You have been retained to audit the financial statement of Hydrafoil products,Inc.for the year ended December 31 .During the current year , Hydrafoil products 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 account receivable.
2.The company was to maintain a debt to equity ratio not to exceed two to one.
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, Hydrafoil Company, borrowed from its Chief Executive on a short term basis, including substantial amounts just prior to the year end.
a) For the purpose of your audit of the financial statement of Hydrafoil company ,what procedures would you employ in examining the above described item? Do not discuss internal control.
b)What financial statement disclosures are appropriate with respect to the loan the Chief Executive?