Evangeline Ltd. took out a 20-year mortgage for $2 600 000 on June 15, 2018, and pledged its only manufacturing building and the land on which the building stands as collateral. Each month, a payment of $20 000 is made to the mortgagor. You are in charge of the current-year audit for Evangeline, which has a balance sheet date of December 31, 2018. The client has been audited previously by your public accounting firm, but this is the first time Evangeline Ltd. has had a mortgage.

REQUIRED

a. Explain why it is desirable to prepare a working paper for the permanent file for the mortgage. What type of information should be included in the working paper?

b. Explain why the audits of mortgage payable, interest expense, and interest payable should all be done together.

c. List the audit procedures that should ordinarily be performed to verify the issue of the mortgage, the balance in the mortgage and interest payable accounts at December 31, 2018, and the balance in interest expense for the year 2018.