Please answer on question below: Distinguish between an audit, a review, and a compilation engagement A friend of Mona and Michael told them that there are several different types of assurance that an auditor can provide. They would like you to explain the differences between an audit, a review, and a compilation engagement. They also would like to know the likely reason(s) that the bank has requested an audit.

Mona's Pharmacy Inc. (MPI) is a new audit client of Sharp and Ming, CGAs. In your first engagement since being promoted to the position of audit senior, you have been assigned to the audit of MPI as part of a team for the year ended December 31, 2013. During several meetings and discussions with the audit manager, you made the following notes: 1. MPI is owned by Mona Mane and her husband, Michael Mane. The business consists of a small retail pharmacy shop and an import and wholesale operation for various pharmaceutical related products. Recently the store unit next door has become available for lease. Mona and Michael have decided to expand the business by leasing this unit and combining it with the current location. They plan on using the extra square footage for a small grocery section within the store, which would include basic grocery items (bread, milk, and packaged goods). In the past, the business was financed from their personal resources and loans from family members. In order to finance the expansion they are currently seeking approval of a loan from a bank. 2. The bank has outlined the following preliminary conditions for the loan: o MPI must provide audited financial statements prepared in accordance with Accounting Standards for Private Enterprises to accompany the loan application. Subsequent to the loan being approved, audited financial statements will be required within 90 days of each year end. In previous years, the financial statements of MPI were reviewed by a CGA practicing as a sole practitioner, who did not want to expand her business to include audit engagements. o The net income before taxes and management bonus must remain above $450,000. o MPI's inventory will be held as collateral for the loan. 3. MPI sells a range of prescription and nonprescription medical products and a variety of beauty products, souvenir items, and so on. The company also imports other pharmaceutical related products such as first aid and hygiene products. These products are sold wholesale to other local ownermanaged pharmacies and convenience stores. MPI provides all of its wholesale customers with payment terms of net 30 days. 1. In order to keep prices lower than its competitors, MPI buys in bulk to benefit from supplier discounts, and encourages retail customers to use cash or debit cards as payment by offering a discount. In the past, this worked well with, on average, 60% of its retail sales and services volumes paid by debit cards or cash. In the current year, this has dropped by 10%, with 50% of its retail sales now being paid by debit cards or cash. 2. You have conducted a preliminary survey to gain some knowledge about both the client company and the industry in which it competes. Recently Salmart and Boblaws have both opened large super center retail outlets in the neighbourhood, both containing pharmaceutical departments. As a result, both MPI and many of MPI's wholesale customers have been experiencing increased competitive price pressure. 3. In the current year, MPI has experienced a 15% reduction in sales. Inventory levels have increased by 20%, and there is concern that various high dollar value pharmaceutical items are approaching their expiry dates. The preliminary financial statements indicated a net income before taxes of $357,000 and a net income after taxes of $285,600. Mona and Michael were each awarded a $100,000 bonus. 4. The firm's policy, in the absence of known adverse factors, is to set audit risk at 3%. Your preliminary assessment of inherent risk for the revenue and collections cycle indicates that there is a 55% likelihood of a material misstatement occurring. Your preliminary assessment of control risk indicates a 10% probability that the control systems in place will not prevent or detect such an error. Your firm uses the planning model (audit risk model) to determine detection risk. 5. As part of this assessment of control risk, you reviewed the accounting systems and internal controls over sales transactions. The controller has provided the following description of the company's system of processing sales: o Orders are received in writing and by telephone from retail stores that sell the company's products. Based on this information, a clerk prepares a twopart prenumbered sales order. Part #1 of the order is sent to the warehouse, while part #2 is sent to the billing clerk. o The warehouse fills the orders and ships the goods to the customers. Any items that are not in stock at the time an order is filled are marked \"back ordered\" on part #1 of the order form. The shipping clerk prepares a threepart bill of lading. Copy #1 accompanies the goods, while copy #2 is attached to part #1 of the order form and the two documents are sent to the billing clerk. The third copy of the bill of lading is retained at the warehouse in numerical sequence. o At the beginning of each month, the billing clerk matches the order/bill of lading copies received from the warehouse with part #2 of the order form, and then prepares a threepart prenumbered sales invoice. The description of items and quantities shipped are taken from part #2 of the order, while the prices are taken from the company's approved standard price list. The terms of all sales are net 30 days. o The original invoice is sent to the customer. Invoice copy #2, together with the sales order copies and the copy of the bill of lading, are filed by customer in the billing department. The third copy of the invoice is sent to the bookkeeper to serve as the basis for posting to the individual customer accounts and for preparing the monthly sales journal. Statements are prepared by the bookkeeper and sent to customers only when requested. 1. In your discussions with the controller, he mentioned that the following issues have been occurring and he would like to know if you can provide any recommendations: o Many customers have indicated that they have been overcharged. o Customers have called, indicating they have not yet received goods that they ordered weeks ago. o The time to collect accounts receivable balances has increased from 30 days to 45 days, and several customers continue to order goods even though they have not yet paid for previous orders. Required Based on the work completed to date, the following items need to be resolved and tasks (among others) need to be completed. Task 1: Distinguish between an audit, a review, and a compilation engagement a. A friend of Mona and Michael told them that there are several different types of assurance that an auditor can provide. They would like you to explain the differences between an audit, a review, and a compilation engagement. They also would like to know the likely reason(s) that the bank has requested an audit