Accounting

ANSWER KEY REEDY AND ABEL CERTIFIED PUBLIC ACCOUNTANTS Mr. Conrad P. Saws, President Mt. Hood Furniture, Inc. 80 Fast Lane Portland, Oregon 97207 Dear Mr. Saws: We are pleased to confirm our understanding of the services we are to provide for Mt. Hood Furniture, Inc. for the year ending December 31, 20X3. We will audit the balance sheet of Mt. Hood Furniture, Inc as of December 31, 20X3 and the related statements of income, retained earnings, and cash flow for the years then ended. The objective of our audit is the expression of an opinion about whether your financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles. Our audit will be conducted in accordance with generally accepted auditing standards and will include test of your accounting records and other procedures we consider necessary to enable us to express such an opinion. If we are unable to complete the audit, or are unable to form or have not formed an opinion, we may decline to express an opinion or to issue a report as a result of this engagement. Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, tests of the physical existence of inventories, and direct confirmation of receivables and certain other assets and liability by correspondence with selected customers, creditors, and banks. At the conclusion of the audit we will require certain written representations from you about the financial statements and related matters. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. Also, we will plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Because of the concept of reasonable assurance and because we will not perform a detailed examination of all transactions, there is a risk that material errors, fraud, or other illegal acts, may exist and not be detected by us. In addition, an audit is not designed to detect errors, fraud, or illegal acts that are immaterial to the financial statements. Our responsibility as auditors is limited to the period covered by our audit and does not extend to any later periods for which we are not engaged as auditors. Our audit will include obtaining an understanding of internal control sufficient to plan the audit and to determine the nature, timing, and extent of audit procedures to be performed. An audit is not designed to provide assurance on internal control or to identify reportable conditions, that is, significant deficiencies in the design or operation of internal control. However, during the audit, if we become aware of such reportable conditions, we will communicate them to you. We understand that you are responsible for making all financial records and related information available to us and that you are responsible for the accuracy and completeness of that information. We will advise you about appropriate accounting principles and their application and will assist in the in the preparation of your financial statements, but the responsibility for the financial statements remains with you. This responsibility includes the establishment and maintenance of adequate records and effective internal controls over financial reporting, the selections and application of accounting principles, and the safeguarding of assets. Management is also responsible for identifying and ensuring that the entity complies with applicable laws and regulations. We understand that your employees will prepare all cash, accounts receivable, and other confirmations we request and will locate any documents selected by us for testing. As part of our engagement, we will also prepare the federal and state income tax returns for your company for the year ended December 31, 20X3. We expect to begin our audit on approximately September 15, 20X3 and to complete your tax returns and issue our report not later than March 1, 20X4. We will observe the counting of inventories on December 31, 20X3. We estimate our fees for those services will range from $20,000 to $25,000 for the audit and $7,500 to $10,000 for the tax return. You will also be billed for travel and other out-of-pocket costs such as report production, typing, postage, etc. Additional expenses are estimated to be $1,500. The fee estimate is based on anticipated cooperation from your personnel and the assumption that unexpected circumstance will not be encountered during the audit. If significant additional time is necessary, we will discuss it with you and arrive at a new fee estimate before we incur the additional costs. As we discussed earlier, we will provide you with separate proposals at a later date for additional value-added services that you might request based on the findings of our audit. Our invoices for these fees will be rendered each month as work progresses and are payable on presentation. In accordance with our firm policies, work may be suspended if your account becomes 60 days or more overdue and will not be resumed until your account is paid in full. If we elect to terminate our services for nonpayment, you will be obligated to compensate us for all time expended and to reimburse us for all out-of-pocket expenditures through the date of termination. We appreciate the opportunity to be of service to you and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign the enclosed copy and return it to us. Your truly, Reddy and Abel, Certified Public Accountants This letter correctly sets forth the understanding of Mt. Hood Furniture, Inc. Mr. Thomas Thorp, President Date