Carl Monson, the owner of Major Products Manufacturing Company Pty Ltd, a small, successful longtime client of your firm, has requested you to work with them in preparing three-year forecasts of information for the year ended 30 June 20X0 and two subsequent years. Monson informs you that he intends to use the forecasts, together with the audited financial statements, to seek additional financing to expand the business. Monson has little experience in formal forecast preparation and counts on you to assist him in any way possible. He wants the most supportive opinion possible from your firm to add to the credibility of the forecast. He informs you that he is willing to do anything necessary to help you prepare the forecast.

First, he wants projections of sales and revenues and earnings from the existing business, which he believes could continue to be financed from existing capital.

Second, he intends to buy a company in a closely related business that is currently operating unsuccessfully. Monson says that he wants to sell some of the operating assets of the business and replace them with others. He believes that the company can then be made highly successful. He has made an offer on the new business, subject to obtaining proper financing. He also informs you that he has received an offer on the assets he intends to sell.

REQUIRED

a. Explain the circumstances under which it would, and would not, be acceptable to undertake the engagement.

b. Why is it important that Monson understand the nature of your reporting requirements before the engagement proceeds?

c. With what information will Monson have to provide you before you can complete the forecast statements? Be as specific as possible.

d. Discuss, in terms as specific as possible, the nature of the report you will issue with the forecasts, assuming that you are able to complete them properly.