Building-On-Line (BOL) is an online retailer that has been selling high-end home building products to construction contractors for several years. It was started by Jack Tosic, once a contractor himself, who wanted to find a way to supply home building products to the construction market at lower costs. Jack started BOL and began selling home building products over the Internet. Because it did not have any retail locations, BOL was able to charge its customers lower prices for higher-end products than its competitors.

In recent years, Jack has tried to diversify and expand the business by taking advantage of the technology structure it has had in place. BOL expanded into the consumer retail market with the goal of becoming a home remodelling marketplace, offering a wider variety of products to a wider range of customers.

In order to enter this market, the company had to further lower its prices, squeezing already low margins. This resulted in declining profitability and, at times, cash flow issues.

To help with its cash flow problems, BOL has recently asked the bank for a loan. The loan would be used to support the day-to-day operations of the business and to allow BOL to continue to invest in its IT infrastructure. After speaking with the bank manager, Jack has learned the bank appears to have some reservations in lending BOL any money. The bank is aware of BOL’s declining profitability and in order to approve the loan, the bank will require a set of financial statements from a CPA. The bank has not indicated the type of engagement it might require. While Jack has seen financial statements before, the bank has suggested it may require some type of report to be attached to the financial statements. Jack wonders what type of reports might be available and what they might say.

Required

a. Compare and contrast the three common types of engagements a CPA may perform in this case.

b. Explain to Jack the various report options and what is included in each report.

c. What type of report do you think would be most appropriate in this case?

d. If the bank requires an audit, discuss how this meets the definition of an assurance engagement.