Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 20

Long-Term Financing Agreement. You have been engaged to audit the financial statements of Broadwall Corporation for the year ended December 31, 2014. During the year, Broadwall obtained a long-term loan from a local bank pursuant to a financing agreement, which provided the following:
1. The loan is to be secured by the company's inventory and accounts receivable.
2. The company is to maintain a debt:equity ratio not to exceed 2:1.
3. The company is not to pay dividends without permission from the bank.
4. Monthly installment payments are to commence July 1, 2014.
In addition, during the year, the company also borrowed, on a short-term basis, substantial amounts just prior to the year-end from the president of the company.
Required:
a. For the purposes of your audit of the Broadwall Corporation's financial statements, what procedures should you employ in examining the described loans? Do not discuss internal control.
b. What are the financial statement disclosures that you should expect to find with respect to the loan from the president?