QUESTION 2 Vial-tek Lid borrowed $1.5m from Australia Bank at an annual interest rate of 9.5%. Under the loan agreement, the bank requires Vialtek to provide it with a copy of its annual financial statements, but does not require an assurance report of any kind. The bank has offered to replace Vialtek's existing loan agreement with a new one at a rate of 8.5%, but would require Vial-tek to provide financial statements that have been reviewed by a public accounting Tim Alternatively, the bank can replace the existing loan agreement with a new one at a rate of 7.5%, but would require Vialtek to have the financial statements audited by a public accounting firm. The financial controller of Vial-tek approached a public accounting firm and was given an estimated cost of $12,000 to perform a review and $20,000 to perform an audit. The accounts clerk has provided this comparatne information in the table below. ASSURANCE SERVICE ANNUAL LOAN COST ($) None COST OF ANNUAL ASSURANCE INTEREST SERVICE RATE 9.5% $12,000 9.5% $ 20,000 ANNUAL INTEREST EXPENSE $ 142,500 S 127.500 $ 112,500 Review 142,500 139,500 132,500 Audit 7.5% Required: Explain why the interest rate charged by the lender is highest when Vial-tek does not provide an assurance report on the financial report and is and lower when an audit report is provided than when a review report is provided