You have been engaged to audit the financial statements of Broadwall Corporation for the year ended December 31, 20X2. During the year, Broadwall obtained a long-term loan from a local bank pursuant to the following financing agreement:
1. Loan was to be secured by the company’s inventory and accounts receivable.
2. Company was to maintain a debt-to-equity ratio not to exceed 2:1.
3. Company was not to pay dividends without permission from the bank.
4. Monthly installment payments were to commence July 1, 20X2. In addition, the company also borrowed, on a short-term basis, substantial amounts from the president of the company just prior to the year-end.
a. For the purposes of your audit of the financial statements of Broadwall Corporation, what procedures should you employ in examining the described loans? Do not discuss internal control.
b. What financial statement disclosures should you expect to find with respect to the loan from the president?