– Katelyn Forster is the majority owner of the company,

| October 14, 2019

(1)   You are in the process of performing a detailed analysis of Renton Rail and Pipeline Inc. (ReRaP), a potential new client for assurance services.  The company name is somewhat misleading, however; the company is no longer in the railroad business.  It still owns the rights to many parcels of land along current and former railway lines.  ReRaP leases the land rights to pipeline companies that use it to transport natural gas, and to communications companies for laying fiber-optic and other cables.  Based on interviews with the previous assurance providers, you have found out the following additional information.


–          Katelyn Forster is the majority owner of the company, having recently acquired the company from its previous owners using a leveraged buyout (LBO), a transaction involving significant amounts of long-term borrowing that ReRaP is obligated to repay.  The loan contracts specify that ReRaP must maintain certain minimum profit and working capital requirements, or else the borrowings are subject to higher interest rates and/or immediate repayment.


–          Katelyn is a turn-around specialist: she buys under-performing companies, turns them back to profitability, and then takes them back public again (performs a public offering to sell the ownership interests to market investors).  She has a very good track record of cutting costs and achieving profitability in a relatively short time.


–          ReRaP has acquired and used additional plots of land adjacent to the land it already owns.  It has clashed with some city and county governments about compliance issues with land-use and environmental statutes.  ReRaP pays a lobbying firm to bargain on its behalf with governmental entities where it owns land and where it is considering additional land purchases.

 ReRaP has recently acquired a small communications company, and is considering a strategy to enter the high-speed internet provision business, potentially capitalizing on its lease agreements for the cables installed on its land.  ReRaP has also recently acquired a small casino operating on its land in the state of Nevada.  Katelyn plans to retain existing management to run the operation, as the casino seems to be growing and profitable.  Katelyn believes that the combination of these two companies may enable, with the right regulatory changes, use of the communications technology for gambling on the Internet.


–          The previous assurance provider had no significant issues with the company, though it only interacted with the management before the LBO.  Katelyn is considering hiring your firm because she thinks the predecessor firm was not large and prestigious enough to provide the service levels and support required.  She has stated that she looks forward to working with a firm that will be able to lever its knowledge and expertise much more effectively and efficiently than the predecessor firm did.


Requirements (50 points): on the next page,

(a)    Discuss fully the potential benefits and risks of providing assurance services to ReRaP.  Identify all the relevant risks to consider in accepting this client, and explain the natures of the risks.


(b)   Based on your list in (a), should your firm submit a high or low bid price for your assurance services, considering you need to balance effectiveness and efficiency?  Explain fully

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