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Tender Treasures You are the audit senior assigned to the review engagementof Tender Treasures for the year ended December 31, 2020
Tender Treasures
You are the audit senior assigned to the review engagementof Tender Treasures for the year ended December 31, 2020.
Tender Treasures Inc is a daycare owned and operated by two sisters Juliana and Sophia Marsilli. Both sisters began their careers working as early childhood educators and had over 15 years' experience. Before they opened Tender Treasures, all of the daycares in the local area had long waiting lists with many children being rejected. In response to this opportunity, they decided to start their own childcare center.
In order to obtain the initial startup funds necessary to start the business they combined their life savings and obtained an operating line of credit from Strawberry Bank. A condition of the operating line of credit is that the financial statements are prepared in accordance with ASPE and have a review engagement performed. Your firm has been performing a review engagement of Tender Treasures for several years. The engagement is underway and you have set overall materiality to be $6,000.
The following is a summary of the revenue for the periods ended December 31st:
| Dec 31 2020 | Dec 31 2019 | |
| Revenue | ||
| Infant program | $ 140,000 | $ 130,000 |
| Toddler | 273,910 | 254,800 |
| Preschool | 223,488 | 253,440 |
| Summer Camps | 52,500 | 32,200 |
| Extended Care | 50,000 | 60,000 |
| Total | $ 739,898 | $ 730,780 |
The daycare operates for 10 months of the year and has 3 programs. The Infant program offers care for infants from 6 weeks to 18 months old at a price of $700 per month. The Toddler Program offers care services from 18 months to 30 months old at a price of $650 per month. The Preschool program offers care for children from 30 months to 5 years old at a price of $600 per month. Over the years Tender Treasures has developed a solid reputation and operates at close to full capacity. There are 20 spots available in the infant program, 48 spots in the Toddler program and 50 spots in the Preschool program. Parents are required to pay first and last month upfront.
Extended care is offered to parents who cannot pick up their children before 5:00 pm. It is at a cost of $25 per day. Summer camps are only offered for 7 weeks of the summer at a cost $250 per week.
Given the high demand for day care, the Association for Childhood Educators reported a 90% average capacity formost daycares in Ontario. Historically Tender Treasures capacity level has been much higher than the industry average.
You obtained a breakdown of the number of children in each of the programs for the following:
| Average Number of Students Per School Year | ||
| Program | Sept 2018 - June 2019 | Sept 2019 - June 2020 |
| Infant | 20 | 20 |
| Toddler | 44 | 41 |
| Preschool | 48 | 44 |
The financial records are maintained by a part-time bookkeeper who prepares all year-end adjusting entries as well as the financial statements and note disclosures. The bookkeeper is also responsible for collections from parents and bank deposits.
Tender Treasures maintains a policy that requires parents to provide 1 month notice before taking their child out of the program. If parents do not provide the notice, the deposit provided for the last month is forfeited. Also, certain discounts are offered to parents if they opt for an earlier payment plan. For instance, if parents opt to pay for the full year in advance they receive a 5% discount, if they opt to pay in 3 installments they receive a 3% discount.
You met with Juliana and Sofia and they mentioned that they have almost paid off the entire operating line of credit. An opportunity has arisen where another local daycare owner is retiring and is selling her successful business - Little CuddlesDaycare. They are considering whether or not to obtain bank financing and purchase this business.
REQUIRED
Part A. Based on their preliminary discussions with the bank, Julia and Sofia learned due to the size of the new loan, that the terms of the new loan would require audited financial statements. Julia and Sofia asked you to provide advice on the following:
1. First, Since the operating line of credit will be paid off by early next year Tender Treasures will no longer have a requirement for a review engagement. They would like your advice as to whether they should continue with the review engagement if they decide not to purchase Cuddles.
2. If they decide to purchase Cuddles Inc. the bank has informed them that it will require audited financial statements. They asked you to summarize the main differences between a review and audit engagement.
Expert Solution
The answer is explained below.
Step-by-step explanation
1.The review engagement that has been offered and done for past number of years has not only help the bank to review and check there operating line of credit but also help the owner to make strong there financials and have it check for any errors or manipulations. It does not only protect interest of outsider but also help owner ascertain the accuracy and also the review of there business. Since in current case as financial statement is prepared by single person who has full control over it is essential that external review make it check and certify it. An independent auditor has experience and skills to disclose loose point of business and as well as financial statement which is helpful for early correction. An review engagement business tends to attract more person then a non review engagement which is beneficial for business so the engagement should be continued.
2.An review engagement generally means adherence to the GAAP and accounting principal it only review financial statement in limited manner to conform to some standards . Whereas the Audit means a critical analysis which involve environment scanning, internal control scanning, risk review and gathering of evidence in order to provide opinion.
An review only provide a view that financial statement is correct and no discrepancy is notice and provide moderate level of assurance. On other hand Audit involve High level of assurance and not moderate that financial statement are free from material error.
In audit opinion is issued positive opinion whereas in review engagement an opinion of auditor is Negative.
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