ACC614DiscussionsWeek 5 - Discussion 2- Long-Term Financial Agreement

Week 5 - Discussion 2

You have been engaged to audit the financial statements of Broadwell Corporation for the year ending December 31, 2020. During the year, Broadwell obtained a long-term loan from a local bank under a financing agreement, which provided the following:

• The loan is to be secured by the company’s inventory and accounts receivable.
• The company is to maintain a debt-to-equity ratio not to exceed 2:1.
• The company is not to pay dividends without permission from the bank.
• Monthly installment payments commenced on July 1, 2020.
• During the year, the company also borrowed, on a short-term basis, substantial amounts just before the end of the year-end from the president of company.

The procedures that Maslov’s kaya should employ in examining the loans are as follows:

• Obtain an understanding of the business purpose of the loans made by the president.
• -Confirm the loans, including terms, by direct communication.
• -Recompute (or verify) interest expense and interest payable.
• -Recompute the long-term and short-term portions of the debt.
• -Review minutes of meetings of the board of directors for proper authorization.
• -Verify payments made during the year and transactions after year-end.
• -Read the financial statements, including footnotes and loan agreements, and evaluate the adequacy of disclosure and compliance with restrictions.
• -Consider any tax implications for the interest on the loan from the company’s president.
• -Obtain a management representation letter.

Broadwell’s financial statements should disclose the following information concerning the loans from its president.

• The nature of the related-party relationship.
• -The dollar amounts of the loans.
• -Amounts due the president and, if not otherwise apparent, the terms and manner of settlement.

Subject to certain limited exceptions, loans to or from executives are prohibited for public companies.

Reference

Louwers, T. J., Bagley, P. L., Blay, A. D., Strawser, J. R., & Thibodeau, J. C. (2021). Auditing & assurance services (8th ed.). McGraw Hill.