You are the audit senior assigned to the review engagement of a daycare, Tender Treasures Inc, 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 reviewed and provided to the bank within 45 days of year-end. Tender Treasures has a December 31^st year-end.

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 for most daycares in Ontario. Historically Tender Treasures capacity level has been much higher than the industry average. You obtained a monthly breakdown of the number of children in each of the programs.

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 Treaures 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 bank loan. An opportunity has arisen where another local daycare owner is retiring and is selling her successful business - Little Cuddles Daycare. They are considering whether or not to obtain bank financing and purchase this business. Based on their preliminary discussions with the bank they have indicated due to the size of the new loan, that the terms of the new loan would require audited financial statements

Required:

Part A - Address Julian and Sofia's questions below.

Part A.1 - Since the bank loan 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
Part A.2 - Should they decide to purchase Cuddles Inc. the bank will require audited financial statements. They asked you to summarize the main differences between a review and audit engagement.

Part B - As part of your analytical review develop expectations for the revenue for the infant, toddler and preschool programs. Provide your conclusions on the plausibility of each of the revenue streams for the infant, toddler and preschool programs. For each revenue stream indicate if further inquiries are warranted. If further inquiries are warranted, explain your concern and the nature of the inquiry. (Note: assume materiality has been set at $6,000)

Part C - In February of 2016 new legislation related to early childcare centers came into effect. The new legislation imposed several new rules that govern child care. For instance the legislation mandates the type of certifications required by staff employed by the center, imposes requirements on staff-child ratios, space requirements (square feet per student), nutritional requirements (food groups, calories etc) , and sleeping arrangements (space provided, cleanliness of bedding etc). Non-compliance with the legislation will result in a suspension of the facilities licensure. Provide three examples of inquiries you would ask to determine if Tender Treasures is compliance with the new legislation.

Answer rating: 100% (QA)

A Questions regarding Julian and Sophia are Addressed below A1 They actually do require a review engagement Explanation Because as discussed Tender Treasure operates 10 months a year And they require ... View the full answer