Ellen Eagle is a banker in a small town. Her customers, Dave and Dot Dauber, are the owners of a franchised candy store in town. They have an opportunity to buy a second franchised store in a nearby town, and are requesting that Ellen increase their bank loan from $300,000 to $2,000,000 to finance this acquisition. The Daubers are two of Ellen’s best customers and have always made their loan payments on time during the 10 years they have been customers of her bank. Currently, Ellen is requiring the Daubers to provide annual financial statements with a review report of a PA. To approve the requested loan increase, the bank’s head office will require them to provide audited annual financial statements.

Required:
Distinguish between a review report and an audit report. Why would the bank require an audit instead of a review in this case? Do you think the bank’s policy is reasonable?