Disclosures You are a staff auditor on the audit of Cosmo Technologies, Inc The audit partner asks you to carefully read the new mortgage contract with the Hometown Bank and abstract all pertinent information that might be needed for a financial
disclosure. Required: (1) List the information in a mortgage that is likely to be relevant to the auditor. (2) What are the pros and cons of using a disclosure checklist for this task?
(1) The information in a mortgage that is likely to be relevant to the auditor includes the following:
1 . The parties to the agreement
2 . The effective date of the agreement
3 . The amounts included in the agreement
4 . The repayment schedule required by the agreement
5 . The definition and terms of default
6 . Prepayment options and penalties specified in the agreement
7 . Assets pledged or encumbered by the agreement
8 . Liquidity restrictions imposed by the agreement
9 . Purchase restrictions imposed by the agreement
10 . Operating restrictions imposed by the agreement
11 . Requirements for audit reports or other types of reports on compliance with the agreement
12 . The interest rate specified in the agreement
13 . Any other requirements, limitations, or agreements specified in the document
(2) While a checklist helps remind the auditor of matters that should be considered for disclosure and provides a convenient format for the documentation of evidence, there may be items that should be disclosed but that are not covered by the audit firm's checklist. The auditor, therefore, cannot blindly follow a checklist, but should also use good audit judgment especially when there are unusual circumstances of which the users should be aware. For example, what if Cosmo Technologies has a controlling interest in Hometown Bank? This would be a related-party issue.
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