Question 3: Discussion Question 20-27 on pages 628-629 of the textbook (10 marks)

20-27 2 3 4You are a senior with Tick and Bop, Public Accountants. Stupendous Soups is one of your clients, and your firm prepares a compilation report for the company for income tax purposes.

Stupendous Soups was started by two stay-at-home moms, Polly Star and Tomiko Moon. Polly and Tomiko prepare and deliver homemade soup for office workers in the downtown core. The demand for their soup has been overwhelming and, as a result, the two owners have decided to expand and are seeking financing from their local bank. They gave the bank manager the last two years' financial statements and the accompanying compilation reports. However, the bank manager told Polly that he would need some sort of assurance on the financial statements if the company wants the loan.

You receive a voicemail message from Polly Star, who wants to know what the bank manager means by "assurance" and whether you can provide assurance on the past two years' financial statements. You have taken out the Stupendous Soups file to familiarize yourself with it again. Below are some notes you have made:

1.Stupendous Soups' kitchen is located in rented space at a local strip mall.

2.The balance sheet consists of a small cash balance, some fixed assets (kitchen equipment, office equipment, and a delivery van), and shareholder loans. Food inventory is negligible.

3.The major items on the income statement are soup sales, cost of sales, rent, utilities, and salaries.

4.Polly and Tomiko purchase all the inventory supplies and do all the food preparation.

5.Polly is in charge of administration (she prepares the invoices, does all the bookkeeping, and makes the bank deposits) and Tomiko is in charge of marketing and promotion.

6.They have one part-time employee who helps out with deliveries.

Required

a.Explain what type of assurance engagement best meets Polly and Tomiko's needs. Provide support for your answer.

b.Provide an overview of the type of engagement you are recommending, the types of procedures you would perform, and the nature of your report.

c.Based upon the financial statement items, are there any concerns about whether or not you can provide assurance on Stupendous Soups' financial statements for the past two years?