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Appropriateness of evidence and related parties

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Question: Appropriateness of Evidence and Related Parties. Johnson & Company, CPAs, audited Guaranteed Savings & Loan Company. M. Johnson had the assignment of evaluating the collectability of real estate loans. Johnson was working on two particular loans:

(1) a $4 million loan secured by Smith Street Apartments and

(2) a $5.5 million construction loan on Baker Street Apartments now being built.

The appraisals performed by Guaranteed Appraisal Partners Inc., showed values in excess of the loan amounts. On inquiry, Bumpus, the S&L vice president for loan acquisition, stated, "I know the Smith Street loan is good because I myself own 40 percent of the partnership that owns the property and is obligated on the loan." Johnson then wrote in the audit documentation:

(1) the Smith Street loan appears collectible as; Bumpus personally attested to knowledge of the collectability as a major owner in the partnership obligated on the loan;

(2) the Baker Street loan is assumed to be collectible because it is new and construction is still in progress; and

(3) the appraised values all exceed the loan amounts.

Required: a. Do you perceive any problems with related-party involvement in the evidence used by Johnson? Explain.

b. Do you perceive any problems with Johnson's reasoning or the appropriateness of evidence used in that reasoning?

Reference no: EM131617960

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