It is now March 2002. Margaret Monson, the owner of Major Products Manufacturing Inc., a small successful long-time audit client of your firm, has requested you to work with them in preparing three-year forecasted information for the year ending December 31, 2002, and two subsequent years. Monson informs you that she intends to use the forecasts, together with the audited financial statements, to seek additional financing to expand the business. Monson has had little experience in formal forecast preparation and counts on you to assist her in any way possible. She wants the most supportive opinion possible from your firm to add to the credibility of the forecast. She informs you that she is willing to do anything necessary to help you prepare the forecast.

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

Second, she intends to buy a company in a closely related business that is currently operating unsuccessfully. Monson states that she wants to sell some of the operating assets of the business and replace them with others. She believes that this will make the company highly successful. She has made an offer on the new business, subject to obtaining proper financing. She also informs you that she has received an offer on the assets that she intends to sell.

Required

a. Explain 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 forecasted statements? Be as specific as possible.

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