1.You have been engaged to audit the ?nancial statements of Quinn Corporation for the year ended December 31, 2010. During the year Quinn obtained a long-term loan from a local bank. The ?nance terms are as follows:
1. The loan is secured by inventory and accounts receivable of the company.
2. The company's debt-to-equity ratio should not exceed 2:1.
3. Monthly installment payments will begin July 1, 2010.
4. The company must get permission from the bank before paying dividends.
In addition to this loan, you learn that the company borrowed short-term funds from the company president. The loan is material and the transaction occurred just prior to year end.
Required:
(a) What procedures (other than internal control tests) should you use when auditing the described loans?
(b) What issues do you believe should be addressed by the ?nancial statement disclosures with respect to the president's loan?
2.Each of the following audit procedures is being used in the audit of Rockport Homes, Inc., to test the production control activities.
Required:
For each of these procedures identify (a) the strength of the internal control procedure being tested and (b) the internal accounting objectives being addressed.