Johnson & Company, CPAs, audited Guaranteed Savings & Loan Company. M. Johnson had the assignment of evaluating the collectability of real estate loans. Johnson was working on two particular loans: (1) a $4 million loan secured by Smith Street Apartments and (2) a $5.5 million construction loan on Baker Street Apartments now being built. The appraisals performed by Guaranteed Appraisal Partners Inc. showed values in excess of the loan amounts. On inquiry, Bumpus, the S&L vice president for loan acquisition, stated, “I know the Smith Street loan is good because I myself own 40 percent of the partnership that owns the property and is obligated on the loan.”Johnson then wrote in the audit documentation: (1) the Smith Street loan appears collectible as Bumpus personally attested to knowledge of the collectability as a major owner in the partnership obligated on the loan; (2) the Baker Street loan is assumed to be collectible because it is new and construction is still in progress; and (3) the appraised values all exceedthe loan amounts. Required:a. Do you perceive any problems with related-party involvement in the evidence used by Johnson? Explain.b. Do you perceive any problems with Johnson’s reasoning or the appropriateness of evidence used in that reasoning?
Johnson & Company, CPAs, audited Guaranteed Savings & Loan Company. M. Johnson had the assignment of evaluating the collectability of real estate loans. Johnson was working on two particular loans: (1) a $4 million loan secured by Smith Street Apartments and (2) a $5.5 million construction loan on Baker Street Apartments now being built. The appraisals performed by Guaranteed Appraisal Partners Inc. showed values in excess of the loan amounts. On inquiry, Bumpus, the S&L vice president for loan acquisition, stated, “I know the Smith Street loan is good because I myself own 40 percent of the
Johnson then wrote in the audit documentation: (1) the Smith Street loan appears collectible as Bumpus personally attested to knowledge of the collectability as a major owner in the partnership obligated on the loan; (2) the Baker Street loan is assumed to be collectible because it is new and construction is still in progress; and (3) the appraised values all exceed
the loan amounts.
Required:
a. Do you perceive any problems with related-party involvement in the evidence used by Johnson? Explain.
b. Do you perceive any problems with Johnson’s reasoning or the appropriateness of evidence used in that reasoning?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
