In late May, 2002, Sheila Chan, a public accountant, received a Telephone call from Raimo, the treasurer of Kar- loan Limited, who disclosed that preliminary arrangements had been made Mth an investment dealer to underwrite an issue of 6 percent first mortgage bonds, to be dated June 30, 2002. He asked Sheila to prepare an auditor's report for the prospectus which would be used for selling the bonds to the public. Sheila's report would cover both the historical financial statements and the earnings forecasts to be included in the prospectus. Raimo also indicated that it had been decided to date the prospectus June 15 but to start prelimi¬ nary advertising of the issue immediately.

Sheila's firm has been the auditor for one and a half years of Karloan Limited and its four subsidiaries, all of which have December 31 year ends. The financial statements of Karloan Limited have never been prepared on a consolidated basis, but Sheila's firm has issued unqualified opinions on the statements of all five companies since being appointed auditor. The company and all its subsidiaries are federal companies incorporated prior to 1990.

Required

a. Comment on any problems you see in connection with what Karloan Limited intends to do.

b. Assuming that the problems on which you commented in part (a) have been overcome, list the steps that Chan would undertake in order to have her firm express an opinion on the financial statements included in the prospectus.
(CICA adapted)