Reviewthejournal,ledgers,andfinancialstatementspreparedbytheCFOfoundin the attacheddocument.Developandlist10indepthquestionsand/orrequestsforadditionalinformationthatyouwouldasktheCFOtoprovideinordertoclarifythefinancialstatementdatathatyoureadover.Theanswerswillbeusedinthepreparationofyear-endfinancialstatementsanddisclosurenotes.Be as specific as possible and phrase your requests in the form of questions as they would normally be asked of a client. REQUIREMENT 1 It was Tuesday, January 6, 20X2 and Tom Lockhart had just gotten back from a session of racquetball and lunch. Tom always enjoyed the week after New Year's. The weather was crisp, and his professional practice was underway in earnest. Tom was a partner in the CPA firm of Coe & Lane, a regional accounting firm headquartered in St. Louis. His messages included a call from Nick Riley at Hydromaint, Inc. He and Nick were members of a local athletic club and Nick had just beaten him in two consecutive games. Tom was fairly certain that Nick had called to gloat a little. They had known each other about five years and enjoyed a healthy rivalry in both tennis and racquetball. Coe & Lane had a professional relationship with Nick and his family. It began in late 20X0 when Nick's father passed away and the firm helped settle the estate. Nick and his three sisters each received about $100,000 as their settlement. Nick was a mechanical engineer and was head of maintenance at a fair-sized chemical plant. Ray Ballard, a close friend of Nick's, managed the City Water District. Both men were recognized experts in hydraulics. For several years, Nick and Ray had discussed the market potential of providing hydraulic maintenance services on a contract basis to water districts, chemical plants, refineries, and pipeline pumping stations throughout the Midwest. Both men were convinced that it was more efficient for these enterprises to outsource maintenance services. With Nick's inherited wealth, the possibility of such a business arrangement became more real. The results of a market study proved to be quite promising, and preliminary negotiations resulted in six maintenance contracts. So in early 20X1, Nick and Ray decided to incorporate a new company in the State of Missouri, Hydromaint, Inc. The six new contracts called for monthly fee payments that were billed and collected after the work was completed. The fees for all six contracts were fixed and covered all maintenance work, even though the amount of work performed might vary from period to period. Hydromaint required its new clients to purchase the material used in its maintenance services directly from third-party suppliers, who provided product warranties in some cases. Since one of the new contracts was with Nick's former employer, he was able to hire most of his former staff, and after extensive training, Hydromaint initiated operations with a competitive work force. Initial financing for the company came from friends and family, including two of Nick's sisters and Ray's father. Coe & Lane helped Hydromaint set up an accounting system and hired its accountant, Jerry Loos. Tom returned Nick's call, and while Nick did gloat about his racquetball triumphs, he also had something else in mind. More contracts were about to materialize, but there was a need for additional financing to support equipment purchases. Hydromaint currently was operating with two rented crew trucks. These trucks were rigged with tooling, but not to the specifications necessary for efficient long-term operations. Additionally, another truck would be required to handle the additional contracts. So, Hydromaint decided to buy three trucks with customized rigging. Other modifications would be added later in the company's shop. To finance the truck purchases, Hydromaint decided to approach Midwest National Bank about securing a loan commitment. However, the bank required the company to provide certain financial information before making a loan decision. Jerry Loos had prepared financial statements as of December 31, 20X1, the end of the company's fiscal year. However, the bank wanted a CPA firm to provide assurances on the integrity of the financial statements in the form of a review. Tom said that Coe & Lane would be glad to do the work and could begin the next afternoon. Tom also got permission to contact Hydromaint's loan officer, Roger Sontag, to be sure he knew what the bank meant by the term "review." When Tom called Roger Sontag at Midwest National Bank, Roger assured him that the bank did not want anything as comprehensive as an audit, but something more than a mere compilation. He wanted a review with a related report prepared by Coe & Lane. Roger also stated that the bank wanted earnings per share (EPS) figures and, if appropriate, line of business or segment information for analytical purposes. Tom consulted the AICPA Statement on Standards for Accounting and Review Services (SSARS) and found the following definition of a review of financial statements: Performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made in the statements in order for them to be in conformity with generally accepted accounting principles. Tom was able to wrest your services away from another engagement to perform Hydromaint's review. You and Tom were scheduled to meet with Nick Riley, Jerry Loos, and Roger Sontag for lunch the next day. You always had enjoyed such luncheon meetings; they were with interesting people and always at quality places. Sure enough, the restaurant was top notch and the food was great. Nick emphasized how important the loan was to adding new contracts and getting the right equipment. With only six contracts, Hydromaint relied heavily on each customer, and losing even one could be devastating. He had a new contract pending, and he was being pressured to close the deal within a couple of weeks. Tom responded that the review could be completed by Tuesday, January 13, 20X2. Roger Sontag assured Nick that with reviewed financial statements in hand, his loan committee would have a response by the following Friday, January 16. Jerry Loos indicated that the financial statements were ready and that he was prepared to provide detailed information on any of the statements' elements. All agreed that you would accompany Jerry to Hydromaint after lunch and make an initial examination of the financial statements. Based on this preliminary investigation, you would prepare a to-do list for Jerry setting forth your additional information needs. Jerry would have at least some of this ready for you the next day. During your initial visit, Jerry answered a number of your questions. He assured you that the company's bank account had been reconciled with outstanding checks accounting for the only reconciling items. He also assured you that he was pretty sure the accruals through December 31, 20X1 had been booked and also shared that he was relieved that payday for crew and shop wages came yesterday after just receiving a customer payment on Monday. He informed you that if he had known he would be in such a cash crunch he may not have paid the insurance premium up front to get the discount he got back in February. Shop equipment was being depreciated over seven years with no salvage value, and depreciation was computed to the nearest full year. Licensing costs were being amortized over the useful life of the license agreement. Jerry noted that income taxes were accrued at the statutory rate of 30 percent. Jerry asked that you prepare the correct income tax entry if adjusting entries were required as a result of your review. REQUIRED: The journal and financial statements as prepared by Jerry Loos follow. Review these data, and prepare a list of thoughtful questions to obtain any additional information needed from the client that will allow you to provide assurance that the financial statements are in accordance with GAAP. Be as specific and respectful as possible, and where possible, provide a reference that supports your request. Also, provide a written reason that explains why you are asking each question and be sure that your questions are worded such that you will obtain the needed information from the client