Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Napper Corporation has an existing loan in the amount of $5.5 million with an annual interest rate of 5.6%. The company provides an internal company-prepared
Napper Corporation has an existing loan in the amount of $5.5 million with an annual interest rate of 5.6%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace Napper Corporation's existing loan agreement with a new one. Money Tree Bank has offered to loan Napper $5.5 million at a rate of 4.6% but requires Napper to provide financial statements that have been reviewed by a CPA firm. Green Back Bank has offered to loan Napper $5.5 million at a rate of 3.2% but requires Napper to provide financial statements that have been audited by a CPA firm. Napper Corporation's controller approached a CPA firm and was given an estimated cost of $29,000 to perform a review and $51,000 to perform an audit. Read the requirements. (Enter amounts in dollars, not millions, throughout.) ... Requirement a. Explain why the interest rate for the loan that requires a review report is lower than that for the loan that did 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. The interest rate for the loan that requires a review report is Compared to a review report, an audit provides the loan that did not require a review because of the assurance and thus information risk. A review report provides information risk. As a result, the interest rate is assurance to financial statement users. for the loan with the audit report. a lesser amount further no additional Requirements I a. Explain why the interest rate for the loan that requires a review report is lower than that for the loan that did 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 Napper Corporation's annual costs under each loan agreement, including interest and costs for the CPA firm's services. Indicate whether Napper should keep its existing loan, accept the offer from Money Tree Bank, or accept the offer from Green Back Bank. c. Assume that Money Tree Bank has offered the loan at a rate of 3.9% with a review, and the cost of the audit has increased to $71,000 due to new auditing standards requirements. Indicate whether Napper should keep its existing loan, accept the offer from Money Tree Bank, or accept the offer from Green Back Bank. d. Discuss why Napper 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 the value of the audit service. increase
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started