Lana Miller is the owner of MSL Corporation, a family owned, very successful business in the area. Your auditing firm has been the auditors for this company for the past ten years and has just completed the audit for the year ended, December $31,20$X$2.$ It is now April $20$X$3$ and Lana has requested your assistance in preparing a two$-$year forecast. This forecast would be for the fiscal years ending December $31,20$X$3$ and $20$X$4.$

MSL plans to use the forecast to obtain some additional financing as they seek to expand the business. This is the first time MSL has attempted to create forecasted financial statements and they are unsure of the process. Lana has asked your firm to help as much as possible. Lana has also told you that MSL would like the forecast to be as credible as possible and he would like your firm to provide the highest assurance available.

Forecasted projections of revenues, expenses and net income will come from the existing business as well as from the acquisition of another company. It is expected that the current business will continue to be financed from existing capital.

The acquisition MSL is planning is the purchase of a small company which operates in the same industry. This company is currently operating unsuccessfully, however MSL plans on selling most of the operating assets and using the services provided by this company to complement MSLs existing business. MSL expects the combined company to be quite successful. An offer has already been made on the new business, subject to proper financing being obtained and MSL has already received an offer for the assets they will want to sell.

Your firm has provided services related to future oriented information in the past and has a good knowledge of MSLs business environment and industry.

 

 

Required:

Discuss how you can lend credibility to MSLs forecast and the acceptance of this engagement.

What information will you require to examine the financial forecast?

What type of report can be issued for this examination? Assuming your firm examines the prospective financial statements and finds no issues, what would the report look like?