Lakeview Development Corporation was formed on January 2, 1999, to develop a vacation recreation area on land purchased the same day by the corporation for \($100,000.\) The corporation also purchased for \($40,000\) an adjacent tract of land that the corporation plans to subdivide into 50 building lots. When the area is developed, the lots are expected to sell for \($10,000\) each.

The corporation borrowed a substantial portion of its funds from a bank and gave a mortgage on the land. A mortgage covenant requires that the corporation furnish quarterly financial statements.

The quarterly financial statements prepared at March 31 and June 30 by the corporation's bookkeeper were unacceptable to the bank officials. The corporation's president now offers you the engagement of preparing unaudited quarterly financial statements. Because of limited funds, your fee would be paid in Lakeview Development Corporation common stock rather than in cash. The stock would be repurchased by the corporation when funds become available. You would not receive enough stock to be a major stockholder.

Required:

1. Discuss the ethical implications of your accepting the engagement and the reporting requirements that are applicable if you should accept the engagement.

2. Assume that you accept the engagement to prepare the September 30, 1999 statements.

What disclosures, if any, would you make of your prospective ownership of corporation stock in the quarterly financial statements?

3. The president insists that you present the 50 building lots at their expected sale price of \($500,000\) in the September 30 unaudited statements as was done in prior statements. The write-up was credited to Contributed Capital. How would you respond to the president's request?

4. The corporation elected to close its fiscal year September 30 and you are requested to prepare the corporation's federal income tax return. Discuss the implication of signing the return and the disclosure of your stock ownership in Lakeview Corporation (disregard the write-up of the land).
5. Assume that you accept the engagement to prepare the tax return. In the course of collecting information for the preparation of the return you find that the corporation's president paid the entire cost of a family vacation from corporate funds and listed the expense as travel and entertainment. You ascertain that the corporation's board of directors would not consider the cost of the vacation as either additional compensation or a gift to the president if the facts were known. What disclosure would you make in

(a) the tax return and

(b) the financial statements?
6. After accepting your unaudited September 30 financial statements, the bank notified the corporation that the December 31 financial statements must be accompanied by a CPA's opinion. You were asked to conduct the audit and told that your fee would be paid in cash. Discuss the ethical implications of accepting the engagement.