for 23.83% of the consolidated current liabilities.
   4. Although the company has formulated relevant measures to improve its going concern capability, the firm was unable to obtain sufficient and appropriate evidence regarding future plans related to improving going concern capability, and thus could not make a clear judgment on the company's ability to continue as a going concern for the next 12 months from the end of the reporting period.

2. Adequacy of Provision for Asset Impairment

   1. As of December 31, 2017, the company's accounts receivable from factoring amounted to RMB 1.936 billion, with a bad debt provision of RMB 19.36 million calculated using the aging analysis method. As noted in Note 13, the overdue amount for factoring business was RMB 1.468 billion as of the approval date of the financial statements.
   2. As of December 31, 2017, the company's accounts receivable from re-export business amounted to RMB 2.5 billion. According to the company's accounting policy, no bad debt provision is made for large orders within six months (including six months), and the company did not make a bad debt provision. As noted in Note 13, the overdue amount for re-export business was RMB 1.019 billion. The firm was unable to obtain sufficient and appropriate audit evidence regarding the adequacy of the impairment provision for the aforementioned accounts receivable, and thus could not determine whether it was necessary to make an impairment provision for the overdue accounts receivable or adjust other items in the financial statements, nor could it determine the amount to be adjusted.

3. Completeness of Related Parties and Their Transactions The company lacks effective internal control procedures to adequately identify related parties and their transactions. During the audit process, the scope of the audit was limited, and the firm was unable to obtain sufficient and appropriate audit evidence to determine whether related party relationships and transactions had been properly identified, accounted for, and disclosed in accordance with accounting standards, nor could it reasonably assure the significant impact these transactions might have on the company's financial reports and their overall impact on the 2017 financial statements.