You have been retained to audit the financial statements of Midwest Products, Inc., for the year ended December 31. During the current year, Midwest had obtained a long-term loan from its bank in accordance with a financing agreement which provided that:

1. The loan was to be secured by the company's inventory and accounts receivable.

2. The company was to maintain a debt-to-equity ratio not to exceed 2 to 1 .

3. The company was not to pay dividends without permission from the bank.

4. Monthly installment payments were to commence July 1 of the next year.

In addition, during the current year, Midwest Products, Inc., borrowed from its president on a short-term basis, including substantial amounts just prior to the year-end.

Required:

a. For the purpose of your audit of the financial statements of Midwest Products, Inc., what procedures would you employ in examining the above-described items? Do not discuss internal control.

b. What financial statement disclosures are appropriate with respect to the loans from the president?