Auditing and Assurance Services, Student Value Edition (16th Edition)
16th Edition
ISBN: 9780134075754
Author: Alvin A. Arens, Randal J. Elder, Mark S. Beasley, Chris E. Hogan
Publisher: PEARSON
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Chapter 1, Problem 16DQP
Busch Corporation has an existing loan in the amount of $6 million with an annual interest rate of 6.0%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace Busch Corporation’s existing loan agreement with a new one. United National Bank has offered to loan Busch $6 million at a rate of 5.0% but requires Busch to provide financial statements that have been reviewed by a CPA firm. First City Bank has offered to loan Busch $6 million at a rate of 4.0% but requires Busch to provide financial statements that have been audited by a CPA firm. Busch Corporation’s controller approached a CPA firm and was given an estimated cost of $35,000 to perform a review and $60,000 to perform an audit.
- a. Explain why the interest rate for the loan that requires a review report is lower than that for the loan that does not require a review. Explain why the interest rate for the loan that requires an audit report is lower than the interest rate for the other two loans.
- b. Calculate Busch Corporation’s annual costs under each loan agreement, including interest and costs for the CPA firm’s services. Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from First City Bank.
- c. Assume that United National Bank has offered the loan at a rate of 4.5% with a review, and the cost of the audit has increased to $80,000 due to new auditing standards requirements. Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from First City Bank.
- d. Discuss why Busch may desire to have an audit, ignoring the potential reduction in interest costs.
- e. Explain how a strategic understanding of the client’s business may increase the value of the audit service.
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Busch Corporation has an existing loan in the amount of $6 millionwith an annual interest rate of 6.0%. The company provides an internal companyprepared financial statement to the bank under the loan agreement. Two competingbanks have offered to replace Busch Corporation’s existing loan agreement with a newone. United National Bank has offered to loan Busch $6 million at a rate of 5.0% butrequires Busch to provide financial statements that have been reviewed by a CPA firm.First City Bank has offered to loan Busch $6 million at a rate of 4.0% but requires Busch toprovide financial statements that have been audited by a CPA firm. Busch Corporation’scontroller approached a CPA firm and was given an estimated cost of $35,000 to performa review and $60,000 to perform an audit.a. Explain why the interest rate for the loan that requires a review report is lower thanthat for the loan that did not require a review. Explain why the interest rate for the loanthat requires an audit report is lower…
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Chapter 1 Solutions
Auditing and Assurance Services, Student Value Edition (16th Edition)
Ch. 1 - What are the information and established criteria...Ch. 1 - Prob. 2RQCh. 1 - Discuss changes in accounting and business...Ch. 1 - Prob. 4RQCh. 1 - Identify the three main ways information risk can...Ch. 1 - Prob. 6RQCh. 1 - Prob. 7RQCh. 1 - Prob. 8RQCh. 1 - Prob. 9RQCh. 1 - Prob. 10RQ
Ch. 1 - Prob. 11RQCh. 1 - Prob. 12.1MCQCh. 1 - Prob. 12.2MCQCh. 1 - Prob. 12.3MCQCh. 1 - Prob. 13.1MCQCh. 1 - Prob. 13.2MCQCh. 1 - Prob. 13.3MCQCh. 1 - Prob. 14.1MCQCh. 1 - Prob. 14.2MCQCh. 1 - Prob. 14.3MCQCh. 1 - Prob. 15DQPCh. 1 - Busch Corporation has an existing loan in the...Ch. 1 - Prob. 17DQPCh. 1 - James Burrow is the loan officer for the National...Ch. 1 - Prob. 19DQPCh. 1 - Prob. 20DQPCh. 1 - Prob. 21DQPCh. 1 - Prob. 22DQPCh. 1 - As discussed in the chapter opening vignette and...Ch. 1 - Prob. 24DQP
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