SCENARIO
As a newly promoted manager at a regional CPA firm, Freedom Rock Accounting (FRA), you have been assigned to work with a new client, Mallory Construction, Inc. Mallory is owned by 5 local residents. The company borrowed $650,000 for working capital and equipment from a local bank 2 years ago. Loan covenants require an annual review of Mallory Construction Inc.’s financial statements by an independent accounting firm. For each of the past 2 years, Mallory has paid approximately $25,000 per year for a review.
Mallory Construction, Inc. is planning to expand into a new market later this year. In preparation for the expansion, Mallory’s owners have discussed the need for increased working capital and equipment. The senior team believes an additional $500,000 will be needed over the next 12 months. It is unclear whether the current lender would be willing to loan the additional money to Mallory. The company may seek additional equity investment, with or without additional financing. Senior management is considering having FRA perform an audit of the financial statements, instead of the review. None of the current management team members have experience with financial statement audits.
TASK
A. Write a professional letter (suggested length of 3−5 pages) to help the Mallory Construction audit committee make an informed decision about which service would be more appropriate in which you do the following:
1. Compare what an audit service and a review service each entails.
a. Discuss the responsibilities of the provider of an audit service.
b. Discuss two benefits of an audit service.
c. Discuss the responsibilities of the provider of a review service.
d. Discuss two benefits of a review service.
ie. Recommend either an audit service or a review service to the Mallory Construction audit committee.
i. Justify your recommendation.
2. Explain two relevant professional standards for a financial statement audit.
3. Explain two relevant professional standards for a review service.
B. Acknowledge sources, using in-text citations and references, for content that is quoted, paraphrased, or summarized
Note: Specific citation of accounting rules is not required.
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