Prefab Sprout Construction Company

You have been approached about auditing Prefab Sprout Construction Company, a family-run general contracting company which is publicly traded on the New York Stock Exchange. The president of Prefab is Jack Warner. His wife, Joan, is the vice president and his son, John, is the treasurer. The Warner family owns about 40 percent of all outstanding shares and no other investor owns more than 1 percent. The company has been previously audited (receiving standard unqualified opinions) by a sole practitioner who closed his practice and is now the controller of Prefab. The company has an audit committee consisting of Joan, John and a local college professor. The company also has a compensation committee consisting of Jack, the company’s lawyer and an employee selected on a rotating basis. Prefab specializes in modular home developments located in areas of South Florida that are densely populated by retirees and recent immigrants from the Caribbean basin. Prefab acquires land, builds streets and other land improvements, builds modular homes on the land and then sells the entire development to limited partnerships that are set up as tax shelters. Prefab finances most of its construction costs through the Sun Atlantic Bank in Fort Lauderdale. Prefab's condensed financial statements for 2013 (audited) and 2014 (un-audited) are presented below.

2013
2014

Cash
Receivables Projects in progress Total assets

Bank loans payable
Advance from JRW Realty Stockholder's equity Total liabilities and equity

Profits on construction projects* General and administrative costs Net income
$ 12,000
300,000
1,200,000
$1,512,000

$ 800,000 150,000 562,000
$1,512,000

400,000
275,000
$ 125,000
$ 10,000
750,000
1,000,000
$1,760,000

$1,050,000 200,000 510,000
$1,760,000

450,000
300,000
$