You have been engaged to audit the financial 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 finance 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 borrows short-term funds from the company president. The amounts are material and just prior to year-end.
a. What procedures (other than internal control) should you use when auditing the described loans?
b. What questions do you expect should be answered by the financial statement disclosures that you find with respect to the president’s loan?