The Thomas Corporation took out a 20-year mortgage on a new headquarters building on June 30, 2014 for $3,000,000 and pledged its only manufacturing facility and the land on which it stands as collateral. The monthly payment to the mortgagor is $25,000

Question

and was first paid on July 1, 2014 . Your firm has audited this client before, but the client has never had a mortgage in previous years. You are in charge of the current year audit for Thomas, which has a balance sheet date of December 31, 2014. REQUIRED: 1 . Explain why it is desirable to prepare a schedule for the permanent file regarding the mortgage. What type of information should this include? 2 . Explain why the audit of mortgage payable, interest expense, and interest payable should all be performed together. 3 . List audit procedures that are typically performed to verify the issue of the mortgage, the mortgage and the interest payable account balances at December 31, 2014, and the balance in interest expense for 2014. 4 . What type of information should be disclosed in the footnotes for this mortgage to help the auditor determine whether the completeness and presentation/disclosure assertions are satisfied?

Answer 1

1 . It is a good idea to prepare an audit schedule for the permanent file for the mortgage information concerning the mortgage so it will be conveniently available for future years' audits. This information should include all the provisions of the mortgage as well as the purchase price, date of purchase, and a list of items pledged as collateral. It may also contain an amortization schedule of principal and interest.
2 . The audit of mortgage payable, interest expense, and interest payable should all be performed together since these accounts are related and the results of testing each account affect the other accounts. The likelihood of misstatement in the client's records is determined more efficiently and effectively by performing these procedures together.
3 . The audit procedures that should ordinarily be performed to verify the issue of the mortgage, the balance in the mortgage and interest payable, and the balance in the interest expense accounts are:
a . Determine if the mortgage was properly authorized.
b. Obtain the mortgage agreement and schedule the pertinent provisions in the permanent file, including the face amount, payments, interest rate, restrictions, and collateral.
c. Confirm the mortgage amount, terms, and collateral with the lending institution.
d. Recompute interest payable at the balance sheet date and reconcile interest expense to the decrease in principal and the payments made.
e. Test interest expense for reasonableness.
4 . Generally accepted accounting principles require disclosures related to long-term debt. The terms of the mortgage are to be disclosed, including interest rates, maturity dates, five-year payment information, assets pledged as collateral, among other items. Significant restrictions on the activities of the company, such as maintaining cash or other compensating balances or restricting the amount of dividends that can be paid, should be disclosed. Thus, auditors should obtain copies of the mortgage agreement to determine that the client's disclosures are complete and accurate.