Required: a. For purposes of Estava's audit of the financial statements of Broadwall Corporation what procedures should Esteva employ in examining the described loans? Identify the audit objective served by each of the procedures. b. What financial statement disclosures should Esteva expect to find with respect to the loans from the president? Answer: Requirement (a) Esteva should apply the following procedures: 1. Send standard bank confirmation a. Direct liabilities b. Security agreements . Examine notes for terms, provisions, etc. . Review board meeting minutes a. Authority for transactions b. Dividends declared 4. Determine compliance with bank loan provisions 5. Consider effects of president's loans on debt/equity 6. Investigate business purpose of loan 7. Trace loan proceeds to cash receipts records 8 9. 1 LON . Trace interest and principal payments to cash disbursements records Recompute and verify interest expense and accrual computations 0. Consider balance sheet presentation/disclosure a. Currenton- current portions b. Assets pledged as collateral c. Related party 1 1. Obtain management representation letter Requirement (b) Broadwall's financial statements should include the following related party disclosures: 1. Nature of party's relationship 2. Description of the transaction 3. Peso volume of the loans 4. Amounts due to president and terms of settlement