Omega Properties

You have been assigned to the December 31, 2011, year-end fiinancial statement audit for Omega Properties, one of your firm’s largest clients. During planning, your audit manager has assigned you the task of preparing the audit program for the mortgages payable account.

Omega is a real estate investment company which owns three office towers, one each in Toronto, Vancouver, and Calgary. Omega has always enjoyed a decent profit due to the high demand for prime office space in these cities. Unfortunately, the recent recession has been hard on Omega as vacancy rates have increased in many office towers and the going rate per square foot has dropped considerably. This has caused a severe cash strain on Omega. The mortgages payable on these three buildings is at a fixed rate. To add to the problem, the long-term leases for many of Omega’s big tenants are up for renewal over the next few years. Omega knows that they will be lucky to get the new leases signed at 75% of the existing rates, and there is a threat that some will move out.

You start to gather some information about the mortgages payable account. You learn that the bank that holds the mortgage on these properties requires a debt to equity ratio of 2:1. Omega has always stayed within the ratio limits. However, for the past two years they have been close to violation. You also learn that the company was late in paying their monthly mortgage payment twice this year and was warned by the bank. It is now February 4, 2012, and you find out that Omega has just defaulted on their mortgage payment due on February 1. The bank has just threatened to foreclose on the mortgage.

You now discover that what started out as a basic audit of mortgages payable has ballooned into something a little more serious.

Required:

Prepare an email to the audit manager informing her of additional audit issues that have arisen as a result of this event, and the impact this has on your audit procedures, the entire audit, and the audit report.