What do you do when you are asked to perform an official review for a journal of a manuscript written by your supervisor?
If this is an informal request for internal review -- definitely go ahead. It is common practice to have close associates review work, and your thoughtful comments will gain you respect.

If this is a formal invitation from a journal -- it is a clear conflict of interest.  It probably should never have been sent to you, quite honestly.  This is not to say you couldn't provide an unbiased, thoughtful review, but to an outsider this would really be questionable. I suggest you take the high road, decline the invitation, and send a letter to the action editor reminding him of your close association.