The long-term debt documentation (indexed K-1) was prepared by client personnel and audited by AA, an audit assistant, during the calendar year 2004 audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is reviewing the working papers thoroughly.

Overall Conclusions:

Long-term debt, accrued interest payable, and interest expense are correct and complete at 12/31/04.

Required:

Identify the deficiencies in the working paper that the engagement supervisor should discover.

Data from long-term debt documentation (indexed K-1)

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Interest Lender Rate Payment Terms Collateral First 12% Interest only on Inventories Commercial 25th of month, Bank* principal due in full 1/1/08 no prepayment penalty Lender's Capital Prime plus 1 Interest only on 2nd mortgage last day of on Park St. Corp.* month, princi- building pal due in full 3/5/08 Gigantic Building & 12% Loan Assoc.* $5,000 principal plus interest due on 5th of month, due in full 12/31/05 1st mortgage on Park St. building American Widgets, Inc. Working Papers December 31, 2004 Index K-1 Initials Date Prepared by Approved by AA 3/22/05 Balance December 31, 2003 2004 2004 Balance December Borrowings Reductions 31, 2004 Interest Paid to $50,000+ $300,000 1/31/04 $100,000 $250,000|| 6/30/04 Accrued Interest Payable December 31, 2004 12/25/04 $2,500** - Comments Dividend of $80,000 paid 9/2/04 (W/P N-3) violates a provision of the debt agreement, which thereby permits lender to demand im- mediate payment; lender has refused to waive this violation Prime rate was 8% to 9% during the year 100,000+ 50,000 2/29/04 200,000 12/31/04 720,000+ - 60,000 660,000 12/5/04 5,642 Reclassification entry for current portion pro- posed (See RJE-3)