Special Explanation on the Inability to Express an Opinion on the 2021 Financial Statements of Zhengzhou Huajing Diamond Co., Ltd.
To all shareholders of Zhengzhou Huajing Diamond Co., Ltd.:
We have been entrusted to audit the financial statements of Zhengzhou Huajing Diamond Co., Ltd., including the consolidated and company balance sheets as of December 31, 2021, the consolidated and company income statements, consolidated and company cash flow statements, consolidated statement of changes in equity, and company statement of changes in equity, along with the notes to the financial statements. On April 29, 2022, we issued audit report No. 04041, which expresses an inability to form an opinion. Our audit was conducted in accordance with the "Auditing Standards for Certified Public Accountants" issued by the Ministry of Finance of the People's Republic of China.
In accordance with the requirements of the China Securities Regulatory Commission's "Rules for the Disclosure of Information by Companies Issuing Securities No. 14 - Non-standard Audit Opinions and Related Matters," "Guidelines for the Application of Regulatory Rules - Audit No. 1," and the "Shenzhen Stock Exchange GEM Listing Rules," we provide the following explanation regarding the issuance of the aforementioned audit opinion:
I. Content of the Non-standard Audit Opinion in the Audit Report
(1) Inability to Obtain Audit Evidence Related to Major Asset Balances
Yujin Diamond Company is under investigation by the China Securities Regulatory Commission for suspected violations of information disclosure laws. In 2020, the CSRC reported on the investigation of Yujin Diamond Company's information disclosure violations and issued an "Advance Notice of Administrative Penalty and Market Ban" on August 9, 2021. The notice disclosed the following suspected illegal facts:
- From 2017 to 2019, the company inflated revenue and profit through various business activities as follows:
| Business Type | 2017 Amount | 2018 Amount | 2019 Amount | Total Amount |
|---|---|---|---|---|
| Jewelry Revenue | 225,550,914.58 | 108,258,472.02 | 12,549,075.31 | 346,358,461.91 |
| Jewelry Profit | 26,589,088.12 | 32,712,310.56 | 4,058,121.74 | 63,359,520.42 |
| Non-jewelry Revenue | 88,164,327.44 | 104,136,405.98 | 27,173,302.51 | 219,474,035.93 |
| Non-jewelry Profit | 28,274,284.77 | 24,391,944.18 | 2,944,127.29 | 55,610,356.24 |
| Equity Transfer Profit | 31,766,251.80 | - | - | 31,766,251.80 |
- As of the end of 2019, the inflated balances of inventory, fixed assets, and non-current assets were as follows:
| Item | Amount |
|---|---|
| Inflated Inventory | 628,133,252.58 |
| Inflated Fixed Assets | 406,450,000.00 |
| Inflated Other Non-current Assets | 821,418,131.45 |
| Total | 1,856,001,384.03 |
- The original controlling shareholder and related parties of Yujin Diamond Company occupied non-operating funds from 2016 to 2019, totaling 3,169,486,021.54 yuan. The original management could not provide details on the composition of these non-operating funds or any potential repayment details, and the company has not corrected the opening balances regarding the suspected illegal facts mentioned in the advance notice. Due to the close interrelationship of these matters, we are unable to verify the amounts involved in the suspected illegal facts against the company's financial records. Given that these matters involve multiple financial statement line items and are significant, they have a substantial impact on the year-end balances for 2021. As of the date of the audit report, we could not obtain sufficient and appropriate audit evidence to assess the impact of the suspected illegal facts on major line items in the consolidated and company balance sheets as of December 31, 2021, such as accounts receivable, other receivables, inventory, fixed assets, construction in progress, and other non-current assets, including existence, completeness, valuation, and presentation.